# Shared Flashcard Set

## Details

Appendix A: Time Value of Money
Notecards over the Time Value of Money
19
Accounting
01/08/2013

Term
 What is the economic asset of an asset or liability?
Definition
 Present Value
Term
 What is referred to as the price of money?
Definition
 Interest- Those who borrow must pay it and those who lend will receive it
Term
 What is the time value of money?
Definition
 The difference between the value of a dollar today and the value of a dollar in the future
Term
 What are the 2 factors that influence the size of the time value of money?
Definition
 The price of money (interest)Length of the Time period
Term
 In an environment with inflation, what are the 2 reasons someone would prefer a dollar today over a dollar in the future?
Definition
 The rental price charged for using the dollarThe erosion of purchasing power of the dollar in the future
Term
 What are the 2 perspectives from which the time value of money can be viewed?
Definition
 The future value of a sum of money received todayThe present value of a sum of money received in the future
Term
 Future Value equation
Definition
 FV = A(1+i)^nA = Amount of moneyi = interest raten = number of periods
Term
 What do the factors found on the tables represent?
Definition
 An individual interest factor (1+i) multiplied by itself for the number of periods
Term
 What is the definition of an annuity?
Definition
 A flow of cash payments of equal amounts paid at periodic intervals
Term
 What is the difference between an ordinary annuity and a due annuity?
Definition
 Ordinary/Arrears annuity is received at the end of a period while a due annuity is paid at the beginning of a period resulting in 1 period more of interest earned than an ordinary annuity
Term
 3 ways to view the computation of the future value of an ordinary annuity
Definition
 View each payment separately and compute its growth over each individual time periodView each payment separately and use the table for a future valueUse the table for a future value of an ordinary annuity with a certain interest rate and time
Term
 What is the relationship between the computation of the future value and present value
Definition
 The exact reciprocal
Term
 Present Value factor equation
Definition
 1/(1+i)^n
Term
 Equivalent Value
Definition
 The idea that a certain number of payments (over periods) is equal to a (smaller) lump sum today or (larger) lump sum after that certain period of time
Term
 What type of transactions utilizes the time value of money concept?
Definition
 Any transaction that can be broken down into periodic cash flows
Term
 What can present values usually not be used in financial accounting?
Definition
 The predictions management must make to apply present value are simply too subjective for financial statements that are to be used by those outside of the company
Term
 What is the name for a value that is allowed to measure PV?
Definition
 Surrogate measure
Term
 What are common types of surrogate measures that can represent present value
Definition
 Historical costFair market valueReplacement CostNet realizable value
Term
 What are the 2 reasons accounting students must understand present value?
Definition
 1. Present value is the economic form of valuation and is therefore an important goal of accounting measurement2. In the cases where present value is sufficiently objective, present value methods are used, and present values are actually incorporated into the financial statements
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