Term
| What is the economic asset of an asset or liability? |
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Definition
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Term
| What is referred to as the price of money? |
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Definition
Interest
- Those who borrow must pay it and those who lend will receive it |
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Term
| What is the time value of money? |
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Definition
| The difference between the value of a dollar today and the value of a dollar in the future |
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Term
| What are the 2 factors that influence the size of the time value of money? |
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Definition
The price of money (interest)
Length of the Time period |
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Term
| In an environment with inflation, what are the 2 reasons someone would prefer a dollar today over a dollar in the future? |
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Definition
The rental price charged for using the dollar
The erosion of purchasing power of the dollar in the future |
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Term
| What are the 2 perspectives from which the time value of money can be viewed? |
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Definition
The future value of a sum of money received today
The present value of a sum of money received in the future |
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Term
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Definition
FV = A(1+i)^n
A = Amount of money
i = interest rate
n = number of periods |
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Term
| What do the factors found on the tables represent? |
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Definition
| An individual interest factor (1+i) multiplied by itself for the number of periods |
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Term
| What is the definition of an annuity? |
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Definition
| A flow of cash payments of equal amounts paid at periodic intervals |
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Term
| What is the difference between an ordinary annuity and a due annuity? |
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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 |
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Term
| 3 ways to view the computation of the future value of an ordinary annuity |
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Definition
View each payment separately and compute its growth over each individual time period
View each payment separately and use the table for a future value
Use the table for a future value of an ordinary annuity with a certain interest rate and time |
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Term
| What is the relationship between the computation of the future value and present value |
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Definition
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Term
| Present Value factor equation |
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Definition
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Term
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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 |
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Term
| What type of transactions utilizes the time value of money concept? |
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Definition
| Any transaction that can be broken down into periodic cash flows |
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Term
| What can present values usually not be used in financial accounting? |
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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 |
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Term
| What is the name for a value that is allowed to measure PV? |
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Definition
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Term
| What are common types of surrogate measures that can represent present value |
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Definition
Historical cost
Fair market value
Replacement Cost
Net realizable value |
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Term
| What are the 2 reasons accounting students must understand present value? |
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Definition
1. Present value is the economic form of valuation and is therefore an important goal of accounting measurement
2. 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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