Flashcards in Ch 6 Deck (31):

0

## Time value of money

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Relationship btw time and money

A dollar received today is worth more than in the future

1

## Present value

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Amount needed to invest now to produce a known

future value

Discounting

2

## Name 8 present value based accounting measurements?

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1 notes

2 leases

3 pensions/post retirement benefits

4 long-term assets

5 stock based compensation

6 business combinations

7 disclosures

8 environmental liabilities

3

## Notes, present value based accounting measurements?

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Valuing non current receivables and payables

That carry no interest rate or lower than market interest rate

4

## Leases, present value based accounting measurements?

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Valuing assets and obligations capitalized under

Longterm leases

Measuring amount of lease payments

+ annual leasehold amortization

5

## Pensions and post retirement benefits, present value based accounting measurements?

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Measuring service cost components of employers'

Post retirement benefits expense

+ post retirement benefits obligations

6

## Long-term assets, present value based accounting measurements?

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Evaluating alternative long term investments by discounting

Future cash flows

Determining value of assets acquired under deferred

Payment contracts

Measuring impairments of assets

7

## Stock based compensation, present value based accounting measurements?

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Determining fair value of employee services in

Compensatory stock-option plans

8

## Business combinations, present value based accounting measurements: 5 things Determining the value of...

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receivables,

payables,

liabilities,

Accruals,

commitments acquired (or assumed in purchase)

9

## Disclosures, present value based accounting measurements?

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Measuring value of future cash flows from oil and gas

Reserves for disclosure in supplementary info

10

## Environmental liabilities, present value based accounting measurements?

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Determining fair value of future obligations for

Asset retirements

11

## Interest

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Payments for use of money

Excess cash received or repaid over the amount lent

12

## Principal

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Amount of money lent or borrowed

Or amount of money invested

13

## 3 variables in interest computation?

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Principal

Interest rate

time

14

## Interest rate

### Percentage of outstanding principal

15

## Simple interest define, equation?

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Return on principal for 1 time period

Interest = p x i x n

Where p= principal,

i = rate of interest single period

n = # of periods

16

## Compound interest

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Principal and any interest earned that hasn't been paid

Or withdrawn

Interest earned to date on 2 or more time periods

17

## 4 Fundamental Variables for time value of money?

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1 rate of interest

2 # time periods

3 future value

4 present value

18

## Rate of interest, fundamental variables?

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Rate unless otherwise stated is annual rate

Must be adjusted to reflect length of compounding

Period if less than 1 year

19

## Number of time periods, fundamental variables?

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Number of compounding periods

(may be equal to or less than 1 year)

20

## Present value, fundamental variables?

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Value now of future sum/sums discounted

assuming compound interest

21

## Time diagram

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Depicts relationship between 4 fundamental variables:

Rate of interest

# of periods

Future value

Present value

22

## Single sum problems?

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Computing the future value or present value of

A one time amount of money over a # of periods

23

## Present value equation and example?

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PV = FV (PVFni)

PVFni = present value factor for n periods at i interest

Ex $50,000 = $84,253 (1/((1 + .11)^5)

24

## 3 characteristics of defining an annuity?

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1 periodic payments (rents) or receipts of same amount

2 same length interval between such rents

3 compounding interest once each interval

25

## Ordinary annuity, annuity due?

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Ordinary annuity- rents occur at end of each period

Annuity due- rents occur at beginning of each period

26

## Present value of an ordinary annuity equation?

### PVF-OAn,i = [1 - 1/(1 + i)^n]/i

27

## Present value of an annuity due factor equation?

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Present value of annuity due factor =

Present value of ordinary annuity factor x (1 + i)

Ex. Present value of ordinary annuity over 4 periods at 11%= 3.10

3.10 x (1.11) = 3.44 = PV of annuity due

28

## Deferred annuity, ex. Ordinary annuity vs annuity due?

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Does not begin to produce rents until 2 or more periods

Annuity where rents begin after specified # of periods

Ex ordinary annuity of 6 annual rents deferred 4 yrs

Means first of 6 rents occur at end of 5th year

Annuity due 6 annual rents deferred 4 yrs

Means first of 6 rents occur at beginning of 5 th year

29

## Two cash flows used in valuating a Longterm bond?

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1 periodic interest payments during life of bond

2 principal paid at maturity

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