Ch 6 Flashcards Preview

Financial Acc Systems 1 > Ch 6 > Flashcards

Flashcards in Ch 6 Deck (31):
0

Time value of money

Relationship btw time and money

A dollar received today is worth more than in the future

1

Present value

Amount needed to invest now to produce a known
future value

Discounting

2

Name 8 present value based accounting measurements?

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?

Valuing non current receivables and payables
That carry no interest rate or lower than market interest rate

4

Leases, present value based accounting measurements?

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?

Measuring service cost components of employers'
Post retirement benefits expense
+ post retirement benefits obligations

6

Long-term assets, present value based accounting measurements?

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?

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...

receivables,
payables,
liabilities,
Accruals,
commitments acquired (or assumed in purchase)

9

Disclosures, present value based accounting measurements?

Measuring value of future cash flows from oil and gas
Reserves for disclosure in supplementary info

10

Environmental liabilities, present value based accounting measurements?

Determining fair value of future obligations for
Asset retirements

11

Interest

Payments for use of money

Excess cash received or repaid over the amount lent

12

Principal

Amount of money lent or borrowed

Or amount of money invested

13

3 variables in interest computation?

Principal
Interest rate
time

14

Interest rate

Percentage of outstanding principal

15

Simple interest define, equation?

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

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?

1 rate of interest
2 # time periods
3 future value
4 present value

18

Rate of interest, fundamental variables?

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?

Number of compounding periods
(may be equal to or less than 1 year)

20

Present value, fundamental variables?

Value now of future sum/sums discounted
assuming compound interest

21

Time diagram

Depicts relationship between 4 fundamental variables:
Rate of interest
# of periods
Future value
Present value

22

Single sum problems?

Computing the future value or present value of
A one time amount of money over a # of periods

23

Present value equation and example?

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?

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?

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?

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?

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?

1 periodic interest payments during life of bond

2 principal paid at maturity

30

Effective interest method of amortization

1 company issuing bond first computes bond interest
expense

2 company determines the bond discount or premium
Amortization by comparing the interest expense
With interest to be paid