Chapter 6 Flashcards
(24 cards)
Time value of money concepts are useful in __________.
valuing several assets and liabilities
What is interest?
Interest is the amount of money paid or received in excess of the amount borrowed or lent.
What is compound interest?
includes interest not only on the initial investment but also on the accumulated interest in previous periods.
Interest rates are typically stated as __________.
annual rates
What is the effective interest rate?
rate at which money actually will grow during a full year
What is the future value of a single amount?
the amount of money that a dollar will grow to at some point in the future
FV = I(1+i)^n I = amount invested at the beg. of the period i = interest rate n = # of compounding periods
What is the present value of a single amount?
is today’s equivalent to a particular amount in the future
PV = FV/(1+i)^n
The calculation of future value requires the __________, while the calculation of present value requires the __________.
addition of interest
removal of interest
Accountants use _____ calculations much more frequently than _____ calculations.
PV (Present value)
FV (Future value)
What are monetary assets?
include money and claims to receive money (e.g. cash and most receivables)
What are monetary liabilities?
obligations to pay amounts of cash (e.g. note payable)
Monetary assets and monetary liabilities are valued at the __________.
present value of future cash flows
__________ provides a framework for using future cash flows in accounting measurements.
SFAC No. 7 (“Using Cash Flow Information and Present Value in Accounting Measurements”)
The key to SFAC No. 7 is determining the present value of future cash flows associated with the asset or liability, taking into account:
- any uncertainty concerning the amounts
2. timing of the cash flows
The company’s __________ is used when applying the expected cash flow approach to the calculation of present value.
credit-adjusted risk-free rate of interest
In an __________ cash flows occur at the end of each period.
ordinary annuity
In an _________ cash flows occur at the beginning of each period.
annuity due
In the future value of an ordinary annuity, the last cash payment will __________.
not earn any interest
In the future value of an annuity due, the last cash payment will __________.
earn interest
In the present value of an annuity due, __________ needs to be removed from the first cash payment.
no interest
What is a deferred annuity?
exists when the first cash flow occurs more than one period after the date the agreement begins
Leases requires the recording of a(n) __________ and __________ at the present value of future lease payments.
asset
corresponding liability
What is the journal entry at the inception of a lease?
Debit: Leased office building
Credit: Lease payable
What is the time value of money?
means that money can be invested today to earn interest and grow to a larger dollar amount in the future.
