Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Which of the following is the correct formula for calculating simple interest?

Simple Interest = Principal \( \times \) Rate \( \times \) Time

Simple Interest = (Principal + Rate) \times Time

Simple Interest = Principal \( \times \) (1 + Rate)^{Time}

Simple Interest = Principal \div (Rate \times Time)

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Verified step by step guidance

Step 1: Understand the concept of simple interest. Simple interest is a method of calculating the interest charged on a principal amount over a specific period of time at a fixed interest rate. It does not compound, meaning the interest is calculated only on the original principal.

Step 2: Identify the correct formula for simple interest. The formula is: Simple Interest = Principal × Rate × Time. This formula calculates the interest by multiplying the principal amount by the interest rate and the time period.

Step 3: Analyze the incorrect options provided in the problem. For example, the formula 'Simple Interest = (Principal + Rate) × Time' is incorrect because it adds the principal and rate, which is not how simple interest is calculated.

Step 4: Similarly, the formula 'Simple Interest = Principal × (1 + Rate)^Time' is incorrect because it represents compound interest, where the interest is calculated on the principal plus previously accumulated interest.

Step 5: Finally, the formula 'Simple Interest = Principal ÷ (Rate × Time)' is incorrect because dividing the principal by the product of rate and time does not align with the definition of simple interest. The correct formula remains Simple Interest = Principal × Rate × Time.