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

According to the time value of money concept, the value of a firm is primarily determined by which of the following factors?

The firm's current stock price and the prevailing interest rate

The expected future cash flows and the discount rate applied to those cash flows

The firm's total assets and liabilities

The number of shareholders and the firm's dividend policy

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Verified step by step guidance

Understand the concept of the time value of money (TVM), which states that money available today is worth more than the same amount in the future due to its earning potential. This principle is foundational in financial accounting and valuation.

Recognize that the value of a firm is determined by its ability to generate future cash flows. These expected future cash flows represent the firm's potential earnings over time.

Learn that the discount rate is applied to these future cash flows to account for the time value of money. The discount rate reflects the risk and opportunity cost associated with the firm's operations and investments.

Combine the expected future cash flows and the discount rate to calculate the present value of the firm. This present value represents the firm's intrinsic value based on its future earning potential.

Understand why other factors, such as the firm's current stock price, total assets and liabilities, or dividend policy, are not primary determinants of the firm's value under the time value of money concept. These factors may influence perceptions but do not directly calculate intrinsic value.