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 methods is used to calculate the present value of a future cash flow?

Compounding present cash flows to a future value

Averaging the future and present cash flows

Summing all future cash flows without adjustment

Discounting future cash flows using a specified interest rate

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Verified step by step guidance

Understand the concept of present value: Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return. It accounts for the time value of money, which states that money available today is worth more than the same amount in the future due to its earning potential.

Recognize the method used: The correct method to calculate the present value of future cash flows is 'Discounting future cash flows using a specified interest rate.' This involves reducing the future cash flows to their present value using a discount rate.

Learn the formula for present value: The formula for calculating the present value of a single future cash flow is \( PV = \frac{FV}{(1 + r)^n} \), where \( PV \) is the present value, \( FV \) is the future value, \( r \) is the discount rate (interest rate), and \( n \) is the number of periods.

Understand the process of discounting: Discounting adjusts future cash flows to reflect their value in today's terms. It accounts for the interest rate and the time period until the cash flow occurs. This is the opposite of compounding, which calculates the future value of present cash flows.

Apply the formula to solve problems: To calculate the present value, identify the future cash flow amount (\( FV \)), the discount rate (\( r \)), and the number of periods (\( n \)). Substitute these values into the formula \( PV = \frac{FV}{(1 + r)^n} \) and simplify to find the present value.