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

Given a present value (PV), an annual interest rate $r$, and $n$ years, what is the correct formula to calculate the future value (FV)?

FV = PV \times (1 + r)^n

FV = PV \div (1 + r)^n

FV = PV \times (1 - r)^n

FV = PV + (r \times n)

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Verified step by step guidance

Step 1: Understand the concept of Future Value (FV). Future Value is the value of a current asset or amount of money at a specified date in the future, based on an assumed rate of growth or interest.

Step 2: Recall the formula for calculating Future Value (FV) using compound interest. The correct formula is FV = PV × (1 + r)^n, where PV is the present value, r is the annual interest rate, and n is the number of years.

Step 3: Analyze the given options. The correct formula should reflect the compounding effect of interest over time, which is represented by (1 + r)^n.

Step 4: Eliminate incorrect options. For example, FV = PV ÷ (1 + r)^n is incorrect because it represents a discounting formula for present value, not future value. Similarly, FV = PV × (1 - r)^n and FV = PV + (r × n) do not account for compounding interest.

Step 5: Confirm that FV = PV × (1 + r)^n is the correct formula for calculating Future Value, as it properly incorporates the compounding effect of interest over the specified number of years.