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

When dealing with a loan that is to be repaid in equal periodic payments, which time value of money equation is most appropriate to determine the payment amount?

Present Value of an Ordinary Annuity

Future Value of a Single Sum

Present Value of a Single Sum

Future Value of an Annuity Due

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Verified step by step guidance

Understand the context of the problem: The question involves a loan that is repaid in equal periodic payments. This indicates that the payments are structured as an annuity, which is a series of equal payments made at regular intervals.

Identify the type of annuity: Since the payments are made periodically and equally, this is an ordinary annuity, where payments occur at the end of each period.

Determine the appropriate time value of money equation: To calculate the payment amount for a loan repaid in equal periodic payments, the Present Value of an Ordinary Annuity formula is used. This formula helps determine the payment amount based on the loan's present value, interest rate, and number of periods.

Understand why other options are not suitable: The Future Value of a Single Sum and Present Value of a Single Sum equations are used for lump-sum calculations, not periodic payments. The Future Value of an Annuity Due applies to payments made at the beginning of each period, which is not the case here.

Set up the formula for Present Value of an Ordinary Annuity: The formula is \( PV = PMT \times \frac{1 - (1 + r)^{-n}}{r} \), where \( PV \) is the present value of the loan, \( PMT \) is the periodic payment, \( r \) is the interest rate per period, and \( n \) is the total number of periods. Rearrange the formula to solve for \( PMT \), the payment amount.