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

Why is compound interest generally more advantageous than simple interest when investing money over time?

Because compound interest is not affected by the frequency of compounding periods.

Because simple interest rates are always lower than compound interest rates.

Because compound interest earns interest on both the initial principal and the accumulated interest from previous periods.

Because compound interest is calculated only on the initial principal, leading to higher returns.

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Verified step by step guidance

Understand the concept of simple interest: Simple interest is calculated only on the initial principal amount over the investment period. The formula for simple interest is:

I = P \times r \times t

, where

I

is the interest,

P

is the principal,

r

is the annual interest rate, and

t

is the time in years.

Understand the concept of compound interest: Compound interest is calculated on the initial principal and also on the accumulated interest from previous periods. The formula for compound interest is:

A = P (1 + r) (^{n)}

, where

A

is the total amount,

P

is the principal,

r

is the annual interest rate, and

n

is the number of compounding periods.

Compare the two methods: In simple interest, the interest earned does not grow over time because it is based solely on the initial principal. In compound interest, the interest earned grows exponentially because it is calculated on both the principal and the accumulated interest from previous periods.

Recognize the advantage of compound interest: Compound interest allows the investment to grow faster over time due to the 'interest on interest' effect. This makes it more advantageous for long-term investments compared to simple interest.

Understand the correct answer: The correct answer is 'Because compound interest earns interest on both the initial principal and the accumulated interest from previous periods.' This highlights the key difference and advantage of compound interest over simple interest.