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

Compound interest earned on a savings account _____.

is calculated on both the initial principal and the accumulated interest from previous periods

is calculated only on the initial principal

remains constant regardless of the interest rate

decreases over time as the account balance grows

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Verified step by step guidance

Understand the concept of compound interest: Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. This is different from simple interest, which is calculated only on the initial principal.

Analyze the options provided in the problem: The first option states that compound interest is calculated on both the initial principal and the accumulated interest from previous periods. The second option states it is calculated only on the initial principal, which is incorrect for compound interest. The third option states it remains constant regardless of the interest rate, which is not true as compound interest depends on the rate. The fourth option states it decreases over time as the account balance grows, which is also incorrect.

Relate the concept to the correct answer: Compound interest grows over time because the interest is calculated on an increasing balance (principal + accumulated interest). This aligns with the first option provided in the problem.

Eliminate incorrect options: The second, third, and fourth options do not align with the definition or behavior of compound interest. Therefore, they can be eliminated.

Select the correct answer: Based on the analysis, the correct answer is that compound interest is calculated on both the initial principal and the accumulated interest from previous periods.