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 statements is true regarding the Accounting Rate of Return (ARR) and the time value of money?

The ARR does not incorporate the time value of money.

The ARR fully incorporates the time value of money.

The ARR partially incorporates the time value of money.

The ARR is only used when the time value of money is considered.

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Verified step by step guidance

Understand the concept of Accounting Rate of Return (ARR): ARR is a financial metric used to measure the profitability of an investment. It is calculated by dividing the average accounting profit by the initial investment or average investment. ARR focuses on accounting profits rather than cash flows.

Recognize the time value of money principle: The time value of money states that a dollar today is worth more than a dollar in the future due to its earning potential. This principle is fundamental in financial decision-making and is incorporated in methods like Net Present Value (NPV) and Internal Rate of Return (IRR).

Analyze whether ARR incorporates the time value of money: ARR does not account for the time value of money because it uses accounting profits rather than discounted cash flows. It treats all profits equally, regardless of when they occur during the investment period.

Compare ARR with other methods: Unlike ARR, methods such as NPV and IRR explicitly incorporate the time value of money by discounting future cash flows to their present value. This makes ARR less suitable for evaluating investments where the timing of cash flows is critical.

Conclude the correct statement: Based on the analysis, the correct statement is 'The ARR does not incorporate the time value of money.' This is because ARR focuses solely on accounting profits without considering the timing or discounting of cash flows.