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 formula illustrates the value of \$100 invested for one year at 5 percent interest?

$100 \times 0.05$

$100 \div (1 + 0.05)$

$100 + (100 \times 0.5)$

$100 \times (1 + 0.05)$

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Verified step by step guidance

Step 1: Understand the concept of simple interest. Simple interest is calculated by multiplying the principal amount (initial investment) by the interest rate and the time period. In this case, the principal is $100, the interest rate is 5% (or 0.05), and the time period is 1 year.

Step 2: Recognize that the formula for the total value of an investment after one year includes both the principal and the interest earned. This is expressed as: Total Value = Principal × (1 + Interest Rate).

Step 3: Compare the given formulas to the correct formula for calculating the total value of the investment. The correct formula is $100 × (1 + 0.05)$, which accounts for both the principal and the interest earned.

Step 4: Eliminate incorrect options by analyzing their structure. For example, $100 × 0.05$ calculates only the interest earned, not the total value. $100 ÷ (1 + 0.05)$ is not relevant to this scenario, as it suggests a discounting approach. $100 + (100 × 0.5)$ incorrectly uses 0.5 instead of 0.05 as the interest rate.

Step 5: Confirm that the correct formula, $100 × (1 + 0.05)$, accurately represents the total value of the investment after one year, including both the principal and the interest earned.