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

7. Receivables and Investments

Introduction to Investments in Securities

Financial Accounting

7. Receivables and Investments

Introduction to Investments in Securities

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Multiple Choice

Which of the following best describes the calculation of the payback period for an investment when net cash flows are uneven?

Add the net cash flows each period until the initial investment is recovered; the payback period is the time at which this occurs.

Subtract the total net cash flows from the initial investment and divide by the number of periods.

Multiply the initial investment by the total net cash flows over the investment period.

Divide the initial investment by the average annual net cash flow.

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Verified step by step guidance

Understand the concept of the payback period: The payback period is the time it takes for an investment to recover its initial cost through net cash inflows. It is a measure of investment risk and liquidity.

Identify the scenario of uneven net cash flows: When net cash flows vary across periods, the calculation requires summing the cash flows sequentially until the initial investment is fully recovered.

Step-by-step calculation: Start by adding the net cash flows from each period cumulatively. For example, if the initial investment is $10,000 and the net cash flows are $3,000 in Year 1, $4,000 in Year 2, and $5,000 in Year 3, you would add $3,000 + $4,000 + $5,000 until the total equals or exceeds $10,000.

Determine the payback period: The payback period is the point in time (e.g., Year 2 or Year 3) when the cumulative net cash flows equal or exceed the initial investment. If the recovery occurs mid-period, you may need to interpolate to find the exact time.

Avoid common misconceptions: Do not divide the initial investment by the average annual net cash flow or use other methods unless specified for even cash flows. Uneven cash flows require cumulative addition to pinpoint the recovery time.