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

What is the primary purpose of interest in the context of time value of money equations?

To compensate lenders for the opportunity cost of lending their money over time

To increase the principal amount of a loan

To reduce the risk of default for borrowers

To calculate depreciation of fixed assets

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Verified step by step guidance

Understand the concept of interest in the context of the time value of money. Interest is the cost of borrowing money and serves as compensation to lenders for the opportunity cost of lending their funds instead of using them elsewhere.

Recognize that the time value of money is based on the principle that money available today is worth more than the same amount in the future due to its earning potential. Interest is a key component in quantifying this earning potential.

Eliminate incorrect options by analyzing their relevance to the concept of interest. For example, 'To increase the principal amount of a loan' is incorrect because interest does not directly increase the principal; it is a separate cost added to the principal.

Similarly, 'To reduce the risk of default for borrowers' is incorrect because interest does not directly address default risk; it compensates lenders for the time value of money.

Finally, 'To calculate depreciation of fixed assets' is unrelated to interest, as depreciation pertains to the allocation of the cost of tangible assets over their useful life. The correct answer is: 'To compensate lenders for the opportunity cost of lending their money over time.'