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 time value of money equations is most appropriate for a manager to use when forecasting future operating income based on current income and a constant growth rate?

Future Value = Present Value \( \times (1 + r)^n \)

Operating Income = Revenue - Cost of Goods Sold

Net Present Value = Cash Inflows - Cash Outflows

Present Value = Future Value \( \div (1 + r)^n \)

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Verified step by step guidance

Understand the concept of time value of money: The time value of money is a financial principle stating that money available today is worth more than the same amount in the future due to its earning potential. This principle is used to calculate future or present values based on growth rates or discount rates.

Identify the equation for forecasting future operating income: The equation Future Value = Present Value × (1 + r)^n is most appropriate for forecasting future operating income when there is a constant growth rate. This formula accounts for the compounding effect of growth over time.

Break down the formula: In the equation Future Value = Present Value × (1 + r)^n, 'Present Value' represents the current operating income, 'r' is the constant growth rate (expressed as a decimal), and 'n' is the number of periods over which the growth occurs.

Relate the formula to operating income: Operating income is calculated as Revenue - Cost of Goods Sold. Once the current operating income is determined, it can be used as the Present Value in the formula to forecast future operating income.

Apply the formula step-by-step: To forecast future operating income, multiply the current operating income (Present Value) by (1 + r)^n, where 'r' is the constant growth rate and 'n' is the number of periods. This will give the projected future operating income based on the given growth rate.