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

Interest paid on a loan is calculated as a percentage of the:

monthly payment

future value of the loan

total interest accrued

principal amount

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Verified step by step guidance

Understand the concept of 'principal amount': In financial accounting, the principal amount refers to the original sum of money borrowed or invested, excluding any interest or additional fees.

Recognize the formula for calculating interest: Interest is typically calculated using the formula $ I = P \times r \times t $, where $ I $ is the interest, $ P $ is the principal amount, $ r $ is the interest rate, and $ t $ is the time period.

Clarify why the principal amount is used: The interest paid on a loan is calculated based on the principal amount because it represents the base amount on which the interest rate is applied. Monthly payments, future value, or total interest accrued are not directly used in this calculation.

Relate this to practical scenarios: For example, if you borrow $10,000 at an annual interest rate of 5%, the interest for one year would be calculated as $ I = 10,000 \times 0.05 \times 1 $. This calculation uses the principal amount ($10,000) as the base.

Summarize the key takeaway: Always remember that the principal amount is the foundation for calculating interest, as it represents the original loan amount before any interest or payments are applied.