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 equations correctly calculates the future value (FV) of $1,000 invested today for 5 years at an annual interest rate of 4.3% compounded annually?

FV = 1,000 \times (1 + 0.043)^5

FV = 1,000 \times (1 - 0.043)^5

FV = 1,000 \times (1 + 0.043 \times 5)

FV = 1,000 \div (1 + 0.043)^5

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Verified step by step guidance

Step 1: Understand the concept of future value (FV). Future value is the value of an investment at a specific point in the future, considering the interest earned over time. When interest is compounded annually, the formula for FV is: FV = PV × (1 + r)^n, where PV is the present value, r is the annual interest rate, and n is the number of years.

Step 2: Analyze the given options. The correct formula for FV must include compounding, which means the interest is applied to the principal and accumulated interest over multiple periods. This is represented by the term (1 + r)^n.

Step 3: Eliminate incorrect options. For example, FV = 1,000 × (1 - 0.043)^5 is incorrect because it subtracts the interest rate instead of adding it. Similarly, FV = 1,000 × (1 + 0.043 × 5) is incorrect because it assumes simple interest rather than compounding. FV = 1,000 ÷ (1 + 0.043)^5 is incorrect because it divides instead of multiplying.

Step 4: Identify the correct formula. The correct formula is FV = 1,000 × (1 + 0.043)^5, as it properly accounts for annual compounding over 5 years.

Step 5: Apply the formula conceptually. To calculate the future value, substitute the values into the formula: PV = 1,000, r = 0.043, and n = 5. The calculation involves raising (1 + 0.043) to the power of 5 and then multiplying the result by 1,000.