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 methods can be used to calculate the present value of a future cash flow?

Averaging the future and present cash flows

Discounting future cash flows using an appropriate interest rate

Adding all future cash flows without adjustment

Compounding present cash flows to a future value

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Verified step by step guidance

Understand the concept of present value: Present value is the current worth of a future sum of money or stream of cash flows, given a specified rate of return. It accounts for the time value of money, which states that money available today is worth more than the same amount in the future due to its earning potential.

Identify the correct method: The method to calculate the present value involves discounting future cash flows using an appropriate interest rate. This process adjusts future cash flows to reflect their value in today's terms.

Learn the formula for present value: The formula for calculating the present value of a single future cash flow is \( PV = \frac{FV}{(1 + r)^n} \), where \( PV \) is the present value, \( FV \) is the future value, \( r \) is the discount rate (interest rate), and \( n \) is the number of periods until the cash flow occurs.

Understand why other methods are incorrect: Averaging future and present cash flows does not account for the time value of money. Adding all future cash flows without adjustment ignores the impact of interest rates and time. Compounding present cash flows to a future value calculates future value, not present value.

Apply the correct method: To calculate the present value, identify the future cash flow amount, the appropriate discount rate, and the number of periods. Use the formula \( PV = \frac{FV}{(1 + r)^n} \) to discount the future cash flow to its present value.