Class 15: Time Value of money; Reporting and Analyzing Liabilities

what do you do for interests compounded more often than annually?

1. Interest rate per compounding period = Yearly interest rate / Compounding periods per year 2. Number of interest periods = Compounding periods per year x number of years

The amount of interest involved is based on three elements:

1. Principal - amount borrowed or invested 2. Interest rate - An annual % of the principal 3. Time - the number of years or portion of a year that the principal is outstanding

to determine annuity payments using future value you would calculate:

Annuity payment = FV of annuity/Factor

to determine annuity payments using present value you would calculate:

Annuity payment = PV of annuity/factor

what are estimated liabilities?

Are definite debts or obligations whose exact dollar amount cannot be known until a later date ex: bonus plans, vacation and sick pay, pension benefits, warranties

How much money will accumulate if you invest in a CD or money market account?

Calculate the future value based on compound interest

How much will you be paying monthly in student loan payments?

Calculate the payments based on the present value of the loan

If you take out an auto loan what will be the monthly loan payments?

Calculate the payments based on the present value of the loan

If you win the lottery, should you take an immediate payment or payment over time?

Calculate the present value of the alternatives based on compound interest.

Warranties:

Companies provide warranties as a sales or marketing tool. An accountant estimates the future repairs and replacement costs related to current sales. Warranty expense is estimated and a liability (warranties payable) is created. When a warranty is honored in the future, the warranties payable account will be reduced for the costs.

To get the future value of an annuity using the tables, you would calculate:

FV of annuity= annuity payment x factor from table 2

To determine number of payments using present value, you would calculate:

Factor = PV of annuity/amount of annuity

long term assets are

Historical cost, but not higher than present value of the cash flows

To get the present value of an annuity using the tables, you would calculate:

PV of annuity = annuity payment x factor from table 4

You inherit $50,000 from a rich uncle. You decide to invest the $50,000 today in a fund that earns 4% compounded annually. To what amount will the investment grow in 4 years when you need to start repaying your student loans? What table will you use?

Table 1: future value of a single amount

When you graduate you want to start saving for a down payment for a home. You figure you can deposit $20,000 at the end of each year in a 4% fund. You are hoping that after 4 years you will have enough for a down payment. What amount will be in the fund immediately after the last deposit? what table would you use?

Table 2: FV Annuity

Lane Kiffin needs $500,000 in 3 years in order to pay his ex-wife a lump sum spousal support. Good thing after getting fired by Alabama he landed the head coach job at Florida Atlantic University (Owls). What amount must he invest today if his investment earns 4% compounded annually? What table should he use?

Table 3: present value of a single amount

Your parents are getting ready to retire. They are considering investing in an annuity contract that will return $150,000 annually at the end of each year for 20 years. What amount should they pay for this investment if it earns a 4% return? what table would you use?

Table 4: present value

Sales taxes are expressed as

a stated percentage of the sales price.

annuity

a stream of equal amounts occurring at regular intervals spread over a period of time

what are known liabilities?

accounts payable, accrued liabilities (expenses), interest payable, short-term notes payable, current portion of long-term debt, deferred revenues (unearned revenues), gift card liabilities and lines of credit

Future value of a single amount is the

amount to be received (paid) in the future based on an amount invested (borrowed) today

current liabilities are shown on:

balance sheet at face value

Usually, which is the preferred interest: simple or compund?

compound

what does the annual rate depend on?

credit score and credit history

What is the value at a specific future date of some $ amount today at a certain interest rate?

future value

Interest be calculated on a simple or compound basis. What is the difference between these calculations?

in a simple interest, you use the same calculation as interest rates in a compound interest, interest rates build up

money is valued by?

interest

Current liabilities fall into two major groups known as:

known and estimated liabilities

single amount

lump sum amount at one point in time

when investing/borrowing compare:

money today vs. money tomorrow

tables assume

ordinary annuity

What is the value today of some $ amount that will be received or paid on a specific date in the future at a certain interest rate?

present value

long-term liabilities are shown at:

present value

bond issue price are

present value of cash flows

leases are

present value of cash flows

Notes Receivable are

present value of the cash flows

For financial reporting purposes we are always talking about

present values

what is used to measure the effect of time on the value of money?

present values and future values

Future Value of an Annuity is the

sum of all the payments or receipts plus the accumulated compound interest on them

Robben Company is considering investing in an annuity contract that will return $40,000 annually at the end of each year for 15 years. What amount should Robben Company pay for this investment if it earns an 8% return? what table would you use?

table 4: present value

the distinction between current and long-term liabilities affects what?

the evaluation of a company's liquidity

is it better to compound an interest a small or large number of times?

the more times compounded, the better

loan payments are based on

the present value of the loan

ordinary annuity

they can be paid at the end of the period

annuity due

they can pay at the beginning of the period

What factors affect the time value of money?

time and money

Present value of a single amount is

today's value of a single sum to be received (paid) at some point in the future

Present Value of an Annuity is the

value now of a series of future receipts or payments, discounted assuming compound interest