6. Intermediate Accounting Chapter 6
What are some topics where the the time value of money is relevant?
(1) notes, (2) leases, (3) pensions and other postretirement benefits, (4) long-term assets, (5) sinking funds, (6) business combinations, (7) disclosures, and (8) installment contracts
Deferred annuity
A deferred annuity exists when the first cash flow occurs more than one period after the date the agreement begins.
annuity
A series of payments or receipts (called rents) that occur at equal intervals.
annuity due
An annuity in which each rent is payable/receivable at the beginning of the period.
ordinary annuity
An annuity in which each rent is payable/receivable at the end of the period. (p. 276).
deferred annuity
An annuity in which the rents begin after a specified number of periods.
Compound interest
Compound interest includes interest not only on the initial investment but also on the accumulated interest in previous periods.
Annuity due
In an annuity due cash flows occur at the beginning of each period.
Ordinary annuity
In an ordinary annuity cash flows occur at the end of each period.
Simple interest
Interest is the amount of money paid or received in excess of the amount borrowed or lent.
simple interest
Interest on principal only, regardless of interest that may have accrued in past periods (compounded). (p. 266).
compound interest
Interest that accrues on both the principal and the interest earned in past periods (interest not withdrawn or paid out).
expected cash flow approach
Method of calculating present value that uses a range of cash flows and incorporates the probability of those cash flows to provide as accurate as possible measure of expected future cash flows. (p. 290).
Monetary assets and Monetary liabilities
Most monetary assets and monetary liabilities are valued at the present value of future cash flows.
interest
Payment for the use of someone else's money. It is the excess cash received/repaid over and above the amount lent/borrowed. (p. 265).
What is the difference between simple and compounded interest?
Simple interest is computed on only the principal. Compounded interest is computed on the principal and any interest earned to date.
future value of an annuity
The accumulated total that results from a series of equal deposits (rents) invested at compound interest. (p. 276).
principal
The amount borrowed or invested. (p. 265).
stated rate
The annual interest rate stated on a financial instrument (a note or bond, for example). Also called face or nominal rate. (p. 269).
nominal rate
The annual interest rate stated on a financial instrument (a note or bond, for example). Also called face or stated rate. (p. 269).
face rate
The annual interest rate stated on a financial instrument. Also called nominal or stated rate. (p. 269).
Effective rate
The effective interest rate is the rate at which money actually will grow during a full year.
Future value (FV)
The future value of a single amount is the amount of money that a dollar will grow to at some point in the future.
effective-interest method
The preferred procedure for computing the amortization of a discount or premium. Under this method, companies compute bond interest expense (revenue) at the beginning of the period by the effective-interest rate) and then subtract bond interest paid (calculated as the face amount of the bonds times the stated interest rate); the result is the amortization amount. (p. 289).
Present value (PV)
The present value of a single amount is today's equivalent to a particular amount in the future
discounting
The process of reducing the amounts or values of cash flows from the future to the present, making the present value less than the future amount. (p. 271).
risk-free rate of return
The pure (real) rate of return plus the expected inflation rate. Typically measured by the return on a low-risk security (such as a 3-month U.S. Treasury bill.) (p. 291).
effective yield
The rate of interest the bondholders actually earn on a bond (and which takes into account the frequency of compounding). If bonds sell at a discount, the effective yield exceeds the stated rate; if bonds sell at a premium, the effective yield is lower than the stated rate. (p. 269).
time value of money
The relationship between time and money. A dollar received today is worth more than a dollar promised at some time in the future, because of the opportunity to invest today's dollar and receive interest on the investment. (p. 264).
Time value of money
The time value of money means that money can be invested today to earn interest and grow to a larger dollar amount in the future.
present value
The value at an earlier date (usually now) of a given future sum discounted at compound interest. (p. 270).
future value
Value at a later date of a single sum that is invested at compound interest. (p. 270).
Monetary assets and Monetary liabilities
are valued at the present value of future cash flows.
Ordinary annuity
cash flows occur at the end of each period.
Compound interest
includes interest not only on the initial investment but also on the accumulated interest in previous periods.
Future value (FV)
is the amount of money that a dollar will grow to at some point in the future.
Effective rate
is the rate at which money actually will grow during a full year.
Present value (PV)
today's equivalent to a particular amount in the future
Deferred annuity
when the first cash flow occurs more than one period after the date the agreement begins.
When computing the future value of an ordinary annuity, the number of compounding periods __
will always be one less than the number of rents.
