Acc 421 Week 5 Reflection
Week Five Team Reflection
ACC 421
2014
Team B
Week Five Reflection This week learning team “B” has discussed the concept of time value of money. One will be able to understand the importance of time value of money, the different ways to compute interest, information about present value and future value, and the how time value relates to accounting.
Importance of Time Value of Money
Time value of money deals with the relationship between money and time (Kieso, Weygandt, & Warfield). A dollar received today is worth more than a dollar received 10 years in the future. This is because a person can invest that one-dollar and gains interest for those 10 years. This means that exact dollar is worth more in …show more content…
the future after it has earned interest than it is now. There are two types of interest simple and compound. Simple interest only uses the principle amount, which is the original amount borrowed or invested, to compute interest earned each period (Kieso, Weygandt, & Warfield). Compound interest uses the principle amount and the previously earned interest when computing the interest earned each period (Kieso, Weygandt, & Warfield). Investing money with interest compounded will allow the investor to earn more money than simply interest. It is important to know the time value of money when investing and borrowing money. If someone wants to earn a certain amount of money he or she needs to know how much he or she must invest and for how long to earn his or her goal amount. People can use time value of money concepts to help them invest so they can have enough for retirement or college. If someone is trying to decide to take small payments over time or a lump sum at the end, time value of money can help determine the best option.
Present Value
“Present value is the amount needed to invest now, to produce a known future value” (Kieso, Weygandt, & Warfield). The present value calculation helps to regulate the value of a property or money invested today to acquire the preferred sum at a later date. Another common use of present value calculations would be the value of a business that an investor would be thinking of obtaining. The values are used as discounted rate because the future earnings of an investment would be more. The formula used to determine the present value is as followed; Present value = FV (PVFn,i)
The formula can be applied in a variety of situations like ordinary annuity, annuity due, interest rate, and periodic rent. The formula for these are as followed; for present value for any annuity: PVF-OAn,i, periodic rent: R (PVF-OAn,i). Then there is the more complex situation liked deferred annuities, and bond problems. For more complex situations with present value the formulas stays the same as the annuity and periodic rent.
Future Value
The future value of money is important to accounting.
It allows accounting departments to determine the value of investments and financing options. Investopedia.com defines future value (FV) as “the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today” (Investopedia.com). This definition states that accounting departments can determine how much money they will earn on an investment made today. Simple and compounded interest help determine future value. The company can determine the amount of interest they will receive over a specific period and also determine if the investment is the correct for them. Determining the amount of return on investment is important to many companies in the statement of cash flows and can increase the numbers for the balance sheet with a favorable …show more content…
investment.
Time Value of Money is applied in Accounting
Time value of money helps a company to know their value of worth, how much debt they will be paying, and how much will be paid in dividends.
Time value of money explains the value of money today is more, less, or the same in the future. An example would be $1 today may be worth $0.75 or $1.75 in the future. Future values help companies determine how much money invested today is worth in the future, and how much dividends will be worth. This is important to the companies to determine how to plan for the future. Present values determine how much a given amount of money in the future is valued at today. An example would be dividends. A company will use this to know how much money they will need to have to pay dividends to stockholders and still be able to conduct business as usual.
In conclusion time value of money is not only important within the accounting industry but is also widely used within every facet of accounting. Businesses must understand how interest is computed either simple interest or compounded. Business must also understand the difference between future and present value of money. By understanding these concepts of time value of money, the business can make the best decisions
possible.
References
Investopedia.com. Definition of 'Future Value - FV '. Retrieved from http://www.investopedia.com/terms/f/futurevalue.asp#axzz1yf87yKxq
Kieso, D.E. Weygandt, J.J., & Warfield, T.D. (2010). Intermediate accounting (13th ed.) Hoboken, NJ: Wiley
ACC 421
2014
Team B
Week Five Reflection This week learning team “B” has discussed the concept of time value of money. One will be able to understand the importance of time value of money, the different ways to compute interest, information about present value and future value, and the how time value relates to accounting.
Importance of Time Value of Money
Time value of money deals with the relationship between money and time (Kieso, Weygandt, & Warfield). A dollar received today is worth more than a dollar received 10 years in the future. This is because a person can invest that one-dollar and gains interest for those 10 years. This means that exact dollar is worth more in …show more content…
the future after it has earned interest than it is now. There are two types of interest simple and compound. Simple interest only uses the principle amount, which is the original amount borrowed or invested, to compute interest earned each period (Kieso, Weygandt, & Warfield). Compound interest uses the principle amount and the previously earned interest when computing the interest earned each period (Kieso, Weygandt, & Warfield). Investing money with interest compounded will allow the investor to earn more money than simply interest. It is important to know the time value of money when investing and borrowing money. If someone wants to earn a certain amount of money he or she needs to know how much he or she must invest and for how long to earn his or her goal amount. People can use time value of money concepts to help them invest so they can have enough for retirement or college. If someone is trying to decide to take small payments over time or a lump sum at the end, time value of money can help determine the best option.
Present Value
“Present value is the amount needed to invest now, to produce a known future value” (Kieso, Weygandt, & Warfield). The present value calculation helps to regulate the value of a property or money invested today to acquire the preferred sum at a later date. Another common use of present value calculations would be the value of a business that an investor would be thinking of obtaining. The values are used as discounted rate because the future earnings of an investment would be more. The formula used to determine the present value is as followed; Present value = FV (PVFn,i)
The formula can be applied in a variety of situations like ordinary annuity, annuity due, interest rate, and periodic rent. The formula for these are as followed; for present value for any annuity: PVF-OAn,i, periodic rent: R (PVF-OAn,i). Then there is the more complex situation liked deferred annuities, and bond problems. For more complex situations with present value the formulas stays the same as the annuity and periodic rent.
Future Value
The future value of money is important to accounting.
It allows accounting departments to determine the value of investments and financing options. Investopedia.com defines future value (FV) as “the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today” (Investopedia.com). This definition states that accounting departments can determine how much money they will earn on an investment made today. Simple and compounded interest help determine future value. The company can determine the amount of interest they will receive over a specific period and also determine if the investment is the correct for them. Determining the amount of return on investment is important to many companies in the statement of cash flows and can increase the numbers for the balance sheet with a favorable …show more content…
investment.
Time Value of Money is applied in Accounting
Time value of money helps a company to know their value of worth, how much debt they will be paying, and how much will be paid in dividends.
Time value of money explains the value of money today is more, less, or the same in the future. An example would be $1 today may be worth $0.75 or $1.75 in the future. Future values help companies determine how much money invested today is worth in the future, and how much dividends will be worth. This is important to the companies to determine how to plan for the future. Present values determine how much a given amount of money in the future is valued at today. An example would be dividends. A company will use this to know how much money they will need to have to pay dividends to stockholders and still be able to conduct business as usual.
In conclusion time value of money is not only important within the accounting industry but is also widely used within every facet of accounting. Businesses must understand how interest is computed either simple interest or compounded. Business must also understand the difference between future and present value of money. By understanding these concepts of time value of money, the business can make the best decisions
possible.
References
Investopedia.com. Definition of 'Future Value - FV '. Retrieved from http://www.investopedia.com/terms/f/futurevalue.asp#axzz1yf87yKxq
Kieso, D.E. Weygandt, J.J., & Warfield, T.D. (2010). Intermediate accounting (13th ed.) Hoboken, NJ: Wiley