Intermediate Accounting (16th Edition)

Published by Wiley
ISBN 10: 1118743202
ISBN 13: 978-1-11874-320-1

Chapter 6 - Accounting and the Time Value of Money - Review and Practice - Questions - Page 301: 1

Answer

“Time value of money” refers to how the worth of money is associated with time. The worth of today’s dollar exceeds the value of a dollar that will be received at a forthcoming time (tomorrow’s dollar). Therefore, the passage of time results in a decrease in the value of a dollar. In their line of work, accountants compute compound interest of various investments and instruments. Compound interest is computed in a myriad of business scenarios. Compound interests are used in evaluating investments by focusing on periodic returns that are reinvested to generate additional returns. Similarly, accountants usually deal with annuities in their work. Annuities comprise payments and receipts that are paid periodically; these amounts are the same, and the interval that lapses before the payments are made is the same. Similarly, the interest of the annuities takes place once for every interval. Accordingly, accountants must be familiar with annuities to account for them appropriately. Present value concepts are crucial for accountants because they aid in computing the values that are utilized in comparing the values of money.

Work Step by Step

“Time value of money” refers to how the worth of money is associated with time. The worth of today’s dollar exceeds the value of a dollar that will be received at a forthcoming time (tomorrow’s dollar). Therefore, the passage of time results in a decrease in the value of a dollar. In their line of work, accountants compute compound interest of various investments and instruments. Compound interest is computed in a myriad of business scenarios. Compound interests are used in evaluating investments by focusing on periodic returns that are reinvested to generate additional returns. Similarly, accountants usually deal with annuities in their work. Annuities comprise payments and receipts that are paid periodically; these amounts are the same, and the interval that lapses before the payments are made is the same. Similarly, the interest of the annuities takes place once for every interval. Accordingly, accountants must be familiar with annuities to account for them appropriately. Present value concepts are crucial for accountants because they aid in computing the values that are utilized in comparing the values of money.
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