Intermediate Accounting Chapter 5: Time Value of Money Concepts

Vocabulary practice flashcards covering fundamental time value of money concepts, annuities, single amounts, and financial accounting valuation applications from Chapter 5.

Time Value of Money

The concept that money can be invested today to earn interest and grow to a larger dollar amount in the future.

Interest

The amount of money paid or received in excess of the amount of money borrowed or lent.

Simple Interest

Interest calculated solely on the initial investment according to the formula$\text{Initial investment} \times \text{Annual Interest rate} \times \text{Period of time}$ .

Compound Interest

Interest that includes earnings not only on the initial investment but also on accumulated interest earned in previous periods when money remains invested for multiple periods.

Future Value (FV) of a Single Amount

The amount of money that a dollar will grow to at some point in the future, determined by the formula: $FV = I(1 + i)^n$.

Present Value (PV) of a Single Amount

Today's equivalent value to a particular amount to be received or paid in the future, determined by the formula: $PV = \frac{FV}{(1 + i)^n}$.

Monetary Assets

Money and claims to receive money in the future, the amount of which is fixed or determinable (for example, cash and most receivables).

Monetary Liabilities

Obligations to pay amounts of cash in the future, the amount of which is fixed or determinable (for example, notes payable).

Annuity

A series of cash flows of the same amount received or paid each period, such as bond interest, lease payments, or service contracts.

Ordinary Annuity

An annuity in which cash payments or receipts occur at the end of each period.

Annuity Due

An annuity in which cash payments or receipts occur at the beginning of each period.

Deferred Annuity

An annuity arrangement that exists when the first cash flow occurs more than one period after the date the agreement begins.

Future Value of an Ordinary Annuity (FVA)

The accumulated future value of a series of equal-sized payments made at the end of each compounding period.

Future Value of an Annuity Due (FVAD)

The accumulated future value of a series of equal-sized payments made at the beginning of each compounding period.

Present Value of an Ordinary Annuity (PVA)

The present value of a series of equal-sized payments made at the end of each compounding period.

Present Value of an Annuity Due (PVAD)

The present value of a series of equal-sized payments made at the beginning of each compounding period.

Excel FV Function

The spreadsheet function given by =-FV(rate, nper, pmt, [pv], [type]), where rate is the interest rate per period, nper is total periods, pmt is payment amount per period, pv is lump sum today, and type indicates timing ($0$ for period-end, $1$ for period-beginning).

Excel PV Function

The spreadsheet function given by =-PV(rate, nper, pmt, [fv], [type]) used to compute the discounted present value of a future single amount or series of payments.