Intermediate Accounting - Chapter 5

time value of money

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

interest

“rent” paid for the use of money for some period of time.

Simple interest

computed by multiplying an initial investment times both the applicable interest rate and the period of time for which the money is used.

compound interest

interest computed not only on the initial investment but also on the accumulated interest in previous periods.

effective rate

the actual rate at which money grows per year.

future value

amount of money that a dollar will grow to at some point in the future.

present value

bases measurement on future cash flows discounted for the time value of money.

monetary assets

money and claims to receive money, the amount of which is fixed or determinable.

Monetary liabilities

obligations to pay amounts of cash, the amount of which is fixed or determinable.

annunity

cash flows received or paid in the same amount each period.

ordinary annunity

cash flows occur at the end of each period.

annunity due

cash flows occurring at the beginning of each period.

Deferred annuity

first cash flow occurs more than the one period after the date the agreement begins.