Learning Module 5 Time Value of Money & Hodgepodge of Other Stuff

Transcription

1 Learning Module 5 Time Value of Money & Hodgepodge of Other Stuff

2 The Concept of Future Value If you have $100 today and put it in the bank, how much will you have in the future? In order to put this concept to practical work, I need to know 1) When in the future are you talking

3 The Concept of Future Value If you have $100 today and put it in the bank, how much will you have in the future? In order to put this concept to practical work, I need to know 1) When in the future are you talking 2) What is the annual interest rate you will earn

4 The Concept of Future Value If you have $100 today and put it in the bank, how much will you have in the future? In order to put this concept to practical work, I need to know 1) When in the future are you talking 2) What is the annual interest rate you will earn 3) How many times per year is the annual interest rate compounded

5 The Concept of Future Value a) So you have $100 today, the bank pays annual interest of 10%, how much will you have in one year? $100 x 1.10 = $110 b) Two years? $100 x = $121

6 The Concept of Future Value c) One year and the bank pays interest at 10% compounded semi-annually? Interest is normally stated on an annual basis. $100 x = $ d) If you have $1,000 today, how much will you have in 2 years, 12% interest, compounded quarterly? $1,000 x = $1,266.77

7 The Concept of Future Value The formula for FV is FV = PV x (1 + i) n The n is the number of compounding periods over the life of the investment. If I put $100 in the bank today, the banks pays 8% interest compounded semiannually, how much will I have in one year? $100 x = $108.16

8 The Concept of Future Value The formula for FV is FV = PV x (1 + i) n The n is the number of compounding periods over the life of the investment. If I put $100 in the bank today, the banks pays 12% interest compounded quarterly, how much will I have in one year? $100 x = $112.55

9 The Concept of Present Value You have a choice between $100 today, $107 in one year, or $115 in two years. You do not need money today and the money is safe if you decide to take it later. How would you make this decision? The idea of Opportunity Costs is the cost of an alternative that must be foregone in order to pursue a certain action.

10 The Concept of Present Value How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually? $110 / 1.10 = $100 What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually? The formula for PV is $100 / 1.10 = $90.91 PV = FV / (1 + i) n

11 How to Use the Calculator How much do I need to put in the bank today if I want to have $1,000 in 3 years, the bank pays interest at 10% compounded annually? 1, FV N I/Y PV =

12 How to Use the Calculator How much do I need to put in the bank today if I want to have $1,000 in 3 years, the bank pays interest at 10% compounded semi-annually? 1, FV N I/Y PV =

13 How to Use the Calculator How about wanting $50,000 in 10 years, bank pays interest of 16% payable quarterly? 50, FV N I/Y PV = -10,414.45

14 Problems 1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually? 1,000, FV N I/Y PV = -821,927.11

15 Problems 2) Compounded semi-annually? 1,000, FV N I/Y PV = -820,348.30

16 Problems 3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8% compounded annually? 100, FV N I/Y PV = -31,524.17

17 Problems 4) What if you want $1,000,000 in 20 years at 12% compounded semiannually? 1,000, FV N I/Y PV = -97,222.19

18 Problems 5) Problem 4 compounded quarterly? 1,000, FV N I/Y PV = -93,977.10

19 Depreciation Depreciation is the allocation of the cost of fixed assets (except land) over the useful life of the asset in order to match the expense recognition with the revenue the asset helps to generate. You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000 and will last for 4 years. At the end of the 4 years, you figure you could sell it for $2,000. Depreciation = Cost - Estimated Salvage Value Estimated Useful Life of Asset

20 Depreciation Depreciation is the allocation of the cost of fixed assets (except land) over the useful life of the asset in order to match the expense recognition with the revenue the asset helps to generate. You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000 and will last for 4 years. At the end of the 4 years, you figure you could sell it for $2,000. Depreciation = Cost - Estimated Salvage Value = 30,000-2,000 = 7,000 Estimated Useful Life of Asset 4

21 Depreciation Journal Entries 1 Truck 30,000 Cash 30,000 To record purchase of truck 2 Depreciation Expense 7,000 Accumulated Depreciation 7,000 To record depreciation on truck

22 Depreciation T-accounts Balance Sheet Income Statement = Assets Liabilities Owners' Equity Revenue Expenses Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 30,000 1 Truck 1 30,000 Accumulated Depr 7,000 2 Depreciation Exp 2 7,000

23 Depreciation Goes on the Balance Sheet Fixed Assets Truck $ 30,000 Total Fixed Assets 30,000 Less: Accumulated Depreciation (7,000) Net Fixed Assets 23,000

24 Inventories We began the year with 5 markers that cost us $10 each. During the year, we purchased 2 more for $12 each. During the year, we sold 3 for $20 each. Cost of Goods Sold? Specific Identification Assume the company sold 2 from the beginning of year inventory and 1 from what was purchased during the year. Cost of Goods Sold = ($10 x 2) + ($12 x 1) = $32

25 Inventories We began the year with 5 markers that cost us $10 each. During the year, we purchased 2 more for $12 each. During the year, we sold 3 for $20 each. Cost of Goods Sold? Weighted Average To calculate the weighted average cost per unit, divide the cost of goods available for sale by the total number of units available for sale. Cost of Goods Sold = [($10 x 5) + ($12 x 2)] / 7 x 3 = $31.71

26 Inventories We began the year with 5 markers that cost us $10 each. During the year, we purchased 2 more for $12 each. During the year, we sold 3 for $20 each. Cost of Goods Sold? LIFO Last In First Out (not used much anymore because of the IFRS International Financial Reporting Standards which does not allow it) Cost of Goods Sold = ($12 x 2) + ($10 x 1) = $34

27 Inventories We began the year with 5 markers that cost us $10 each. During the year, we purchased 2 more for $12 each. During the year, we sold 3 for $20 each. Cost of Goods Sold? FIFO First In First Out Cost of Goods Sold = $10 x 3 = $30

28 Inventories Inventory Management Metrics Inventory turn = Cost of Goods Sold (or turnover) Average Inventory Average days' = 365 sales in inventory Inventory Turnover Working Capital = Current Assets - Current Liabilities

29 Prepaid Expenses and Accruals Remember the matching principle is expenses are recognized in the same accounting period as the revenue they help to generate. You started the year with a beginning balance in Rent Payable of $2,000. You paid 15 months rent of $15,000. Record the journal entry. 1 Rent Payable 2,000 Rent Expense 12,000 Prepaid Rent 1,000 Cash 15,000 To record payment of 15 months rent

30 Prepaid Expenses and Accruals You started the year with a beginning balance in Prepaid Rent of $2,000. You paid 8 months rent of $16,000. Record the journal entry. 1 Rent Expense 18,000 Prepaid Rent 2,000 Cash 16,000 To record payment of 8 months rent

31 Prepaid Expenses and Accruals You started the year with $3,000 in Wages Payable. You paid $40,000 to your worker. You owed her $7,000 at the end of the year. Record the journal entries. 1 Wages Payable 3,000 Wage Expense 37,000 Cash 40,000 To record payment of wages 2 Wage Expense 7,000 Wages Payable 7,000 To record wages owed

32 Prepaid Expenses and Accruals You started the year with $1,200 in Prepaid Insurance. This was for the final two years of a three year policy. Record the journal entry for the end of the year. 1 Insurance Expense 600 Prepaid Insurance 600 To record insurance expense

33 Homework Complete all the problems on pages 95-96