B A P P E N D I X NOTES ON COMPOUND INTEREST AND INTEREST TABLES Interest is the cost of using money. It is the rental charge for funds, just as renting a building and equipment entails a rental charge. When the funds are used for a period of time, it is necessary to recognize interest as a cost of using the borrowed ( rented ) funds. This requirement applies even if the funds represent ownership capital and if interest does not entail an outlay of cash. Why must interest be considered? Because the selection of one alternative automatically commits a given amount of funds that could otherwise be invested in some other alternative. Interest is generally important, even when short-term projects are under consideration. Interest looms correspondingly larger when long-run plans are studied. The rate of interest has significant enough impact to influence decisions regarding borrowing and investing funds. For example, $100,000 invested now and compounded annually for 10 years at 8% will accumulate to $215,900; at 20%, the $100,000 will accumulate to $619,200. interest tables Many computer programs and pocket calculators are available that handle computations involving the time value of money. You may also turn to the following four basic tables to compute interest. Table 1 Future Amount of $1 Table 1 shows how much $1 invested now will accumulate in a given number of periods at a given compounded interest rate per period. Consider investing $1,000 now for three years at 8% compound interest. A tabular presentation of how this $1,000 would accumulate to $1,259.70 follows: Cumulative Interest Called Compound Total at End of Year Interest per Year Interest Year 0 $ $ $1,000.00 1 80.00 80.00 1,080.00 2 86.40 166.40 1,166.40 3 93.30 259.70 1,259.70
This tabular presentation is a series of computations that could appear as follows: S 1 = $1,000(1.08) 1 S 2 = $1,000(1.08) 2 S 3 = $1,000(1.08) 3 The formula for the amount of 1, often called the future value of $1 or future amount of $1, can be written S = P(1 + r) n S = $1,000(1 +.08) 3 = $1,259.70 S is the future value amount; P is the present value, $1,000 in this case; r is the rate of interest; and n is the number of time periods. Fortunately, tables make key computations readily available. A facility in selecting the proper table will minimize computations. Check the accuracy of the preceding answer using Table 1. Table 2 Present Value of $1 In the previous example, if $1,000 compounded at 8% per year will accumulate to $1,259.70 in 3 years, then $1,000 must be the present value of $1,259.70 due at the end of 3 years. The formula for the present value can be derived by reversing the process of accumulation (finding the future amount) that we just finished. If P = S = P(1 + r) n S (1 + r) n $1,259.70 then P = = $1,000 (1.08) 3 Use Table 2 to check this calculation. When accumulating, we advance or roll forward in time. The difference between our original amount and our accumulated amount is called compound interest. When discounting, we retreat or roll back in time. The difference between the future amount and the present value is called compound discount. Note the following formulas (where P = $1,000): Compound interest = P[(1 + r) n 1] = $259.70 Compound discount = S[ 1 ] = $259.70 Table 3 Amount of Annuity of $1 1 (1 + r) n An (ordinary) annuity is a series of equal payments (receipts) to be paid (or received) at the end of successive periods of equal length. Assume that $1,000 is invested at the end of each of 3 years at 8%: 0 1 2 3 End of Year Amount 1st payment $1,000.00 $1,080.00 $1,166.40, which is $1,000(1.08) 2 2nd payment $1,000.00 1,080.00, which is $1,000(1.08) 1 3rd payment 1,000.00 Accumulation (future amount) $3,246.40 NOTES ON COMPOUND INTEREST AND INTEREST TABLES A-17
The preceding arithmetic may be expressed algebraically as the amount of an ordinary annuity of $1,000 for 3 years = $1,000(1 + r) 2 + $1,000(1 + r) 1 + $1,000. We can develop the general formula for S n, the amount of an ordinary annuity of $1, by using the example above as a basis: 1. S n = 1 + (1 + r) 1 + (1 + r) 2 2. Substitute: S n = 1 + (1.08) 1 + (1.08) 2 3. Multiply (2) by (1 + r): (1.08)S n = (1.08) 1 + (1.08) 2 + (1.08) 3 4. Subtract (2) from (3): 1.08S n S n (1.08) 3 1 Note that all terms on the right-hand side are removed except (1.08) 3 in equation (3) and 1 in equation (2). 5. Factor (4): S n (1.08 1) = (1.08) 3 1 (1.08) (1.08) 6. Divide (5) by (1.08 1): S n = 3 1) = 3 1 1.08 1.08 7. The general formula for the amount of an ordinary (1 + r) annuity of $1 becomes: S n = n 1 or r Compound interest Rate This formula is the basis for Table 3. Look at Table 3 or use the formula itself to check the calculations. Table 4 Present Value of an Ordinary Annuity of $1 Using the same example as for Table 3, we can show how the formula of P n, the present value of an ordinary annuity, is developed. End of Year 0 1 2 3 1,000 1st payment = $ 926.14 $1,000 (1.08) 1 1,000 2nd payment = $ 857.52 $1,000 (1.08) 2 1,000 3rd payment = $ 794.00 $1,000 (1.08) 3 Total present value $2,577.66 For the general case, the present value of an ordinary annuity of $1 may be expressed: A-18 APPENDIX B 1 1 1 1. P n = + + 1 + r (1 + r) 2 (1 + r) 3 2. Substitute 1 1 1 P n = + + 1.08 (1.08) 2 (1.08) 3 1 1 1 1 1 3. Multiply by : P n = + + + 1.08 1.08 (1.08) 2 (1.08) 3 (1.08) 4 1 1 1 4. Subtract (3) from (2): P n P n = 1.08 1.08 (1.08) 4 5. Factor: P n ( 1 1 ) = 1 [ 1 1 (1.08) 1.08 (1.08) ].08 1 1 1.08 1.08 (1.08) 3 6. or P n ( ) = [ 1 ]
1.08 1 7. Multiple by : P n = [ 1 1.08.08 (1.08) ] 3 Solving, The general formula for the present value of an annuity of $1.00 is: 1 r 1 (1 + r) n P n = [ 1 ] =.2062 P n = = 2.577.08 Compound discount Rate The formula is the basis for Table 4. Check the answer in the table. The present value tables, Tables 2 and 4, are used most frequently in capital budgeting. The tables for annuities are not essential. With Tables 1 and 2, compound interest and compound discount can readily be computed. It is simply a matter of dividing either of these by the rate to get values equivalent to those shown in Tables 3 and 4. CPA and CMA Designations Many American readers may eventually take the Certified Public Accountant (CPA) examination or the Certified Management Accountant (CMA) examination. Certification is important to professional accountants for many reasons, such as: 1. Recognition of achievement and technical competence by fellow accountants and by users of accounting services 2. Increased self-confidence in one s professional abilities 3. Membership in professional organizations offering programs of career-long education 4. Enhancement of career opportunities 5. Personal satisfaction The CPA certificate is issued by individual states; it is necessary for obtaining a state s license to practice as a Certified Public Accountant. A prominent feature of public accounting is the use of independent (external) auditors to give assurance about the reliability of the financial statements supplied by managers. These auditors are called Certified Public Accountants in the United States and Chartered Accountants in many other English-speaking nations. The major U.S. professional association in the private sector that regulates the quality of external auditing is the American Institute of Certified Public Accountants (AICPA). The CMA designation is offered by the Institute of Management Accountants (IMA). The IMA is the largest association of management accountants in the world. 2 The major objective of the CMA certification is to enhance the development of the management accounting profession. In particular, focus is placed on the modern role of the management accountant as an active contributor to and a participant in management. The CMA designation is gaining increased stature in the business community as a credential parallel to the CPA designation. The CMA examination consists of 4 parts taken during 2 days (16 hours): Part 1: Economics, finance, and management Part 2: Financial accounting and reporting Part 3: Management reporting, analysis, and behavioral issues Part 4: Decision analysis and information systems Questions regarding ethical issues will appear on any part of the examination. A person who has successfully completed the U.S. CPA examination is exempt from Part 2. Cost/management accounting questions are prominent in the CMA examination. The CPA examination also includes such questions, although they are less extensive than questions regarding financial accounting, auditing, and business law. On NOTES ON COMPOUND INTEREST AND INTEREST TABLES A-19
TABLE 1 Compound Amount of $1.00 (The Future Value of $1.00) S = P(1 + r) n. In this table P = $1.00 Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% Periods 1 1.020 1.040 1.060 1.080 1.100 1.120 1.140 1.160 1.180 1.200 1.220 1.240 1.260 1.280 1.300 1.320 1.400 1 2 1.040 1.082 1.124 1.166 1.210 1.254 1.300 1.346 1.392 1.440 1.488 1.538 1.588 1.638 1.690 1.742 1.960 2 3 1.061 1,125 1.191 1.260 1.331 1.405 1.482 1.561 1.643 1.728 1.816 1.907 2.000 2.097 2.197 2.300 2.744 3 4 1.082 1.170 1.262 1.360 1.464 1,574 1.689 1.811 1.939 2.074 2.215 2.364 2.520 2.684 2.856 3.036 3.842 4 5 1.104 1.217 1.338 1.469 1.611 1.762 1.925 2.100 2.288 2.488 2.703 2.932 3.176 3.436 3.713 4,007 5.378 5 6 1.126 1.265 1.419 1.587 1.772 1.974 2.195 2.436 2.700 2.986 3.297 3.635 4.002 4.398 4.827 5.290 7.530 6 7 1.149 1.316 1.504 1.714 1.949 2.211 2.502 2.826 3.185 3.583 4.023 4.508 5.042 5.629 6.275 6.983 10.541 7 8 1.172 1.369 1.594 1.851 2.144 2.476 2.853 3.278 3.759 4.300 4.908 5.590 6.353 7.206 8.157 9.217 14.758 8 9 1.195 1.423 1.689 1.999 2.358 2.773 3.252 3.803 4.435 5.160 5.987 6.931 8.005 9.223 10.604 12.166 20.661 9 10 1.219 1.480 1.791 2.159 2.594 3.106 3.707 4.411 5.234 6.192 7.305 8.594 10.086 11.806 13.786 16.060 28.925 10 11 1.243 1.539 1.898 2.332 2.853 3.479 4.226 5.117 6.176 7.430 8.912 10.657 12.708 15.112 17.922 21.199 40.496 11 12 1.268 1,601 2.012 2.518 3.138 3.896 4.818 5.936 7.288 8.916 10.872 13.215 16.012 19.343 23.298 27.983 56.694 12 13 1.294 1.665 2.133 2.720 3.452 4.363 5.492 6.886 8.599 10.699 13.264 16.386 20.175 24.759 30.288 36.937 79.371 13 14 1.319 1,732 2.261 2.937 3.797 4.887 6.261 7.988 10.147 12.839 16.182 20.319 25.421 31.691 39.374 48.757 111.120 14 15 1.346 1.801 2.397 3.172 4.177 5.474 7.138 9.266 11.974 15.407 19.742 25.196 32.030 40.565 51.186 64.359 155.568 15 16 1.373 1.873 2.540 3.426 4.595 6.130 8.137 10.748 14.129 18.488 24.086 31.243 40.358 51.923 66.542 84.954 217.795 16 17 1.400 1.948 2.693 3.700 5.054 6.866 9.276 12.468 16.672 22.186 29.384 38.741 50.851 66.461 86.504 112.139 304.913 17 18 1.428 2.026 2.854 3.996 5.560 7.690 10.575 14.463 19.673 26.623 35.849 48.039 64.072 85.071 112.455 148.024 426.879 18 19 1.457 2.107 3.026 4.316 6.116 8.613 12.056 16.777 23.214 31.948 43.736 59.568 80.731 108.890 146.192 195.391 597.630 19 20 1.486 2.191 3.207 4.661 6.727 9.646 13.743 19.461 27.393 38.338 53.358 73.864 101.721 139.380 190.050 257.916 836.683 20 21 1.516 2.279 3.400 5.034 7.400 10.804 15.668 22.574 32.324 46.005 65.096 91.592 128.169 178.406 247.065 340.449 1171.356 21 22 1.546 2.370 3.604 5.437 8.140 12.100 17.861 26.186 38.142 55.206 79.418 113.574 161.492 228.360 321.184 449.393 1639.898 22 23 1.577 2.465 3.820 5.871 8.954 13.552 20.362 30.376 45.008 66.247 96.889 140.831 203.480 292.300 417.539 593.199 2295.857 23 24 1.608 2.563 4.049 6.341 9.850 15.179 23.212 35.236 53.109 79.497 118.205 174.631 256.385 374.144 542.801 783.023 3214.200 24 25 1.641 2.666 4.292 6.848 10.835 17.000 26.462 40.874 62.669 95.396 144.210 216.542 323.045 478.905 705.641 1033.590 4499.880 25 26 1.673 2.772 4.549 7.396 11.918 19.040 30.167 47.414 73.949 114.475 175.936 268.512 407.037 612.998 917.333 1364.339 6299.831 26 27 1.707 2.883 4.822 7.988 13.110 21.325 34.390 55.000 87.260 137.371 214.642 332.955 512.867 784.638 1192.533 1800.927 8819.764 27 28 1.741 2.999 5.112 8.627 14.421 23.884 39.204 63.800 102.967 164.845 261.864 412.864 646.212 1004.336 1550.293 2377.224 12347.670 28 29 1.776 3.119 5.418 9.317 15.863 26.750 44.693 74.009 121.501 197.814 319.474 511.952 814.228 1285.550 2015.381 3137.935 17286.737 29 30 1.811 3.243 5.743 10.063 17.449 29.960 50.950 85.850 143.371 237.376 389.758 634.820 1025.927 1645.505 2619.996 4142.075 24201.432 30 35 2.000 3.946 7.686 14.785 28.102 52.800 98.100 180.314 327.997 590.668 1053.402 1861.054 3258.135 5653.911 9727.860 16599.217 130161.112 35 40 2.208 4.801 10.286 21.725 45.259 93.051 188.884 378.721 750.378 1469.772 2847.038 5455.913 10347.175 19426.689 36118.865 66520.767 700037.697 40
TABLE 2 (Place a clip on this page for easy reference.) Present Value of $1.00. S P =. In this table S = $1.00. (1 + r) n Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% Periods 1 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 1 2 0.961 0.925 0.890 0.857 0.826 0.797 0.769 0.743 0.718 0.694 0.672 0.650 0.630 0.610 0.592 0.574 0.510 2 3 0.942 0.889 0.840 0.794 0.751 0.712 0.675 0.641 0.609 0.579 0.551 0.524 0.500 0.477 0.455 0.435 0.364 3 4 0.924 0.855 0.792 0.735 0.683 0.636 0.592 0.552 0.516 0.482 0.451 0.423 0.397 0.373 0.350 0.329 0.260 4 5 0.906 0.822 0.747 0.681 0.621 0.567 0.519 0.476 0.437 0.402 0.370 0.341 0.315 0.291 0.269 0.250 0.186 5 6 0.888 0.790 0.705 0.630 0.564 0.507 0.456 0.410 0.370 0.335 0.303 0.275 0.250 0.227 0.207 0.189 0.133 6 7 0.871 0.760 0.665 0.583 0.513 0.452 0.400 0.354 0.314 0.279 0.249 0.222 0.198 0.178 0.159 0.143 0.095 7 8 0.853 0.731 0.627 0.540 0.467 0.404 0.351 0.305 0.266 0.233 0.204 0.179 0.157 0.139 0.123 0.108 0.068 8 9 0.837 0.703 0.592 0.500 0.424 0.361 0.308 0.263 0.225 0.194 0.167 0.144 0.125 0.108 0.094 0.082 0.048 9 10 0.820 0.676 0.558 0.463 0.386 0.322 0.270 0.227 0.191 0.162 0.137 0.116 0.099 0.085 0.073 0.062 0.035 10 11 0.804 0.650 0.527 0.429 0.350 0.287 0.237 0.195 0.162 0.135 0.112 0.094 0.079 0.066 0.056 0.047 0.025 11 12 0.788 0.625 0.497 0.397 0.319 0.257 0.208 0.168 0.137 0.112 0.092 0.076 0.062 0.052 0.043 0.036 0.018 12 13 0.773 0.601 0.469 0.368 0.290 0.229 0.182 0.145 0.116 0.093 0.075 0.061 0.050 0.040 0.033 0.027 0.013 13 14 0.758 0.577 0.442 0.340 0.263 0.205 0.160 0.125 0.099 0.078 0.062 0.049 0.039 0.032 0.025 0.021 0.009 14 15 0.743 0.555 0.417 0.315 0.239 0.183 0.140 0.108 0.084 0.065 0.051 0.040 0.031 0.025 0.020 0.016 0.006 15 16 0.728 0.534 0.394 0.292 0.218 0.163 0.123 0.093 0.071 0.054 0.042 0.032 0.025 0.019 0.015 0.012 0.005 16 17 0 714 0.513 0.371 0.270 0.198 0.146 0.108 0.080 0.060 0.045 0.034 0.026 0.020 0.015 0.012 0.009 0.003 17 18 0.700 0.494 0.350 0.250 0.180 0.130 0.095 0.069 0.051 0.038 0.028 0.021 0.016 0.012 0.009 0.007 0.002 18 19 0.686 0.475 0.331 0.232 0.164 0.116 0.083 0.060 0.043 0.031 0.023 0.017 0.012 0.009 0.007 0.005 0.002 19 20 0.673 0.456 0.312 0.215 0.149 0.104 0.073 0.051 0.037 0.026 0.019 0.014 0.010 0.007 0.005 0.004 0.001 20 21 0.660 0.439 0.294 0.199 0.135 0.093 0.064 0.044 0.031 0.022 0.015 0.011 0.008 0.006 0.004 0.003 0.001 21 22 0.647 0.422 0.278 0.184 0.123 0.083 0.056 0.038 0.026 0.018 0.013 0.009 0.006 0.004 0.003 0.002 0.001 22 23 0.634 0.406 0.262 0.170 0.112 0.074 0.049 0.033 0.022 0.015 0.010 0.007 0.005 0.003 0.002 0.002 0.000 23 24 0.622 0.390 0.247 0.158 0.102 0.066 0.043 0.028 0.019 0.013 0.008 0.006 0.004 0.003 0.002 0.001 0.000 24 25 0.610 0.375 0.233 0.146 0.092 0.059 0.038 0.024 0.016 0.010 0.007 0.005 0.003 0.002 0.001 0.001 0.000 25 26 0.598 0.361 0.220 0.135 0.084 0.053 0.033 0.021 0.014 0.009 0.006 0.004 0.002 0.002 0.001 0.001 0.000 26 27 0.586 0.347 0.207 0.125 0.076 0.047 0.029 0.018 0.011 0.007 0.005 0.003 0.002 0.001 0.001 0.001 0.000 27 28 0.574 0.333 0.196 0.116 0.069 0.042 0.026 0.016 0.010 0.006 0.004 0.002 0.002 0.001 0.001 0.000 0.000 28 29 0.563 0.321 0.185 0.107 0.063 0.037 0.022 0.014 0.008 0.005 0.003 0.002 0.001 0.001 0.000 0.000 0.000 29 30 0.552 0.308 0.174 0.099 0.057 0.033 0.020 0.012 0.007 0.004 0.003 0.002 0.001 0.001 0.000 0.000 0.000 30 35 0.500 0.253 0.130 0.068 0.036 0.019 0.010 0.006 0.003 0.002 0.001 0.001 0.000 0.000 0.000 0.000 0.000 35 40 0.453 0.208 0.097 0.046 0.022 0.011 0.005 0.003 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.000 0.000 40
TABLE 3 Compound Amount of Annuity of $1.00 in Arrears* (Future Value of Annuity) S n = (1 + r)n 1 r Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% Periods 1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1 2 2.020 2.040 2.060 2.080 2.100 2.120 2.140 2.160 2.180 2.200 2.220 2.240 2.260 2.280 2.300 2.320 2.400 2 3 3.060 3.122 3.184 3.246 3.310 3.374 3.440 3.506 3.572 3.640 3.708 3.778 3.848 3.918 3.990 4.062 4.360 3 4 4.122 4.246 4.375 4.506 4.641 4.779 4.921 5.066 5.215 5.368 5.524 5.684 5.848 6.016 6.187 6.362 7.104 4 5 5.204 5.416 5.637 5.867 6.105 6.353 6.610 6.877 7.154 7.442 7.740 8.048 8.368 8.700 9.043 9.398 10.946 5 6 6.308 6.633 6.975 7.336 7.716 8.115 8.536 8.977 9.442 9.930 10.442 10.980 11.544 12.136 12.756 13.406 16.324 6 7 7.434 7.898 8.394 8.923 9.487 10.089 10.730 11.414 12.142 12.916 13.740 14.615 15.546 16.534 17.583 18.696 23.853 7 8 8.583 9.214 9.897 10.637 11.436 12.300 13.233 14.240 15.327 16.499 17.762 19.123 20.588 22.163 23.858 25.678 34.395 8 9 9.755 10.583 11.491 12.488 13.579 14.776 16.085 17.519 19.086 20.799 22.670 24.712 26.940 29.369 32.015 34.895 49.153 9 10 10.950 12.006 13.181 14.487 15.937 17.549 19.337 21.321 23.521 25.959 28.657 31.643 34.945 33.593 42.619 47.062 69.814 10 ll 12.169 13.486 14.972 16.645 18.531 20.655 23.045 25.733 28.755 32.150 35.962 40.238 45.031 50.398 56.405 63.122 98.739 11 12 13.412 15.026 16.870 18.977 21.384 24.133 27.271 30.850 34.931 39.581 44.874 50.895 57.739 65.510 74.327 84.320 139.235 12 13 14.680 16.627 18.882 21.495 24.523 28.029 32.089 36.786 42.219 48.497 55.746 64.110 73.751 84.853 97.625 112.303 195.929 13 14 15.974 18.292 21.015 24 215 27.975 32.393 37.581 43.672 50.818 59.196 69.010 80.496 93.926 109.612 127.913 149.240 275.300 14 15 17.293 20.024 23.276 27.152 31.772 37.280 43.842 51.660 60.965 72.035 85.192 100.815 119.347 141.303 167.286 197.997 386.420 15 16 18.639 21.825 25.673 30.324 35.950 42.753 50.980 60.925 72.939 87.442 104.935 126.011 151.377 181.868 218.472 262.356 541.988 16 17 20.012 23.698 28.213 33.750 40.545 48.884 59.118 71.673 87.068 105.931 129.020 157.253 191.735 233.791 285.014 347.309 759.784 17 18 21.412 25.645 30.906 37.450 45.599 55.750 68.394 84.141 103.740 128.117 158.405 195.994 242.585 300.252 371.518 459.449 1064.697 18 19 22.841 27.671 33.760 41.446 51.159 63.440 78.969 98.603 123.414 154.740 194.254 244.033 306.658 385.323 483.973 607.472 1491.576 19 20 24.297 29.778 36.786 45.762 57.275 72.052 91.025 115.380 146.628 186.688 237.989 303.601 387.389 494.213 630.165 802.863 2089.206 20 21 25.783 31.969 39.993 50.423 64.002 81.699 104.768 134.841 174.021 225.026 291.347 377.465 489.110 633.593 820.215 1060.779 2925.889 21 22 27.299 34.248 43.392 55.457 71.403 92.503 120.436 157.415 206.345 271.031 356.443 469.056 617.278 811.999 1067.280 1401.229 4097.245 22 23 28.845 36.618 46.996 60.893 79.543 104.603 138.297 183.601 244.487 326.237 435.861 582.630 778.771 1040.358 1388.464 1850.622 5737.142 23 24 30.422 39.083 50.816 66.765 88.497 118.155 158.659 213.978 289.494 392.484 532.750 723.461 982.251 1332.659 1806.003 2443.821 8032.999 24 25 32.030 41.646 54.865 73.106 98.347 133.334 181.871 249.214 342.603 471.981 650.955 898.092 1238.636 1706.803 2348.803 3226.844 11247.199 25 26 33.671 44.312 59.156 79.954 109.182 150.334 208.333 290.088 405.272 567.377 795.165 1114.634 1561.682 2185.708 3054.444 4260.434 15747.079 26 27 35.344 47.084 63.706 87.351 121.100 169.374 238.499 337.502 479.221 681.853 971.102 1383.146 1968.719 2798.706 3971.778 5624.772 22046.910 27 28 37.051 49.968 68.528 95.339 134.210 190.699 272.889 392.503 586.481 819.223 1185.744 1716.101 2481.586 3583.344 5164.311 7425.699 30366.674 28 29 38.792 52.966 73.640 103.966 148.631 214.583 312.094 456.303 669.447 984.068 1447.608 2128.965 3127.798 4587.680 6714.604 9802.923 43214.343 29 30 40.568 56.085 79.058 113.263 164.494 241.333 356.787 530.312 790.948 1181.882 1767.081 2640.916 3942.026 5873.231 8729.985 12940.859 60501.081 30 35 49.994 73.652 111.435 172.317 271.024 431.663 693.573 1120.713 1816.652 2948.341 4783.645 7750.225 12527.442 20188.966 32422.868 51869.427 325400.279 35 40 60.402 95.026 154.762 259.057 442.593 767.091 1342.025 2360.757 4163.213 7343.858 12936.535 22728.803 39792.982 69377.460 120392.883 207874.272 1750091.741 40 *Payments (or receipts) at the end of each period.
TABLE 4 (Place a clip on this page for easy reference.) Present Value of Annuity $1.00 in Arrears*. P = 1 [ ] 1 1 n r (1 + r) n Periods 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% 40% Periods 1 0.980 0.962 0.943 0.926 0.909 0.893 0.877 0.862 0.847 0.833 0.820 0.806 0.794 0.781 0.769 0.758 0.714 1 2 1.942 1.886 1.833 1.783 1.736 1.690 1.647 1.605 1.566 1.528 1.492 1.457 1.424 1.392 1.361 1.331 1.224 2 3 2.884 2.775 2.673 2.577 2.487 2.402 2.322 2.246 2.174 2.106 2.042 1.981 1.923 1.868 1.816 1.766 1.589 3 4 3.808 3.630 3.465 3.312 3.170 3.037 2.914 2.798 2.690 2.589 2.494 2.404 2.320 2.241 2.166 2.096 1.849 4 5 4.713 4.452 4.212 3.993 3.791 3.605 3.433 3.274 3.127 2.991 2.864 2.745 2.635 2.532 2.436 2.345 2.035 5 6 5.601 5.242 4.917 4.623 4.355 4.111 3.889 3.685 3.498 3.326 3.167 3.020 2.885 2.759 2.643 2.534 2.168 6 7 6.472 6.002 5.582 5.206 4.868 4.564 4.288 4.039 3.812 3.605 3.416 3.242 3.083 2.937 2.802 2.677 2.263 7 8 7.325 6.733 6.210 5.747 5.335 4.968 4.639 4.344 4.078 3.837 3.619 3.421 3.241 3.076 2.925 2.786 2.331 8 9 8.162 7.435 6.802 6.247 5.759 5.328 4.946 4.607 4.303 4.031 3.786 3.566 3.366 3.184 3.019 2.868 2.379 9 10 8.983 8.111 7.360 6.710 6.145 5.650 5.216 4.833 4.494 4.192 3.923 3.682 3.465 3.269 3.092 2.930 2.414 10 11 9.787 8.760 7.887 7.139 6.495 5.938 5.453 5.029 4.656 4.327 4.035 3.776 3.543 3.335 3.147 2.978 2.438 11 12 10.575 9.385 8.384 7.536 6.814 6.194 5.660 5.197 4.793 4.439 4.127 3.851 3.606 3.387 3.190 3.013 2.456 12 13 11,348 9.986 8.853 7.904 7.103 6.424 5.842 5.342 4.910 4.533 4.203 3.912 3.656 3.427 3.223 3.040 2.469 13 14 12.106 10.563 9.295 8.244 7.367 6.628 6.002 5.468 5.008 4.611 4.265 3.962 3.695 3.459 3.249 3.061 2.478 14 15 12.849 11.118 9.712 8.559 7.606 6.811 6.142 5.575 5.092 4.675 4.315 4.001 3.726 3.483 3.268 3.076 2.484 15 16 13.578 11.652 10.106 8.851 7.824 6.974 6.265 5.668 5.162 4.730 4.357 4.033 3.751 3.503 3.283 3.088 2.489 16 17 14.292 12.166 10.477 9.122 8.022 7.120 6.373 5.749 5.222 4.775 4.391 4.059 3.771 3.518 3.295 3.097 2.492 17 18 14.992 12.659 10.828 9.372 8.201 7.250 6.467 5.818 5.273 4.812 4.419 4.080 3.786 3.529 3.304 3.104 2.494 18 19 15.678 13.134 11.158 9.604 8.365 7.366 6.550 5.877 5.316 4.843 4.442 4.097 3.799 3.539 3.311 3.109 2.496 19 20 16.351 13.590 11.470 9.818 8.514 7.469 6.623 5.929 5.353 4.870 4.460 4.110 3.808 3.546 3.316 3.113 2.497 20 21 17.011 14.029 11.764 10.017 8.649 7.562 6.687 5.973 5.384 4.891 4.476 4.121 3.816 3.551 3.320 3.116 2.498 21 22 17.658 14.451 12.042 10.201 8.772 7.645 6.743 6.011 5.410 4.909 4.488 4.130 3.822 3.556 3.323 3.118 2.498 22 23 18.292 14.857 12.303 10.371 8.883 7.718 6.792 6.044 5.432 4.925 4.499 4.137 3.827 3.559 3.325 3.120 2.499 23 24 18.914 15.247 12.550 10.529 8.985 7.784 6.835 6.073 5.451 4.937 4.507 4.143 3.831 3.562 3.327 3.121 2.499 24 25 19.523 15.622 12.783 10.675 9.077 7.843 6.873 6.097 5.467 4.948 4.514 4.147 3.834 3.564 3.329 3.122 2.499 25 26 20.121 15.983 13.003 10.810 9.161 7.896 6.906 6.118 5.480 4.956 4.520 4.151 3.837 3.566 3.330 3.123 2.500 26 27 20.707 16.330 13.211 10.935 9.237 7.943 6.935 6.136 5.492 4.964 4.524 4.154 3.839 3.567 3.331 3.123 2.500 27 28 21.281 16.663 13.406 11.051 9.307 7.984 6.961 6.152 5.502 4.970 4.528 4.157 3.840 3.568 3.331 3.124 2.500 28 29 21.844 16.984 13.591 11.158 9.370 8.022 6.983 6.166 5.510 4.975 4.531 4.159 3.841 3.569 3.332 3.124 2.500 29 30 22.396 17.292 13.765 11.258 9.427 8.055 7.003 6.177 5.517 4.979 4.534 4.160 3.842 3.569 3.332 3.124 2.500 30 35 24.999 18.665 14.498 11.655 9.644 8.176 7.070 6.215 5.539 4.992 4.541 4.164 3.845 3.571 3.333 3.125 2.500 35 40 27.355 19.793 15.046 11.925 9.779 8.244 7.105 6.233 5.548 4.997 4.544 4.166 3.846 3.571 3.333 3.125 2.500 40 *Payments (or receipts) at the end of each period.
C A P P E N D I X COST ACCOUNTING IN PROFESSIONAL EXAMINATIONS This appendix describes the role of cost accounting in professional examinations. We use professional examinations in the United States, Canada, Australia, Japan, and the United Kingdom to illustrate the role. 1 A conscientious reader who has solved a representative sample of the problems at the end of the chapters will be well prepared for the professional examination questions dealing with cost accounting. This appendix aims to provide perspective, install confidence, and encourage readers to take the examinations. Canadian Professional Examinations Three professional accounting designations are available in Canada: Designation Certified Management Accountant (CMA) Certified General Accountant (CGA) Chartered Accountant (CA) Sponsoring Organization Society of Management Accountants (SMA) Certified General Accountants Association (CGA) Canadian Institute of Chartered Accountants (CICA) The SMA represents over 27,000 certified management accountants employed throughout Canadian business, industry, and government. The CMA Entrance Examination is a two-day examination, divided into three broad categories: 1. Management accounting area 50% 60% 2. Financial accounting area 20% 30% 3. Management studies 15% 25% Objective questions comprise 40% to 50% and cases 50% to 60% of the exam. Topics covered on recent examinations in the management accounting area include relevant costing, transfer pricing, capital budgeting, performance measures, activity-based costing, cost allocation, and productivity. The Society of Management Accountants publishes CMA: The Management Accounting Magazine monthly. This magazine includes details of courses that assist students in preparing for the CMA examination. 1 We appreciate help from Bill Langdon (Canada), Tom Craven (United States), John Goodwin (Australia), Michi Sakurai (Japan), and Louise Drysdale and Andrea Jeffries (U.K.).
CPA and CMA Designations American Professional Examinations Many American readers may eventually take the Certified Public Accountant (CPA) examination or the Certified Management Accountant (CMA) examination. Certification is important to professional accountants for many reasons, such as: 1. Recognition of achievement and technical competence by fellow accountants and by users of accounting services 2. Increased self-confidence in one s professional abilities 3. Membership in professional organizations offering programs of career-long education 4. Enhancement of career opportunities 5. Personal satisfaction The CPA certificate is issued by individual states; it is necessary for obtaining a state s licence to practise as a Certified Public Accountant. A prominent feature of public accounting is the use of independent (external) auditors to give assurance about the reliability of the financial statements supplied by managers. These auditors are called Certified Public Accountants in the United States and Chartered Accountants in many other English-speaking nations. The major U.S. professional association in the private sector that regulates the quality of external auditing is the American Institute of Certified Public Accountants (AICPA). The CMA designation is offered by the Institute of Management Accountants (IMA). The IMA is the largest association of management accountants in the world. 2 The major objective of the CMA certification is to enhance the development of the management accounting profession. In particular, focus is placed on the modern role of the management accountant as an active contributor to and a participant in management. The CMA designation is gaining increased stature in the business community as a credential parallel to the CPA designation. The CMA examination consists of 4 parts taken during 2 days (16 hours): Part 1: Economics, finance, and management Part 2: Financial accounting and reporting Part 3: Management reporting, analysis, and behavioral issues Part 4: Decision analysis and information systems Questions regarding ethical issues will appear on any part of the examination. A person who has successfully completed the U.S. CPA examination is exempt from Part 2. Cost/management accounting questions are prominent in the CMA examination. The CPA examination also includes such questions, although they are less extensive than questions regarding financial accounting, auditing, and business law. On the average, cost/managerial accounting represents 35% to 40% of the CMA examination and 5% of the CPA examination. This book includes many questions and problems used in past CMA and CPA examinations. In addition, a supplement to this book, Student Guide and Review Manual [ John K. Harris and Dudley W. Curry (Englewood Cliffs, NJ: Prentice Hall, 1997)], contains over one hundred CMA and CPA questions and explanatory answers. Careful study of appropriate topics in this book will give candidates sufficient background for succeeding in the cost accounting portions of the professional examinations. The IMA publishes Management Accounting monthly. Each issue includes advertisements for courses that help students prepare for the CMA examination. 3 2 The IMA has a wide range of activities driven by many committees. For example, the Management Accounting Practices Committee issues statements on both financial accounting and management accounting. The IMA also has an extensive continuing-education program. 3 Other U.S. professional associations also require detailed knowledge of cost accounting. For example, the Certified Cost Estimator/Analyst (CCEA) program is administered by the Society of Cost Estimating and Analysis, 101 South Whiting Street, Suite 313, Alexandria, VA 22304. The society s primary purpose is to improve the effectiveness of cost estimation and price analysis. Special attention is given to contract cost estimation. COST ACCOUNTING IN PROFESSIONAL EXAMINATIONS A-25
Australian Professional Examinations The Australian Society of Certified Practising Accountants is the largest body repre senting accountants in Australia. Their professional designation is termed a CPA (Certified Practising Accountant). The basic entry requirements for Associate membership of the Society are having an approved Bachelors degree. Associates of the Society can advance to CPA status by passing the CPA program and having the required amount of relevant work experience. There are two compulsory core segments in the program. Core I covers the practical application of the more common accounting standards and ethics, while more technical standards (such as foreign currency translation) are covered in the Core II segment. Candidates are then required to take three segments from seven elective subjects. These subjects are: (1) external reporting, (2) insolvency and reconstruction, (3) management accounting, (4) management of information systems, (5) auditing, (6) treasury, and (7) taxation. Personal Financial Planning and Superannuation is a new elective subject which will soon be added to the electives. The management accounting segment topics include: 1. Management accounting in the contemporary business environment 2. Accounting for strategic management 3. Long-term project planning and management 4. Costing for decision making 5. Performance measurement and reward systems The Australian Accountant, published each month (except January), includes advertisements for courses that help students prepare for the CPA examination. The Institute of Chartered Accountants in Australia (ICAA) has membership requirements that include passing four core modules (Taxation, Accounting I, Accounting II, and Ethics) and one elective module (one of which is Advanced Management Accounting). Management related topics are in both the Accounting 2 and Advanced Management Accounting modules. These include: purpose and perspective (including strategic and operational management; organizations, goals, ethics; operational environments; cost concepts); strategic management accounting (including strategic applications, project evaluation and capital budgeting); operational management accounting (including decision analysis, financial planning and management, product and service costing, control and performance evaluation). Japanese Professional Examinations There are two major management accounting organizations Japanese Industrial Management and Accounting Association and Enterprise Management Association. The JIMAA is the oldest, largest, and most authoritative accounting organization of its kind in Japan. It directs a School of Cost Control and a School of Corporate Tax Accounting. There are two courses in the School of Cost Control Preparatory Course and Cost Control Course. These courses are taught by university professors and executives from member corporations. The Enterprise Management Association is the Japanese chapter of the U.S.-based Institute of Management Accountants. United Kingdom Professional Examinations A-26 APPENDIX C The Chartered Institute of Management Accountants (CIMA) is the largest professional management accounting body in the United Kingdom. CIMA provides a wide range of services to members in commerce, education, government, and the accounting profession.
The syllabus for the CIMA examination consists of four stages: 1. Preparation for business and accounting (including foundation costing ) 2. The tools of management accounting (including operational cost accounting ) 3. The rules of a profession (including management accounting applications ) 4. The application of knowledge to business management and finance (including strategic management accounting and management accounting control systems ) Management Accounting, published monthly by CIMA, includes details of courses assisting students in preparing for their examinations. Management accounting topics are also covered by several other professional bodies. The syllabus for the examinations of the Chartered Association of Certified Accountants (ACCA) has three stages: I (Foundation), II (Certificate), and III (Professional). Skills examined in III include information for control and decision making, management and strategy, and financial strategy. Other accounting bodies include the Institute of Chartered Accountants in England and Wales (ICAEW ) and the Institute for Chartered Accountants of Scotland (ICAS). Both institutes have requirements that cover proficiency in general management topics as well as professional accounting topics. COST ACCOUNTING IN PROFESSIONAL EXAMINATIONS APPENDIX C A-27