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The fact that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity is the time value of money. If you receive the money today you can invest and make money on it so that it grows in future. hence, the value currently would be higher than the same amount received in future.
Present value is the value of the money as of today.
Future value is the value of the money in some future date.
If you had $100 today and invested at 10% interest - the present value is $100 and the future value of the $100 after a year is $110.
2. Your uncle offers you a choice of $20,000 in 50 years or $45 today. If money is discounted at 13%, which offer should you choose? Explain.
The present value of $20000 received after 50 years at 13% interest will be $20000/(1+.13)^50 which is $44.38 today. Since this amount is less than $45, you would rather take $45 today and invest it at 13% and make more money in 50 years.
3. You and Frank are studying for an upcoming accounting exam. Frank says, "Contributed capital is basically the stockholders' equity of the company. It includes things like the common stock, paid-in capital in excess of par, preferred stock, and retained earnings." Do you agree with Frank? Why or why not? Explain.
No, do not agree with Frank.
Contributed capital is the funds collected from the investors.It includes the funds that are paid into the company by the stockholder such as - Preferred stock(par value and additional paid in capital) and Equity Stock or common stock(par value and additional paid in capital). It does not include retained earnings.
4. Another student in your accounting class says that, as she understands it, most current liabilities appearing on the balance sheet arise from transactions involving operating activities. Do you agree? Why or why not? List three current liabilities that might appear on the balance sheet. For each one, explain the underlying transaction that must have occurred for that specific liability to arise. Indicate, for each liability, whether it is the result of an operating, financing, or investing activity.
Yes, most of the current liabilities appearning on the balance sheet arise from transactions involving operating activities.
1. Accounts Payable - These accounts represents purchases made in regular course of business for materials or supplies on account from the vendors.(operating activity)
2. Income tax payable- resulting from the income tax due from the net income and expenses of the business (operating activity)
3. Accrued Liabilities - This account includes wages and payroll liabilities payable, sales tax payable and similar liabilities resulting from operating activities. (Operating activity)