Solutions Manual for Fundamentals of
Advanced Accounting
Time value of money - ANSThe idea that money has a time value and is worth more today than
in the future due to the opportunity cost of forgoing consumption today.
Future value - ANSThe sum to which an investment will grow after earning interest.
Present value - ANSThe value today of a future cash flow, obtained by discounting future cash
flows back to the present at an appropriate discount rate.
Compounding - ANSThe process of converting an initial amount into a future value by earning
interest on the initial investment and reinvesting the interest.
Discounting - ANSThe process of converting future cash flows to their present value by
adjusting the cash flows for the time value of money.
Principal amount - ANSThe initial amount of an investment.
Simple interest - ANSThe interest paid on the original investment, which remains constant from
period to period.
Compound interest - ANSThe interest earned on the reinvestment of previously earned interest,
resulting in interest-on-interest effect.
Discount rate - ANSThe compound interest rate used to determine the present value of future
cash flows.
Growth rate - ANSThe rate at which a value or investment grows over time.
Time line - ANSA horizontal line that shows cash flows as they occur over time, used to analyze
cash flows over certain time periods.
Rule of 72 - ANSA rule of thumb to determine how fast an investment can double, where the
time to double the money is approximately equal to 72 divided by the interest rate.
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