Chapter 6, Problem 1Q

To determine

Money: A generally accepted medium of exchange to make legal payments with a standard value and measuring capacity is termed money.

To determine the time value of money and the reason for understanding the accounting concepts by the accountants.

Explanation of Solution

Time value of money: Time value of money is the worth of funds after a certain period.The value of the funds increase based on the worth of the purchased item. If the funds are invested tactically after a thorough knowledge of where it is being invested, it will give high returns and if they are invested without any plan, there are chances for the worth of money being lost.

Time plays an important role in multiplying the worth of funds. Longer-period investments lead to greater returns or sometimes might act as a cost.

Justification: Accountants come across various transactions and numerous types of business events. Therefore, a thorough knowledge in compound interest, present value, and annuities is required.

Normally, the accountants apply the knowledge of the time value of money in the following:

• Estimating the fair value of an asset
• Calculation of notes receivable/bills receivable
• Calculation of notes payables/bills payable
• Estimating the value of sinking funds
• Finding the long-term worth of an asset
• Calculation of pension funds
• Calculating the instalment contracts
• Estimation of lease value of an asset

Conclusion

The time value of money helps in the assessment of the worth of funds after a certain period. The worth of the money helps in determining about the investment. It exhibits whether the investment is a good one or not.