Question

1. What best describes the time value of money?

a. The interest rate charged on a loan.

b. Accounts receivable that will be collected at a later date.

c. The difference in the worth of a sum today and in the future.

d. The change in net income from one accounting period to another.

2. Finding a present value by means of multiplying a future value by a present value factor is called

a. accumulation.

b. factoring.

c. compounding.

d. discounting.

3.Deposits held as compensating balances

a. usually do not earn interest.

b. if legally restricted and held against short-term credit may be included as cash.

c. if legally restricted and held against long-term credit may be reported separately in current assets.

d. if legally restricted and held against long-term credit should not be reported on the balance sheet.

4. The sale of accounts receivable in order to raise funds is called

a. pledging.

b. factoring.

c. leasing.

d. collateralizing.

5. Which of the following is not a potential difference between notes receivable and accounts receivable?

a. Accounts receivable are evidenced by formal legal agreements.

b. Notes receivable generally include an interest component.

c. Notes receivable are often longer term assets than accounts receivable.

d. Accounts receivable arise from everyday business transactions.

Answer 1

1.) The interest rate charged on a loan: - The time value of a money means present value of a money of future cash inflows discounted at a interest rate probably arise in future. Therefore, it is just an estimate value of future amount in present terms and value can change to any extent if interest rate changes at unpredicted levels.

2.) Discounting: - We discount the future cash inflows at present value levels. Since, we are finding current value of future cash inflows, it has to be a lower value than the future value. therefore, it is called discounted value because it has be lower than the future value. Future value includes interest rates.

Therefore, thw formula is: -

Discounted Value + Interest rate = Future Value

3.) Usually do not earn interest: - Deposits are taken to set off the balances if the party do not pay the future dues and it doesn't generate interest income since it is considered as a security money.

4.) Factoring: - when we are unable to recover our amount receivable from parties, we hire some third party who works for us to recover that dues and charge some some commission from us. Banking Industry face this problem as they lend large sum of money as loans and some people doesn't pay back. Therefore, when we hire third party to recover dues its called Factoring.

5.) Accounts receivable are evidenced by formal legal agreements: -

Notes receivable is an legally binding agreement between the issuer & the payee.

Accounts receivable, on the otherhand, has no written agreement between the buyer & the customer. The only document available is the Sales Invoice.