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In: Finance

How do present values and future values relate to: Personal Budget Income Statement Balance Sheet

How do present values and future values relate to:

  1. Personal Budget
  2. Income Statement
  3. Balance Sheet

Solutions

Expert Solution

Present value and future value are the two main components of "Time value of money concept".

Present value- It is the present worth of a future's sum of money.

Formula: PV = FV / (1+r)n

Future value- It is the value of an asset or investment after a certain period of time, at a specific date.

Formula: FV = PV (1+r)n

FV = Future value, PV = Present value, r = rate of interest, n = number of years.

PV and FV in personal finance- When we make our own personal financial budget, PV and FV play a great role, It is useful in determining the present worth of a sum of money that we are getting in the future, it tells us how much, we will get after a certain period of time if we invest xyz amount today.

PV and FV in Income statement- PV factor is used in determining the present value of an expenditure that may occur in future. PV and FV are used in calculating the value of forecasting figures today and in future. Some amounts are discounted to know the present worth and their impact.

PV and FV in Balance sheet- These concepts are used to know the present worth of the future cash flows, a project is approved when it has positive Net present value, that is calculated based on PV factor. Balance sheet items are the discounted value of future cash flows.

jeff jeffy answered 1 year ago
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