Financial Accounting- Tools for Business Decision Making, 10th Edition Kimmel
Complete Test Bank
APPENDIX F
TIME VALUE OF MONEY
CHAPTER LEARNING OBJECTIVES
1. Compute interest and future values. Simple interest is computed on the principal only, while
compound interest is computed on the principal and any interest earned that has not been
withdrawn.
To solve for future value of a single amount, prepare a time diagram of the problem. Identify the
principal amount, the number of compounding periods, and the interest rate. Using the future
value of 1 table, multiply the principal amount by the future value factor specified at the
intersection of the number of periods and the interest rate.
To solve for future value of an annuity, prepare a time diagram of the problem. Identify the
amount of the periodic payments (receipts), the number of payments, and the interest rate. Using
the future value of an annuity of 1 table, multiply the amount of the payments by the future value
factor specified at the intersection of the number of periods and the interest rate.
2. Compute present values. The following three variables are fundamental to solving present
value problems: (1) the future amount, (2) the number of periods, and (3) the interest rate (the
discount rate).
To solve for present value of a single amount, prepare a time diagram of the problem. Identify
the future amount, the number of discounting periods, and the discount (interest) rate. Using the
present value of a single amount table, multiply the future amount by the present value factor
specified at the intersection of the number of periods and the discount rate.
To solve for present value of an annuity, prepare a time diagram of the problem. Identify the
amount of future periodic receipts or payment (annuities), the number of discounting periods,
and the discount (interest) rate. Using the present value of an annuity of 1 table, multiply the
amount of the annuity by the present value factor specified at the intersection of the number of
periods and the interest rate.
To compute the present value of notes and bonds, determine the present value of the principal
amount: Multiply the principal amount (a single future amount) by the present value factor (from
the present value of 1 table) intersecting at the number of periods (number of interest payments)
and the discount rate. To determine the present value of the series of interest payments: Multiply
the amount of the interest payment by the present value factor (from the present value of an
annuity of 1 table) intersecting at the number of periods (number of interest payments) and the
discount rate. Add the present value of the principal amount to the present value of the interest
payments to arrive at the present value of the note or bond.
3. Compute the present value in capital budgeting situations. Compute the present values of
all cash inflows and all cash outflows related to the capital budgeting proposal (an investment-
type decision). If the net present value is positive, accept the proposal (make the investment). If
the net present value is negative, reject the proposal (do not make the investment).
,F-2 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
4. Use technological tools to solve time value of money problems. Technological tools, such
as financial calculators and Excel, can be used to solve the same and additional problems as
those solved with time value of money tables. When using a financial calculator, you will enter
into the financial calculator the amounts for all of the known elements of a time value of money
problem (periods, interest rate, payments, future or present value), and it solves for the unknown
element. Particularly useful situations involve interest rates and compounding periods not
presented in the tables. When using Excel, each function will require some combination of the
following inputs: Rate, Nper, Pmt, PV or FV, and Type. The advantage of Excel is that it allows
users to quickly modify inputs to understand how changes in inputs such as the interest rate
might impact the present value.
Difficulties:
Easy: 29
Medium: 50
Hard: 0
Questions by Section
Interest and Future Values
Nature of Interest: 1
Simple Interest
Compound Interest: 2, 13
Future Value of a Single Amount: 3, 14,, 15, 16, 17, 46, 47, 48, 49, 50
Future Value of an Annuity: 4. 18, 19, 20, 21, 22, 51, 52, 53, 54, 55 56, 75, 76
Present Values
Present Value Variables: 5, 6, 23, 24, 25, 77
Present Value of a Single Amount: 26, 27, 28, 29, 31, 32, 33, 34, 35, 36, 57, 58, 59, 60, 61, 62,
63
Present Value of an Annuity: 7, 9, 37, 38, 40, 41, 64, 65, 66, 67, 68, 69, 70, 71
Time Periods and Discounting: 30
Present Value of a Long-term Note or Bond: 8, 39, 42, 72, 78
Capital Budgeting Situations: 10, 11, 43, 44, 73
Using Technological Tools: 12, 45, 74
, F-3
Time Value of Money
TRUE-FALSE STATEMENTS
1. Interest is the difference between the amount borrowed and the principal.
Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Nature of Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
2. Compound interest is computed on the principal and any interest earned that has not been
paid or received.
Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
3. The future value of a single amount is the value at a future date of a given amount invested
now, assuming compound interest.
Ans: T, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
4. When the periodic payments are not equal in each period, the future value can be computed
by using a future value of an annuity table.
Ans: F, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC:
None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
5. The process of determining the present value is referred to as discounting the future amount.
Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value Variables, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA
AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
6. A higher discount rate produces a higher present value.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
7. In computing the present value of an annuity, it is not necessary to know the number of
discount periods.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
8. The present value of a long-term note or bond is a function of two variables.
Ans: F, LO: 2, Topic: Present Values, Subtopic: Present Value of a Long-term Note or Bond, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
9. The present value of an annuity is the value now of a series of future receipts or payments,
discounted assuming compound interest.
Ans: T, LO: 2, Topic: Present Values, Subtopic: Present Value of an Annuity, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
10. The decision to make long-term capital investments is best evaluated without recognizing
the time value of money.
Ans: F, LO: 3, Topic: Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
11. In a capital budgeting decision, a positive net present value means the decision to invest
should be accepted.
Ans: T, LO: 3, Capital Budgeting Situations, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
, F-4 Test Bank for Kimmel, Financial Accounting: Tools for Business Decision Making, 10e
12. With Excel or a financial calculator, one can solve for any interest rate or for any number of
periods in a time value of money problem.
Ans: T, LO: 4, Topic: Using Technological Tools, Subtopic: None, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC:
Technology and Tools, AICPA PC: None, IMA: Reporting and Control
MULTIPLE-CHOICE QUESTIONS
Note: Students will need future value and present value tables for some questions.
13. Compound interest is the return on principal
a. only.
b. for one or more periods.
c. plus interest for two or more periods.
d. for one period.
Ans: c, LO: 1, Topic: Interest and Future Values, Subtopic: Compound Interest, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None,
AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
14. The factor 1.08160 is taken from the 4% column and 2 periods row in a certain table. From
what table is this factor taken?
a. Future value of 1
b. Future value of an annuity of 1
c. Present value of 1
d. Present value of an annuity of 1
Ans: a, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: C, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
15. If $40,000 is put in a savings account paying interest of 4% compounded annually, what
amount will be in the account at the end of 5 years?
a. $32,878
b. $48,000
c. $48,620
d. $48,666
Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: AP, Difficulty: Medium, Min: 2, AACSB: Knowledge,
AICPA BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
Solution: Use Table 1: ($40,000 × 1.21665)
Dep. × FV of 1, n = 5, i = 4)
16. The future value of 1 factor will always be
a. equal to 1.
b. greater than 1.
c. less than 1.
d. equal to the interest rate.
Ans: b, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
17. All of the following are necessary to compute the future value of a single amount except the
a. interest rate.
b. number of periods.
c. principal.
d. maturity value.
Ans: d, LO: 1, Topic: Interest and Future Values, Subtopic: Future Value of a Single Amount, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA
BC: None, AICPA AC: Measurement Analysis and Interpretation, AICPA PC: None, IMA: Reporting and Control
