How is TVM used in business?
The time value of money is the concept that money received today has a greater value that money received in the future. This is true because money you have today can be invested, which can appreciate or earn interest. The calculations of the time value of money are important because they give companies the ability to compare investment options. This can help improve return on equity and increase shareholder wealth. The most simple example of the time value of money is a savings account. When a person deposits money into a savings account it will generate interest. This simple opportunity makes money worth more now than it would be in the future. TVM is calculated by comparing the future value of money (FV) to its present value (PV). This can be used to determine the present and future value of annuities, as well as simple interesting earning accounts, such as the saving account. When making calculations it is important that the correct discount rate is used. If the rate is not accurate it will cause the resulting calculations to be inaccurate as well. The formulas for present value and future value can be arranged to solved for any variable in the equation.
Showing posts with label basic finance. Show all posts
Showing posts with label basic finance. Show all posts
Sunday, March 22, 2009
Saturday, March 21, 2009
Can a Company Operate Without Current Liabilities?
What is an Asset? Liability? And how do they differ?
An asset can be defined as any item that adds value to a company. In general, they are divided into current assets (Less then 1 year) and long term (Greater than 1 year). Some examples of assets are inventory, buildings, vehicles, cash, etc. A liability is the opposite of an asset, and can be defined as anything that a company is obligated to contribute assets to resolve. The most common example of a liability is a loan. A loan will allow initially provide a company with cash, but will have to pay it off at a later date with interest. The main difference between assets and liabilities it that assets add value, while liabilities take away value. A company that has more assets than liabilities will have positive equity.
Can a Company Operate Without Current Liabilities?
Although it is unlikely, it is possible for a company to operate without any current liabilities. A company that has ample cash reserves would be able to pay for all assets at the time of purchase. This is not typical because the time value of money prompts companies to invest their cash reserves. Another method of operating with without current liabilities would be financing all assets with long term liabilities. This is also not typical because a company can usually save money on financing costs by utilizing short term loans for seasonal needs.
An asset can be defined as any item that adds value to a company. In general, they are divided into current assets (Less then 1 year) and long term (Greater than 1 year). Some examples of assets are inventory, buildings, vehicles, cash, etc. A liability is the opposite of an asset, and can be defined as anything that a company is obligated to contribute assets to resolve. The most common example of a liability is a loan. A loan will allow initially provide a company with cash, but will have to pay it off at a later date with interest. The main difference between assets and liabilities it that assets add value, while liabilities take away value. A company that has more assets than liabilities will have positive equity.
Can a Company Operate Without Current Liabilities?
Although it is unlikely, it is possible for a company to operate without any current liabilities. A company that has ample cash reserves would be able to pay for all assets at the time of purchase. This is not typical because the time value of money prompts companies to invest their cash reserves. Another method of operating with without current liabilities would be financing all assets with long term liabilities. This is also not typical because a company can usually save money on financing costs by utilizing short term loans for seasonal needs.
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