CHAPTER 5
ACCOUNTING AND THE TIME VALUE OF MONEY
TRUE-FALSE—Conceptual
1. The time value of money refers to the fact that a dollar received today is worth less than a
dollar received in the future.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
3. Simple interest is computed on principal and on any interest earned that has not been
withdrawn.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
4. Compound interest, rather than simple interest, must be used to properly evaluate long-term
investment proposals.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
5. Compound interest uses the accumulated balance at each year-end to compute interest in
the succeeding year.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
6. The future value of an ordinary annuity table of 1 is used when equal payments are invested
at the beginning of each period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
7. The present value of an annuity due table of 1 is used when equal payments are made at
the end of each period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
8. If the compounding period is less than one year, the annual interest rate must be converted
to the compounding period interest rate by dividing the annual rate by the number of
compounding periods per year.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
9. Present value is the value now of a future sum or sums discounted assuming compound
interest.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
,5-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. The future value of a single sum is determined by multiplying the future value factor by its
present value.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
11. In determining the present value of an amount to be received or paid in the future, a
company moves backward in time using a process of accumulation.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
12. Cash flows are discounted from the future to the present.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
13. If an investment is made for a set number of periods and at a set interest rate, the amount
to be received at maturity can be determined by multiplying the amount of the investment by
the appropriate future value factor.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
14. The unknown present value is always a larger amount than the known future value because
dollars received currently are worth more than dollars to be received in the future.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
15. The rents that comprise an annuity due earn no interest during the period in which they are
originally deposited.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
16. The number of compounding periods will always be one less than the number of rents when
computing the future value of an ordinary annuity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
17. The future value of an annuity due factor is found by multiplying the future value of an
ordinary annuity factor by 1 minus the interest rate.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
18. If two annuities have the same number of rents with the same dollar amount, but one is an
annuity due and one is an ordinary annuity, the future value of the annuity due will be
greater than the future value of the ordinary annuity.
Ans: T, LO: 3, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
19. An ordinary annuity’s rents are deposited at the end of the period so no interest is earned
on the rent during the period in which it is deposited.
Ans: T, LO: 3, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
20. If two annuities have the same number of rents with the same dollar amount, but one is an
annuity due and one is an ordinary annuity, the present value of the annuity due will be
greater than the present value of the ordinary annuity.
Ans: T, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
, Accounting and the Time Value of Money 5-3
21. The present value of an ordinary annuity is the present value of a series of equal rents
withdrawn at equal intervals.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
22. The future value of a deferred annuity is less than the future value of an annuity not
deferred.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
23. The expected cash flow approach uses a range of cash flows and incorporates the
probabilities of those cash flows to provide a more relevant present value.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
24. Because there is no accumulation or investment on which interest accrues, the future
value of a deferred annuity is the same as the future value of an annuity that is not
deferred.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
25. “An annuity due of three annual rents deferred 5 years” means that no rents will occur
during the first 4 years and that the first of three rents will occur at the end of the fifth year.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
MULTIPLE CHOICE—Conceptual
26. What best describes the time value of money?
a. The interest rate charged on a loan
b. Accounts receivable that are determined uncollectible
c. An investment in a checking account
d. The relationship between time and money
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
27. Which of the following situations does not base an accounting measure on present
values?
a. Pensions
b. Prepaid insurance
c. Leases
d. Environmental Liabilities
Ans: b, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
28. What is interest?
a. Payment for the use of money
b. An equity investment
c. Return on capital
d. Loan
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
, 5-4 Test Bank for Intermediate Accounting, Eighteenth Edition
29. What is not a variable that is considered in interest computations?
a. principal
b. interest rate
c. assets
d. time
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
30. If you invest $50,000 to earn 8% interest, which of the following compounding approaches
would return the lowest amount after one year?
a. daily.
b. monthly.
c. quarterly.
d. annually.
Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
31. Which factor would be greater — the present value of $1 for 10 periods at 8% per period
or the future value of $1 for 10 periods at 8% per period?
a. Present value of $1 for 10 periods at 8% per period.
b. Future value of $1 for 10 periods at 8% per period.
c. The factors are the same.
d. Need more information.
Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
32. Which of the following tables would show the smallest value for an interest rate of 5% for
six periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
33. Which table would you use to determine what amount was deposited three years ago to
provide $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
Ans: a, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
34. Which table would you use to determine how much must be deposited now in order to
provide for 5 annual withdrawals at the beginning of each year, starting one year from the
first deposit?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. Present value of an ordinary annuity of 1.
ACCOUNTING AND THE TIME VALUE OF MONEY
TRUE-FALSE—Conceptual
1. The time value of money refers to the fact that a dollar received today is worth less than a
dollar received in the future.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
2. Interest is the excess cash received or repaid over and above the amount lent or borrowed.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
3. Simple interest is computed on principal and on any interest earned that has not been
withdrawn.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
4. Compound interest, rather than simple interest, must be used to properly evaluate long-term
investment proposals.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
5. Compound interest uses the accumulated balance at each year-end to compute interest in
the succeeding year.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
6. The future value of an ordinary annuity table of 1 is used when equal payments are invested
at the beginning of each period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
7. The present value of an annuity due table of 1 is used when equal payments are made at
the end of each period.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
8. If the compounding period is less than one year, the annual interest rate must be converted
to the compounding period interest rate by dividing the annual rate by the number of
compounding periods per year.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
9. Present value is the value now of a future sum or sums discounted assuming compound
interest.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
,5-2 Test Bank for Intermediate Accounting, Eighteenth Edition
10. The future value of a single sum is determined by multiplying the future value factor by its
present value.
Ans: T, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
11. In determining the present value of an amount to be received or paid in the future, a
company moves backward in time using a process of accumulation.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
12. Cash flows are discounted from the future to the present.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
13. If an investment is made for a set number of periods and at a set interest rate, the amount
to be received at maturity can be determined by multiplying the amount of the investment by
the appropriate future value factor.
Ans: T, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
14. The unknown present value is always a larger amount than the known future value because
dollars received currently are worth more than dollars to be received in the future.
Ans: F, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
15. The rents that comprise an annuity due earn no interest during the period in which they are
originally deposited.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
16. The number of compounding periods will always be one less than the number of rents when
computing the future value of an ordinary annuity.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
17. The future value of an annuity due factor is found by multiplying the future value of an
ordinary annuity factor by 1 minus the interest rate.
Ans: F, LO: 3, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
18. If two annuities have the same number of rents with the same dollar amount, but one is an
annuity due and one is an ordinary annuity, the future value of the annuity due will be
greater than the future value of the ordinary annuity.
Ans: T, LO: 3, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
19. An ordinary annuity’s rents are deposited at the end of the period so no interest is earned
on the rent during the period in which it is deposited.
Ans: T, LO: 3, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
20. If two annuities have the same number of rents with the same dollar amount, but one is an
annuity due and one is an ordinary annuity, the present value of the annuity due will be
greater than the present value of the ordinary annuity.
Ans: T, LO: 4, Bloom: C, Difficulty: Difficult, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
, Accounting and the Time Value of Money 5-3
21. The present value of an ordinary annuity is the present value of a series of equal rents
withdrawn at equal intervals.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
22. The future value of a deferred annuity is less than the future value of an annuity not
deferred.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
23. The expected cash flow approach uses a range of cash flows and incorporates the
probabilities of those cash flows to provide a more relevant present value.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
24. Because there is no accumulation or investment on which interest accrues, the future
value of a deferred annuity is the same as the future value of an annuity that is not
deferred.
Ans: T, LO: 5, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
25. “An annuity due of three annual rents deferred 5 years” means that no rents will occur
during the first 4 years and that the first of three rents will occur at the end of the fifth year.
Ans: F, LO: 5, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
MULTIPLE CHOICE—Conceptual
26. What best describes the time value of money?
a. The interest rate charged on a loan
b. Accounts receivable that are determined uncollectible
c. An investment in a checking account
d. The relationship between time and money
Ans: d, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
27. Which of the following situations does not base an accounting measure on present
values?
a. Pensions
b. Prepaid insurance
c. Leases
d. Environmental Liabilities
Ans: b, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
28. What is interest?
a. Payment for the use of money
b. An equity investment
c. Return on capital
d. Loan
Ans: a, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
, 5-4 Test Bank for Intermediate Accounting, Eighteenth Edition
29. What is not a variable that is considered in interest computations?
a. principal
b. interest rate
c. assets
d. time
Ans: c, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA PC:
None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
30. If you invest $50,000 to earn 8% interest, which of the following compounding approaches
would return the lowest amount after one year?
a. daily.
b. monthly.
c. quarterly.
d. annually.
Ans: d, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
31. Which factor would be greater — the present value of $1 for 10 periods at 8% per period
or the future value of $1 for 10 periods at 8% per period?
a. Present value of $1 for 10 periods at 8% per period.
b. Future value of $1 for 10 periods at 8% per period.
c. The factors are the same.
d. Need more information.
Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
32. Which of the following tables would show the smallest value for an interest rate of 5% for
six periods?
a. Future value of 1
b. Present value of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
Ans: b, LO: 1, Bloom: C, Difficulty: Difficult, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
33. Which table would you use to determine what amount was deposited three years ago to
provide $1,000 today?
a. Future value of 1 or present value of 1
b. Future value of an annuity due of 1
c. Future value of an ordinary annuity of 1
d. Present value of an ordinary annuity of 1
Ans: a, LO: 1, Bloom: C, Difficulty: Moderate, Min: 3, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement Analysis & Interpretation, AICPA
PC: None, IMA: Strategy, Planning & Performance: Decision Analysis, IFRS: None
34. Which table would you use to determine how much must be deposited now in order to
provide for 5 annual withdrawals at the beginning of each year, starting one year from the
first deposit?
a. Future value of an ordinary annuity of 1
b. Future value of an annuity due of 1
c. Present value of an annuity due of 1
d. Present value of an ordinary annuity of 1.
