Accounting: The Language of Business - Vol. 2 (Intermediate: Part 96)

And this exclusion of "women's work" continues, despite United Nations data gathered since 1975 (the beginning of the UN Decade for Women) indicating that women globally contribute two-thirds of the world's work hours, for which - given the imbalanced, unjust, and truly peculiar nature of the accounting characteristic of dominator economics - they globally earn only one-tenth of what men do and own a mere one-hundredth of the world's property.

Riane Eisler

Accounting and the Time Value of Money (Part I)

by

Charles Lamson

Annuities

An annuity is a series of periodic payments or receipts of equal amounts that occur at equal time intervals between each cash flow. For example, the monthly payments on a car loan are an annuity. The equal cash flows are referred to as payments (PMT). There are two types of annuities: an ordinary annuity and an annuity due.

An ordinary annuity is an annuity where the cash flows occur at the end of the interest period. An annuity due is an annuity where the cash flows occur at the beginning of the interest period.

Annuity problems can have five variables:

1. Present value (PV)

2. Future value (FV)

3. Interest rate per compounding period (I/Y) 

4. Number of compounding periods (N)

5. Payments (PMT) 

We begin our discussion with the computations of the future value of ordinary annuities. 

Future Value of Ordinary Annuities 

In a future value of an ordinary annuity problem, the payments, the interest rate, and the number of corresponding periods are known and we compute the future value. Again, payments occur at the end of the period for an ordinary annuity. For example, assume that an undergraduate accounting student wants to accumulate a sum of money to pay for a master's program to earn the 150 credit hours required for accounting certification. The student will make $10,000 deposits at the end of each year for 3 years and the interest rate is 10% as depicted by Exhibit 7.8. interest is compounded annually. 

The third payment does not earn any interest. The first payment is on deposit and accumulates interest for two periods, and the second payment accumulates interest for only a single period. The third payment is made at the end and does not accumulate interest. To solve this problem, we can compound each cash flow as three separate single-sum problems as shown in the following table.

The future value of this annuity is therefore $33,100. The difference between the sum of the cash flows ($30,000) and the future value of the cash flows ($33,100) represents the interest earned on the investment, $3,100. 

This approach of turning an annuity into a series of single sum problems is too cumbersome for most annuity problems. Techniques involving a formula, table, spreadsheet, or financial calculator are efficient ways of solving future value of ordinary annuity problems. We will discuss these ways in Parts 97 and 98.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 331-332*

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