Question

Explain present and future value. Provide examples of the use of present value techniques in accounting.

Answer 1

Time value of money is an essential economic principle in accounting and finance that holds a dollar received today is more worth than a dollar received in a year hence. The preference for receiving the dollar now is due to the opportunity cost of dollar, investment risk involved or higher current purchasing power of dollar. The present value of a dollar represents the value of future dollar if received today and the future value of a dollar represents the value of present dollar if received at a future date. These present and future value calculations are useful in the valuation of long-term bonds, long-term leases, and pension obligations etc.