Understanding of basic accounting terms

 In this presentation we will take a look at present value and future value and the relationship between them To do that we're going to take a look at these two sets of data and compare and contrast that calculation of the present value and future

 value Now remember that there are three ways that we can go about this Typically one with the use of formulas to with the use of tables three with the use of Excel or some type of financial calculator we're going to go through the concepts 

here So if we have the amount of ten thousand dollars the number of payments five years we're going to say in years in this case and the rate 15 percent this is what we need to calculate the present value If we were to calculate the present value no matter what method we use whether it be the formulas the tables or excel we would then get the present value of 4000 972 Now if we take that same present value and then use it as the amount that we're going to use the present value

 to calculate the future value using our same data or similar data we're gonna have the amount 4000 972 the number of payments five years and the rate 15 percent we can then calculate the future value and you could do this in Excel we'll do this in excel in our practice files as well And that hopefully we'll just kind of solidify this relationship between the present value and the future value They're going to be of course related formulas We would get to the 10000 which was our original 10000 that we started with 

Another way you might want to consider going through this data just to solidify the relationship between present value and future value is going through the calculation starting at the place of Year Zero which is going to be the four thousand nine seventy two the present value and then get to year five through our calculation Year by year So if we take the rate then of one hundred and fifteen This is kind of short cutting it because of course we're taking the 15 percent and then and then we're taking point one five plus one one hundred and fifteen percent 100 percent plus 15 percent 

So you could calculate it such as 4 9 7 2 times point 1 5 and then you would get 4 forty eight and then add to that the 4 9 7 2 and you get the 5 7 1 7 or And this is rounded 5 7 1 8 or you can just take the 1 9 7 2 times the 100 percent plus the 15 percent or the one point 1 5 150 percent to get that same 1 7 1 7 point 8 and it's rounded to 1 7 18 here If we take that number times another one hundred and fifteen percent So 5 7 1 8 times 1 point 1 5 Then we're going to get in year

 to six thousand five seventy five So if we take that six thousand five seventy five six five seven five times one point one five four year three we get these 7 5 6 1 So if we take that 7 5 6 1 times 1 point 1 5 we're going to get the 8 6 9 6 and if we take this of course we're rounding here 8 6 9 6 times 1 point 1 5 we're going to get the 10000 thousand of course it's rounded and so that kind of calculation

 can give you a better idea or an idea of this relationship between the present value and the future value of a better understanding a feel for the formulas so that when you use them you have a better idea of what's going to happen what you want to do is have a good enough idea of what's going to happen The relationship between them so that if you miss key something or something goes wrong you can say hey it doesn't make sense Obviously I mean I go back through there and figure

 out what is wrong instead of blindly relying on this on the formulas because we don't understand exactly how they work or what the relationships are Once we have that information we can go through the goal seek and solve for other factors which might add to our understanding of the relationship between the present value and future value We'll do this in Excel examples

 but note that if we're if we have our information everything except the interest rate we can use goal seek to find that for example if we knew the ten thousand five years and we knew that the present value should be four thousand 972 well then we want to solve for the interest rate we could do that with a formula and plug in everything except the unknown the rate solve for it or we can use goal seek with an 

Excel which will in essence do the same thing we can tell Excel I'm going to put in the present value formula here the present value formula and then I'm going to tell Excel Hey Excel would you make that present value formula that cell B would I know the answer is for what it should be for nine seventy two That's an that's a no one factor in my in this problem what I don't know is the rates I want you to make use that present value formula to make this number four thousand nine seventy two by adjusting this rate this rate is used in the present value

 formula and in so doing it I'll figure out of course what the rate is which will be 15 percent and if we did that same kind of analysis down here with the future value if I knew the amount of the present value if I knew the number of payments and then the future value we know as ten thousand we can say hey I'm going to put in the future value formula here let's put in the future value 

formula and then tell Excel Hey the future I want you to make this future value formula are equal This ten thousand by changing the rate I want you to change the rate until this is gonna be ten thousand And again if we do that it will It will fix the rate or change the rate to the 15 percent using a similar method So if we go through some of these exercises you can give us a better idea of a feel for these things are the relationship between present and future value Recommend going through the Excel files and actually doing these exercises and they'll give you a good feel for them as well as learn the tool of things like gold seek and the formulas