Over time, the value of money changes based on the effects of interest rates and inflation.
Present value is the measure of the current cash flow. When combined with the effects of the interest
rate, the present value can be calculated to find the future value. Inflation is the rate that prices are
increased as a whole (Brealey, 2015).
Interest is rate of return on an investment. Interest is accumulated in two ways. A simple
interest rate is applied to only the initial amount of investment. Compounding interest is where the
interest rate is applied to the investment and the interest that is earned. Simple interest that is
compounded annually is known as annual percentage rate. Compounding interest rates that compound
annually are known as effective annual interest rates (Brealey, 2015).
Annuities are cash flows that are level and stream at regular intervals for an allotted amount of
time. If an annuity lasts forever it is called a perpetuity (Brealey, 2015).
The three important documents that can tell you about a company’s income and sustainability
are the balance sheet, income statement, and statement of cash flows. The balance sheet reports the
assets and liabilities of a corporation. With this information you can understand the net worth of the
company. The income statement provides information on the revenue and expenses generated by the
company. Finally, the statement of cash flows gives a report of how much cash and cash equivalents
came into the company in a given period (One Minute Economics, 2016).
References:
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2015). Fundamentals of corporate finance. New York, NY:
McGraw-Hill/Irwin.
One Minute Economics. (2016, August 06). Financial Statements Explained in One Minute: Balance
Sheet, Income Statement, Cash Flow Statement. Retrieved May 30, 2018, from
https://www.youtube.com/watch?v=6GVVTfj7ndc