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Could you pls explain me the Present value and Future value concept?
1. Present value is used for liability purpose only to see the Present value of Future cashflows (Future liability) as of Today which is to be paid in future but the purpose of calculating is to simply recognize it in our Financial statements.
2. We calculate the Present value by discounting the Future cashflows (future liability) using interest rate but the discounted value is diminished due to inflation effect which explains by the value for money concept.
3. To cover the difference caused by the inflation is compensated by the interest that would be payable each year by unwinding (unfolding / unrolling) using the interest rate because it is the
thread that ties present value and future value together.4. Future value is used for investment purpose only to see the Future value of the investment at Present (made today).
5. We calculate the Future value by multiplying the Present value with interest rate for a specified period to see how much our investment will grow in future.
6. The purpose of calculating Future value is to simply recognize it in our financial statements.
Thanks to you…
Paper MA is management accounting and is not concerned with what might appear in the financial statements.
Basic discounting is examined in Paper MA and is covered in our free lectures, and is nothing directly to do with inflation.
I understand that. But could you help me on this once please because it is important for me 🙂
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