Chapter 3
TIME VALUE OF MONEY (TVM)
- the concept that a sum of money is worth
more now that the same sum will be at a
future date due to its earnings potential in
the interim. This is a core principle of
finance. A sum of money in the hand has
greater value than the same sum to be paid
in the future.
How is TVM used in real life?
- Time value of money, real example, if you
put $1,000 in a bank, you may be willing to
accept a $50 dollar return on an investment
after a year. This is because the risk that the
bank will not repay you is low. If you lend
the same $1,000 to a stranger, you may
require a $200 return on investment instead.
Reasons of time value of money
1. Inflation
2. Risk
3. Liquidity
Money has time value because of the following
reasons:
1. RISK AND UNCERTAINTY FUTURE is
always uncertain and risky
2. INFLATION IN AN INFLATIONARY
ECONOMY, the money received today has
more purchasing power than the money to
be received in future.
3. CONSUMPTION
4. INVESTMENT OPPORTUNITIES
PRESENT VALUE FORMULA
present value / (1 + interest rate)^yrs
FUTURE VALUE OF MONEY
● Future value, or FV is what money is
expected to be worth in the future.
● Typically, cash in a savings account or cash
in a time certificate of deposits, or a hold in
a bond purchase earns compound interest
and so has a different value in the future.
FUTURE VALUE FORMULA
future value / (1 + interest rate)^yrs
The three most important financial statements:
● the income statements
● balance sheet
● statement of cash flows
- statement of shareholders equity
These three are required financial statements, they
are very informative tools that traders can use to
analyze a company's financial strength and provide
a quick picture of a company's financial health and
underlying value.
THE INCOME STATEMENTS
- An Income statement is also called a profit
and loss account. One of the Financial
statements of a company and shows the
company's revenues and expenses during a
particular period. It indicates how the
revenues are transformed into the Net
income or Net Profit.
What is the purpose of an Income statement?
➢ The purpose of an income statement is to
show a company's financial performance
over a period. It tells the financial story of a
business activities. Within an Income
statement, you'll find all revenue and
expense accounts for a set period.
NET INCOME = (TOTAL REVENUE + GAINS)
(TOTAL EXPENSES + LOSSES)
The income statement is an important part of a
company's performance reports that must be
submitted to the securities and exchange
commissions (sec).
A balance sheet is a financial statement that
contains details of a company's assets or liabilities
at a specific point of time. it is one of the three core
financial statements (income statement and cash
flow statement being the other two important
financial statements) used for evaluating the
performance of a particular business
Asset-something that the company owns and that
is beneficial for the growth of the business
 1. CURRENT ASSETS- examples short term
deposits, marketable securities stocks (can
easily le converted into cash)
2. FIXED ASSETS - building, machinery,
equipment, trademarks

A statement of cash flows is a financial statement

that summarizes the amount of cash and cash
equivalents entering and leaving a company, just
like an income statement a statement of cash flow
measures the performance of a company over a
period of time.

A statement of shareholders equity details the

changes within the equity section of the balance
sheet over a designated period of time. The report
provides additional information to readers of the
financial statements regarding equity related
activity during a reporting period. it provides
investors information on how the value of the
business to shareholders has changed from the
start to the finish of accounting periods

2 major sections of a statement of estockholder's

equity are:
1. capital stock - the amount of common and
preferred shares that a company is
authorized to issue, according to its
corporate charter
2. retained earnings - the amount of profit a
company has left over after paying all its
direct costs, indirect costs, income taxes
and its dividends to shareholders.

STOCKHOLDERS REPORT
- The stockholders report places the
company's achievements on display for
shareholders, while highlighting future plans
and disclosing the financial well being of the
company.