Intermediate accounting

INTERMEDIATE ACCOUNTING

Time value of money

            “Time value of money” refers to the potential of money to grow over time. Because of this fact, money available at the present is considered more valuable than that similar amount in the future. For example, if you have $1000 today and deposited that money in a savings account which pays an annual interest rate of 1%, this money could be worth $1010at the end of one year. This is more than you would have if you received the $1000 at that point. Time value of money, however, is not only related to growth but is also associated with loss of value. Inflation, for instance, leads to reduction in the value of money. If inflation rate rises by 10% in one year, a person who has $100 bill today will have the value of his money reduced to $90 bill.  From these interpretations, it is clear that accountants need to have an understanding of compound interest, annuities and present and future value concepts. This is because accountants serve as financial advisors of an organization and so this understanding will allow them in making sound financial decisions especially when it comes to issues of investing.

            When investors borrow money from a bank, they may be charged interest for a fixed period of time. This kind of interest is what is referred to as simple interest. When time for paying back borrowed money comes, borrowers pay back the principal sum (actual amount borrowed) plus interest earned. Generally, simple interest is charged for cash borrowed and used for a short duration of time, say 2 years at most. Compound interest on the other hand is calculated from the principal sum plus interest accumulated. What happens with compound interest is that the first interest payment made is equivalent to that of simple interest but interest paid on successive years is different. The second payment is equivalent to the principal plus interest earned in the first period then this is multiplied by the rate of interest rate. In other words, compound interest (unlike simple interest) incorporates an interest on the interest of all preceding payment periods.

            Enterprise resource planning (ERP) and material requirements planning (MRP) are not the only resource planning processes applicable to manufactured processes. There is a host of several other resource planning processes which might as well fit in manufacturing. Some of these processes are: line scheduling and production planning (LSPP), tactical and strategic decision support and labor planning and employee scheduling (LPES).

            Both ERP and MRP processes are not restricted only to manufacturing industry. They can as well be applicable to service industry. The financial sector (a service industry) takes much use of these two planning processes. Both ERP and MRP software are customized in such a way that they can meet specific demands of an industry. The two planning processes are used by banks in automation of such components as: customer order management, inventory management, reporting and analysis and preparing production schedules. In addition to these functions, banks have used software affiliated to ERP and MRP to track the customer banking behavior. Customers with a good loan repayment record or other bank related activities may be tracked easily using these planning processes. Bank of America uses ERP to identify customers who have reduced their borrowing by 10 percent. It also uses the same to email customers who have requested newest products (Bailey, 2009).

 

 

References

Bailey Eldon, (2009) The Essentials of Intermediate Accounting I Upper Saddle River: Prentice Hall

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