 In this discussion we will discuss the discussion question of explain the concept of present value and apply it to long-term liabilities. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broke. The concept of present value basically just means that money in the future that we receive in the future is worth less than money today. And so that means that in other words if we had the option of course of receiving money either today or in the future we would want to receive it today. Now you can get into a couple of reasons on why that would be. We can talk more in a discussion question like this or an essay question in terms of why would the present value be and then we can apply it to things like a note in a concrete example. Why would that be? Why would it be that we want it today? Well one of course if we needed it today you might say well if I want to buy something right now I want it now if I had a thousand dollars today or a thousand dollars a year from now and I want to buy something then I would like it now. But even if we were to just not want to buy anything if I had enough money to buy stuff right now and I didn't need a thousand to buy anything immediately we would still want it today or it would be worth more today for a few different reasons. One is the fact that the money goes down the the major of money just due to inflation will typically go down so usually the purchasing power will go down in the future. It's not the the ruler of money a major of value is not a constant ruler it's not always a 12 inch ruler it's going to go up and down and typically it goes down at a constant rate that's kind of like the plan and therefore we know that just in purchasing power that same one thousand will be less in the future but that's not the only reason that we don't want it now when we would rather have it now than in the future. It's also opportunity cost meaning even if the ruler had the same value even if the money was worth the same today as it was in the future we know that there's purchasing power with that money we can do what it we could purchase something with it but even if we didn't want to purchase it something with it we can lend out the purchasing power to somebody else and that's the point so if if I can lend out the purchasing power to somebody else rent my purchasing power out to somebody else then I can typically get payment on that and that's really what we do even when we put it into the bank into a savings account we're saying bank you hold on to the money and you can loan it out you can loan it out to someone else while I don't need it and while you do that pay me a little bit of interest so the bank is giving security over the money but also able to use it in the interim while we're not using it and typically may pay us interest or we may put it into another investment stocks and bonds and try to get a return on it so for that reason the purchasing power is valuable even if we're not spending the money on things or services at this point in time so that's going to be the concept of it so then we're if we apply that concept to something like a long term liability a note then how do we how are we going to value basically a note what is the note worth well when you think about the note payment if we're gonna if we're gonna borrow money and we're gonna have to pay back the money what's the what's the value of the note it's gonna be the value of the interest payments on the note and and the principle so if we were to if we were to think about a note like a bond it's almost easier to think about this because a bond is something that typically has two distinct cash flows meaning we're gonna pay back the original amount of the bond a hundred let's say the bond is a thousand we're gonna pay back the thousand at the end of the bond and we're also going to pay back interest payments so if we were to present value this on a bond type of example we would say that there's one thousand we're gonna have to pay back and then we've got the interest payments that we pay periodically throughout the bond one's an annuity and we want to get the present value over here at time zero so we'd have to present value these items and say well what would these series of payments if we're if we're playing you know 200 every every six months 200 200 we'd have to present value that annuity bring it back to the current day and present value this this time period of one and bring it back to the current day and you would think that that would be the price of the bond a note would be the same way we could set up a note in many different ways a long-term liability in terms of a note could have installment notes that have interest and principle or it could be set up in a similar way to a bond but whatever the whatever the way it is set up the value of it you would think would be the present value of the future payments so what we would do is figure out what those future payments are in the case of a bond it's usually the way the preferred way that this type of present value is given because it gives both the the types of present values in terms of annuities which is going to be a series of payments and the present value of one and if we take present value both of those back to the current day you would think then that that would be the price of the note the value of the note