Tutor profile: Mansoor A.
How are prices determined by supply and demand?
Let us assume that you sell apples. You have 10 boxes of apples to sell at $10 and no one is buying them, What do you do? You decrease the price to $9 and one buyer comes. You still have nine boxes left, so what do you do? You decrease the price to $4 and now 20 buyers show up! The problem is you only have nine boxes left, so what do you do? You increase the price until people start walking away until you reach the highest price that you could sell those apples without any left over. In our example, let us assume that price was at $6: anything less would bring more than nine buyers, and any price higher would cause you to have leftovers.
What is the time-value of money?
The time-value of money is the idea that a dollar received today is worth more than a dollar received a year from now. If I could buy a chocolate bar with one dollar today, the price of the chocolate bar will most likely increase one year from now and I would need more money to afford that chocolate bar. Let us assume that the cost of the chocolate bar has become $1.05 next year. In that case, I would need an extra 5 cents to my dollar last year to preserve the same purchasing power. In this example, we could say that one dollar today is equivalent to $1.05 one year from now. The passing of time has changed the value of money. The more distant money is in the future, the less value it carries today. Would you prefer to get $100 today or five years from now? Clearly, money today is worth more.
What is the difference between cash-based and accrual accounting?
Cash-based accounting records transactions only when cash is paid or received, whereas accrual accounting records transactions when they are incurred even if the cash payment or receipts is to be paid or received at a later date. For example, let is assume that I sell you my iPhone but you promise to pay me next month on your next paycheck. Cash accounting would not record the sale today but would wait until the money is received next month. On the contrary, accrual accounting would record the sale today as Receivables.
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