Microsoft Office Tutorials and References

In Depth Information

**Understanding How Excel Handles Money**

amount, the interest rate, the
period
(how often you make a payment), and

the length of the loan. Then, the functions return an answer such as your

payment amount. In this chapter, I show you how to use these functions to turn

your finance figures into meaningful results.

The
principal
is the amount being borrowed. The
interest rate
is the annual

percentage that the lender charges for lending the money. Your total

payments will equal the principal plus the sum of all interest charges.

Understanding How Excel

Handles Money

Excel is a lot more than a simple adding machine. It has great tools for

working with money values and a number of ways of presenting the amounts.

For example, Excel makes it easy for you to make sure that your financial

amounts are displayed with two decimal points. You can even work with

different currencies from around the world.

Going with the cash flow

Excel works with money on a cash flow basis. In other words, money

amounts are treated either as a cash flow
in (money you receive) or a cash

flow
out
(money you pay out). Yes, there always seems to be too many of the

latter and not enough of the former — but hey, you can’t blame Excel for that!

Excel represents cash flows
in as positive numbers and cash flows
out
as

negative numbers. For example, when you calculate the payments on a loan,

the situation is as follows:

✓
The amount of the loan is entered as a positive value because this is the

money you’ll receive from the bank or whoever is giving you the loan.

✓
The monthly payment that Excel calculates is a negative value because

this is money that you’ll be paying out.

Formatting for currency

One of Excel’s shining strengths is accepting, manipulating, and reporting on

monetary data. As such, Excel provides robust formatting for numeric data,