finance Flashcards
functions of money
unit of account- it allows us to place monetary value on goods and services
means of exchange- allows us to trade
store of value- allows us to use it in the future as it keeps its value
Advantages of cash
-most widely accepted form of exchange
-physical not virtual
- makes budgeting easier
Disadvantages of cash
-can be stolen or lost
- threat of counterfeit (fraud)
- only appropriate on purchases up to a certain amount
- can’t be used online
debit card
(payments come directly from the account)
advantages of debit cards
- no need to carry cash
- secure method of payment with low risk of theft
- widely accepted
- offers protection on purchases
- suitable for online transactions
disadvantages of debit cards
- overspending
- not accepted or appropriate for small transactions
credit card
(can delay payments)
advantages of credit cards
- allows a period of credit that is interest free (a month)
- most cards are widely accepted
- loyalty schemes are often offered (collect points or cash back)
- offers a degree of protection on purchases
- suitable for online transactions
disadvantages of credit cards
- interest is charged on balances not paid off within a month
- can encourage overspending and therefore being in debt
- interest is charged on cash withdrawals
- limit is set on the amount of credit allowed
cheque
(a written order to a bank to transfer money from one persons account to another)
advantages of a cheque
- low risk
- widely accepted for face to face and postal transactions
- no need to provide change as the amount is written
disadvantages of a cheque
- time consuming
- old fashioned
- easy to make errors
advantages of a electronic transfer
- instant
- provides a record of payment
- no additional costs
- easy to use
disadvantages of electronic transfers
- transfer could get lost
- not useful for face to face
direct debit
(agreement made with a bank to allow a third party to withdraw money and set a pay day)
advantages of direct debit
- easy to pay for regular payments like bills
- quick and easy
- amount paid can vary
disadvantages of direct debit
- if payer makes a mistake then payee has to claim back the money
- payer determines the amount paid each time
standing order
(agreement made with the bank to transfer a fixed sum of money on a set date on a regular basis) e.g phone bill
advantages of standing order
- same amount paid each time is easy
- easy to set up and cancel
- don’t need to remember to make regular payments
disadvantages of standing order
- payments are taken regardless of the customers balance so may have to use an overdraft
- payments will continue unless cancelled
pre paid card
(money is uploaded onto a card with transactions then being withdrawn to reduce the balance)
advantages of a pre paid card
- can set up a budget in advance to avoid overspending
- if lost or stolen it’s limited to the remaining balance
- effective way of controlling the amount spent
disadvantages of a pre paid card
- no protection if lost
- sometimes require an initial fee
advantages of a contactless card
- easy
- secure method of making payments
- popular
disadvantages of contact less cards
- only accepted for small transactions
- not widely accepted as it’s new tech
charge card
(allows customers to delay payments for a short period of time)
advantages of charge cards
- reduces risk of debt
- allows a short period of credit
- don’t need to carry cash
- offers additional perks
disadvantages of charge cards
- must be paid in full each month
- often an annual fixed fee
store card
(retail outlets can delay payments for customers)
advantages of store cards
- allows a short period of credit
- often offers discounts
disadvantages of store card
- only accepted in issuing store
- can encourage overspending
advantages of mobile banking
- convenient
- secure
disadvantages of online banking
- features are limited
BACS
(transferring payments from one account to another within 3 days
advantages of BACS
- instant transfers
- can be accessed in many ways
- no additional costs
disadvantages for BACS
- faster payment not offered from all banks
- limit set on the amount transferred
CHAPS
(can transfer payments from one account to another on the day)
advantages of CHAPS
- transfers can be made the same day
- no limit to the amount transferred
disadvantages for CHAPS
- there is a fixed charge per transaction
^ methods of payment
overdraft
(you can borrow extra money through your account)
advantages of overdrafts
- can be paid off without penalties
- provides a short term solution
disadvantages of an overdraft
- interest charges are often high
- not the cheapest form of borrowing
- could encourage overspending
advantages of personal loans
- useful when paying for a big item like a house
- makes budgeting easier
- regular payments
disadvantages of personal loans
- not suitable for short term loans
hire purchase
(customer makes a down payment when buying an expensive item)
advantages of a hire purchase
- spreads the cost of an expensive item over time
- credit is secured against a specific item
disadvantages of hire purchase
- high interest charges
- agreements can be manipulated to make a purchase seem appealing
advantages of a mortgage
- can spread the payment over a long period of time
- interest rates could be fixed reducing the risk of fluctuations
disadvantages of a mortgage
- interest payments could vary which could be hard to meet expenses
- could lose your home if you fail to pay or could affect your credit rating
- penalties may be applied to pay early
payday loans
(cover immediate financial needs but is repaid on the next payday)
advantages of payday loans
- solve short term cash flow problems
disadvantages of payday loans
- interest rates are very high and can spiral out of control if not paid on time
^ types of borrowing
expenditure
(the amount of money you need to cover all your expenses/ outgoings)
ISA
individual savings account
advantages of ISA
- interest rates are slightly higher than in other saving accounts
- tax is not charged on interest earned allowing the customer to keep the rewards for saving
disadvantage of ISA
- set limit on how much you put in
- can’t withdraw from it too often
- notice is often required to make withdrawals
advantages deposit and saving accounts
- interest is earned on positive balances
- accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan
disadvantages of deposit and savings accounts
- interest earned is taxed
premium bonds
(savings account where the interest paid is decided in a monthly prize draw)
advantages or premium bonds
- you can claim premium bonds immediately if someone passes away
- are safe and secure
- no limited amount of money you can win
disadvantages of premium bonds
- no guarantee of winning
- a risk of losing value (your balance)
- no regular income
bonds and gilts
(lending money to the gov in return for regular interest)
advantages of bonds and gilts
- regular fixed returns
- spreads risk across a range of markets
disadvantages of bonds and gilts
- risk of losing some or all value of the investment if the bond of gilts value falls
- interest payments may not be received if the issuer is unable to make payments
advantages of shares
- share prices fluctuate offering a potential high reward
- as part owners you may get discounts and special offers
disadvantages of shares
- share prices fluctuate which could be bad
- no guarantee of any reward
advantages of pensions
- encourages people to save throughout their life
- savings may be boosted by employers contributions increasing the final value of the savings
disadvantages of pensions
- final outcome is difficult to predict
- if you move jobs it may mean a policy stops and another starts, reducing the overall value
- if payments are deducted this may affect short term living standards
^ savings and investment
advantages of car insurance
- protects you from damage or theft
- meets legal requirements
disadvantages of car insurance
- premiums can be high (like for young drivers)
- excess money may need to be paid (you may still need to pay for some damages)
advantages of home and contents
- protects against damage which may be too expensive to repair resulting in a loss of a home
- contents are protected inside and outside the house
disadvantages of home and contents
- premiums are an additional expense to home ownership
- some items cannot be replaced due to value (like jewellery or a painting)
advantages of life insurance
- provides peace of mind to family when you have lost someone
advantages of travel insurance
- protects your belongings
- protects against cancellations or delays
- covers medical costs when your on holiday
disadvantages of travel insurance
- may be a waste if you don’t travel much
- additional costs when travelling abroad
advantages of pet insurance
- avoids expensive pet fees
disadvantages of pet insurance
- an additional monthly expense to protect against the unexpected
advantages of health insurance
- some compensation is provided when your ill which can reduce financial burden
- if used to fund private care you can get better facilities and quicker treatments
disadvantages of health insurance
- won’t cover pre known conditions
- you may not need to use it
margin of safety
actual output or sales divided by break even point
break even point
fixed costs divided by contribution per unit
contribution per unit
selling price - variable costs
closing balance
open balance + net cash flow
profit
sales revenue - total costs
sales revenue
total units sold x price of each unit
total contribution
sales revenue + total variable costs
contribution margin
revenue - fixed costs
bank of england
UKs central bank
responsibilities include legal tender and setting interest rates for the uk
building societies
-these are organisations that handle -financial transactions and stored money on behalf of customers
-members and account owners are part owners of the building society
credit unions
- these are non profit organisations
- members are the owners
national savings and investments
- this is a government backed organisation that offers a secure savings option
- offers a range of options such as ISA
premium bonds and so on
insurance companies
- protect against the risk of loss
- are profit making organisations
pension companies
- sell policies to individuals or to their employer so they can save for retirement
pawnbrokers
- loan money against the security of a personal asset
advantages of building societies
- offer a range of services and account types
- secure
- owned by members so costs are kept down
disadvantages of building societies
- savings are only protected up to a certain amount so if the society goes bankrupt then savings above the certain amount get lost
^types of current account
standard
provides full day to day bank facilities e.g cheques and debit cards
packaged premium
additional charge in return for extras e.g discounted home insurance, no fee overdraft and access to things like tickets to concerts
basic
limited features
held by a person with no credit history
students
for students
free overdraft facilities
^types of borrowing
overdraft
can withdraw money from a current account that you don’t have
adv of overdraft
flexible
quick to arrange
not normally a charge if you pay off the overdraft earlier than expected
disad of overdraft
charged interest for borrowing
may affect your credit score
personal loan
borrow a set amount of money which is repaid in regular instalments with interest
adv of personal loan
flexible
fast funding
positive credit score
higher borrowing limit than credit card and lower interest rates
disad for personal loan
fees and penalties
interest charges
credit impact
debt
hire purchase
pay for an item in instalments to own
adv for hired purchase
flexible
ownership
cash flow
immediate access
disad of hire purchase
asset depreciation
overall cost
ongoing fixed payments
payday loan
get money quickly but have to pay it back in full on time
adv for payday loans
quick money
disad of payday loan
debt
have to pay more and more if you don’t pay on time
^ communication with customers
branch
physical place to get financial advice
online banking
telephone banking
mobile banking
citizens advice
run by charities
advise on financial and non financial issues
debt counsellor
professionals who offer advice on how to manage debt
individual voluntary arrangements bankruptcy (IVA)
a gov organisation that allows an individual to declare themselves bankrupt while agreeing to pay all or part of the money they owe to creditors
^accounting
accounting
recording financial transactions, planning and produce financial info
capital income
money invested by the owners or other investors used to set up the business or buy additional equipment
revenue income
money coming into the business from performing day to day function selling goods or providing a service e.g sales (cash or credit), rent received
expenditure
money spent by the business
capital expenditure
used to buy capital items that stay in the business for a long time
non current assets
tangible items e.g land, equipment, vehicles
intangible assets
cannot be touched e.g trademarks, brand names
revenue expenditure
spending on things like rent, salaries, wages etc
crowdfunding
large group of people invest small amounts
venture capital
investing in a business for a stake
debt factoring
selling debts of a business to third party for money
leasing
pay to use an asset in instalments
trade credit
allow a customer to purchase now and pay later
grant
gov gives money to a business
peer to peer lending
business lending money to another
invoice discounting
making a product or service cheaper
retained profit formula
profit= sales revenue-total cost
net current assets formula
current assets-current liabilities
variable costs
raw materials
semi variable costs
part of the costs stays the same but part varies depending on business activity e.g worked paid a fixed rate to varies overtime
fixed costs
rent
total costs formula
fixed costs+ total variable costs
total revenue
selling price x quantity sold
cash inflows/receipts
money coming into business e.g cash sales, loans
cash outflow/payments
money going out e.g rent
opening balance formula
same as the closing balance at the start of the month before
closing balance
opening balance + net cash flow
liquidity
measures a firms ability to meet short term cash payments
statement income
accrual
an expense is paid after a period to which it relates
prepayment
statement of financial position
snapshot of the net worth of the business, summary of what the business owns (assets) and what it owes (liabilities)
current liabilities
things owned by the business that must be repaid within a 12 month period e.g overdraft
non current liabilities
things a business owes that will take longer than a year to repay
depreciation
used to spread the cost of an asset over its useful life
straight line depreciation
asset is depreciated by a set amount each year
reducing balance depreciation
asset is depreciated by a set % of its remaining value each year
^ ratio analysis
gross profit margin
ratio looks at gross profit as a % of sales turnover
mark up
ratio calculates gross profit as a % of the cost of sales
net profit margin
ratio shows net profit as a % of sales
return on capital employed (ROCE)
shows the % return a business is achieving from the capital invested to generate the return
current ratio
shows a business the amount of current assets it owns in relation the amount of current liabilities it owes
liquid capital ratio
shows accurate liquidity as it removes the least liquid of all current assets e.g inventories
trade receivable
how long it takes for debtors to pay and is expressed as a number of days
trade payable
how long it takes a firm to pay for goods and services bought on credit and is expressed as a number of days
inventory turnover
shows the average amount of time an item of stock is held by a business and is expressed as a number of days
net cash flow
inflow - outflow
total revenue
price x quantity sold
total costs
fixed + variable
profit
total revenue - total costs
total contribution
sales revenue - total variable costs
contribution (per unit)
selling price - variable cost (per unit)
profit (using contribution)
contribution per unit x margin of safety
break even output
total fixed costs / unit contribution
margin of safety
actual sales - break even level of output
revenue
unit price x quantity sold
gross profit formula
sales revenue - cost of goods sold
cost of goods sold formula
opening inventory + purchases - closing inventory
profit/ loss for the year formula
gross profit - expenses + other income
net book value formula
cost - depreciation
net current assets formula
current assets - current liabilities
net assets formula
non current assets + net current assets - long term liabilities
capital employed formula
opening capital + profit for the year less drawings
balance sheet (what needs to balance)
net assets = capital employed
gross profit margin formula
gross profit / revenue x100
mark up formula
gross profit / cost of sales x100
profit margin
profit / revenue x100
return on capital employed formula
profit / capital employed x100
current ratio
current assets / current liabilities
liquid capital ratio
current assets - inventory / current liabilities
trade receivable
trade receivable / credit sales x365
trade payable
trade payable / credit purchases x365
inventory turnover
average inventory / cost of sales x365
