Unit 3 Flashcards
What are the 4 functions of money?
● Means of exchange
● Store value
● Legal tender
● Unit of account
What are the 16 methods of payment?
● BACS
● Cash
● CHAPS
● Charge card
● Cheque
● Contactless card
● Credit card
● Debit card
● Direct debit
● Electronic transfer
● FPS
● Mobile banking
● Mobile payment apps
● Standing order
● Store card
What are the 4 types of current account?
● Standard account
● Basic account
● Packaged/premium account
● Student account
What is cash back?
When the bank gives you a small amount of money back when you purchase from certain businesses.
What is the maximum amount you can save in an ISA?
£20,000
What date is the end of the tax year?
5th April
What is the minimum age to have a cash ISA?
16
What is the minimum age for a stocks & shares ISA?
18
What are the age restrictions for a lifetime ISA?
18-39
What is the maximum you can put into a lifetime ISA each tax year?
£4,000
What bonus does the government pay into your lifetime ISA at the end of each tax year?
25% of the money put in that tax year
What can the consumer use the savings in a lifetime ISA for?
First home or retirement
What is a disadvantage of a stocks and shares ISA?
Savings are at risk if shares decrease in value
Give an advantage of an overdraft.
Helps avoid fees from bounced/returned payments; can spend money you don’t have immediately; paying off quickly can increase credit rating
What does ISA stand for?
Individual savings account
What is the main advantage of a cash ISA?
You don’t have to pay tax on any interest earned
Give a disadvantage of a cash ISA
Can only open one in a tax year
What is a disadvantage of overdrafts, credit cards and payday loans?
High interest rates
Give an advantage of a personal loan
Can borrow more than overdraft; cheaper in interest rates; spread payments over long time period; manageable, fixed monthly repayments
Give a disadvantage of a personal loan.
Interest; may be tempted to borrow more for lower interest rates; usually have to borrow at least £1,000 over 1 year
Advantages and disadvantages of cash?
●can’t spend what you don’t have
●eliminates hidden fees
●does not build credit score
●Higher risk of theft
Advantages and disadvantages of credit cards?
● builds credit score
● convenient and less risk of theft
● delays money coming out of account
● potential to overspend
● processing fees
● high interest on unpaid balances
Advantages and disadvantages of debit cards?
● can use online
● convenient
● offers protection
● secure, low theft risk
● not accepted for small transactions
● leaves account immediately
Advantages and disadvantages of standing orders?
● usually free
● quick to set up
● payer sets amount and duration
● payee not notified if payment fails
● less flexibility
● risk of late payment
● high administration
Advantages and disadvantages of prepaid cards?
● safe and convenient
● not affected by credit score
● spending easily tracked
● doesn’t build credit score
● often fees before use
● lots of fees for withdrawing, reloading, replacement
Advantages and disadvantages of mobile payment apps?
● convenient, fast, secure
● can be expensive
● tech issues
Advantages and disadvantages of direct debit?
● convenient for recurring payment ● spread costs and budget
● guaranteed
● insufficient funds = overdraft
● refund process takes time
● payments controlled by third party
Advantages and disadvantages of electronic transfer?
● faster than other methods
● can be set as automatic for recurring transactions
● payer must have funds immediately
● possible high transaction fees
What is a charge card?
A card which usually does not have a spending limit and requires its full bill to be paid each month.
Advantages and disadvantages of charge cards?
● uncapped spending means you can spend money you wont have until needed at end of month
● no interest
● v bad for credit score if payments missed
● large annual fees
● minimum income required
Advantages and disadvantages of contactless cards?
● quick and convenient
● hygienic
● easier for someone to use stolen card
● impulse payments from convenience
Advantages and disadvantages of store cards?
● possible benefits like discounts
● increase credit score
● high interest
● not widely accepted
● v low credit limits
Advantages and disadvantages of mobile banking?
● convenient and easy
● fast and always available
● tech problems
● acces to account if phone stolen
● regular use can accumulate significant charges from banks
What is bankers automated clearing services (BACS)?
A scheme that facilitates electronic transactions between banks. Bank transfer used for direct debits and direct credits.
Advantages and disadvantages of BACS?
● secure and reliable
● free transfers
● costs for transferring abroad
● 3 day processing time
● hard to reclaim funds if error is made in account number
What is faster payments service (FPS)?
Fast electronic transfer, from 1 UK bank account to another.
Advantages and disadvantages of FPS?
● short processing time - max 2 hrs
● must have sufficient funds to make payments
● limit on amount - often £250,000
● not offered by all banks
● potential for errors
What is clearing house automated payment system (CHAPS)?
Electronic transfers with no payment limit that are processed within 1 working day.
Advantages and disadvantages of CHAPS?
● quick transfer
● no payment limit
● transfer guaranteed once payment initiated
● transaction costs higher than other methods
● only available during business hours
● potential for errors
Advantages of standard account?
No charges on credit balances
Wide range of facilities like chequebook, debit card, overdraft
Convenient for regular payments
Advantages of basic account?
Can get with low credit rating
Easy first step for access to banking facilities
Advantages of premium accounts?
No charges on credit balances
Wide range of facilities
Convenient for regular payments
Extra perks
Advantages of student accounts?
Course fees and student loans are handled easily
Bonuses for students e.g discounts on travel insurance
Disadvantages of standard accounts?
Overdraft = potentially high charges
No extra perks
Disadvantages of basic accounts?
Limited facilities e.g. no debit card or overdraft
Disadvantages of premium accounts?
Additional monthly charges
May not be good value for money if perks not used
Disadvantages of student accounts?
Overdraft facility could encourage overspending
High charges for overspending
Features of easy access savings?
Often can withdraw savings over the counter, from cash machines with a plastic card, and online quickly and penalty free.
Good for emergency savings.
Features of regular savings accounts?
Save monthly chunk of income.
Rules about amounts deposited and withdrawn.
Slightly higher interest rate.
Features of fixed-term deposit accounts?
Set money aside for set amount of time
Interest rate fixed in advance
One lump sum and can’t be accessed until end of term
Often have highest interest rates
What are index linked accounts?
Same as fixed term deposit accounts but interest changes in line with inflation.
What are premium bonds?
Account to store money, but each £1 is a bond bought and monthly prize draw decides interest. Average is 1.25%
Advantages of premium bonds?
Potential to win big
Returns not taxed
No risk of losing money
Accessible
Disadvantages of premium bonds?
Potential to earn no interest
Low odds of winning
Have to wait a month before eligible to win
What are the fixed interest rates from bonds and gilts called?
Coupons
Advantages of bonds and gilts?
Could get high return if accept high risk
Often less risky than shares
Disadvantages of bonds and gilts?
Lower risk often means lower return
Money at risk and interest rates may pay more in interest
Advantages of shares
Can vote on important company decisions
Can earn capital from dividends and selling shares
Disadvantages of shares
Scam shares
Have to pay charges
Market is unpredictable
How much is employer contribution to pensions?
They match what you put in
What is the state pension?
£203.85 a week from age 67.
Advantages of pensions?
Not taxed
Compound interest added
Employer contributions
Guaranteed income at end
Disadvantages of pensions?
Lack of access
Risk of poor returns - invested in stocks and shares
Complicated- lots of options
Rewards of savings?
Interest payments
Money safe
Financial security
Risks of savings?
Inflation can reduce the value of the money when withdrawn later down the line.
Rewards of investments?
Can be exciting
Potential for high financial return
Risks of investment?
No guarantee of return
All/some value may be lost
Define national savings and investments.
Government backed organisation that handles financial transactions and stores money on behalf of its members
Responsibilities of the Bank of England?
Setting interest rates
Control national debt
Issue legal tender
What are credit unions?
Not for profit organisations that handle financial transactions and store money on behalf of members.
List 9 financial institutions
Bank of England, Banks, Building societies, Credit unions, National savings and investments, Insurance companies, Pension companies, Pawnbrokers, Payday loan providers
Strengths of Bank of England?
Reduce risk through monitoring
Lend to banks
Maintain economic financial stability
Weaknesses of Bank of England
Not available to general public
Change to interest rates affects borrowing and saving
Strengths of banks
Store money securely
Pay interest to consumers
Weaknesses of banks
Only protect savings up to £75,000
Easy access to savings could lead to unnecessary spending
Strengths of building societies
Store money securely
Owned by members rather than stakeholders, so running costs are lower and competitive interest rates can be offered
Weaknesses of building societies
Accounts inflexible
Penalty for early withdrawal
Not as commercially driven as banks due to absence of shareholders
Strengths of credit unions
Lower interest on loans than banks
More interest payed to members
Weaknesses of credit unions
Fewer branches means less accessible
Not as commercially driven as banks
Strengths of national savings and investments
100% secure - backed by HM treasury
Weaknesses of national savings and investments
Consumers may have to pay income tax on returns
Have to give notice period for withdrawal
Strengths of insurance companies
Consumer protected against unexpected losses
Weaknesses of insurance companies
Insurance may be unnecessary cost
Strengths of pension companies
Consumer in control of savings and how they are invested
Employer contributions
Weaknesses of pension companies
Can’t access before 55 without damaging costs incurred
Strengths of pawnbrokers
Access to funds same day
Can buy back asset
Weaknesses of pawnbrokers
Minimum borrow often £500 - encouraged to borrow more
Amount offered often lower than market value and have to pay more to retrieve asset
Asset may be sold
Role of financial conduct authority?
Regulate UK finance industry
Protect customers
Promote competition between financial services
Ensure practices are in interest of consumers
Permit financial services to trade
Role of financial services compensation scheme
Set up by government
Protect finances when financial services fail
Protect finances up to £85,000
Role of financial ombudsmen service
Settle complaints between consumers and financial businesses
Remain impartial
Role of office of fair trading
Uk government department
Economic regulator of country
Protect consumer interests
Role of legislation - consumer credit
Protect consumers from harm from creditors, banks, and credit card companies
Role and features of citizens advice
Run by charities
Advice for financial and non financial issues
Role of independent financial advisor
Professionals who give financial advice
Role of debt counsellor
Professional offering independent advice on managing debt
Role of individual voluntary arrangements (IVA) bankruptcy
Government organisation
Allows person to declare bankruptcy
Advantages of citizens advice
Free
Face to face or over the phone
Impartial
Disadvantages of citizens advice
Trained volunteers, not professionals - limited financial knowledge
Advantages of independent financial advisor
Professional
Advice based on individual
Disadvantages of independent financial advisor
Have to pay fees
Advantages of debt counsellors
Professionals
Advice most suitable for debt
Disadvantages of debt counsellors
Charge fees
Advice only for debt
Advantages of individual voluntary arrangements (IVAs) bankruptcy
Help arrange regular payments
Unbiased as advice is independent
Disadvantages of individual voluntary arrangements
Charge fees
Negative impact on credit score
Advantages of declaring bankruptcy
Debts usually written off
Disadvantages of declaring bankruptcy
Severe credit score impact
Stays on credit report for 7-10 years
What does the trade receivables days ratio show?
How long in days it takes debtors to pay your business
What is the trade receivables days calculation?
Trade receivables/credit sales x 365
What does the trade payables days ratio show?
The average number of days it takes you to pay your creditors
What is the trade payables days calculation?
Trade payables/credit purchases x 365
What does inventory turnover show?
The average time that an item of stock is held by a business in days.
What I’d the inventory turnover calculation?
Average inventory/cost of sales x 365
What does current ratio show?
How much a business has available (current assets) to pay for its current liabilities
What form is current ratio written in?
A ratio of ___:1
What is the current ratio calculation?
Current assets ÷ current liabilities
What does liquid capital ratio show?
How much a business has available (current assets - inventory) to pay for its current liabilities without stock as this is difficult to turn into cash.
In current ratio and liquid capital ratio, what would a result of 1.25:1 show?
For every £1 of current liabilities (minus inventory for liquid capital ratio) the business has £1.25 of current assets to pay for it.
What is the liquid capital ratio calculation?
Current assets - inventory/current liabilities
What does the gross profit margin ratio show?
What percentage of every £1 of revenue you get to keep as gross profit.
What is the gross profit margin calculation?
Gross profit/revenue x 100
What does mark up show?
How much profit you have achieved from the amount you have spent on your cost of sales - e.g 25% means the product has been sold for 25% more than cost of sales
What is the mark up calculation?
Gross profit/cost of sales x 100
What does net profit margin show?
The percentage of every £1 of revenue that you get to keep as net profit
What is the net profit margin calculation?
Net profit/revenue x 100
What does ROCE stand for?
Return on capital employed
What does ROCE show?
The % return the business is achieving for the capital that has been invested
What is the ROCE calculation?
Net profit before interest and tax/capital employed x 100
What are premiums?
Regular payments made by the consumer to the insurance provider
What is excess in insurance?
The initial amount that you need to pay before your insurance provider will provide the “pay out” you are claiming for.
How does choosing a higher excess amount affect insurance price?
Decreases it
What cars don’t need insurance?
Cars registered as Statutory Off Road Notice (SORN)
What is third party car insurance?
Only covers damage to someone else’s vehicle or property or injury to someone else in an accident - even if caused by your passenger.
Cheapest, good if car value is low
What is third party fire and theft car insurance?
Covers same as third party plus covers you for damage caused by fire or having your vehicle stolen
What additional cover does fully comprehensive car insurance offer?
Pays out for damage to your own car
Advantages of pet insurance?
Don’t have to choose between expensive bills and letting pet die
Most cover pet boarding costs if you go into hospital
Helps ensure your pet can get right treatment
Disadvantages of pet insurance?
Very expensive
More expensive with age and health problems
May not need to use it
Advantages of car insurance?
Protects against expensive repairs/treatment/replacement
Disadvantages of car insurance?
May never need it
Have to pay more premium after making a claim
Advantages of health insurance?
Reduce wait time
Choose surgeon and hospital
More likely to get private room
Access to specialist drugs and treatment not available on NHS
Disadvantages of health insurance?
Might get better care on NHS
Expensive and will go up
Chronic illness and preexisting conditions not covered
Locations may not be convenient
Advantages of home insurance?
Also protects outside structures which would be expensive to replace
Disadvantages of home insurance?
May never be needed
Can’t replace sentimental value of items
What is life assurance?
Builds up and you will eventually earn a pay out.
What is life insurance?
Taken out for set period of time - pay out if you die in that time.
Advantages of life insurance?
Financial stability for loved ones if you are not around to provide for them
Advantages of life assurance?
Income tax free payout
Whenever you pass away, permanent coverage
Disadvantage of life assurance over life insurance?
More expensive
Disadvantages of life insurance?
Coverage is temporary
Premiums will rise with age
Worthless if you don’t die within term
Advantages of travel insurance?
Protects against holiday cancellations and sometimes delays
Protection for personal belongings away from home
Covers medical costs on holiday
Disadvantages of travel insurance?
May not be used
Additional cost when travelling
What do businesses record in their accounts?
Profits, revenue
Expenditure, total costs, start up costs
Sales
Tax
Who is interested in a business’s accounts?
Stakeholders - customers, business angels, government, banks, owners/managers
Gross profit equation?
Revenue - cost of sales
Net profit calculation?
Gross profit - expenses
What are the headings for a statement of comprehensive income?
Revenue
Cost of sales
Gross profit
Expenses
Net profit
What are the headings for a statement of financial position?
Fixed assets
Total fixed assets
Current assets
Total current assets
Total assets
Current liabilities
Total liabilities
Net assets
Represented by
Total
What 2 figures have to match on a balance sheet?
Net assets and total
What does a statement of financial position show?
Snapshot of what the business is worth
Includes how much the business is worth and where that money has come from
What is capital expenditure?
Money the business spends on large items that stay within the business for a long period of time (capital items)
What are fixed/tangible assets?
Things like land, premises, machinery, equipment
What are intangible assets?
Add value to business but can’t be touched e.g. patents, trademark, brand name
What is revenue expenditure?
Day to day costs of the business e.g. utilities, salaries, stock
What is capital income?
Large sums of money the business receives occasionally
What is revenue income?
The money that flows into the business from performing day to day functions
What are sources of revenue income?
Interest, product sales, leasing, advising other businesses
What are sources of capital income?
Business loans, mortgages, selling shares, owners capital, debentures
What is depreciation?
When an asset loses monetary value over its useful life due to wear and tear
What is straight line depreciation?
Reduces the value of the asset by the same amount each year
How to calculate straight line depreciation?
Historic value - residual value/expected life = depreciation value per year
What is reducing balance depreciation?
Reduces the value of the asset by a set % per year - works the same as compound interest
What are 13 external sources of finance?
Owner’s capital Trade credit
Loans Leasing
Hire purchase Invoice discounting
Debt factoring P2P lending
Mortgages Donations
Venture capital Grants
Crowd funding
What is trade credit?
Pay supplier for goods you have already received 30-90 days later.
What is leasing?
The business rents equipment instead of buying it to spread payments.
What are grants?
Government payments to business given with conditions that don’t need to be payed back.
What is peer to peer lending?
Small investors use an organisation to help them find businesses to invest in and that organisation takes a fee for matching them to the business.
What is invoice discounting?
Reductions offered to customers making a product or service cheaper. Usually applied as a % of total value.
What is crowd funding?
Raising funds online by asking many people to invest a small amount in the business in return for reward or future discount.
What is venture capital?
Funds from professional investor in return for a share of business ownership and input on decisions.
What is debt factoring?
Selling business’s invoices to a third party. The debtor now owes money to the factor agency and they will pursue payment.
What are the 3 internal sources of finance?
Retained profit, net current assets, sale of assets
Evaluate net current assets as a source of finance
Available quickly
Promotes efficiency - minimises stock holding
Quick inventory turnover can mean struggle to meet demand - not much stock stored
Shorter credit terms puts pressure on customers
Evaluate retained profit as a source of finance
No interest charges
No loss of ownership
Limited amount available
Reduces payments to shareholders
Evaluate owners capital as a source of finance
Family and friends more flexible than other lenders
Potential interest free loan
May need money back unexpectedly
May want input on business decisions
Evaluate sale of assets as a source of finance
No interest charged
Can clear space of unnecessary assets
Will probably sell for less than value
May not sell
May need assets
Evaluate loans as a source of finance
Pre agreed payments are good for planning
No loss of ownership
Interest
Often secured against asset in case of missed payments
Evaluate crowd funding as a source of finance
Can get cash from many investors
No interest
Partial loss of ownership
May not attract sufficient investment
Evaluate mortgages as a source of finance
No loss of ownership
Long time to pay back
Interest
Not suitable short term
Evaluate venture capital as a source of finance
Advice from investor as well
Connections from investors
Partial loss of ownership
Conflict with investor possible
Evaluate hire purchase as a source of finance
Avoids need to pay lump sum for asset
Regular installments aid planning
Don’t own asset
Can become more expensive than buying
Evaluate trade credit as a source of finance
Delays payments so improves cash flow
No loss of ownership
No discounts for early payment
Only short term
Evaluate grants as a source of finance
No repayment
No interest
Lengthy application
Have to meet conditions
Evaluate donations as a source of finance
No loss of ownership
No repayment
Often small
Unpredictable
Evaluate peer to peer lending as a source of finance
Often lower interest rates
Can agree fixed interest which aids planning
Amount available may be limited
Funds may only be available for short period of time
Evaluate invoice discounting as a source of finance
No repayment or interest
Reduce costs
Often only available when paying in cash
May need to buy more than needed for discount
Evaluate cash flow forecast
Identify problems
Plan expenditure
Show to investors
Reminder to chase payments
Only forecast - may be inaccurate
May put in unnecessary measures
Can’t plan for unexpected price rises
What are the headings for a cash flow forecast?
Inflows
Total inflows
Outflows
Total outflows
Net cash flow
Opening balance
Closing balance
Positives of breakeven
Easy to calculate
Aids planning
Shows revenue at each output
Negatives of breakeven
Doesn’t acknowledge start up costs
Difficult to use when selling price or variable cost varies
Businesses can be unrealistic in their calculations
What are the headings for a statement of comprehensive income
Revenue
Cost of sales
Gross profit
Expenses
Net profit
Revenue calculation
Selling price x quantity sold
Gross profit calculation
Revenue - cost of sales
Net profit calculation
Gross profit - expenses
Cost of sales calculation
Opening inventory - closing inventory + purchases
Straight line depreciation calculation
(Historic value - residual value)/no. of years
What is an accrual?
Where you pay after your purchase.
What are the headings for a statement of financial position?
Non current assets
Current assets
Current liabilities
Net current assets
Non current liabilities
Net assets
Financed by
Capital employed
Which ratios are profitability ratios
Gross profit margin
Mark up
Net profit margin
Return on capital employed (ROCE)
Which ratios are liquidity ratios
Current ratio
Liquid capital ratio
Which ratios are efficiency ratios
Trade receivables days
Trade payables days
Inventory turnover
What is profitability?
How much profit the business is making in relation to another factor
What is liquidity?
A measure of how solvent a business is - how they are able to meet their short term debts
What is efficiency?
How well the business controls the key aspects of the business.
Evaluate ratios?
Help identify problems
Help decision making
Only predictions - extrapolation, historic values
