Unit 3 Personal and Business Finance Flashcards
Name the 4 Functions of Money
Unit of account
Means of Exchange
Store of value
Legal Tender
What is meant by Unit of account?
The way people present prices and measure the value of goods and services
What is meant by means of exchange?
Money gives notes and coins to make transactions instead of swapping goods and services of the same value
What is meant by store of value?
It allows individuals to hold on to a currency that has some known future value
What is meant by legal tender?
Money is accepted as a means of payment across the economy and also it allows payment on credit because the future value can be agreed
Name 5 factors of the factors that can effect the role of money for an individual
Life Stage eg childhood, old age
Cultural, including religious and ethics
Interest rates
Life Events eg sickness, redundancy
Personal attitude towards risk
External influences eg a recession
There are 15 ways to pay. Name the 6 beginning with C
Charge card, credit card, CHAPS, contactless card, cheque and cash
There are 15 ways to pay. Name the 6 cards.
Debit card, store card, contactless card, pre-paid card, credit card, charge cards
Name the 3 transfer methods that use abbreviated names
BACS, FPS and CHAPS
What are the 3 abbreviated payment methods short for?
Bankers Automated Clearings Services, Faster Payments Services, Clearing House Automated Payment Systems
Name 2 advantages and 2 disadvantages of a credit card
Allows you to delay payment to the end of the month & allows payments to be spread out. However, interest is charged on the balance not paid off each month and it can encourage over spending
Name 2 advantages and 2 disadvantages of a pre-paid card
Prevents overspending and encourages good budgeting as the amount can only be spent on whatever the card is used for eg electricity or mobile. However, can be difficult to monitor the balance and there may be a fee to set up the card
What is the difference between a direct debit and a standing order?
Standing orders take a fixed amount out of your bank each month while direct debits allow the third party to take varying amounts out each month (but they have to inform you in advance)
What is the difference between a charge card and a credit card?
Both buy on credit however a charge card is automatically paid off in full from your account while a credit card the individual has to manage the monthly amount to be paid off.
What time frames do FPS, CHAPS and BACS transfer money?
FPS 2 hours
CHAPS same day
BACS make take a few days
What are the 4 types of current account?
Basic, Standard, Student and Premium
Give 2 features of a premium account
Often charged additional fees but may come with insurance
Give 2 features of a basic account
A way of opening an account with a low credit rating. No access to credit but many features are available eg cash withdrawals
List 6 methods of borrowing money
Personal loan, payday loan, credit card, mortgage, overdraft, hire purchase
Name 6 options for savings and investment
Pension, shares, premium bonds, bonds and gilts, ISA, deposit and savings account
Name 6 types of insurance
Pet, Car, Home and Content, Life insurance/assurance, Travel, Health
What is the difference between life insurance and life assurance?
Life assurance provides small, regular pay-outs where as life insurance offers a single pay out on death
What is the difference between saving and investment?
Saving has an agreed return at the end of the period and is lower risk while investments have higher potential rewards but a higher risk as there is no guaranteed return at the end.
Explain the term ISA
ISA stands for Individuals Savings Accounts where the income earned from interest is exempt from income tax
Explain how Premium Bonds work
An individual buys a bond from the NSI (government owned). You are entered into a monthly prize draw for upto £1m. No interest is paid on the bond.
What are bonds and gilts?
individuals or companies lend money to the government and the money is paid back by the government in the future at a fixed (fairly low) interest. They are seen as safe but they are quite long term and your money can’t be accessed.
Why are shares a risky investment?
Share prices can go up or down so you could lose some or all of your investment if the company’s value goes down.
What is Hire Purchase?
A way of borrowing where the individual pays off the amount each month, with interest and then completes the purchase with a lump sum at the end. The item is owned by the company until the final purchase.
Name 2 advantages and 2 disadvantages of HP
Payments are spread out and payments are fixed so easier budgeting. However interest means the cost is higher and the company can repossess the item if payments are defaulted.
Name 2 advantages and 2 disadvantages of a mortgage
The cost is spread over a long period of time making the item more affordable and the terms of the mortgage can be renegotiated every few years. However, interest rates can change making the loan hard to afford and a large deposit is required against the mortgage (eg 20%)
There are 9 financial institutions. Name the 3 beginning with B
Bank, Bank of England, Building Society
There are 9 financial institutions. Name the 3 beginning with P
Pension company, payday loan company, Pawnbroker
There are 9 financial institutions. Name the 3 that do not start with either B or P
Credit Union, NSI, Insurance companies
Name the organisation that regulates the 9 financial institutions
FCA Financial Conduct Authority
What does the FCA do?
Regulates the financial services industry by overseeing the design of products, regulating wording of products, monitoring companies
What is a credit union?
A small, not-for-profit lending company where some members save while others borrow from those members
What are the advantages and disadvantages of a credit union?
Helps members who might struggle to borrow from banks and they have a local presence. However loans are only for small amounts and savers get low interest
What is the role of the Bank of England?
The bank is independent of the government. The B of E sets interest rates. It controls how much money is in circulation. It sells government debt to other countries.
How do pawn brokers work?
It gives customers a short term loan secured by the deposit of an asset eg jewellery. If the loan is not repaid, the asset is sold. The rates of interest are higher than a bank. But the loan does not effect credit scores and they are quick to organise.
How do pensions work?
1.Individuals pay regularly into a pension fund (private or run by the company) for their retirement.
2.Employers have to contribute towards the employees pension from the age of 26. The payment in is tax free.
3.Deposits in the pension should increase in value in line with inflation as the sum is invested by the pension company in stocks and shares.
What is a disadvantage of paying into a pension?
You might die before you get to retirement age. Your pension benefits are subject to tax.
Name the 5 methods banks interact with their customers
Branch, online, telephone, mobile, postal
Which financial body supports customers in disputes with a financial institution?
Financial Ombudsman Service (FOS)
What does the FSCS do?
The FSCS is the Financial Services Compensation Scheme. It is a last resort to compensate customers if financial institutions can’t pay the compensation. It covers banks, pensions, insurance, mortgages etc
What is the Consumer Credit Act?
- Government passed law
2.Applies to all credit ie credit card, store card, hire purchase and charge card
3.Regulates how interest on the credit is presented to consumers
4.Regulates protection of the purchases made by the consumer
Who monitors the Consumer Credit Act?
FCA
Name 6 sources of Information and Advice for financial Services
IFA (Independent Financial Advisor), Citizens Advice, IVA (Independent Voluntary Agreement), price comparison sites, Debt counsellors, MPAS (Money and Pensions Advice Service)
Name the 5 steps for how an IVA works?
- Government service provides a partner to an individual to manage their debt.
2.Individual declares bankruptcy
3.Agree regular payments to the partner
4.Partner shares out this payment to creditors
5.All or some debts get paid off
What is bankruptcy?
1.An individual applies to an adjudicator to judge if they are bankrupt
2.Service costs £680
3.Persons assets can be used to pay off as much of the debt as possible
4.You have 12 months bankruptcy restrictions eg can’t borrow more than £500 without disclosing bankruptcy & can’t start a company
5.You go on an insolvency register for the 12 months
How can you consider the advantages and disadvantages of the different Information providers?
Cost of the service, depth of the advice on offer
What is the formula for Contribution per unit
Selling Price - Variable Cost
What is the formula for Total Contribution?
SP-VC x the number of units sold
What is the formula for Break Even?
Fixed Cost / contribution per unit
What is the margin of safety?
Expected Output - Break Even value
What is the difference between break even value and break even?
Break even value is break even number x selling price
What is profit worked out using Total Contribution?
Total Contribution - Fixed Costs
Name 3 things break even is used for
Planning, target setting, monitoring
Give 2 weaknesses of break even
Only based on predictions which can be inaccurate and it is a model so doesn’t guarantee businesses will break even
How is Net Cash Flow calculated?
Total Inflows - Total Outflows
How is Closing Balance calculated?
Opening Balance + Net Cash Flow
How is Cost of Sales calculated?
Opening Stock + Stock Purchases - Closing Stock
How is Gross Profit calculated?
Sales Revenue - Cost of Sales
How is Operating profit calculated?
Gross Profit - Operating expenses
Give 2 examples of operating expenses
rent, wages, utilities, marketing
How is profit for the year calculated?
Operating profit - finance costs
How is profit for the year calculated?
Operating profit - finance costs
What is the Statement of Comprehensive income?
A document
Over a set period (often last 12 months)
Setting out the revenue, costs and profit
What is the Statement of Financial position?
A financial document
At one point in the year
Setting out the assets and liabilities of a business
What appears at the top of a Statement of Financial position?
Fixed Assets
How is working capital worked out?
Current Assets - Current Liabilities
How is Net Assets Employed Worked out
All assets - all liabilities
Which two numbers on a Statement of Financial position always balance?
Net Assets and Total Equity
When time frame is used to decide fixed or current?
12 months
What 3 sources might a business use to finance Capital Employed?
Retained Profit, Share capital, long term borrowing
What term is used on a Statement of Financial position for a liability that will be paid beyond 12 months?
Non current liability
Give 3 examples of current assets
stock, cash, debtors
Give an example of a fixed asset
building, land, vehicle
Give an example of a current liability
overdraft, creditors
Who might want to see a business’ Statement of Financial position?
Shareholders, lenders, managers
What is liquidity?
A measure of a business’ ability to survive in the short term.
A business’s ability to raise cash.
Name 2 measures of liquidity
Current ratio and liquid capital ratio
What is the formula for current ratio?
current assets/current liabilities
What is the formula for liquid capital ratio?
current assets - inventories/current liabilities
Give 2 strategies if liquidity is too low
Sell unused non current assets to gain cash, or chase debtors so they have less payment time
Give 2 strategies if liquidity is too high
Move cash to higher interest accounts, or switch to long term sources of finance
What is profitability?
A measure of efficiency of generating profit from revenue, capital employed or cost of sales
Name 4 measures of profitability
Gross Profit margin, profit margin, Return on Capital Employed, Mark up
What is the formula for Gross Profit margin?
Gross profit/revenue x 100
What is the formula for Return on Capital Employed?
Operating profit/capital Employed (TE+LTL) x100
What is the formula for Mark up?
Gross profit/cost of sales x 100
