BTEC Level 3 Business Unit 3: Personal and Business Finance

Comprehensive practice flashcards covering all key concepts, definitions, formulas, and financial calculations for BTEC Level 3 Business Unit 3: Personal and Business Finance.

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What are the four primary functions of money?

Unit of account, means of exchange, store of value, and legal tender.

How is the 'unit of account' function of money defined?

It allows a monetary value to be placed on goods and services, showing prices such as a chocolate bar costing $60\,\text{p}$ or a car costing $£30,000$.

What is the definition of an interest rate?

The cost of borrowing money or the reward for saving money.

What is the difference between being solvent and being bankrupt?

Solvent is the ability to meet day-to-day expenditure and repay debts, whereas bankrupt is when an individual or organisation legally states its inability to repay debts.

What is a credit rating?

A score given to individuals indicating how likely they are to repay debts based upon their previous actions.

What is the key functional difference between a direct debit and a standing order?

A direct debit allows a third party to withdraw variable amounts from an account on a set day, whereas a standing order is an agreement to transfer a fixed sum of money on a regular set date.

What features distinguish a charge card from a standard credit card?

A charge card allows a short period of credit but the balance must be paid off in full each month when the statement is issued, and an annual fixed fee is often applied.

How do BACS Faster Payment and CHAPS compare in terms of transfer speed, limits, and costs?

BACS Faster Payment guarantees transfers within $2\,\text{hours}$ with no additional costs up to a transaction limit; CHAPS provides same-day transfers with no upper limit but normally charges a fixed fee per transaction.

What are the main characteristics and limitations of a basic current account?

It is designed for individuals with low credit ratings to pay in and withdraw cash, but it offers limited facilities with no debit card, no overdraft, and no interest on credit balances.

What are the key features of a packaged, premium current account?

It charges an additional monthly fee in exchange for bundled perks such as travel insurance, breakdown cover, and mobile phone protection.

What is hire purchase and who retains legal ownership during the agreement?

Hire purchase allows the customer to use an item immediately while paying in regular instalments; the seller retains legal ownership until all instalments are fully paid.

What are payday loans and what is their main disadvantage?

They are short-term loans used to bridge the gap between now and the next wage, offering small amounts at very high interest rates that can quickly spiral.

What is the primary financial advantage of an Individual Savings Account (ISA)?

The account holder is not charged income tax on the interest earned on their savings.

How do premium bonds provide a return on investment?

They pay no regular interest; instead, each government-backed bond is entered into a regular prize draw for cash prizes.

What is the difference between saving and investment in terms of risk and reward?

Saving involves placing extra money in a secure place with low or zero risk for interest rewards, whereas investment involves speculative commitments with the risk of losing capital in pursuit of higher potential rewards.

What is the distinction between life assurance and life insurance?

Life assurance is an ongoing policy that pays a lump sum upon death whenever it happens, whereas life insurance pays out only if death occurs within a specified time period.

What are the core responsibilities of the Bank of England?

Maintaining overall UK financial stability, issuing legal tender, setting interest rates, controlling the national debt, and acting as lender to banks.

How does the ownership structure of a building society differ from a commercial bank?

A building society is a mutual organisation owned by its members (account holders) who vote on its running, whereas a commercial bank is a profit-making business owned by shareholders.

What protection does the Financial Services Compensation Scheme (FSCS) provide to UK savers?

It guarantees and refunds savings up to $£85,000$ per eligible person per institution if a bank, building society, or credit union becomes bankrupt.

What are the three key areas of focus for the Financial Conduct Authority (FCA)?

Authorisation (permitting financial service providers to trade), supervision (ensuring fair consumer practices), and enforcement (maintaining standards through regulatory powers).

What is the role of the Financial Ombudsman Service (FOS)?

An independent government-appointed body that settles disputes between consumers and financial service providers if they cannot resolve them directly.

What are the five primary purposes of accounting in a business?

Recording transactions, management of the business, compliance with laws and regulations, measuring performance, and controlling financial flows.

What is the difference between capital income and revenue income?

Capital income is money invested long term to set up a business or buy fixed assets (such as loans, mortgages, and shares), whereas revenue income is money received from day-to-day sales and operations.

What is a debenture?

A medium- to long-term source of capital income issued by large companies that pays a fixed rate of interest and is repaid as a lump sum on an agreed date.

How does capital expenditure differ from revenue expenditure?

Capital expenditure is spending on long-term assets that remain in the business for more than a year, whereas revenue expenditure is spending on day-to-day running expenses shown on the profit and loss account.

What are intangible assets and what are four common examples?

Non-physical assets owned by a business that add value, such as goodwill, patents, trademarks, and brand names.

What is the difference between public liability insurance and employers' liability insurance?

Public liability insurance protects people who may be injured while on the business premises, whereas employers' liability insurance protects the business against compensation claims if an employee is injured at work.

What are the three internal sources of finance for a business?

Retained profit, net current assets, and sale of assets.

What is venture capital and what is its primary drawback for an entrepreneur?

Investment provided by an experienced entrepreneur in return for an equity stake, which requires the business owner to give up partial ownership and control.

How does debt factoring work and what is its main disadvantage?

A business sells its customer debts to a third party to receive quick cash, but it receives only a percentage of the total owed, which reduces final profit margins.

What formula calculates the closing balance in a cash flow forecast?

$$\text{Opening balance} + \text{cash inflows} - \text{cash outflows} = \text{closing balance}$$

How should credit periods be structured between customers and suppliers to avoid liquidity issues?

Credit periods given to customers should be shorter than the credit periods received from suppliers to ensure cash flows in before liabilities must be paid.

How is net VAT calculated for a cash flow forecast?

$\text{Net VAT} = \text{total VAT received on sales} - \text{total VAT paid on purchases}$, where a positive net figure must be paid to HMRC.

What is the definition of the break-even point?

The point where total revenue equals total costs ($\text{TR} = \text{TC}$), meaning the business makes neither a profit nor a loss.

What is the formula for calculating contribution per unit?

$$\text{Contribution per unit} = \text{selling price} - \text{variable cost per unit}$$

What is the formula for calculating the break-even point in units?

$$\text{Break-even point} = \frac{\text{Fixed costs}}{\text{Contribution per unit}}$$

What is the margin of safety and how is it calculated?

The amount by which actual output exceeds the break-even level, calculated as: $\text{Margin of safety} = \text{actual sales in units} - \text{break-even level of output}$.

What formula calculates cost of goods sold on a statement of comprehensive income?

$$\text{Cost of goods sold} = \text{opening inventory} + \text{purchases} - \text{closing inventory}$$

What formula calculates gross profit?

$$\text{Gross profit} = \text{sales revenue} - \text{cost of goods sold}$$

What formula calculates profit or loss for the year?

$$\text{Profit or loss for the year} = \text{gross profit} - \text{expenses} + \text{other revenue income}$$

What formula calculates annual depreciation using the straight-line method?

$$\text{Annual depreciation} = \frac{\text{Historic value} - \text{residual value}}{\text{Expected life}}$$

How is reducing balance depreciation calculated?

By deducting a predetermined percentage from the remaining net book value of the asset each year.

How are prepayments treated in financial statements?

Prepayments are deducted from expenses in the statement of comprehensive income and recorded as a current asset in the statement of financial position.

How are accruals treated in financial statements?

Accruals are added to expenses in the statement of comprehensive income and recorded as a current liability in the statement of financial position.

What is net book value and how is it calculated?

The value of an asset recorded on the balance sheet, calculated as: $\text{Net book value} = \text{historic cost} - \text{accumulated depreciation}$.

What formula calculates net current assets (working capital)?

$$\text{Net current assets} = \text{current assets} - \text{current liabilities}$$

What formula calculates capital employed on a statement of financial position?

$$\text{Capital employed} = \text{owners' or shareholders' capital} + \text{retained profit} - \text{drawings}$$

What is the formula for the gross profit margin ratio?

$$\text{Gross profit margin} = \left(\frac{\text{Gross profit}}{\text{Revenue}}\right) \times 100$$

What is the formula for mark-up?

$$\text{Mark-up} = \left(\frac{\text{Gross profit}}{\text{Cost of sales}}\right) \times 100$$

What is the formula for the net profit margin ratio?

$$\text{Net profit margin} = \left(\frac{\text{Net profit}}{\text{Revenue}}\right) \times 100$$

What is the formula for Return on Capital Employed (ROCE)?

$$\text{ROCE} = \left(\frac{\text{Net profit before interest and tax}}{\text{Capital employed}}\right) \times 100$$

What is the formula for the current ratio?

$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$, expressed as $x:1$.

What is the formula for the liquid capital ratio (acid test)?

$\text{Liquid capital ratio} = \frac{\text{Current assets} - \text{inventory}}{\text{Current liabilities}}$, expressed as $x:1$.

What are the formulas for trade receivable days and trade payable days?

$\text{Trade receivable days} = \left(\frac{\text{Trade receivables}}{\text{Credit sales}}\right) \times 365$ and $\text{Trade payable days} = \left(\frac{\text{Trade payables}}{\text{Credit purchases}}\right) \times 365$.

What is the formula for calculating inventory turnover in days?

$\text{Inventory turnover} = \left(\frac{\text{Average inventory}}{\text{Cost of sales}}\right) \times 365$, where $\text{Average inventory} = \frac{\text{Opening inventory} + \text{Closing inventory}}{2}$.