Chapter 12 Income Management UNIT 4: FINANCE. Without money, businesses could not operate, and consumers could not buy they goods and services they.

Chapter 12Income Management

UNIT 4: FINANCE

Without money, businesses could not operate, and consumers could not buy they goods and services they need and desire.

Forms of Legal Tender Legal tender – must be accepted as payment for goods and services.

There are two main forms of legal tender and they are coins and bil ls.

Coins are minted , or manufactured, at the Royal Canadian Mint headquarters in Ottawa or at the Mint’s Winnipeg branch.

The Bank of Canada issues paper money, also known as bank notes . The Bank issued its fi rst notes in separate French and English versions in 1935. In 1937, it released a redesigned, bil ingual series. The Bank of Canada does not run its own facil it ies to print bank notes. It uses two privately owned, high-security printing companies.

Counterfeiting is the production of fake money. Features on our bil ls are always under review, to ensure they can not be replicated falsely.

Please see fi gure 12.1 on page 366

WHAT IS MONEY?

Money’s true value is its purchasing power. The paper used to print our currency is virtually worthless, as are the metals used to make coins.

Although money serves as a standard of value, its purchasing power changes as prices for goods and services change.

In general, prices tend to rise (inflation), so the dollar buys less from one year to the next.

Purchasing power is measured by the Consumer Price Index (CPI), which is calculated monthly by Statistics Canada. It measures 600 products typically bought by Canadian households. These products include food, shelter, transportation, clothing, and recreation.

MONEY’S CHANGING PURCHASING POWER

Income is money that an individual or business receives from various sources, such as wages, sales, interest, or dividends. For some people, most of the money they earn is used to pay for necessities such as food, rent, and clothing.

Types of Personal Income Most people earn money through employment, in forms such as

salary, wages, commission, piecework and profi t sharing.

Gross income – is the total amount of income received by a person.

Disposable income – is the total amount of income received after taxes, CPP, and EI is deducted. It is also known as take-home-pay.

Discretionary income – is the income left after necessities have been paid for. It is used to purchase luxury items and other items wanted not needed.

WHAT IS INCOME?

Money management – refers to the daily financial activities connected to using your limited income to satisfy all your needs and wants.

Why do we buy?Income and Price – The amount of money

consumers have to spend has a big influence on what they buy. Price is the most important consideration for consumers. Today, consumers expect good value for the money they spend. Most will not pay more than what they believe an item is worth.

Status – many people brag about how much they paid for a product. This desire to flaunt purchases to impress others is called conspicuous consumption.

MANAGING MONEY FOR PERSONAL USE

Current trends – Peer pressure – clothing, gadgets, technology…

expensive to keep up with peers.Customs and habits – family, religion, and customs

aff ect consumer choices. Habits play a part in what you buy regularly.

Promotion – business advertising and promotion influence consumer spending. Lifestyle advertising shows attractive, healthy, successful, and appealing people using a product or service.

MANAGING MONEY FOR PERSONAL USE

Comparison shopping – areas that are considered when comparison shopping are:

- price and quality- features- services such as warranties- planning and comparing by visiting stores locations,

internet searches, consumer reports, newspapers, fl yers, etc.

When to buy – a decision based on income availability, choice of products, time of year, etc. Examples of when to buy are:

- clearance sales- promotional sales- second-hand shopping- avoiding impulse buying

SPENDING MONEY

A budget is a plan for wise spending and saving based on income and expenses.

Personal budgeting is a matter of determining what and how much you can spend in a given period. This can be accomplished through:

- setting personal goals- preparing a personal budget: with fixed and variable

expenses.

See sample budget on page 383 Figure 12.7

BUDGETING

Types of business income:- revenue – the amount of money collected by the

business- gross income – the total amount of money received

by the business minus the cost of goods sold.- net income – is the gross income minus the

business’s expenses.Budgeting for a business:- start-up budget – needed to plan for the opening of

a business.- operating budget – done on a monthly, yearly, or

project basis, clearly sets out the on-going revenues and expenses of the company.

MANAGING MONEY FOR BUSINESS USE

Setting business goals – goals may be to launch a new product, expand internationally, increase research and development, or close down a division.

Preparing a business budget:-step 1: calculate the amount of income expected-step 2: calculate expenses-step 3: calculate the amount left over-step 4: review the budget

Figure 12.10 on page 388 has an example of a business budget.

MANAGING MONEY FOR BUSINESS USE

Chapter 13 Banking

UNIT 4: FINANCE

When someone says, “I need to go to the bank to get some money,” that person may not mean a bank as you know it.

They might be referring to another one of Canada’s financial institutions or to an automated banking machine (ABM)

The main deposit-taking institutions in Canada are chartered banks, trust companies, caisses populaires, and credit unions.

These institutions accept deposits, encourage saving, and keep our money safe. They provide loans to individual consumers and to businesses.

THE NEED FOR FINANCIAL INSTITUTIONS

Banks are businesses, just as retail stores and manufacturing companies or businesses. Banks sell services and earn profi ts on thee services. They earn most of their revenue by charging interest on money they loan to consumers, businesses, and government. They also invest customer funds and receive interest from them.

The Bank Act – The Canadian Constitution of 1867 gave the federal government control over money and banking.

The government created a common, unifi ed banking system – all banks in Canada had to operate under similar rules.

In 1871, the federal parl iament passes Canada’s fi rst bank act. The Bank Act outl ines the rules and regulations that banks have to

follow. All banks in Canada receive a charter, that is why they are known as chartered banks. Only a chartered institution that operates under Bank Act can call itself a “bank”.

Please see Table 13.1 and Table 13.2 on pages 398 and 399, for the three classes of Canadian banks.

CANADIAN BANKING

Branch Banking – Each Schedule I bank has a head offi ce in one of Canada’s main cities. Each head offi ce determines overall bank policy and is connected to thousands of bank branches across Canada. Canadian banks have also established branches in more than 40 foreign countries.

Please see Table 13.3 on page 400, Branch Banking in Canada

The Bank of Canada – is not a chartered bank – customers cannot open accounts in or borrow money from the Bank of Canada. It helps keep the Canadian economy as stable as possible.

It controls the money supply (all the money in circulation), by raising or lowering the bank rate (also called prime lending), the minimum rate of interest that the Bank of Canada charges for loans it makes to chartered banks.

CANADIAN BANKING

Trust Companies – fi rst established in Canada in the late 1800s to manage and invest the funds entrusted to them by consumers.

Today, they also provide many banking services, such as loans and savings and chequing accounts.

Caisses populairs and credit unions are organized and owned by groups of people who agree to pool and share their resources. They are a form of co-operative business ownership.

Both belong to the World Council of Credit Unions.

Insurance Companies are fi nancial institutions that insure risks. Their usual focus is on life and health insurance, and property and car insurance.

Insurance works by using the payments from many policyholders to pay out claims of a few.

OTHER FINANCIAL INSTITUTIONS

All of Canada’s deposit-taking institutions accept and hold deposits. The institution holds this money in an account until the depositor needs it.

The steps in opening an account are basically the same in all financial institutions.

A savings account can be in your own name, giving you full control.

A joint account can be opened in the name of two or more people, such as a married couple or a parent and child.

ABOUT ACCOUNTS

Opening and Accessing an AccountMust provide personal informationMust show IDs that have your signature and is

possible, a photographYou must fi ll out a signature card to provide a sample

of your signature.Receive a banking card to conduct your transactions.

These can also be used as a debit card.

ABOUT ACCOUNTS

Sample of bank signature card

ABOUT ACCOUNTS

Account Statements and PassbooksThe financial institution may give you an account

statement or a passbook as a record of account transactions.

ABOUT ACCOUNTS

Making a Deposityou can deposit your money into your account at a

financial institution or at an automated banking machine (ABM).

Making a WithdrawlYou can go to a financial institution, where a teller

will input your request electronically, or you may make withdrawls at an ABM.

Please see security tips for using ATMs on page 408 of the textbook.

ABOUT ACCOUNTS

Transaction accounts– accounts where clients place money to use for everyday needs.

Transaction register (account statement) – shows all transactions of a bank account from day to day.

Straight transaction account – a simple way to pay personal and household bil ls. No interest is paid on the balances in this account.

Combination account – allows you to save and pay bil ls . It is part chequing and part savings. They can collect a small amount of savings.

Service charges – a fee on processing cheques and other transactions. Cancelled cheque – is a cheque that has been cashed and paid by the

fi nancial institution. Current accounts – are for businesses. To open a current account, a

business must be registered with the provincial or federal government, and the account must be in the business’s name.

Reconciliation – checking to make sure your bank statement balances with your transaction records.

Outstanding cheques – cheques that are not yet cashed and deducted from your account balance.

TRANSACTION ACCOUNTS

Cheque Essentials

Date Stale dated cheques – cheques that have not been

cashed for 6 months or more after the date shown on them.Postdating – a cheque that has been dated for a later

date.Payee – is the name of the person or business to whom the

cheque is written.Drawee – is your fi nancial institution.Drawer – the person from whose account the money will

be taken.AmountAccount number

WRITING CHEQUES

Security Features: Some cheques have a section using a special ink that changes

colour when it is rubbed Some have watermarks and fi bres seen under fl orescent lights

Stop payment – if a cheque is lost or stolen, or if you do not want it cashed for some reason, you have the right to stop payment on the cheque.

Cheque clearing – is the processing of cheques and the settling of account balance among fi nancial institutions.

Magnetic Ink Character Recognition (MICR) – across the bottom of any preprinted cheque is a string of coded numbers, or an encoding line. The encoding is the cheque number, branch number, institution number and account number.

WRITING CHEQUES

Holds on cheques – holds are delays on payment of the cheque. The hold gives the bank time to clear the cheque and to make sure that you or the financial institution on which the cheque is written does not present a risk.

If you earn interest on money in your account, it is paid even if funds are being held.

Holds simply protect you and your financial institution against losses from NSF cheques or cheques written for illegal purposes.

WRITING CHEQUES

Sample cheque

WRITING CHEQUES

Automated machines provide services more quickly, conveniently, and accurately than the old manual methods.

The Electronic Funds Transfer System (EFTS) –is a computerized system of electronic deposits and withdrawals.

Debit Cards and Direct Deposit Interac Direct Payment (IDP) became available across

Canada in 1993.With direct payments, consumers can use their ABM

cards as debit cards.

SHARED ABM NETWORKS

Telephone BankingOnline Banking- also known as virtual banksLoans- a term loan involves borrowing money and paying it

back at a specificLines of Credit- is a form of instant access to credit that has been

arranged between you and your financial institution.Credit cardsDirect deposit – transfers funds from an outside

source directly into a specific account that you designate.

OTHER BANKING ITEMS

Money order – is a form of payment similar to a cheque. Payment is guaranteed by the issuing institution.

Night depository – a chute at the bank that allows customers to make deposits or drop off important fi nancial documents at any time.

Overdraft protection – is when the institution lends the depositor the money so the payee can cash the cheque. Overdraft means that you write a cheque for more than what you have in your account.

Preauthorized bill payments (or debit) – with written permission, a company can make regular and automatic withdrawals from your account.

Safety deposit boxes – they are fi reproof, metal boxes to store important documents and valuables.

OTHER BANKING ITEMS

When you are ready to open an account, visit diff erent fi nancial institutions in your area to compare what each one has to off er.

The future of fi nancial services – although more and more fi nancial transactions are being done electronically, there will be times when you have to visit a branch of your fi nancial institution, and where there will always be some people who prefer the direct contact with employees of the fi nancial institution.

Over the past years, there has been a lot of discussion about smart cards. They look like an ABM card or a credit card, but has a powerful microchip. It can store diff erent applications, including e-cash, or electronic cash. Plus the microchip adds another level of security.

SHOPPING FOR A FINANCIAL INSTITUTION