UNIT 4: FINANCE
Chapter 12
Income
Management
WHAT IS MONEY?
 Without money, businesses could not operate, and consumers could not
buy they goods and ser vices they need and desire.
 Forms of Legal Tender
 Legal tender – must be accepted as payment for goods and ser vices.
There are two main forms of legal tender and they are coins and bills.
 Coins are m inted, or manufactured, at the Royal Canadian Mint
headquar ters 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 fir st notes in separate French and English ver sions
in 1935. In 1937, it released a redesigned, bilingual series. The Bank
of Canada does not run its own facilities to print bank notes. It uses
two privately owned, high -security printing companies.
 Counter feiting is the production of fake money. Features on our bills
are always under review, to ensure they can not be replicated falsely.
 Please see figure 1 2.1 on page 366
MONEY’S CHANGING PURCHASING
POWER
 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.
WHAT IS INCOME?
 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 Per sonal Income
 Most people earn money through employment, in forms such as salar y,
wages, commission, piecework and profit sharing.
 Gross income – is the total amount of income received by a per son.
 Disposable income – is the total amount of income received af ter
taxes, CPP, and EI is deducted. It is also known as take-home-pay.
 Discretionar y income – is the income lef t af ter necessities have been
paid for. It is used to purchase luxur y items and other items wanted
not needed.
MANAGING MONEY FOR PERSONAL USE
 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 af fect
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.
SPENDING MONEY
 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, flyers, 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
BUDGETING
 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
MANAGING MONEY FOR BUSINESS USE
 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.
UNIT 4: FINANCE
Chapter 13
Banking
THE NEED FOR FINANCIAL INSTITUTIONS
 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.
CANADIAN BANKING
 Banks are businesses, just as retail stores and manufacturing
companies or businesses. Banks sell ser vices and earn profits on thee
ser vices. They earn most of their revenue by charging interest on
money they loan to consumer s, businesses, and government. They also
invest customer funds and receive interest from them.
 The Bank Act – The Canadian Constitution of 1 867 gave the federal
government control over money and banking.
 The government created a common, unified banking system – all banks
in Canada had to operate under similar rules.
 In 1 871 , the federal parliament passes Canada’s fir st bank act.
 The Bank Act outlines the rules and regulations that banks have to
follow. All banks in Canada receive a char ter, that is why they are
known as char tered banks. Only a char tered 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 office in one
of Canada’s main cities. Each head office 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.
OTHER FINANCIAL INSTITUTIONS
 Trust Companies – first 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 financial 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.
ABOUT ACCOUNTS
 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 Account
 Must provide personal information
 Must show IDs that have your signature and is possible, a
photograph
 You must fill 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 Passbooks
 The financial institution may give you an account statement or
a passbook as a record of account transactions.
ABOUT ACCOUNTS
 Making a Deposit
 you can deposit your money into your account at a financial
institution or at an automated banking machine (ABM).
 Making a Withdrawl
 You 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.
TRANSACTION ACCOUNTS
 Transaction accounts – accounts where clients place money to use for
ever yday needs.
 Transaction register ( account st atement) – shows all transactions of a
bank account from day to day.
 Straight t ransaction account – a simple way to pay per sonal and
household bills. No interest is paid on the balances in this account.
 Combination account – allows you to save and pay bills . It is par t
chequing and par t savings. They can collect a small amount of savings.
 Ser vice c harges – a fee on processing cheques and other transactions.
 Cancelled c heque – is a cheque that has been cashed and paid by the
financial 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 c heques – cheques that are not yet cashed and deducted
from your account balance.
WRITING CHEQUES
 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 financial institution.
 Drawer – the person from whose account the money will be
taken.
 Amount
 Account 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 fibres seen under florescent 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 financial 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
SHARED ABM NETWORKS
 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.
OTHER BANKING ITEMS
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Telephone Banking
Online Banking
- also known as virtual banks
Loans
- a term loan involves borrowing money and paying it back at
a specific
Lines of Credit
- is a form of instant access to credit that has been arranged
between you and your financial institution.
Credit cards
Direct 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 of f important financial 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 fireproof, metal boxes to store
important documents and valuables.
SHOPPING FOR A FINANCIAL
INSTITUTION
 When you are ready to open an account, visit dif ferent
financial institutions in your area to compare what each one
has to of fer.
 The future of financial services – although more and more
financial transactions are being done electronically, there will
be times when you have to visit a branch of your financial
institution, and where there will always be some people who
prefer the direct contact with employees of the financial
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 dif ferent applications,
including e-cash, or electronic cash. Plus the microchip adds
another level of security.