LM1 - Unspoken Laws of Business PDF

LM I — Unspoken laws of business I. List 5 main participants in the economy? (P4) Households (basic consumers) Businesses (producers) The government (provides payments, collect taxes) The foreign sector (importers and exporters in o...

LM I — Unspoken laws of business I. List 5 main participants in the economy? (P4) Households (basic consumers) Businesses (producers) The government (provides payments, collect taxes) The foreign sector (importers and exporters in open economy) Financial institutions (middle man between borrowers and lenders) 2. List 8 disadvantages of inflation. (P19) Losses to savers — erodes purchasing power of amount saved Losses to people with fixed incomes (fixed interest on deposits — purchasing power diminishes Losses to taxpayers — Salaries increase in line with inflation — higher tax bracket- bigger share of salary paid to tax man Confusing price signals to producers and slower expansion of businesses — regular inflation related price adjustment because of permanent high demand of product Speculation preferred over production — in times of high inflation and financial instability, entrepreneurs tend to speculate in existing assets and less expansion in production and employment Reduced attention to productivity — when salaries keep on increasing to keep up with inflation, but productivity becomes less important Wastage of resources — High inflation, daily price increases, daily price changes — could've spent time on more productive activities like selling products to clients Devaluation in currency — Inflation reduces the value of a country's currency 3. Describe economics. Economics studies and explains how scarce resources are combined and applied to satisfy unlimited needs. 4. Define difference between wants and needs. Wants = Things we don't need, but would like to have Needs = Things that are essential to survival 5. Define between Micro- and Macroeconomics. Micro = Individual parts of economy. Micro means small. Households, consumers.... Macro = Concerned with economy as a whole. Macro = large. Focus on the big picture Total production, economic growth, inflation Column A Column B Household All the people that live under the same roof who jointly make financial decisions and earn a joint income Macroeconomics Concerned with economy as a whole  National Government Led by the President and the Cabinet Consumer Price Index Used to measure the inflation rate to consumers Scarcity There are not enough resources to satisfy everyone's wants, needs and demands Provincial government Controlled by provincial premiers and the Executive council in each of the 9 provinces Stare decisis Rule that creates a court hierarchy where decisions at higher courts are binding on lower courts Economics Social science that studies and explains how scarce resources are combined and applied to satisfy unlimited needs Equilibrium Demands equals supply and the market just clears Financial institutions Intermediaries between lenders and borrowers High inflation Detrimental to an economy as it can cause losses to people with a fixed income Microeconomics Focuses on individual parts of the economy Substantive law Determines the content and meaning of different legal rules Civil law Rules of how people behave towards each other Constitution Supreme law of the land Delict Culpable wrongful acts that cause another person some form of injury, harm, damage or loss Judiciary Responsible for the determination of legal disputes by the courts Adjective law Determine how substantive laws are enforced Unjustified enrichment Occurs when I person is enriched at the expense of another without a just cause 6. Describe law of demand. Higher the price, the lower the demand. NEGATIVE relation between price and quantity Demand curve always have a NEGATIVE SLOPE. 7. Describe law of supply. Higher the price, the greater the supply. POSITIVE relation between price and quantity supplied Supply curve always have a POSITIVE SLOPE. 8. Ceteris paribus All other things remain constant 9. Equilibrium Quantity demanded = quantity supplied No inherent tendency to change (markets are stable) Markets just clears (no excess or shortages of goods/services) 10. Determinants of demand Income of consumers (income increase, tend to spend more money) Availability of substitute products (replacements like generic medicines) Preferences and tastes of consumers (clothes in fashion is more expensive) Change in price of complementary products (fuel and motor vehicles) Expectations (Expect a product price to increase, will buy more now) Change in nr of possible buyers (increase in population) Il. Determinants of supply FINANCIAL FACTORS - capital contributions by owners Loans from third parties Profits ploughed back into business REAL FACTORS - better organization in the industry (shift to R) Changes in technology of production (shift to R) Change in competition Price of production inputs (higher costs- shift L) Climate and natural disasters (shifts L) Government policy (Shifts L— taxes, Shifts R — subsidies) 12. Deflations is bad for the economy. Why? If product prices keep on falling, people would want to wait for the next price decrease before buying products/services. Without demand in an economy, there's no economy. Controlled economy is healthy. Inflation rate between 3 and 6% is healthy as long as employment levels are high and economic growth is good.  LM2 — WRITTEN LAWS OF BUSINESS I. Name 3 major legal systems of the world. Civil law Common law (Roman Dutch SA's common law) Moral law (conscience, values and morals) 2. Name 2 main categories of our laws. Substantive laws — determine content & meaning of different legal rules Adjective laws — determine how substantive rules are enforced 3. Differentiate between Public and Private laws. Public = regulates relationships between State & legal subjects Private = Between legal subjects (the individual) 4. Name our legal system's main pillar. Constitution of Republic of SA. This is the SUPREME LAW, can be changed with 2/3 majority 5. State power is divided in 3 spheres: National government — President & cabinet - Legislative Provincial government— Premiers & MEC's - Executive Municipal government— Mayors & executive councils — judiciary 6. Explain an important source of law in court decisions named Stare decisis. Stand by your previous decisions. Lower courts are bound by decisions of higher courts. 7. Rank the courts from the highest to the lowest" Constitutional court (Jhb — Il judges) Supreme court of Appeal (SCA) — civil & criminal jurisdiction - Bloemfontein High Court — Criminal & civil jurisdiction (14 provincial divisions) Magistrate's Court (criminal & civil jurisdiction) Small Claims Court 8. Describe the 3 alternative dispute resolution(ADR) methods: Arbitration — an arbitrator can be appointed. Decision made is final and binding with no right of appeal Negotiation — Discussion between parties of a dispute Mediation —a mediator is called to find common ground and a negotiated settlement. The negotiated settlement is not enforcable. 9. What is meant by domicilium citandi et executandi? Where a person lives and choose to receive legal documentation. 10. What is a contract? A valid and binding agreement between 2 or more persons. 11. A legal obligation consist of 2 elements: The right of the CREDITOR to claim performance The duty of the DEBTOR to perform accordingly 12. Name the 6 sources from which legal obligation arise. A contract Delict (a culpable wrongful act that causes injury, damage, harm or loss to another) Unjustful enrichment (where 1 person is enriched at the expense of another, without a just case) Unauthorised agency or administration (where an unauthorized person manages the affairs of another at the former person's expense) Statute (Where a person must act in a prescribed manner, by legislation Family relationships — Where parents have to support children or spouses one another 13. A contract is only valid if these 5 requirements are met: Consensus (agreement reached between contracting parties) Capacity to act (Contract is invalid if both parties doesn't have capacity to act) Legality (if contract is illegal or immoral it's void) Formality (contracts can be in oral or writing. Some must be written —sales of immovable property, suretyships and credit agreements) Possibility of performance(contract must be possible to perform, but may become impossible because of act of God, fate, luck or chance. Contract then become impossible through circumstances beyond their control) 14. Who don't have capacity to enter into contracts? People declared insane or illegal aliens An infant (someone younger than 7 years) People under the influence of drugs and/or alcohol People who are highly irresponsible with money 15. Who have limited contractual capacity? Prodigals (people who spends money irresponsibly) Insolvent people (not yet rehabilitated) Unmarried minors (Between 7 and 18 years) 16. Name the 5 ways in which a contract can be breached: Repudiation or anticipatory breach(refusal of one party to carry out his/her obligations. Aggrieved party can accept repudiation and claim damages for losses suffered or refuse to accept repudiation and insist on specific performance) Default by debtor — failure of debtor to perform in proper/reasonable time. Cancel contract & claim damages placing them in the position win which they would've been if breach had not occurred or claim specific performance) Default by creditor — (if party to whom obligation is due refuse/unwillingness to perform when debtor is ready to perform. Aggrieved party can cancel contract and claim damages or claim specific performance) Prevention of performance — where 1 party prevents other party to perform Defective or positive malperformance occur — where 1 party performs defectively 17. Ways to terminate a contract. Name 9. Honouring the agreement/Discharge — paym ent/settlement Release(waiver). Release each other and give up their rights Novation(substitute new contract for an old one) Merger- (when lessee buys the same property he has previously rented) Impossibility of performance — act of God, changes in law to make performance illegal Set-off — debts are balanced against each other Prescription — possible to be released from obligations by the passing of time (3 years debt) Insolvency —L>A Death — Executor is liable is his/her representative capacity for all contracts deceased were liable in his lifetime 18. Name the 5 types of contracts: Contract of sale Contract of lease Credit agreements Contract of suretyship Contract of Insurance — indemnity (comprehensive insurance against damage/loss) Non-indemnity insurance (life insurance) 19. Intellectual property law consist of 4 parts: Copyright Trademarks Industrial designs Competition law 20. List the general exceptions for protection by Copyright Act: Copyright is not infringed if a literary or musical work is used solely and then only to the extent reasonably necessary for the following purposes to: Research or private study by, to the personal or private use of, the person using the work Criticism or review of that or another work Reporting current events in a newspaper, magazine or similar periodical or by means of broadcasting or a film 21. Who can apply for copyright protection? Copyright may be conferred upon the author is he's a SA citizen or domiciled or resident in SA or if the author is a company incorporated in SA, or if the work is first published in SA. 22. How long will copyright protection last and at what point does copyright protection becomes effective? Copyright generally lasts for 50 years. Period of duration commences at different times, depending on the nature of the work being protected. Copyright of literacy, artistic or musical works commences from the end of the year of the author's death Copyright of cinematographic films, photographs and computer programmes from the end of the year in which the work was made available to the public with consent of the author Copyright of sound recordings commence from the end of the year in which the recordings were first published Broadcast copyright commences from the end of the year in which the broadcast first took place. Copyright of programme-carrying signals commence from the end of the year in which the signals were transmitted to a satellite. Copyright of published editions commence from the end of the year in which the edition is first published. 23. What is the designated time period for which patents are valid? Patents are time-limited monopoly rights. When the patent expires, is, the patent rights cease and the public are entitled to use the information as provided in the patent specification. A patent is granted for 20 years from the date of patent application. 24. Describe the term "money laundering". The process whereby the origin of funds generated by illegal means(smuggling) is concealed, FICA(Financial Intelligence Centre Act) was promulgated to combat money laundering. 25. A patent may not be registered over the following.... A discovery A scientific theory Any creative work A mathematical method Literacy/dramatic/musical/artistical work A scheme/rule/method for performing a mental act Playing a game or doing business A computer programme The presentation of information. 26. Differentiate clearly between the types of cases that goes to labour, small constitutional and magistrates courts. Labour — disputes between employers and employees Small — handle civil matters involving claims less than R12 000. No appeal is allowed. Constitutional — Has final say on all matters relating to the constitution. It's decision is binding on all other courts. Magistrates — lower courts dealing with most matters. No jurisdiction with civil matters over RIOO 000. Do not handle more serious criminal cases because they can't pass a sentence longer than 3 years. 27. What is the law of delict? Give 2 examples. Unlawful act committed intentionally or negligently causing harm/loss to another. Defamation(slander), invasion of privacy, contracts by minors who fraudulently misrepresent their age and cause loss to another. 28. What is unjust enrichment? Give 2 examples. 1 Person being unjustfully enriched at the expense of another. — one person in a contract get richer and the other person poorer. — When minors enters into contracts with another person who is aware of minority — When a person enters into a contract and pays, but the other party doesn't deliver the item sold. This is breach but also causes unjust enrichment. 29. What is a suretyship and what makes it valid? The suretyship agreement must be in writing in order to be valid. The person who provides surety(borg) must sign the document or by his duly appointed agent. 30. Name 3 sources of SA law? Custom Legal precedent Common law statutes 31. To be registered, a copyright must have......  proprietary(not be contrary to good morals) must be original (not a reproduction) must be in a material form(written, recorded,...) Application must be made by a qualified person People who are qualified in ant country that belongs to WTO also enjoy protection 32. Who can apply for copyright? The author and 1 st copyright holder The employer or whoever commissions a literacy or artistic work, made by the author in the course of their employment at a newspaper or periodical for publication, is the owner thereof Person who commissions a photograph, portrait, painting film or sound recording is the owner of such work The employer is the owner of the work made in terms of an employment, relationship/apprenticeship or learnership. 33. A client signs up for a life policy. Avery important part of the policy is the Policy Protection Rules(PPR). What is the policy holder's rights regarding the "cooling-off"-period and the cancellation of the policy sold to him? If no benefit has yet been paid or claimed, the policy holder may cancel the insurance transaction in WRITING, sent to insurer, within 30 days or less. All premiums up to date of receipt of cancellation note shall be refunded to policyholder. Cost of risk cover actually enjoyed may be deducted or also market loss of investment made may be deducted The insurer shall ensure that it complies with the cancellation request after the 30day notice period but no later than 60 days after the effective date where policyholder can prove communication to the insurer. If a policy can't be cancelled in law or of its terms, this must be disclosed to the policyholder, by the intermediary, before entering into the insurance contract. 34. Name 5 types of credit agreements under NCA Pawn transactions (goods offered as security for cash) Discount agreements (goods offered over a period @ more than one price- lower amount settled sooner and higher amount settled later) Incidental credit agreements (goods/services are provided over time and interest is charged if not settled in time — Dentist account) Instalment agreement (movable property is sold and paid in instalments over time(furniture) Mortgage agreements over immovable property (bonds and secured loans -personal loans) Lease over movable property (temporary use given to consumer and the option to buy goods at a deferred price @ the end of the period (lease of photo-copier) LM3 MANAGING YOUR PERSONAL FINANCES I. Name the 4 factors affecting one's investment strategy. Individual's RISK profile LIQUIDITY required from the investment  The effects of TAXATION on the investment INFLATION 2. Name the 5 main asset classes, ranked from least to most risky and give brief explanation. cash/interest bearing investments — Investments like fixed deposits, notice deposits & savings accounts. There returns usually don't outperform inflation. However, they are generally regarded as a safe haven in times of volatile markets. They carry a very low risk. Bonds — also interest-bearing investment. Offer a slightly higher return than savings & are backed by large corporations or a government. Carry relative low risk, but in the secondary market(where bonds are traded), the risk can become very high, since bonds become part of 'hedge funds" which are based on expectations on future interest rates. Property -Higher return than cash & bonds — higher risk. During times of falling interest rates, property prices boom (due to increased demand) & return on property is phenomenal. During times of rising interest rates, property market seems to come under pressure, due to lack of demand. Equities(shares) — risky, potential of good return over long run- do well when interest rates fall and come under pressure during times of rising interest rates. Precious metals — safe haven in times of uncertainty & rising inflation 3. Summarise the individual's personal risk tolerance. With age, become more risk averse. Losses can't be recouped Young people, invest in growth assets — risky markets outperform safe havens over long time Longer term of investment, greater chance to absorb market volatility Short term investments — riskier- not enough time for market recovery before maturity Higher disposable income, the greater potential to absorb possible investment risks Investor's experience & expertise. Bigger knowledge gives better understanding of risks Investor's reaction to market fluctuations — emotional decisions If investor has no short-term insurance — could indicate high risk tolerance Diversification strongly linked to risk. Asset classes often do not rise & fall together. Invest in 2 or more classes — when 1 underperform, other will perform well Prudent investor could build lucrative portfolio based on interest rate fundamentals 4. Are EQUITIES a good short-term investment? No, this is a volatile asset class with a possibility to lose money in the sort run. But it's possible that good returns can be made. 5. Are EQUITIES a good long-term investment? Yes, because short-term volatility is smoothed out over the years with favourable long-term results 6. Should a person of 60 invest in equities only? No, invest in less risky funds, due to fact that person is dependent on his income. Cash & bonds will be more suitable. 7. The government want to stimulate economy with interest cuts. SA's has strong Rand and low inflation. What asset classes should be in your portfolio favourable for this new scenario? Property, equities and bonds. When interest rates drop, you can buy more house for your money. This demand for property, cause price increase. Investors bought into prop at beginning stage of falling interest rate cycle, will sell their prop at higher prices at end of cycle. Equities perform well during periods of falling interest rates. Investing in equities, means investing on JSE. Limit offshore exposure during time of falling interest rates. Share prices increase when Co's become more profitable. Co's get more profitable for 2 reasons: 1: lower interest rates = less interest on loans, lower overheads and higher profits. 2: Low interest rates, make it cheaper to expand = more production, turnover, profits. Expansionary monetary policy by SARB characterized by falling interest rates. Bond prices increase when interest rates fall & decrease when it rise. Best time to buy bonds or bond-linked investments is when interest rates are high and expected to drop. Time (years) 8. Why do precious metals do well during periods of high interest rates? PM have always been regarded as hedge against inflation. Gold is a popular investment class, because it won't get lost in an accounting scandal or market collapse. Gold is an ideal diversifier in a portfolio. Key to diversification is finding investments not closely correlated to 1 another, like most shares and bonds are. Gold has very low correlation to shares & bonds, so is a good asset in portfolio to reduce risk. 9. Why do offshore funds do well during times of rising interest rates? During periods of low productivity, inflation will rise and cause interest rate hikes. This may cause the value of currency to depreciate. 10. Describe the term liquidity? One needs to ensure that enough cash is kept on hand for emergency expenses(medical costs) and planned future expenses(overseas trip). A liquid investment, is 1 where the existing funds are easily accessible. Traditionally the general rule was the longer the term(less liquid) the higher the yield. 11. What is inflation? Decline in purchasing power of money. The rule of 72 is used as guide to determine how long it will take for the purchasing power of money to HALVE @ a given inflation rate. Annual inflation rate of 12% 72/12 = 6 years 12. Calculate net investment return as %: Unit trusts with following growth distribution: 2% dividends(tax exempt), 6% interest, 10% capital gains. Marginal tax rate: 41%. A 25% inclusion on capital gains. Gross yield x (100 — marg rate)/100 + tax exempt yield 8.5 x (100-41)/100 + 2 = 7.015% 13. Why is it wise to start saving for retirement @ a young age? Premiums you pay into your retirement plan during first 10 years, will yield more retirement savings. This is the central truth = start saving as early as possible. 14. Define difference between saving and investing. A savings account is fully liquid. It's an interest-bearing investment offering the investor a safe haven for his money (Chances of losing money or receiving negative returns are very unlikely). The interest earned on a savings account is taxed in the investor's hands @ his marginal tax rate. A savings account is used to postpone expenditure. Interest rates paid on savings accounts are more or less the same as current inflation, so you don't outperform inflation. For a saving to become an investment, you must receive interest rate higher than inflation. At the end of your investment period you should be able to buy more with the investment proceeds than you could buy before you initially invested the money. 15. How long will it take for money to double @ 8% interest annually compounding? Use Rule 72. 72/8 = 9 years 16. At what interest rate will my money double in 6 years? Use Rule 72. 72/6 = 12% interest 17. To what rule are Pension & retirement funds subject? 1/3 lump sum and 2/3 annuilty rule. 18. Explain difference between: Defined benefit PF and Defined contribution PF? DBPF not common in SA. Mostly government employees belong to this fund. Employer takes investment risk — Employee know R of pension money they will receive when they go on pension — No guarantee to employee that pension will keep up to inflation. DCPF — more popular. Investment risk transferred to employee. — With this scheme there;s no relation to nrs of years service of his final 2 year's salary. The employee's share will be determined by the fund itself. Individual may receive higher pension than with DBPF because of good investment growth Individual have more say in investment as control are given to members Employee takes investment risk This pension plan offers very few guarantees The employee's final salary is not so NB and it's not formula-based. 19. Name the general investment vehicles. Savings accounts, notice- and fixed deposits, money market accounts Unit trusts Endowment policies 20. Who would invest in a savings account? Someone with low tax-rate, or person who doesn't have to pay tax at all Who needs to create an "emergency fund" accessible at all times Risk averse person Person didn't use his annual interest exemption for tax purposes Person who can't afford to lose any funds invested. 21. Why does Unit trust make it possible for man on street to buy shares on JSE? JSE shares can only be bought in lots of 100. This can be very expensive with shares costing more than RIOO each.( 100 x RIOO + RIO 000). In a UT many investors pool their money together. A fund manager is appointed who will be able to buy and sell lots of 100 in different Co's, thereby reducing the risk. Investment growth is then proportionally distributed back to the various investors in the proportion of their original investment and for how long they have kept the unit trusts. 22. What's a unit trust and who would invest in it? This is a unitised investment. Assets are pooled and owned by more than 1 person/entity, called the investors. Every investor owns an apportioned part of the pooled assets. The pool of assets is called a unitised portfolio or underlying securities. The underlying securities are managed by collective investment managers. The pool of assets can consist of listed shares, interest bearing securities as bonds and also cash. Portfolio managers manage the day-to-day activities in portfolio's. Unit trusts are a popular investment vehicle.  Cost effective (management costs are spread over many unitholders) Underling diversification — reduces risk for investor, increase range possibilities to investor Flexible investment vehicles — investors allowed to purchase & sell units or switch between unitized products Unit trusts provide superior growth Attracts people with low tax-rate or who pays no tax at all People who want to create "emergency fund" accessible @ all times People who want to avoid paying monthly premiums over a long time. No tax reduction 23. What is an endowment policy and who would invest in it? Investment vehicle offered by insurance Co's. Funds aren't easily accessible(only 1 loan during first 5 years, early withdrawal penalties) Premiums may escalate (max 20% p a) Taxed in hands of insurance Co When policy mature, investors make tax-free withdrawals from fund Private individuals pay flat rate of 30% tax on investment growth Very attractive investment for some-one in high tax bracket(eg 41%) Investment with superior growth Attractive to people with high marginal tax rate People who don't need regular access to invested funds within 1 st 5 years of investment People won't have to worry about paying taxes to SARS after receiving tax assessment. 24. How much life cover is enough? 10 x breadwinner's annual gross earnings 25. Why is the amount of disability cover that a person may contract for regulated by law? The level ensures the disabled will not earn more than 75% of his total earnings as documented before he became disabled. If your monthly gross income is RIO 000, the disability cover you may take out may not exceed R7 500. If it were possible to have a better lifestyle after becoming disabled, people would inflict harm upon themselves in order to claim disability benefits. 26. Short-term insurance premiums are based on your risk profile. Name a few risks. Age, gender, where you live, security measures, item insured, claims history of insured. High risk profile attracts high premiums. 27. Name a few short-term insurance policies. Household contents(homeowner's insurance) — compulsory if you have a home loan All-risk insurance Vehicle insurance — monthly or annual premiums Watercraft Personal liabililty Personal accident 28. SA is a debt-ridden county, as SA citizens are borrowers and not savers. The National Credit Act(NCA) affects everyone, but especially credit providers and compulsive spenders and borrowers. Name 10 things you should know about the NCA: NCA regulates all credit agreements (small RO — R15 000; intermediate R15 001 — R250 000 and large R250 001 and above) NCA requires a more detailed application process to prevent reckless lending to take place NCA gives rights to the consumer and obligations to the credit provider Collection, repayment, surrender and debt enforcement procedures are retrospective in terms of NCA-it will apply to all agreements from 1 June 2007, no matter when agreement was entered into No early termination fees are payable on small & intermediate agreements. NCA provides a 5-day period to consider a quote. After the5-day period the quote is no longer valid. The client has the right to receive documentation in the way they prefer, via fax, email or post. Client has the right to know why finance was declined. Fees and charges on credit agreements are now prescribed and limited. The client has the right to know who the Finance & Insurance mManager/Business Manager is and who he/she represents hen assisting you in your finance application. 29. How can you reduce your mortgage repayment term by half? By paying 15% extra on your monthly repayment. 30. What is a preservation fund? Preservation funds are registered in terms of the Pension Funds Act in terms of Income Tax Act as either pension or provident fund. No recurring contributions are allowed into a preservation fund. These funds may only accept transfers from other pension or provident funds resignation, dismissal or winding up of the fund. One big advantage of this fund is that investor may make one taxable withdrawal before age 55. If employee transferred the money into a retirement annuity, no preretirement withdrawal will be allowed. 31. Define between pension and provident fund? Pension fund: From 1 March 2016, no limit is placed on the employer with regards to the claimable deduction for contributions made to the funds on the employee's behalf. Contribution of employer on behalf of employee will be taxed as fringe benefit in employee's hands. Employee may deduct up to 7,5% for tax purposes At retirement(not earlier than 55 or later than 69), a max of 1/3 of fund value may be taken in cash as a lump sum (subject to tax). At least 2/3 will then be invested in an annuity fund which will pay a monthly, quarterly or annual income to investor. The income is taxable at annuitant's marginal tax rate. Provident fund: Employers have no limit from 1 March 2016 in contributions of the member's taxable salary. Employee's contributions are not tax deductible At retirement (55-69) investor is permitted to access the entire fund value(subject to tax). Investor can do with this money as he wishes. 32. Debt consolidation is a popular motion. Is it wise to use your access bond to finance a car? No. At first the lower instalments available on a long-term bond may seem attractive compared to an applicable instalment sale or lease, there are long-term implications of using your bond to buy a car. A house is an investment and a car is not. As soon as you drive your car from the showroom floor it starts to devalue. Your house, on the other hand, is a valuable investment. Buying a car on you bond could undermine your underlying investment. It will also be very difficult to trade your vehicle in an buy another. If you want to replace your car in 3 year's time, you will still have 17 years of payment left. If you now add a second vehicle to your bond, you're effectively paying off 2 vehicles. Add a 3 rd vehicle down the line and your heading for disaster. One of the base reasons for buying a home is that it will ultimately increase in value, which will make it possible to upgrade to a better home. This will be impossible if your bond facility has been gobbled up by buying a car. Column A Column B Gross yield Taxable portion of the interest rate Homeowner's insurance Compulsory if you have a home loan Liquidity How much funds in the investment can be accessed National Credit Act Regulates all credit agreements Offshore investments Performs well when R is depreciating against other currencies Pension Fund Employee may deduct up to 7.5% of salary for tax purposes Precious metals Safe haven in times of uncertainty and rising inflation Risk tolerance The amount of risk investor is prepared to accept Provident fund Employee's contributions not tax deductible @ all Repo rate Rate at which SARB lends money to commercial banks Diversification Investing in 2 or more asset classes to reduce risk Endowment policies Taxed in hands of insurance Co, not of investor Consumer Price Index Measures the inflation rate attributable to consumers Defined Contribution Fund Employee's share of the fund will be determined by the fund value itself Savings account Liquid investment vehicle Tax efficiency Tax benefits attributed to the particular investment Tax-exempt yield % of total investment that's tax exempt Volatile investments Risky investments with high potential exposure to losses and gains Retirement annuity One-man pension plans  LM 4 ACCOUNTING SYSTEMS - INTERNAL CONTOL CONCEPTS 1. Name the process designed and effected by those charged with governance, management and other personnel, to help the Co. to accomplish its goals and objectives? Internal control 2. Internal control gives management comfort and plays NB role in ensuring... Name 5. Safeguarding of assets against theft/damage Accuracy and completeness of accounting records Prevention and detection of fraud and error Effectiveness and efficiency of operations Compliance with laws and regulation Adherence to management policies for all aspects of the business Timely preparation of reliable financial and other info necessary to run the business 3. Internal control has 5 elements. Name them. Control environment Entity's risk assessment process Financial reporting information system Control activities Monitoring of controls 4. Describe control environment It's the framework in which internal controls operate and its mainly determined by the management of the business. It refers to the overall attitude, awareness and actions of those charged with governance regarding the internal control system and its importance to the entity. It's characterized by: Management style Corporate culture Values Philosophy and operating style Organisational structure Human resources & procedures A strong control environment promotes the effectiveness of the overall internal control system. Controls are more likely to operate well in an environment where they are considered to be NB. 5. An entity should have a process for risk assessment. Name 4. Identify the risks which threaten the achievement of business objectives Estimate how significant the risks are  Estimate the likelihood that the risks will occur Decide on controls to reduce these risks 6. Describe Financial reporting information system. FRIS are the procedures and records established to initiate, process and report transactions and to maintain accountability for related assets, liabilities and equity. Establishing the FRIS objectives entails establishing: The classes of transactions in entity operations significant to financial reporting The procedures by which transactions are initiated, recorded, processed, corrected and transferred to the general ledger & reported in financial statements The related accounting record, supporting info and specific accounts in the FNST How system records non-transactional events & conditions significant to FNST The financial reporting process used to prepare an entity's FNST, including significant accounting estimates and disclosures Controls over journal entries 7. Describe control activities. The policies and procedures which help ensure that management directives are carried out. Control activities include those designed to prevent, detect & correct errors. It includes activities relating to: Segregation of duties — limit risk of fraud & accidental errors Custody of assets(physical controls) — physical protection & maintain proper records Recording (information processing) — efficient & effective Authorisation — every transaction must be authorized by signature or authority to do so Management review 8. Give examples of control activities. Approval & control of documents Checking arithmetic accuracy of records Maintaining & reviewing control accounts & trial balances Reconciliations Comparing the results of cash, security & inventory counts with accounting records Comparing internal data with external sources is a measure of the quantity of audit evidence. Sufficiency 10... is a measure or the quality or reliability of audit evidence. Appropriateness Il. Name the 3 audit procedures when collecting audit evidence: Test of controls Substantive procedures — performed to detect material misstatement/fraud Risk assessment 12. Quality of evidence obtained by auditor is crucial. Name and describe forms of evidence. External — 3 rd parties — reasonably reliable — Supplier statements or bank confirmations Auditor— most reliable — Ratio & trend calculations, physical inspection/attendance counts Entity — least reliable (lacks independence) — Co accounting records, client explanations Written — More reliable than oral representations Originals — more reliable than photocopies/faxes 13. Audit tests are designed to obtain evidence about FNST assertions which relate to classes of transactions and events, account balances @ period end, presentation & disclosure. Name 7. Completeness — No unrecorded transactions or undisclosed items. Nothing has been omitted form the accounting records and FNST Occurrence — There's no fraudulent info. All transactions & events occurred during the period and belongs to the entity Existence— All A & L included in FNST do exist. No fictious A & L. Accuracy — All transactions are recorded at the correct R & income & expenses are allocated to proper period Valuation — All A & L included in the FNST are recorded at appropriate carrying values Rights & obligations — All A & L included in the accounting records & FNST belong to the enity at a given date and aren't property of others Presentation & disclosure — All items included in accounting records & FNST are described in accordance to the applicable financial reporting frameworks 14. Describe audit test of controls. Test of controls are used to test if control procedures relating to the accounting system have been complied with. Test of controls are performed to obtain evidence of whether: Controls are suitably designed to prevent, detect and correct material misstatement Controls have operated effectively throughout accounting period It's not possible to only perform test of control, as: All internal control systems have inherent limitations which makes them less than 100% efficient The internal controls may only have been excellent at time auditor was taking tests Inherent risk is still a consideration Successful test of control will reduce the nature, timing and extent of substantive testing, but won't completely eliminate the need to perform substantive testing. 14. Name the 4 categories of test of control.  Reperformance — auditor repeats same internal control procedures as client