ABS NEWGENERATION TVET COLLOEGE L-III

A S
ACCOUNT BUDGET SUPPORT

S LEVEL –III M

/
TTLM A
K
FOR R
UNIT OF COMPETENCE :- PERFORM FINANCIAL
T
CALCULATION

COMPLIED BY:- shemsadin h.

Lo1:- Obtain data and resources for financial calculations
1.1: Review Basic & Algebra

Calculation techniques
BODMAS
This term refers to the order in which calculations need to be completed to achieve the
correct
result. The order is:
B racket Any sets of calculations which are contained within a set of brackets
need to be performed first.

O rders Generally powers and roots of the given number.

D ivision Calculations which require dividing.
M ultiplication Calculations which require multiplying.
A ddition Calculations which require adding.
S ubtraction Calculations which require subtracting.
Whole Numbers, Fractions & Decimals
First, we look at the order in which we do the operations of addition, subtraction,
multiplication and division of these numbers.
Order of Operations
Sometimes in mathematics, you have to solve questions which have more than one
operation. Take a look at the following example: 5 + 3 x 4:-
= 5 + 12 (multiplication worked first)
= 17 (then addition is done)
Grouping Symbols
Sometimes, grouping symbols (brackets, parentheses or braces) occur in ‘order of
operations’ questions. Whatever occurs inside the grouping symbols must be done first.
Example 1 (14 – 2)  4 Example 2 =11 – (9 – 3)

= 12  4 =11 – 6 (grouping symbols are worked first!)

= 48 =5

Example 3
Sometimes, more than one set of grouping symbols may occur in the same calculation. In
this case, the inner grouping symbols are worked first.
3 + [10 – (4 + 3)] (inner grouping symbols worked first)
= 3 + [10 – 7] (other grouping symbols then worked)
= 3+3
= 6

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Let’s now look at the steps you have followed. The way you work out an ‘order of
operations’ question is shown here as a flowchart.

Example 4
We work the ‘operations’ of each step from left to right.
14 – (10 – 2)  2  (5 – 2) + 4
Do step 1 = 14 – 8  2  3 + 4 (grouping symbols simplified)
Do step 2 = 14 – 4  3 + 4 (division and
= 14 – 12 + 4 multiplication done)
Do step 3 = 2 + 4 subtraction and
= 6 addition done)
Activity 1
1 Using the correct order of operations answer the following:
a. 13 + 5 – 6 + 3 (d) 10 – 12 ÷ 4 + 5 x 3
b. 24 ÷ 2 ÷ 3 x 5 (e) 9 x (12 – 4) + 3
c. 18 ÷ 3 – 1 x 4 (f) (5 + 2) x (8 – 8)
Fraction Bars
Sometimes a fraction bar occurs in a calculation. A fraction bar means division.
Example 5

Everything above a fraction bar is divided by

everything below the fraction bar. When you re-
write the fraction as a division, you must put
grouping symbols where they are needed, as
shown in the next two examples.
Example 6 Example 7

Order of Operations and the Calculator

Most calculators have the ‘order of operations’ built-in, but you will need to check
whether your calculator has this by doing the following questions.
9+15
If you got 14 as your answer, your calculator does order of operations.
Activity 3

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 1 A group of 143 students meet to see a hockey match. Four buses, each holding
32 passengers, took most of the students. The rest went by train. How many
students went by train?
2 Sue and Paul are planning to marry. They have a quote from a caterer for $24 per
head. Sue has estimated that there will be at least 44 people from her side of the
family and Paul wants to invite a further 38 people.
(i) How many people will be attending Paul and Sue’s wedding?
(ii) Calculate the cost of catering for Sue and Paul’s wedding.

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Fractions
A fraction has a numerator (top line) and a denominator (bottom line) expressed as:
Example 10

Equivalent Fractions
Equivalent fractions are fractions which represent exactly the same number

Example 11: fill in the missing space

Simplify Fractions
Whenever you work with fractions, you are often expected to simplify them—or to reduce
them to their lowest terms. This means you have to find an equivalent fraction that has no
common factors in its numerator and denominator. The easiest way to simplify a fraction is
to divide the numerator and denominator by the highest common factor.

The factors of 45 are: 1, 3, 5, 9, 15, 45

The factors of 60 are: 1, 2, 3, 4, 5, 6, 10, 12, 15, 20, 30, 60
Addition and Subtraction of Fractions
If one denominator is not a multiple of the other, we obtain similar fractions by multiplying
each fraction by the other denominator.

Example 13 Example 14

Activity 7
Find the values of:

Multiplying Fractions
When multiplying fractions, we simply multiply the denominators
together, and the numerators together.
Example 17

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Note: You are not allowed to multiply the whole numbers first—they must be changed to
improper fractions.
Dividing Fractions
You will remember from earlier modules, that when dividing by a fraction we need only
invert the fraction, and then multiply.
Example 18

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Decimals
Decimals are forms of fractions in which the denominator is always 10, 100, 1000 or a
greater multiple of ten.
Instead of writing the fraction with a denominator, we write only the numerator part
and use a decimal point to show where the fraction starts. Here are some examples:

So decimals are just an extension of the ‘place value’ system that you have already
seen in our number system.
Part of this system can be seen in the table below:

Here are a couple of points to remember:

When we write a positive fraction with a value less than 1 as a decimal, we always
place a zero in the units column. The zero is there to ‘hold the place’ and to make
sure that the decimal point is not missed.
In a number like 0.001, there are no units, no tenths and no hundredths. We put
zeros in these places in order to keep the 1 in the thousandth place. We read 0.001
as ‘zero point zero zero one’.
Now look at these examples.
Example 19
The number 287.648 is made up of
2 hundreds (2  100) 200

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 8 tens (8  10) 80
7 units (7  1) 7
6 tenths .6

4 .04
hundredths
8 .008
thousandths
287.648

Example 20 Example 21

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Decimals and Fractions
Decimals are just a different way of writing fractions with a multiple of ten
in the denominator. So these fractions can easily be turned into decimals:
Example 22

Activity 11
Convert the following fractions to decimals:

Reversing the Process: Changing Decimals

to Fractions
Since any decimal is just a form of a fraction with some particular multiple of ten in the
denominator, we can change the decimal into a fraction very easily.
Example 23

Activity 13
Convert these decimals to fractions and simplify, if necessary.
(a) 0.6 (d) 1.2
(b) 0.25 (e) 5.46
(c) 0.625 (f) 2.585
‘

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Lo2:- Select appropriate methods and carry out financial calculations
2.1 Percentage Calculations in Accounting & Bookkeeping
Understanding & Working With Percentages
Writing Percentages as Fractions
A per cent (%) is just a common fraction, which has a denominator of 100. Since you know
the bottom line is always 100, you don’t need to write it, so you just put the % sign.
‘Per cent’ actually means ‘out of 100’ in Latin.
So, 50% just means a fraction with a top line of 50, and bottom line of 100:
50% = You can of course cancel this to .
Examples
1 25% = = after cancelling.
To enter 25% just enter 25 100 and the display is .
2 2% = =
2 100 and the answer is .
3 37% = (we can’t cancel).
37 100 and the answer is .
100% means or 1! So, any percentage larger than 100 represents a number larger
than 1.
4 130% = =1
130 100 and the answer 1 .
5 280% = = 2 . Use your calculator to cancel down.
6 112.5% = = 1 (using the calculator).
Writing Percentages as Decimal
Percentages can be easily turned into decimals:
50% = = 0.5
Remember—when dividing by 100, you just move the decimal point two places to the left.
Examples
7 23% = = 0.23
On the calculator, 23 100 gives 0.23
Actually, it’s easier to do 23 100 which also gives 0.23
8 140% = = 1.4
140 100 and the answer is 1.4
9 17.25% = 17 = 0.1725
Self check 1!
1 Change these percentages to fractions in their simplest form (cancelled down):
(a) 80% __________ (b) 74% __________
(c) 12.5% __________ (d) 175% __________
(e) 387.5% __________ (f) 0.16% __________

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2 Change these percentages to decimals.
(a) 60% __________ (b) 37.5% __________
(c) 213% __________ (d) 0.45% __________
Changing Fractions to Percentages
You can also easily change fractions to percentages. All you need to do is to use equivalent
fractions to turn the denominator to 100.
Examples
1. To change to a percentage, multiply top and bottom by 20:

There is a simpler way to get the same answer. Just multiply the fraction by 100
and add a % sign. We use the calculator for this:
= × 100% = 80%
4 5 100 and the display is 80.
2. Change to a percentage.
= × 100% = 75%
3. Change to a percentage.
= × 100% = 8. %
4 Change 3 to a percentage.
3 = 3 × 100% = 362 %
Changing Decimals to Percentages
To change decimals to a percentage, you also just need to multiply by 100 and add a % sign:
0.4 = 0.4 × 100% = 40%
Examples
14 0.23 = 0.23 × 100% = 23%
15 2.07 = 2.07 × 100% = 207%
16 1.0671 = 1.0671 × 100% = 106.71%
Self check 2
Convert the following to percentages.
1 __________ 2 __________
3 __________ 4 3 __________
5 0.7 __________ 6 1.8 __________
7 2.075 __________ 8 5.6775 __________
Percentages of Amounts
Percentages are most often used to represent a fraction of a given amount; for example, a
store may offer 20% off all items.
Examples
First, we convert the percent to a fraction, then replace the ‘of’ with ‘×’:
a. Find 20% of $55.
20% of $55 = × 55 or 20/100*55
Answer is $11.
b. Find 18% of 350 mm.

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 18% of 350 = × 350
Answer is 63 mm.
c. Find 135% of $20.
135% of 20 = × 20
Answer $27.
d. Find 12.5% of $512.
12.5% of 512 = × 512
Answer is $64.
Expressing an Amount as a Percentage of Another Amount
You may want to know what percentage one value is of another.
Example
Remember:- Here, you can write the first value as a fraction of the second, then convert
to a percentage by multiplying by 100.
a. What percentage is 30 cm of 150 cm?
The percentage 30 cm is of 150cm is × 100%.
30 150 100 and the answer is 20%.
b. What percentage is $15 of $300?

The percentage $15 is of $300 is × 100%.

15 300 100 and the answer is 5%.
Self check 3
1 Find:
(a) 50% of $300 ________ (b) 25% of $180 ________
(c) 15% of 600 mm ________ (d) 27% of 60 kg ________
(e) 140% of 8 litres ________ (f) 12.5% of $80 ________
2 What percentage is:
(a) 15 cm of 120 cm? __________ (b) $20 of $25? __________
(c) 30 mins of 2 hours? (Hint: Convert both measurements to mins.) __________
(d) $21.25 of $85?__________
Percentages are used in an endless variety of situations in the business world, as well as in
everyday situations. A few of these applications are shown in the sections that follow:
 Simple Profit and Loss  Commission
 Mark-Up  Depreciation & Appreciation
 Discounts  Goods & Services Tax

Simple Profit and Loss

In business the principal aim of buying and selling goods is to make a profit, by selling
goods for more than they cost. In simple terms:
Profit = Selling Price - Cost Price.
Sometimes (for a variety of economic reasons) goods need to be sold for less than what
they cost, and so a loss is incurred:
Loss = Cost Price - Selling Price.
The percentage profit (or percentage loss) is, in general, the profit or loss expressed as a
percentage of the selling price.
Percentage Profit/(Loss) = Profit x 100

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 Selling Price
Example 1
A heater that cost a retailer $64.50 and was sold for $95. What percentage profit
does the retailer make?
Solution
Cost Price = $64.50, Selling Price = $95
Profit = $95 - $64.50 = $30.50
Percentage Profit/(Loss) = Profit x 100
Selling Price
= 30.50/95.00 x 100
= 32.10526
= 32% (nearest percent)
Example 2
Michael bought a second-hand car for $4,000 and a year later sold it for $3,200. What
is the percentage loss?
Solution
Cost Price = $4,000, Selling Price = $3,200
Loss = $3,200 – $4,000 = $800
Percentage Profit/(Loss) = Loss x 100
Selling Price
= 800/3,200 x 100
= 25%
Mark-Up

Percentage Mark-up = Sales Price – Cost Price x 100

Cost Price
As you can see this formula is just an alternative to the above formula. “Profit” is replaced
by “Sales Price – Cost Price”.
Example 1
A heater that cost a retailer $64.50 and was sold for $95. What is the mark-up??
Solution
Cost Price = $64.50, Selling Price = $95

Percentage Mark-up = SP - CP x 100

CP
= 30.50/64.50 x 100
= 47.2868
47% (nearest percent)
Example 2
A retailer marks up all his outdoor goods by 45%. If he bought a tent for $680, what
will the selling price be?
Solution
100% + 45% = 145%
145% of $680 = 145 x 680 = $986, so the selling price is $986.
100

Discounts
There are many times when we come across percentages in real life. Shops often advertise
a sale with a given percentage off the regular price. The amount taken off the regular price
is called the discount.

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Example 1
A shirt normally sells for $45 but is on sale for a discount of 20%. Calculate the new
price.
Solution
20% of $45 = 20/100 x $45
= 0.2 x $45
= $9
The discount is therefore $9. The new price is $45- $9 = $36.

Another way of looking at the problem is to look at the discount price as being 80% of
the original price (100% - 20% = 80%).
So the new discount price is 80% of $45 = 80/100 x $45
= 0.8 x $45
= $36
Example 2
A personal computer was reduced from $1800 to $1350 in a sale. What was the
percentage discount that was given?
Solution
Discount = $1800 - $1350
= $450
% Discount = 450/1800 x 100
= 25%
Example 3
At a sale advertising 15% off all items in the store, a jacket was marked down to
$127.50. What was the original price of the jacket?
Solution
100% – 15% = 85% of the original price = $127.50
$127.50 / 0.85
= $150.
Example 4
Jack is a builder. At the hardware store he receives a trade discount of 7.5% on all
purchases, plus a further 2.5% discount if he pays his account within 30 days. Jack
bought timber at the marked price of $1,200, and paid his account ten days later. How
much did Jack pay?
Solution
Trade discount = 7.5% of $1,200
= 0.075 x $1,200
= $90
Amount owing after trade discount = $1200 - $90 = $1,110
Early payment discount = 2.5% of $1,110
= 0.025 x $1,110
= $27.75
Amount owing after early payment discount = $1,110 - $27.75 = $1,082.25
Hence Jack paid $1,082.25.
Note: We could have found 92.5% of $1,200, and then 97.5% of $1,110.

Commission
Some people, for example real estate agents and salesmen, earn their money by charging
commission on the value of goods they sell. The agent acts on behalf of the seller, and the
seller pays the agent a percentage of the sale price of the commodity, such as land or

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houses. The commission is usually a percentage of the selling price. Some salesmen are
paid a retainer plus commission on the value of their sales.
Example 1
John is a car salesman. He is paid a commission of 2.5% on the value of sales he
makes. Last month John sold cars to a value of $185,000. How much commission
did he earn for the month?
Solution
Commission = 2.5% of $185 000
= 0.025 x $185 000
= $4,625
Example 2
Naomi is a real estate agent. He charges commission for sales as follows: 3% on the
first $100,000, and 1.75% on any amount above $100,000. Last week Naomi sold a
house for a client for $485,000. How much commission did he charge on the sale?
Solution
Commission = 3% of $100,000 + 1.75% of $(485,000 – 100,000)
= 3% of $100,000 + 1.75% of $385,000
= 0.03 x 100,000 + 0.0175 x 385,000
= $3000 + $6737.50
= $9737.50
Naomi charged her client $9737.50 for the sale.
Depreciation & Appreciation
Over time, commodities tend to either decrease or increase in value. When a commodity
(such as computers, cars, equipment) decreases in value, we say that it depreciates in
value. When a commodity (such as antiques, land, houses) increases in value, we say that
it appreciates in value. In most cases depreciation and appreciation over a number of years
are calculated on the value of the commodity at the end of each year.
Example 1
Farmer Joe bought some new machinery for $46,000. In the first year it will
depreciate in value by 15%. Find the value of the machinery after one year.
Solution
Machinery decreases in value by 15%. 100% - 15% = 85%
Value after one year = 85% of $46,000
= 0.85 x $46,000
= $39,100
After one year the machinery will be worth $39,100.
Example 2
Jan bought a block of land for $50,000. In the first year it increased in value by 4%,
and in the second year it increased in value by 5%. What was the value of the block of
land after two years?
Solution
In the first year 4% was added to the value. 100% + 4% = 104%
Value at end of first year = 104% of $50,000
= 1.04 x $50,000
= $52,000
In the second year 5% was added to the value. 100% + 5% = 105%
Value at end of second year = 105% of $52,000
= 1.05 x $52,000
= $54,600

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 Goods & Services Tax (GST)
Another situation where we often come across percentages is in the Australian Goods and
Services Tax (GST). GST was introduced in Australia in the year 2000. The Australian
Government charges a 10% tax on most goods and services.
Example 1
The charge for a double room at a motel is $130 per night, before GST has been
added.
(a) Calculate the amount of GST (10%) to be added to the charge.
(b) Calculate the amount to be charged after GST has been added.
Solution
(a) GST= 10% of $130
= 0.10 x $130
= $13
(b) Charge (including GST) = $130 + $13
= $143
Alternatively, to work out the charge including GST, we could simply find 110% of
$130 (in other words, find 1.10 x $130).
Example 2
Including 10% GST, Jim’s new suit cost him $385.
(a) What was the price of the suit before GST was added?
(b) How much GST was added?
Solution
(a) Price including GST = 100% + 10%
= 110%
110% of pre-GST price = $385
= 385 / 1.10
= $350
The price of the suit before GST was added was $350.
(b) Amount of GST = $385 - $350
= $35
Alternatively, to work out the 10% GST that was added, we could do these
calculations:
1. 385/110 x 10 = $35.
2. 385 / 11 = 35

Activity 4
1 At a ‘20% off’ sale, Susan bought a pair of slippers that normally retail for $25. What
discount did she get, and how much did she have to pay for the slippers?
2 A store has a ‘45% off clearance’ sale on all electrical items. Jason bought a juicer
(normal price $29) and a microwave oven (normal price $161). What was the total price
he paid at the sale?
3 A used car salesman receives 2.5% commission on all the cars he sells. He sold one car
for $8 500, another for $11 000, and another for $23 500. What was his total
commission?
4 An art auction house retains 8% of all money gained at auction. A ‘Dobell’ was sold for
$240 000. What was the commission?
5 A washing machine man came to fix my washer. The cost was $112 labour, and $28
parts. How much GST must be added?
6 A store offers a ‘20% off’ sale on all items. What is the discount on a $315 TV and a $42
picture frame?

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7 At a ‘15% off’ sale, Dale bought an electric chainsaw, which normally retails for $140.
What discount did he get, and how much did he have to pay for the saw?
8 A store has 12.5% off all women’s clothes. Saffron bought a top (normal price $45) and
a skirt (normal price $35). What was the total price she paid?
9 Charlotte bought jeans, normally priced at $85, on sale for just $63.75. What was the
percentage discount?
10 A used caravan salesman receives 5% commission on all the vans he sells. He sold one
van for $12 500, and another for $14 000. What was his total commission?
11 A real estate agent charges 1.8% commission on a house sale. What is the commission
on a house which sold for $650 000?
12 What GST is charged on a refrigerator priced at $800?
13 I bought items costing for $45, $67, and $11. What total GST did I pay?
Part 3: Simple Interest
There are two main types of interest:
1) Simple Interest
The investment earns the same amount of interest each period based on the original
amount of principal and the rate of interest charged.
2) Compound Interest
The investment earns a different amount of interest each period based on the
accumulation of principal and interest at the time the interest is calculated.
At this point we will consider simple interest only.
Calculations Involving Simple Interest
This was the favoured type of interest rate in hire purchase and / or most other unsecured
loans in motor trade and white goods retailing (e.g., refrigerators, washing machines).
Why was this so? The reasons are:
 Calculations were easy to make.
 Calculations were easy to understand.
 Simple interest earned more for the lender/finance company than compound interest.
Definitions
Here are some definitions to start with:
Principal Amount of loan or investment deposit.
Instalments Dollar amount to be repaid per loan period: principal (part) and
interest.
Term Agreed period or time the borrower has to repay all of the
principal and attached interest OR period of investment.
interest rate Represents the risk level associated with the loan or
deposit—expressed as a percentage.
Interest The dollar amount charged by the lender on the basis of
applying an interest rate to the principal or dollar amount
received from a deposit.
Income to depositor/lender and an expense to borrower.
The idea of simple interest is that interest charged or paid on the initial loan or deposit
remains the same for each and every period of the loan term. The interest dollar amount
remains fixed.
Investing / Depositing Money at Simple Interest
If you are investing / depositing money at simple interest, provided interest is not paid
during the deposit term, simple interest calculations do not recognise that the
accumulating interest should attract interest itself. Note, the financial institution (bank,
finance company etc) has the use of this interest by way of on-lending until the deposit
term finishes and the principal is repaid.

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Borrowing Money at Simple Interest
If you are borrowing money at simple interest, there is no recognition that the loan amount
reduces over the period of the loan. The borrower pays the same amount of dollar interest
in the first year of the loan period as is paid in the last repayment.
Symbols
Before we start making simple interest calculations, here are some symbols that are used
to construct simple interest formulae and that you will need in order to solve simple interest
problems.
P Principal
I Interest
R interest rate
T Term
A future value (sometimes called ‘accumulated
amount’)
N number of loan repayments during the term
Lr dollar amount of each loan repayment

Now the formulae:

(1) Principal

(2) Interest
I = (P × R × T )
(3) Rate

The interest rate R is usually given as an annual percentage rate with the time
in years. The time needs to be converted to the time measurement used in the
problems
E.g.. if in months then:

Or if days:

(4) Term

(5) Future value or accumulated amount

Use one of the formulae below:
A = P + [ 1 + ( R × T) ]
A=P+I
A = P + (P × R × T)
(6) To calculate loan repayments

Activity 1
1. You have a bank deposit earning simple interest @ 6% per year that has grown to $3570

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 after three years.
(a) Calculate the amount of the original deposit. (P)
(b) Calculate the amount of interest earned over the three years. (I)
2. Alice earns $1500 interest over five years on a deposit of $9000.
Calculate the simple interest rate that was applied (R).
3. If a $6500 deposit grows to $8700 at a simple interest rate of 4.5 % per year, what
period of time has this taken? (T)
4. Investment: Deposit $5000 @ 4% per year simple interest. How much do you have at the
end of five years? (A)
5. This is a loan repayment: (Lr)
Principal: $5000
Interest 4% per year simple interest
rate:
Term: 5 years with monthly instalments/repayments
Instalments: to be calculated
Part 4: Compound Interest
Remember: Simple Interest is always calculated on the original amount of investment and
a fixed amount of interest is earned each period.
Compound Interest is calculated on the value of the investment (principal plus interest) at
the time the interest is charged. If you have invested an amount of money in a fixed bank
deposit the original amount of the investment will increase as the interest earned is added
to it. The interest is calculated on the increased investment and is said to be compounding.
The investment earns a different amount of interest each period based on the accumulation
of the investment amount and interest at the time the interest is calculated.
If you are paying back a loan amount you will be reducing the principal each time you make
a repayment. The interest included in each payment will be calculated on the actual
principal owing at the time. The amount of interest decreases in each payment made.
Formulas for Calculations of Compound Interest
Formulas for compound interest are summarised below. Where:
PV = Present Value — the original
investment amount or the amount
borrowed, or the present value of
future cash flows
I = interest rate
N = number of periods over which the
interest rate is compounded
FV = accumulated value at the end of the
period or Future Value
I = Amount of interest

To calculate the FUTURE

VALUE or accumulated
value (FV)

N.B. The compound interest tables are based on the accumulation factor

To calculate the amount

of interest earned or paid

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 (I)

Then:

To calculate Present Value

(PV)

To calculate the interest

rate (i)
Multiply both sides by 1/n

Example 1
You deposit $5000 at the beginning of Year 1 earning compound interest of 4% per year
with a term of five years. How do we calculate the future amount?

We will set up a table to show how compound interest works.

Table 1: How compound interest works
Year Opening Interest earned @ Closing balance
balance 4%
1 5000.00 200.00 5200.00
2 5200.00 208.00 5408.00
3 5408.00 216.32 5624.32
4 5624.32 224.97 5849.29
5 5849.29 233.97 6083.26

The table is using the same data from Activity xx (4). Using simple interest the answer is a
closing balance of $6000; and using the compound interest formula, the result will be a
further $83.26 earned. This may not seem a large advantage, but on millions of dollars over
long terms the benefit to depositors can be enormous.
Superannuation has this advantage, particularly for those who are able to contribute to a
super fund from an early age. Imagine the benefit of leaving your contributions in a fund for
thirty five years (from 25 years of age to 60 years).While annuities also play a major role, it
is the compound interest concept that has the multiplier effect. It’s like a snowball
gathering more snow as it rolls down a hill.
Compound interest is all about earning interest on your interest.
We are assisted by three procedures to make compound interest calculations quicker than
using a table like the one above.
Future Value
Procedure 1: using a formula
This involves using a formula to calculate the Future Value (FV) of a single or lump sum.
FV = PV ( 1 + i ) ⁿ
Where:
FV = Future value
PV = Present value

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 i = Interest rate
n = number of compounding periods raised
to a power
Example 2
We will use the data from the table in Example 1 so that you can compare the time taken to
arrive at the same result.
FVIF
FV = 5000 (1 + .04 )ⁿ 5 = 5000 × 1.2167 = $6083.26
How did we calculate 1.2167? Future value interest factor (FVIF).
Using the Sharp EL-735, the entries are:
Enter 1 + 0.04
" 2nd F
" [CST] Yⁿ
" 5
" = 1.2167
Procedure 2: using tables
Tables have been constructed that produce future value interest factors (FVIF).
You will see it is headed up ‘Future Value of $1 at the End of n Periods FVIF = ( 1 + k )ⁿ’ or
something similar.
The table’s vertical column is headed up ‘Period’.
Then spread across the table you will see %.
To find 1.2167, look down the Period column until you find 5. Then look across the top of
the table until you see 4%. Where the row meets the column is 1.2167.
Tables have been supplied with this Workbook. Your teacher can give these to you or
alternatively go to the following website:
So, if you know the interest rate and the number of compounding periods (the term), you
can find the FVIF.
Procedure 3: using financial calculator
Using the Sharp calculator EL – 735:
Enter 5000
" PV
" 4
" I
" 5
" N
" Comp
" FV $6,083.26

Note: You will not need to purchase a financial calculator for this subject. Knowing how to
use tables and ordinary calculator will suffice.
Present Value
The next step is to calculate the present value (PV) of a future lump sum (time value of
money in action).
Procedure 1: using a formula
We can do this in two ways and get the same result.
Method 1

Calculate the present value of a deposit that has grown to $9000 in four years,
earning compound interest of 6% per year.

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 Below is another way of calculating it.
Method 2

Procedure 2: using tables

Under the heading “Present Value of $1: PVIF” (or similar named table), look down the
period column till you find 4 — and then across the page till you find 6%.
Where the row meets the column you find .7921 present value interest Factor (PVIF).
Procedure 3: using financial calculator

Enter 9000
" FV
" 6
" I
" 4
" N
" Comp
" PV
$7128.84
Note: You will find minor differences in PV results when using the tables as
compared to the Sharp calculator ($7,128.71 tables compared to $7,128.84
calculator). This happens because the tables are to four decimal places and the
calculator has 10 decimal places.
Activity 1
1. You deposit $3,000 at the beginning of Year 1 earning compound interest of 3%
per year with a term of 2 years. What is the future value?
2. You have inherited $12,000 and have decided to invest it in a term deposit for 5
years at an interest rate of 10%. How much will you have on maturity?
3. You hope to have $40,000 in 2 years time for a car. The current interest rate is
8%. How much do you need to invest today?
4. You are saving for a house and need a $150,000 deposit in 3 years time. The
current interest rate is 3%. How much do you need to put into your bank account
today?
Part 5: Income Tax
Income tax is a tax on the earnings of all income earners. It is deducted from the wages and
salaries of workers throughout the year and is paid to the Federal Government. State
governments receive a proportion of this personal income tax to fund spending on

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education, health services, and so on. Most wage and salary earners have PAYG tax (Pay As
You Go tax) deducted from their pay according to a prescribed rate and the employer
forwards this to the government. At the end of the financial year (June 30) all income
earners are expected to fill out a tax return and lodge it with the Australian Taxation Office
(ATO). Each employer sends a payment summary to the employee showing the employees
earnings for the year and the amount of tax deducted by the employer
The purpose of the tax return is to make sure that the employee has paid the correct
amount of tax. If an employee has paid more tax during the year than the ATO assesses, he
or she will receive a refund. If less tax has been paid, he or she will be required to pay the
difference.
The income on which tax is calculated is called the taxable income.
Some expenses are allowed as deductions. In general, a tax deduction is allowed for a
necessary expense incurred by the taxpayer in the course of earning their income. For
example, someone setting up a lawn-mowing business could claim a tax deduction for the
cost of a lawn-mower and other gardening implements, and a vehicle. These allowable
deductions are specified by the ATO for different jobs.
Taxable income = Gross income - Deductions
The amount of tax to be paid depends on how much is earned, with lower paid workers
paying a smaller percentage of their gross earnings in tax. All tax calculations are based on
annual income
The ATO provides a table from which the amount of tax that should be paid per year can be
calculated. This is in a booklet called the Tax Pack, which contains instructions on how to
complete a tax return.
Calculating Tax Payments
Income is taxed progressively: low-income earners pay a smaller percentage of their
earnings than high-income earners. The ATO provides a table that gives the marginal rates
of tax. The marginal rate is the percentage rate of tax to be paid on that part of the income
that falls within a particular bracket. These are shown below for the financial year
2010/2011:

Taxable income Tax on this income

0 – $6,000 Nil
$6,001 – $37,000 15c for each $1 over $6,000
$37,001 – $80,000 $4,650 plus 30c for each $1 over $37,000
$80,001 – $180,000 $17,550 plus 37c for each $1 over $80,000
$180,001 and over $54,550 plus 45c for each $1 over $180,000

Suppose Helen has a taxable income of $100,000. The amount of tax payable could be
calculated as follows.
$100,000 falls within the 80,001 – 180,000 tax bracket
Tax payable = 17,550 + 0.37 x (100,000 - 80,000)
= 17,550 + 0.37 x 20,000
= 17,550 + 7,400
= 24,950
Example 1
Using the income tax table for the 2010/2011 financial year calculate the tax payable
on taxable incomes of:
(a) $17 000 (b) $5,500
Solutions

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 (a) $17,000 is in the $6,001 - $37,000 tax bracket.
Tax payable = 0.15 x (17,000 - 6,000)
= 0.15 x 11,000
= 1,650
(b) $5,500 is in the $0 - $6,000 tax bracket.
Tax payable = NIL
Example 2
Last year Michelle’s gross income was $29,960. Her allowable deductions were $860.
(a) Find her taxable income
(b) Calculate the amount of tax due.
(c) Michelle’s employer deducted $205 each week in tax. How much will her refund
be?
Solution
(a) Taxable income = Gross income - Allowable deductions
= $29,960 - $860
= $29,100
(b) Tax on $29 100 = 0.15 x (29,100 - 6,000)
= 0.15 x 23,100
= 3,465
(c) Tax already paid = 52 weeks x $205 = $10,660
Refund = $10,660 – $3,465
= $7,195
Activity 2
Using the income tax tables for the financial year 2010/2011 calculate the tax payable on
incomes of:
a) 32,900
b) 190,000
c) 26,000

Activity 3
Using the income tax tables for the financial year 2009/2010 calculate the tax
payable on incomes of: (You will need to go to the following link on the ATO
website for the 2009/2010 tax tables:
http://www.ato.gov.au/individuals/content.aspx?doc=/content/73969.htm).

a) 15,500
b) 175,100
c) 6,100

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Lo3:- Check calculations and record outcomes

Part 6: Business Calculators, Software and Programs

Calculators and computers have taken away much of the need for manual and mental
calculation. Whilst most of the activities you have done in this workbook have been manual
there are more efficient ways of doing things. The introduction of technology and computer
software has made complex calculations appear much simpler & faster. However, even
though calculators & computers can “crunch the numbers” it is still important for you to be
able to understand what the numbers mean.
 Hand Held Calculators
Calculators perform many of the basic mathematical tasks that have been applied in this
workbook. Calculators add, subtract, divide, multiply etc. Even a simple calculator can
perform other functions such as calculating percentages, tax rates and even keep numbers
in memory for future use.
You will need to have a basic inexpensive calculator for your course.
Financial calculators such as the popular Sharp EL735 perform more complex calculations
such as calculating compound interest; annuities; amortising a loan; discounted cash flows.
Refer to the calculator’s user manual on how to perform these calculations. You may be
required to purchase a financial calculator later on in your course.
Statistical calculators will perform calculations such as measures of central tendency
(mean) & measures of dispersion (standard deviation). Portfolio theory and correlation &
regression are also additional examples of the types of calculations that can be performed
by a scientific calculator.
 Computers
Computers have made many time consuming tasks fast, accurate & timely. All sorts of
programs are available to perform all sorts of calculations. For example, commercial
financial software can be purchased to analyse shares & markets. Statistical packages
such as SPSS make analysing statistics (almost) a breeze!
 Spreadsheets
Spreadsheets such as Microsoft Excel take out the tedious nature of manual calculations
which gives the developer more time to spend on analysing & interpreting the results.
 On-Line Special Purpose Calculators
On-line special purpose calculators have been developed by organisations to assist their
customers in making financial decisions.
For example, the Commonwealth Bank has developed a number of calculators and tools for
their customers. They cover everything from foreign exchange; personal loans; home loans;
insurance & investments.

Activity 1
Give three advantages in using calculators, spreadsheets or other software for performing
business calculations.
1. ________________________________________________________________
2. ________________________________________________________________
3. ________________________________________________________________
Give three disadvantages in using calculators, spreadsheets or other software for
performing business calculations.
1. ________________________________________________________________
2. ________________________________________________________________
3. ________________________________________________________________

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Part 7: Common Computational Errors
To err is human! We all make mistakes. Errors in business calculations can have dire
consequences if they are not picked up. For example, if there is an error in a breakeven
calculation a company may be making business decisions on incorrect information.
Most errors can be picked up if we have a “gut feel” for what the answer should be or if the
information makes sense. This is one reason why it is so important to have an
understanding of what the numbers mean. Once numbers have been calculated it is
important to analyse and interpret their business meaning. If it does not make sense then
one of the many things that can be looked at is if there were any errors in calculations.
Let’s have a look at some common computational errors.
 Input / Transcription Errors
Incorrect amounts may have been keyed into a computer program or spreadsheet. For
example, the hours worked for an employee should have been entered as 40 but were
accidently entered as 4. What do you think would be the consequence of this?
In a transcription error I have reversed the numbers. A general journal to write off an
advertising expense was entered as $19 instead of $91. What do you think would be the
consequence of this error? Has the net profit ultimately been overstated or understated?
 Wrong Spreadsheet Function or Formula
Incorrect formulas, functions or cell referencing etc. will all result in errors. For example,
you may have a spreadsheet that you have prepared that shows your budgeted production
over the next 12 months. If any of the formulas or cell referencing is incorrect you will be
making business decisions on incorrect information.
 Incorrect Methodology
Using an incorrect method will also result in errors. Accidently using present value instead
of future value would affect the viability of a business decision.
 Other Mathematical Errors
Other mathematical errors include:
1. Wrong computational sign – for example, should have added not subtracted
2. Incorrect order of operations – amounts in brackets are calculated first;
3. Incorrect positioning of decimal points and brackets in equations – for example
amount should have been 20.1 not 2.01.

Activity 1
1. Are the following correct (C) or not correct (NC)?
a. 40 + 5 – 13 = 14 C or NC
b. 10 x (12 – 2) = 118 C or NC
c. 10 x (12 – 2) = 100 C or NC
d. 2/5 = 0.04 C or NC
e. 4/8 = 0.50 C or NC
Activity 2
What three things could you do to help prevent errors in business calculations?

1. ___________________________________________________________________________________
___________________________________________________
2. ___________________________________________________________________________________
___________________________________________________
3. ___________________________________________________________________________________
_________________________________________________

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