Authors: Rosel Lozarito Adrian Pendaton Julie Ann Bulabon

Donald Queroda Dennis Borinaga Jan Clarence Lucero Veronica Culminas

BUSINESS
MATHEMATICS For College Student
Table of Content
• Financial Statement
• Bank Reconciliation
• Ratio and Proportion
• Percent, Base and Rate
(Increase and Decrease)
• Buying and Selling
• Markup and Markdown
• Payroll, Commission and Taxes
• Simple and Compound Interest
• Simple Interest and Simple Discount
 FINANCIAL
STATEMENT

1
 The Balance Sheet

 Prepare the balance sheet.

 Prepare the vertical analysis of a balance
sheet.
 Prepare a horizontal analysis of a balance
sheet.

2
 Prepare a Balance Sheet

 Owners, creditors and investors need to know

the financial condition of a business before they
can make decisions and plans.
 Two important financial statements are the
balance sheet and the income statement.
 On the balance sheet, the assets = liability +
equity, hence the name, balance sheet.

3
 Key Terms
 Balance sheet: financial statement that
indicates the worth or financial condition of a
business as of a certain date.
 Assets: properties or anything of monetary
value owned by the business.
 Current assets: assets that are normally
turned into cash within a year.
 Plant and equipment: assets used in
transacting business.
4
 Key Terms

 Cash: a current asset of money in the bank or

cash on hand.
 Accounts receivable: a current asset that is
the money owed by customers.
 Note receivable: a current asset that is a
promissory note owed to the business.
 Merchandise inventory: a current asset that
is the value of merchandise on hand.
5
 Key Terms

 Liabilities: amounts the business owes.

 Current liabilities: debts that must be paid in
a short period of time.
 Long-term liabilities: current liabilities that
are paid over a long period of time.
 Accounts payable: a current liability for
merchandise or services that has not been paid.

7
 Key Terms

 Note payable: promissory notes that are

owed.
 Mortgage payable: a long-term liability for
the building and land the business owns.
 Owner’s equity or stockholder’s equity:
the difference between the assets and the
liabilities.
 Capital, proprietorship or net worth:
other terms for owner’s equity.
8
 How to prepare a balance
sheet
1. Find and record the total assets, working by asset
category. (Total assets= total current assets +
total plant and equipment.)
-(a) List the current assets and draw a single line
underneath the last entry.
-(b) Add the entries and record total current assets,
drawing a single line underneath the total.
-Repeat step (a) for plant and equipment and step (b)
for total plant and equipment assets.
-Add the category totals and draw a double line
9
underneath the grand total.
 Prepare a balance sheet
(cont.)
2. Find and record the total liabilities, working by liability
category.
- Repeat step 1a for current liabilities and step 1b for
total current liabilities.
- Repeat step 1a for long term liabilities and step 1b
for total long term liabilities.
- Add the category totals and draw a single line
underneath the total.
Total liabilities = total current liabilities + total
long-term liabilities

10
 Prepare a balance sheet
(cont.)
3. Find and list the total owner’s equity.
List the equity entries and draw a single line
underneath the last entry.
Add the entries and draw a single line underneath
the total.
4. Find and record the total liabilities and owner’s equity
and draw a double line underneath the grand total.
Total liabilities and owner’s equity =
total liabilities + total owner’s
equity
11
 A=L+E
5. Confirm that the double line grand totals
from step 1 (Total assets) and step 4 (Total
liabilities + total owner’s equity) match up.

Assets = Liabilities + Owner's Equity

12
 Look at this example

 Prepare a balance sheet using Figure 20-1 in

your text as a guide for Sander’s Woodworks for
December 31st.
 Assets include: cash ($1,973); AR ($2,118);
merchandise inventory ($18,476); equipment
($18,951).
 Liabilities include: AP ($2,317); wages
payable ($684); mortgage note payable
($15,286).
 Owner’s capital is $22,871.
13
Check your work

14
 Prepare a Vertical Analysis

 A vertical analysis shows the ratio of each

item on the balance sheet to total assets.

 To find the ratios, use the formula of R =

P/B.

 Each item on the balance sheet is a

percentage (P) and the total assets are the
base (B).

 Their ratio “R” is expressed as a percent.

15
 Look at Figure 20-2

 What is the ratio between cash and total assets?

 4.8%

 What is the ratio between total plant and

equipment and total assets?
 45.2%

 What is the ratio between the mortgage note

payable and total assets?
 37.1%16
 Look at the complete vertical
analysis of Sander’s Woodworks

17
 Prepare a Horizontal
Analysis of the Balance Sheet

 Another way to analyze information on a

comparative balance sheet is to compare item
by item in a horizontal analysis.

 A horizontal analysis compares the same item

for two different years, recording both the
amount of increase (or decrease) and the
increase (or decrease) as a percent of the earlier
year’s amount.

18
 Prepare a horizontal
analysis
1. Prepare a balance sheet for two or more years; record
each year’s amounts in separate columns.
2. Create an additional column labeled “amount of
increase (decrease)” for each yearly item.
a) Subtract the smaller amount from the larger
amount and record the difference.
b) If the earlier year’s amount is larger than the more
recent year’s amount, record the difference in step
2a as a decrease using parentheses or a negative
(minus) sign.

19
 Prepare a horizontal analysis
(cont.)

3. Create an additional column label percent

increase (decrease); for each year item, divide
the amount of increase (decrease) by the earlier
year’s amount and record the difference as a
percent.
Percent increase (decrease) =
amount of increase (decrease) x
100%
earlier year’s amount
20
Look at this example

21
 Tip!

 Which year is the base in the percent of

increase?
 In a horizontal analysis, the earlier year is
always the base year in calculating percent
increase or decrease.
 It is possible to have a 0% change if there is no
dollar change in the amounts.

22
 Income Statements
 Prepare an income statement.

 Prepare a vertical analysis of an income

statement.

 Prepare a horizontal analysis of an income

statement.

23
 Key Terms

 Income statement: a financial statement; the

net income of a business over a period of time.
 Total sales: earnings from the sale of goods or
the performance of services.
 Sales returns or allowances: refunds or
adjustments for unsatisfactory merchandise or
services.
 Net sales: total sales minus sales returns or
allowances.
24
 Key Terms

 Cost of goods sold: cost to the business for

merchandise or goods sold.
 Gross profit or gross margin: net sales
minus the cost of goods sold.
 Operating expenses: overhead or cost
incurred in operating a business.
 Net income or net profit: gross profit or
gross margin minus the operating expenses.
25
 Prepare an income
statement
1. Find and record net sales.
(a) Record gross sales.
(b) Record sales returns and allowances.
(c) Subtract sales returns and allowances from gross
sales.
2. Find and record the cost of goods sold.
• Record cost of beginning inventory.
• Record cost of purchases.
• Record cost of ending inventory.
• Add cost of beginning inventory and cost of
purchases and subtract cost of ending inventory. 26
 Prepare an income statement
(cont.)
COGS = cost of beginning inventory + cost
of purchases – cost of ending inventory

3. Find and record gross profit from sales = net

sales – cost of goods sold.
4. Find and record total operating expenses: list
the operating expenses and add the entries.
5. Find and record net income = gross profit from
sales –operating expenses.

27
 Look at this example
Complete the income statement for Corner
Grocery using the following information:

 Gross sales: $25,283

 Returns and allowances: $ 492
 Cost of beginning inventory: $ 5,384
 Cost of purchases: $18,923
 Cost of ending inventory: $ 5,557
 Total operating expenses: $ 3,750
28
 Example (cont.)

 Net sales = gross sales – returns and allowances

($25,283 - $492 )
 Net sales = $24,791
 COGS = cost of beginning inventory + purchases – cost
of ending inventory
(COGS = $5,384 + $18,923 -$5,557 = $18,750)
 Gross profit = net sales – COGS
Gross profit = $24,791 - $18,750 = $6,041
 Net income = gross profit – operating expenses
Net income = $6,041- $3,750 = $2,291
 Net income = $2,291 29
Income statement
for Corner Grocer

30
 Prepare a Vertical Analysis of an
Income Statement

Just as you do with a vertical analysis of a

balance sheet, to make a vertical analysis of an
income statement you use the percentage
formula: R = P/B
 P = each entry on the income statement as a
percentage.
 B = net sales.
 R = expressed as a percent, it is the ratio
between P and B.
31
 Prepare a vertical analysis

1. Prepare an income statement.

2. Create an additional column labeled
percent of net sales for each item. Divide
the amount of the item by the net sales and
record the result as a percent.
Percent of net sales =
amount of item x 100%
net sales

32
 Try these examples
Using net sales of $839,056:
 What is the percent if the amount of the cost of
goods sold is $516,019?
 61.5%

 What is the percent if total operating expenses

totals $126,305?
 15.1%
33
Vertical analysis of The Seventh
Inning’s income statement

34
 Horizontal Analysis
of an Income Statement

 Comparative income statement: an

income statement that includes data
from two or more years.
 Horizontal analysis of an income
statement: a comparison of like
entries for two years; the amount of
increase or decrease and the percent of
increase or decrease are determined.

35
 Prepare a horizontal
analysis

1. Prepare an income statement for two or more years;

record each year’s amounts in separate columns.
2. Create an additional column labeled amount of
increase (decrease). For each yearly item:
(a) Subtract the smaller amount from the larger
amount and record the difference.
(b) If the earlier year’s amount is larger than the later
year’s amount, record the difference from step 2a
as a decrease using parentheses.
(continue on next slide) 36
Prepare a horizontal analysis
(cont.)

3. Create an additional column labeled percent

increase (decrease). For each yearly item,
record the difference as percent:

Percent increase (decrease) =

amount of increase (decrease) x
100%
earlier year’s amount

37
 Look at this example

Davis Percent
2009 2008 Amount of net
Company sales
Net sales $242,897 $239,528 $3,369 1.4
Cost of
goods 116,582 115,351 1,231 1.1
sold
Gross
$126,315 $124,177 2,138 1.7
profit
Operating
38,725 37,982 743 2.0
Expenses
Net
$87,590 $86,195 $1,395 1.6
Income 38
 Financial Statement Ratios
 Find and use financial ratios
 Financial ratio: analysis of financial data to
compare a business’s performance with other
businesses.
 Working capital: current assets minus current
liabilities.
 Current ratio or working capital ratio: the
ratio of the current assets to the current
liabilities.
39
 How to find a financial
ratio
1. Write one amount as the numerator of a
fraction and a second amount as the
denominator.
2. Write the fraction in decimal form (or for
some ratios, in percent form).
Example: Current assets
Current liabilities

40
 Look at this example

 Compare the current ratio for Aaron’s Air Conditioning

with Zelda’s Zeppelins.
 Aaron: CR = $11,000 ÷ $5,000 = 2.2
 Zelda: CR = $615,000 ÷ $609,000 = 1.01
 What does this mean?
 Aaron has more than $2 in assets for every $1 in
liabilities.
 Zelda has about $1 in assets for each $1 in
liabilities.
 What could you possibly infer from this information?
41
 Additional financial ratios

 The acid test: also called the quick ratio, it

measures the relationship between quick
current assets to current liabilities.
 Find the acid-test ratio if the balance sheet
shows the following amounts:
 Cash: $17,342; Marketable securities: 0; and
Accounts receivable: $10,345; and Current
Liabilities = $26,345
 The acid test ratio is 1.05 to 1.
42
 Operating ratio

 Operating ratio = COGS + operating

expenses
net sales
 This ratio indicates the amount of sales dollars
that are used to pay for the cost of goods sold and
administrative expenses.
 A ratio of less than 1:1 is desirable.
 The lower the operating ratio, the more income
there is to meet financial obligations. 43
 Other financial ratios

 Asset turnover ratio compares the net

sales to the average total assets.
 Total debt to total assets ratio compares
the total liabilities to the total assets.
 The gross profit margin ratio shows the
average spread between cost of goods sold
and the selling price.

44
 Interpreting financial
ratios
 The mere calculation of a ratio is meaningless
unless the business owner, financial analyst,
creditor or investor is able to interpret them.
 Industry standards are an important base.
 Historical performance also adds perspective.
 Industry-specific ratios also help one interpret
performance within a field of similar firms.

45
 BANK
RECONCILIATION

1
 Bank Records

 Checking account transactions

 Bank statements

2
 Checking Account Forms
 Make account transactions

 Record account transactions

withdrawals, deposits, credits,

fees, ATMs and others

3
 Make Account Transactions
 Various checking account forms or records are
needed to provide written documentation of the
funds that flow into and out of the account.
 A transaction is a banking activity that changes
the amount of money in a bank account.
 Funds going into the account are deposits and
are recorded as a credit to the account.
 A deposit ticket is needed to support the
transaction.
4
 Make an account deposit
1. Record the date.
2. Enter the amount of currency and/or coins
being deposited.
3. List the amount of each check to be deposited
including an identifying name or company.
4. Add the currency, coins and checks.
5. If the deposit is going into a personal account
and you need “cash back,” indicate the
amount and sign. Subtract from the total.
6. Record the net deposit. 5
 If there is a mistake in the
deposit

 The bank will issue a bank memo.

 An increase in the balance (or in your favor)

is called a credit memo.

 A decrease in the balance (or in the bank’s

favor) is called a debit memo.

6
 A credit memo or a debit
memo?

 Suppose Janice recorded a check for $174.00

when the actual amount of the check is
$147.00. Would she receive a credit memo
or a debit memo once the bank detected the
error?

 A credit memo

7
 Electronic deposits
 Businesses allowing customers to charge an
amount through a credit card are sometimes
called point-of-sale transactions, allowing the
business to receive payment electronically from
the credit card company.
 These include Visa®, MasterCard® and
Discover.®
 Another type of electronic deposit is direct
deposit for payroll. Employees can access their
paycheck funds directly from their accounts.
8
 Taking money out of the
account

 A withdrawal is a transaction which reduces

the amount of funds in the account.
 These transactions are called debits.
 One bank record for withdrawals is a check or
bank draft.
 Another type of debit is through the use of a
debit card to pay for goods and services.
 Withdrawing funds from an ATM will also
result in a debit to the account.
9
Identify the elements of a
check

10
 Key Terms

 Payee: the one to whom the money on a check

is paid.
 Payor: The bank or institution that pays the
amount of the check to the payee.
 Maker: The one who is authorizing the payment
of the check.
 Automatic Drafts: regular withdrawals that
the owner of an account authorizes to be made
electronically. 11
 Key Terms
 Automatic drafts: Regular monthly bills
which are paid electronically and debited
from the account.
 Signature card: Signature of those
authorized to sign the checks for a given
account.
 Personal identification number (PIN): a
private code that is used to authorize a
transaction on a debit card or ATM card.
12
 Make a withdrawal
with a check
1. Enter the date of the check.
2. Enter the name of the payee.
3. Enter the amount of the check in numerals;
cents can be written as a fraction of a dollar or
using a decimal notation.
4. Write the amount of the check in words.
5. Explain the purpose of the check.
6. Sign the check.
13
 Record Account Transactions

 Individuals and business who have banking

accounts must record all transactions made to
the account.
 Check stub: a form that is attached to the
check for recording account transactions that
show the account balance.
 Account register: a separate form for
recording all checking account transactions. It
also shows the account balance.
14
 Record account transactions
On a check stub or account register:
1. Enter the date, the amount of the amount of
the check, the person or company to whom the
check is made and the purpose of the check.
2. To the balance forward, add any deposits made
since the last check.
3. Subtract the amount of the check to obtain the
new balance.
4. Carry the new balance forward to the next stub.
15
 Record account transactions
On an electronic money management
system:

1. Enter the appropriate details for producing a

check.
2. For business accounts or personal accounts
that are being used for tracking expenses,
record the type of expense or budget account
number.
The account register is maintained by the
system automatically.
16
 Endorsements
 Simple endorsement: the payee signs or
stamps the bank of the check to deposit the
amount in an account or to cash the check.
 Banks will require payees who are not
account holders to present identification
before cashing a check from their bank.
 Account holders will be required to sign the
check and also record the account number on
the back of the check.

17
 Key terms
 Enrollment: a signature, stamp or
electronic imprint on the back of a check that
authorizes payment in cash or directs
payment to a third party or account.
 Restricted endorsement: a type of
endorsement that reassigns the check to a
different payee or directs the check to be
deposited in a specified account.

18
 Restricted endorsements
 The original payee writes “pay to the order
of,” lists the name of the new payee and signs
the check.
 Another type of restricted endorsement is using
the phrase “for deposit only” and listing the
account number without actually signing or
endorsing the check.
 These measures are intended to provide greater
security when handling checks.

19
 Bank statements
 Bank reconciliation: The process of
making the account register agree with the
bank statement.

 The bank statement is like a photograph

taken a specific moment. Any transactions
that had not been posted at that time are
considered “outstanding” and are taken into
account during this process.

20
 Key terms
 Bank statement: an account record
provided by the bank periodically designed to
match your records to the bank’s records.
 Service charge: a fee the bank charges for
maintaining the checking account or for other
banking services.
 Returned check: deposited check that was
returned because the maker’s account did not
have sufficient funds.

21
 Key terms
 Returned check fee: a fee the bank charges
the depositor for returned checks.
 Non-sufficient fund fee: fee charged to the
account holder when a check is written for which
there are not sufficient funds.
Note: when a check is returned NSF, there are
sometimes two penalties: one the bank charges
and another by the payee who was unable to
collect the money in a timely manner.

22
 Key terms
 Outstanding checks: Checks that have been
written, but have not yet been posted to the
maker’s account.
 Outstanding deposits: deposits that have
been made, but have not yet been posted to the
maker’s account.
When reconciling your account, be sure to note
any bank fees (for returned checks, service
charges, etc.) on your account register.

23
Bank statement

24
Ratios and Proportions
 Outline:

 Ratios!
What is a Ratio?
How to Use Ratios?
How to Simplify?
Proportions!
What is a proportion?
Properties of proportions?
How to use proportions?
 Mysterious Problems…
 What is a Ratio?

 A ratio is a comparison of two numbers.

 Ratios can be written in three different ways:
a to b
a:b
a Because a ratio is a fraction, b can not be zero
b

Ratios are expressed in simplest form

 How to Use Ratios?

 The ratio of boys and girls in the class

is 12 to11.
• The ratio of length and width of this rectangle
is 4 to 1.
4cm

1cm

.• The ratio of cats and dogs at my home is 2 to 1

 How to simplify ratios?
 The ratios we saw on last The ratio of boys and girls in the
slide were all simplified. class is
12
How was it done? 11
Ratios can be expressed 4
in fraction form… a a
b The ratio of the rectangle is 1

b
This allows us to do math The ratio of cats and dogs in my
on them. house is 2
1
 How to simplify ratios?

 Now I tell you I have 12 cats and 6 dogs. Can

you simplify the ratio of cats and dogs to 2 to 1?
2
12= 12 / 6=
6 6/6 1
Divide both numerator and
denominator by their
Greatest Common Factor 6.
 How to simplify ratios?

A person’s arm is 80cm, he is 2m tall.

Find the ratio of the length of his arm to his total
height

• Let’s try cm first!

 2m 
arm 80cm 80cm Once we have the
same units, we can

 
height 200cm simplify them.

80 2
200 5
 How to simplify ratios?
• Let’s try m now!

arm 
80cm 0. 8 m Once we have the
same units, they
simplify to 1.
height 2m 2m

 
8 2
20 5
To make both numbers
integers, we multiplied both
numerator and denominator by
10
 How to simplify ratios?

 If the numerator and denominator do

not have the same units it may be
easier to convert to the smaller unit so
we don’t have to work with decimals…
3cm/12m = 3cm/1200cm = 1/400

2kg/15g = 2000g/15g = 400/3

5ft/70in = (5*12)in / 70 in = 60in/70in = 6/7

2g/8g = 1/4 Of course, if they are already in the same units, we

don’t have to worry about converting. Good deal
More examples…
1 12 6
8= =
50 25
24 3
27 3
40= 1 =
18 2
200 5

27 3
=
9 1
 Now, on to proportions!
What is a proportion?


A proportion is an equation
a c that equates two ratios
b d
The ratio of dogs and cats was 3/2
The ratio of dogs and cats now is 6/4=3/2


So we have a proportion :
3 6
2 4
 Properties of a proportion?


3 6
2 4 Cross Product Property
2x6=12 3x4 = 12

3x4 = 2x6
 Properties of a proportion?

• Cross Product Property


a c ad = bc
b d means

extremes
 Properties of a proportion?

Let’s make sense of the Cross Product Property…


For any numbers a, b, c, d:

d  d
a c a c
b d b d

d  c  d b  bc
a a
b b

ad  bc
Properties of a proportion?

• Reciprocal Property


If 3 6
2 4 Can you see it?
If yes, can you think


Then 2 4 of why it works?

3 6
How about an example?


7 xSolve for x:
2 6
7(6) = 2x Cross Product Property

42 = 2x
21 = x
How about another example?


7 12
Solve for x:

2 x
7x = 2(12) Cross Product Property

7x = 24
x= 24 Can you solve it
7 using Reciprocal
Property? If yes,
would it be easier?
 Can you solve this one?


7 3
x 1 x
Solve for x:

7x = (x-1)3 Cross Product Property

7x = 3x – 3
4x = -3 Again, Reciprocal
Property?

3
x=
4
Now you know enough about properties,
let’s solve the Mysterious problems!

If your car gets 30 miles/gallon, how many gallons

of gas do you need to commute to school
everyday?
5 miles to home

5 miles to school

Let x be the number gallons we need for a day:

30miles (5  5)miles
Can you solve it

 
from here?
30 10
1gal x _ gal 1 x
1
x= 3 Gal
 5 miles to home

5 miles to school

So you use up 1/3 gallon a day. How many gallons would

you use for a week?

Let t be the number of gallons we need for a week:

 
1 / 3gal t _ gal 1/ 3 t
1day 5days
What property 1 5

 1(5)  3t t  Gal
is this?
1 t 5
3 5 3
 So you use up 5/3 gallons a week (which is about 1.67
gallons). Consider if the price of gas is 3.69 dollars/gal,
how much would it cost for a week?

Let s be the sum of cost for a week:

 
3.69dollars s _ dollars 3.69 s
1gallon 1.67 gallons 1 1.67
3.69(1.67) = 1s s = 6.16 dollars

5 miles to home

5 miles to school
 So what do you think?
5 miles

10 miles

You pay about 6 bucks a week just to get to school!

What about weekends?
If you travel twice as much on weekends, say drive
10 miles to the Mall and 10 miles back, how many
gallons do you need now? How much would it cost
totally? How much would it cost for a month?
Think proportionally! . . . It’s all about proportions!
PERCENT, BASE,
RATE
(Increase and Decrease)
Percent Equivalents
 Write a whole number, fraction or
decimal as a percent.
 Write a percent as a whole number,
fraction or decimal.
1 = 100%
0.8 = 80% = 4/5
 Write a Whole Number, Fraction
or Decimal as a Percent

 Percents are used to calculate markups,

markdowns, discounts and many other
business applications.
 Hundredths and percent have the same
 meaning: per hundred.
 100 percent is the same as 1 whole quantity,
100% = 1.
 When we multiply a number by 1, the product
has the same value as the original number.
 Change to equivalent percents

 Nx1=N
 So, if 1 = 100%, then ½ x 100% = 50%.
 Also, if 1 =100%, then 0.5 x 100% = 050.%
= 50%
 In each case when we multiply by 1 in some
form, the value of the product is equivalent
to the value of the original number even
though the product looks different.
 Write a number as its
percent equivalent

 Multiply the number by 1 in the form of 100%.

 The product has a % symbol.
 Example:
 Write 0.65 as a percent.
 0.65 = 0.65 x 100% = 065.% = 65%
 The decimal point moves two places to the
right.
 Write the decimal or whole
number as a percent

 0.98 = 0.98 x 100% = 098.% = 98%

 1.52 = 1.52 x 100% = 152.% = 152%
 0.04 = 0.04 x 100% = 004.% = 4%
 5 = 5.00 x 100% = 500.% = 500%
 0.003 = 0.003 x 100% = 000.3% = 0.3%
Try these examples
 .48 =
 48%

 7.16 =
 716%

 0.0034 =
 0.34%
 Write a fraction as a percent
 ¼ = ¼ x 100%/1 = 25% [Reduce and
multiply]

 For the following, change the mixed number

to an improper fraction and multiply by
100%.
3 ½ = 3 ½ x 100%/1 = 7/2 x 100%/1 =350 %

 ⅔ = ⅔ x 100% / 1 = 200%/3 = 66⅔%

Try these examples
 ⅜=
 37.5%

 ⅞=
 87.5%

 ¾=
 75%
 Write a Percent as a Whole
Number, Fraction or Decimal
 When a number is divided by 1, the quotient
has the same value as the original number.
 N ÷ 1 = N or N/1= N
 We can also use the fact that N ÷ 1 = N to
change percents to numerical equivalents.
 50% ÷ 100% = 50%/100% = 50/100 = ½
 50%/100% = 50/100 = 0.50 = 0.5
 Write the percent as a number

 Divide by 1 in the form of 100% or multiply by

1/100%.
 The quotient does not have the % symbol.
 Examples:
 37% = 37% ÷ 100% = .37 = 0.37
 127% = 127% ÷ 100% = 1.27
 To divide by 100 mentally, move the decimal
point two places to the left.
 Write the percent as a fraction
or mixed number

 In multiplying fractions, we reduce or cancel

common factors from a numerator to a
denominator. Percent signs also cancel.
 Division is the same as multiplying by the
reciprocal of the divisor.
 Similarly, % ÷ % = 1
 Example:
65% = 65% ÷ 100% = 65%/1 x 1/100% = 13/20
Try these examples
 150% =
 1½

 12.5% =
 ⅛

 ¼%=
 1/400
 Solving Percentage Problems

 Identify the rate, base and percentage in

percentage problems.
 Use the percentage formula to find the
unknown value when two values are known.

P=RxB
 Identify the rate, base and
percentage in percentage problems

 In the formula P = R x B:

“B” refers to the base which is the original
number or one entire quantity.
 “P” refers to percentage and represents a
portion of the base.
 “R” refers to rate and is a percent that tells
us how the base and percentage are related.
 Find the percentage
 The original formula is P = R x B
 To find the percentage, we multiply the rate by
the base.
 If 60 people registered for this course and 25%
are Spanish-speaking, what number of students
are Spanish-speaking?
 Identify the base; identify the rate.
 Use the solution plan to find the answer.
Find the percentage
1. What are you looking for?
The number of Spanish-speaking students
2. What do you know?
The base is 60 (rate); and the rate is 25% or 0.25.

3. Solution plan
P = 60 x 25% (or .25)
4. Solve
P = 15
5. Conclude
15 students are Spanish-speaking
 Try these problems

 If 40% of the registered voters in a

community of 5,600 are Democrats, how
many voters are Democrats?
 2,240

 If 58% of the office workers prefer diet soda

and there are 600 workers, how many prefer
diet soda?
 348
 Find the base

 Refer to the original formula: P = R x B.

 To find “B,” we can change the formula so that it
becomes: B = P/R
 To find the original number, we can divide the
percentage by the rate.
 Example: Forty percent, or 90 diners preferred
outdoor seating at the new restaurant. How
many diners were interviewed in all?
 Use the solution plan.
Find the base
1. What are you looking for?
The total number of diners surveyed.

2. What do you know?

The percentage (90) and the rate (40%).

3. Solution plan
Base = P/R; Base = 90/.40

4. Solve
B = 225

5. Conclude
225 diners were interviewed in all.
 Try these examples

 1700 dentists attending a convention last

month prefer fluoride treatments for
preschoolers. That’s 4 out of every 5 dentists.
How many dentists attended in all?
 2,125

 80%, or 560, of our current clients take

advantage of our cash discount program for
prompt payment. What is our current client
base?
 700
 Find the rate
 Refer to the original formula: P = R x B.
 To find “R,” we can change the formula so that
it becomes:R = P/B
 To find the rate, we can divide the percentage
by the base.
 Example: 55 insurance agents were able to
meet with their clients to inform them of policy
changes. If there are 220 agents in all,
what percent does this represent?
 Use the solution plan
1. What are you looking for?
The percent or rate of agents who talked to their clients.

2.What do you know?

The base or total number of agents and the percentage who talked
to their clients.

3.Solution plan
R = P/B ; R = 55/220

4.Solve
R= .25

5.Conclusion
25% of the agents talked to their clients.
Try these examples
 The plant foreperson reported that 873 of the
900 items tested met the quality control
specifications for production. What is the rate
of acceptable items?
 97%
 In the new product focus group, 6,700 of the
8,375 customers rated the product as “very
good” or “superior.” What was the
rate?
 80%
 Identify what is missing
 Sometimes, you will be asked to find one of the
elements: rate, base or percentage when you
know the other two.
 Learn to “read” the problem to identify the
missing element.
 Example: 30% of 70 is what number?
 30% is the rate.
 70 is the base.
 You are looking for “P” or percentage.
 P = R x B P = 0.3 x 70 = 21
 Try these problems
 Identify what’s missing and then solve the
problem using the correct formula.
 60 is what percent of 80?
 R = P/B R = 75%
 35% of 350 is what?
 P=RxB P = 0.35 x 350 = 122.5
 25% of what number is 125?
 B = P/R B = 125/.25 = 500
 6.3 Increases and Decreases

 Find the amount of increase or decrease in

percent problems.
 Find the new amount directly in percent
problems.
 Find the rate or the base in increase or
decrease problems.
 Find the Amount of Increase
or Decrease in Percent Problems

 Examples of increases in business

applications include:
 Sales tax
 Raise in salary
 Markup on a wholesale price
 Decreases in percent
problems
 Some examples of decreases include:
 Payroll deductions
 Markdowns
 Discounts on sale items
 How to find
the amount of increase

 To find the amount of increase:

amount of increase = new amt – beg. amt.

Example: Joe’s salary has been $400 a

week. Beginning next month, it will be $450
a week. The amount of increase is $50
a week.
 How to find the
amount of decrease

 To find the amount of decrease:

Amount of decrease = beg. amt - new amt.

 Example: Roxanne’s new purse

originally cost $60, but it was on sale when
she bought it on Saturday for $39.99. The
amount of decrease (or markdown) is
$20.01.
 Percent of change
 The amount of change is a percent of the
original or beginning amount.

 Find the amount (increase or decrease) from a

percent of change by:
 Identifying the original or beginning amount
and the percent or rate of change.
 Multiplying the decimal equivalent of the rate
of change by the original or beginning
amount.
 Here’s an example
 Your company has announced a 1.5%
cost of living raise for all employees next
month. Your monthly salary is currently
$2,300. Starting next month, what will
your new salary be?
 You will need to find the amount of increase
by multiplying the rate by the base.
 To find the new amount, add the amount of
increase to the original amount.
Find the new amount
 Current salary = $2,300 a month
 Rate of change = 1.5%
 Amount of raise =
Percent of change x original amount
.015 x $2,300 = $34.50 a month
 Add $34.50 to the original amount of $2,300
to identify the new amount.
 New amount = $2,334.50
 Find the New Amount
Directly in Percent Problems
 Often in increase or decrease problems, we are
more interested in the new amount than the
amount of change.
 Find the new amount by adding or subtracting
percents first.
 The original or beginning amount is always
considered to be the base and is 100% of
itself.
 Find the new amount directly
in a percent problem

 Find the rate of the new amount.

 For increase: 100% + rate of increase
 For decrease: 100% - rate of decrease

 Find the new amount.

 P=RxB
 New amount = rate of new amt. x original amt.
 Here’s an example

 Medical assistants are to receive a 9%

increase in wages per hour. If they were
making $15.25, what is the new per hour salary
to the nearest cent?
 Rate of new amount = 100% + rate of increase
 Rate of new amount = 100% + 9% = 109%
 Rate of new amount = $15.25 x 109%
 Change 109% to its decimal equivalent: 1.09
 $15.25 x 1.09 = $16.6225 = $16.62
 Here’s another example
A new pair of jeans that costs $49.99 is advertised at
70% off. What is the sale price to the
nearest cent of the jeans?
Rate of new amount = 100% - rate of decrease
= 100% - 70% = 30%
New amount = rate of new amt. x original amt.
New amount = 30% x $49.99
New amount = 0.3 x $49.99
= $14.997
New amount = $15.00 (nearest cent)
 Try these examples

 The property taxes at your business office will go

up 5% next year. Currently, you pay $3,400.
How much will you pay next year?
 $3,570

 A wholesaler is offering you a 20% discount

if you purchase new inventory before the 15th
of the month. If your normal invoice is $3,600,
how much would you pay if you got the discount?
 $2,880
 Find the Rate or the Base in
Increase or Decrease Problems
 Identify or find the amount of increase or
decrease.
 To find the rate of increase or decrease, use
the percentage formula: R = P/B.
 Rate = amount of change/original amount.
 To find the base or original amount, use the
percentage formula: B = P/R.
 Base = amount of change/rate of change.
Here’s an example

 During the month of May, a graphic artist

made a profit of $1,525. In June, she made
a profit of $1,708. What is the percent of
increase in profit?

 Use the solution plan to figure out the

answer.
 Solution plan
 What are you looking for?
 Percent of increase in profits.

 What do you know?

 Original amt. = $1,525; New amt.=$1,708

 Solution plan
 Find amt. of increase; Find percent of increase.

 Solution
 $1,708-$1,525 = $183
$183/$1,525 = 0.12 =12%

 Conclusion
 The rate of increase in profit is 12%.
 Try these two examples
 A popular detergent cost $5.99 last Saturday,
but today the same detergent costs $7.50. What
is the rate of increase?
 25.2%

 Sales in the East Region were $10,800 in

January and dropped to $9,700 in February.
What is the rate of decrease from January to
February?
 10.2%
BUYING
AND
SELLING
1
 Stocks

 Read stock listings.

 Calculate and distribute dividends.

2
 Key Terms

 Stock: the distribution of ownership of a

corporation. Partial ownership can be purchased
through various stock markets.

 Share: one unit of ownership of a corporation.

 Face value (par value): the value of one

share of stock at the time the company first
issued stock for sale.
3
 Key Terms
 Stock certificate: a certificate of ownership of
stock issued to the buyer.
 Dividend: a portion of the profit of a company
that is periodically distributed to the
stockholders of a company.
 Preferred stock: a type of stock that
guarantees a specific dividend to the
stockholder. The preferred stockholder
does not have voting rights.
4
 Key Terms

 Common stock: a type of stock that gives the

stockholder voting rights. After dividends are
paid to preferred stockholders, the remaining
dividends are distributed among common
stockholders.
 Stock market: the structure for buying and
selling stock.
 Trade: either the buying or selling of a stock.
5
 Key Terms

 Stockbroker: the person who handles the

trading of stock. A stockbroker receives a
commission for these services.
 Stock listings: information about the price of
a share of stock and some historical information
that is published in newspapers and on the
Internet.
 Price-earning (PE) ratio: the ratio of closing
price of a share of stock to the annual earnings
per share.
6
 Read Stock Listings

 In the stock listing in Table 21-1 in your text,

there are fifteen (15) columns across the top of
the page and they identify specific information
related to a particular stock.
 Stock prices are listed in dollars and cents.
 Positive and negative signs show the direction of
the stock: “+0.13” means the stock went up
thirteen cents over the previous day’s price.
 The rows list the stock name in alphabetical
order.
7
 From Table 21-1 identify each
column for ABN Amro Holding
1. Shows the corporation name: ABN Amro
Holding
2. Shows the company symbol: ABN
3. Share price when the market opens: $48.60
4., 5. and 6. Show the high, low and close at which
the stock sold this day: high is $49.07; low is
$48.52; close is $48.74.
7: Shows how much this day’s closing price per share
differs from the previous day’s closing price per
share for this stock: net change is $0.29. 8
 Identify each column
(cont.)
8. Shows the percentage increase/decrease of
day’s closing price to the opening price: 0.6%
9. Shows the total number of shares that are
traded on this day: 1,598,100 shares
10. and 11. show the high and low price at which
the stock was traded in the last 52 weeks, not
including this day: high $50.83; low $25.43.
12. Shows the dividend paid per share of stock
the previous year: an irregular cash dividend
of $1.48 per share was paid last year. (An e
denotes an irregular cash dividend)
9
 Identify each column
(cont.)
13. Yield shows the previous year’s dividend
as a percent of the current price per share:
yield is 3% (If there was no dividend paid the
previous year, the entry is “…”)
14. Shows the stock’s price earnings ratio (PE):
The P/E ratio is unchanged.
15. (YTD% Chg) shows the percentage by which
the closing price differs from the first business
day of the year: the price per share rose
52%. 10
Look at this table

11
 Calculate and
Distribute Dividends
 Corporation’s board of directors votes to
reinvest any profits into a business or
can declare a dividend with some or all of
the profits.
 Dividend can be expressed as a
percentage of the par value of the shares,
or as a dollar amount per share.
 Usually declared quarterly.

12
 Key Terms
 Participating preferred stock: a
type of preferred stock that allows
stockholders to receive additional
dividends if the company does well.

 Convertible preferred stock: a stock

option that allows the stockholder to
exchange the stock for a certain
number of shares of common stock.
13
 Key Terms
 Cumulative preferred stock: preferred
stock that earns dividends every year.

 Dividends in arrears: dividends that were

not paid in a previous year and must be paid
to cumulative preferred stockholders before
dividends can be distributed to other
stockholders.

14
 How to calculate
and distribute dividends

1. First pay dividends in arrears:

a) Multiply the number of shares held by
preferred stockholders by the given rate,
expressed as dollars per share.
b) Subtract those dividends in arrears from
the available amount of money
(continued next slide)

15
 Calculate and distribute
dividends
2. Pay the present year’s preferred stock
dividends:
a) Multiply the number of preferred shares held
by stockholders by the given rate.
b) Subtract these preferred stock dividends
from the difference from step 1b.

(continued on next slide)

16
Finally…
3. Pay the common stock dividend:
Divide the difference from step 2b by the
number of common shares held by
stockholders. This is the dividend per share
paid to common stockholders.

17
Look at this example
Your company has issued 20,000 shares of
cumulative preferred stock that will earn
dividends at $0.60 per share, and 100,000
shares of common stock. Last year, you paid
no dividends. This year, $250,000 is available
for dividends. How are the dividends to be
distributed?
(next slide)

18
 Pay the stockholders
1. Pay last year’s dividends in arrears: 20,000 x
$0.60 = $12,000 (to preferred stockholders)
2. Pay preferred stockholders for this year:
20,000 x $0.60 = $12,000
3. The remaining amount ($226,000) is divided
among the 100,000 shares of common stock
yielding a payout of $2.26 per share.

Preferred stockholders receive $24,000

and common stockholders receive
$226,000. 19
 Try this example
The Puffer Fish Company has issued 10,000
shares of cumulative preferred stock that will
earn dividends of $0.80 per share and 50,000
shares of common stock. Last year they paid no
dividends. This year $100,000 is available for
dividends. How are the dividends to be
distributed?
Preferred stockholders will receive $16,000
&
common stockholders will receive $84,000,
at $1.68 per share. 20
 Bonds and Mutual Funds
 Read bond listings.

 Calculate the price of bonds.

 Read mutual fund listings.

21
 Key Terms
 Bond: a type of loan to the issuer to raise
money for a company or municipality. The
investor or bondholder will be paid a specified
rate of interest each year and will be paid the
entire value of the bond at maturity.
 Face value (par value): the original value of a
bond, usually $1,000.
 Maturity date: the date at which the face
value of the bond is paid to the bondholder.
22
 Key Terms

 Junk bonds: high-risk bonds that are usually

from companies in bankruptcy or in financial
difficulty.

 Corporate bonds: bonds issued by a business.

 Municipal bonds: bonds issued by local and

state governments.

 Treasury bonds: bonds issued by the federal

government.
23
 Key Terms
 Coupon bonds: bonds that require the
investor to submit a coupon at a specified time
to receive interest.
 Registered bonds: investors receive interest
automatically by being listed with the company.
 Convertible bonds: bonds with a provision for
being converted to stock.
 Callable bonds: bonds that can be
repurchased by the company before the
maturity date. 24
 Key Terms
 Bond market: the structure for buying and
selling bonds.
 Premium bond: a bond that sells for more
than the face value.
 Discount bond: a bond that sells for less
than the face value.

25
 Read Bond Listings
 There is less activity in the bond market, so
prices are given weekly.
 CLS: closing price
 100% means bonds selling at par value
 Discount bonds have a listing of less than
100%
 Premium bonds have a listing of greater than
100%
26
 How to read bond listings
 There are nine columns in all.
 Columns 1 and 2 give the high and low values
over the past twelve months.
 Column 3 tells the name of the issuing
company, the annual interest rate (expressed as
percent of face value) and the last two digits of
the year of maturity.
 Column 4 (Cur Yld) tells the current yield which
is the ratio of the annual interest earned per
bond and the current price per bond.
27
 Read bond listings (cont.)
 Column 5 (Sales) tells the amount of sales in
$1,000’s.
 Columns 6 and 7 give the weekly high and low
values.
 Column 8 (Weekly Last) tells the closing price
per bond as a percent of the face value per
bond.
 Column 9 (Net Change) tells how much this
week’s closing price per bond differs from the
previous week’s closing price per bond.
28
Table 21-2

29
 Calculate
the Price of Bonds

 Locate the percent of $1,000 that the bond

was selling for at the close of the week
(column 8).

 Multiply the decimal equivalent of the percent

by $1,000.

 Round the product to the nearest cent.

30
 Key Terms

 Yield: a measure of the profitability of the

investment.

 Current bond yield or average bond

yield: the annual interest per bond to the
current price per bond.

31
 Look at this example
 Calculate the closing price of PhilPt bond.

 From column 8, the closing price as a

percent of face value was 103.13% which
is equal to 1.0313.

 Closing bond price = $1,000 x 1.0313

 The closing bond price is $1,031.30

32
 Read Mutual Fund Listings
1. Find the appropriate fund family
(bold entry in column 1).
2. Find the appropriate fund name
(indented entry in column 1).
3. Find the mutual fund symbol in column 2.
4. Find the net asset value (NAV) in column 3.
5. Identify the one-day total change
(Chg) from column 4.
6. Identify the total return for the year to date
(YTD % Ret) from Column 5.
33
 Key Terms
 Portfolio: a variety of types of investments

 Mutual fund or investment trust: a

collection of stocks, bonds, and other securities
that is managed by a mutual fund company

 Net asset value: the value of one share of the

fund. This value fluctuates just as the value of
stocks and bonds fluctuates.

34
 Look at this example
Find the (a) current price per share of LCEDX
fund. What was (b) the price per share
yesterday?
(a) current price per share = $14.09 (NAV)
(b) yesterday’s price = $14.09 - $0.05
= $14.04
 Yesterday’s price per share was $14.04.

35
 How to find the NAV at the beginning
of the year for a mutual fund

1. Divide the current NAV by the sum of:

100% and YTD% return.
Beginning of year NAV = current NAV
100% + YTD% return
2. Round the quotient to the nearest cent.

36
 Look at this example
Using Table 21-3, find the beginning of year
NAV for AWSBX.
Beginning of year NAV = current NAV
100% + YTD%

Beginning of year NAV = 16.48

1.048

 The beginning of year NAV = $15.73.

37
 MARKUP
AND
MARKDOWN
1
 Markup and Markdown
 Find the cost, markup or selling price
when any two of the three are known.
 Find the percent of markup based on the
cost when the cost and selling price are
known.
 Find the selling price when the cost and
percent of markup based on the cost are
known.
(continued)
2
 Markup and Markdown
(continued)

 Find the cost when the amount of markup

and the percent of markup based on the cost
are known.
 Find the cost when the selling price and the
percent of markup based on the cost are
known.

3
Markup = Selling price – Cost

Cost = Selling price - Markup

4
 Try these examples
If an item sells for $20 and has a markup of
$12, what is the cost of the item?
Answer: $8

If an item costs $16 and is sold for $20, what is

the markup of that item?
Answer: $4

5
Find the percent of markup based on the cost
when the cost and selling price are known

When the markup is based on cost

The rate of cost is always 100%

6
 A retailer can buy a shirt from a wholesaler at
$10.00.
 The retailer will add $5.00 to the cost.
 The retailer then sells it for $15.00.

7
 P=RxB

Using the formula

Markup = rate of markup x cost

Change the equation so the rate of markup

is equal to markup divided by the cost.

8
 Rate of markup based on cost
The shirt Cost $10 Rate of 100%
cost
+Markup $5 + Rate of ?
markup
=Selling $15 = Rate of ?
price Selling
price

9
 Five Step Solution Plan
1. What you know…
Rate of cost always equals 100%; MU and C values.

2. What you are looking for?

Rate of markup and rate of selling price

3. Solution plan
Rate of markup = MU divided by cost

4. Solution
Carry out operation

5. Conclusion
Add rate of MU to C to find rate of SP. Does it make sense? 10
 Substitute the known values

 A shirt that costs $10 and sells for $15 has a

markup rate of 50%

 $5 divided by $10 is equal to .5 or 50%

Rate of markup [based on cost] is equal

to 50%

11
 Try these examples
1. Duke’s photography pays $9 for a 5x7
photograph. If the photograph is sold for $15,
what is the percent of markup based on cost?
Answer: 66.67%

2. Lilly buys tea from England for $4 a box and

sells it in “The Tea Party” for $12 a box. Find
the percent of markup based on cost.
Answer: 200%

12
Find the selling price when the cost and percent
of markup based on the cost are known

A boutique pays $5 a pair for handmade

earrings and sells them at a 50% markup
based on cost. Find the selling price of
the earrings.
Cost $5 Rate of Cost 100%

+Mark-up ? Rate of markup +50%

=Selling price ? Rate of SP =150

%
13
 Find the selling price

 The rate of the selling price is found by

adding the rate of cost (100%) to the rate of
markup.

 Selling price = Rate of selling price

(based on cost) x cost

14
 Do these examples
 What is the selling price for a CD which costs
the retailer $8.00 and is marked up 60% based
on cost?
Answer: $12.80

 What is the selling price for a set of hairbrushes

which cost the salon $12.00 and is marked up
150% based on cost?
Answer: $30
15
Find the cost when the amount and
the percent of markup are known

A DVD movie is marked up $6.50

which represents a 40% markup based
on cost. What is the cost of the DVD?
Cost ? RC 100
%
+MU 6.50 +RMU 40%

= SP ? = RSP 140%

16
Find the cost by dividing the markup
amount by the markup rate

 Cost = Markup
Markup rate

 Cost = $6.50
40% [or 0.4]

 Cost = $16.25

17
 Try these two examples
 Find the cost of a box of ballpoint pens which
has been marked up $4 and has a markup rate
of 30%.
Answer: $13.33

 Find the cost of a pair of shoes that has been

marked up $25 and has a markup rate of 50%.
Answer: $50

18
Find the cost when the selling price and the
percent of markup based on cost are known

A camera sells for $20. The markup rate

is 50% of the cost. Find the cost of the
camera and the markup.
Cost ? RC 100
%
+Markup ? +RMU 50%

= Selling price $20 = RSP 150%

19
Find the cost by dividing the selling
price
by the rate of the selling price

 Cost = Selling price

Rate of the selling price

 Cost = $ 20
150% (or 1.5)

 Cost = $13.33

20
 Try these examples
 Find the cost and markup of a bicycle
tire which sells for $18 and is marked up
50% of the cost.
Answer: $12 and $6

 Find the cost and markup of a

moisturizing cream which sells for $30
and is marked up 150% of the cost.
Answer: $12 and $18
21
 Markup based on selling
price and markup comparisons
 Find the amount of markup and the percent
of markup based on selling price when the
cost and selling price are known.

 Find the selling price when the amount of

markup and the percent of markup based on
selling price are known.

(continued)

22
 Markup based on selling price
and markup comparisons
(continued)

 Find the selling price when the cost and the

percent of markup based on the selling price
are known.
 Find the cost when the selling price and the
percent of markup based on the selling price
are known.
 Compare the markup based on cost with the
markup based on selling price.
23
 Take note!

 In the previous section, the markup based on

cost, the rate of cost was always 100%.

 In this section, the markup based on selling

price, the rate of selling price is always
100%.

24
 Find the amount of markup
and the percent of markup
A calculator costs $5 and sells for $10.
Find the rate of markup based on the
selling price.
Cost $5 Rate of Cost ?

+Markup ? +Rate of ?
Markup
= Selling price $10 = Rate of 100%
Selling price
25
 Find the rate of markup by dividing the markup
by the selling price and multiplying it by 100%

 The markup amount is the difference

between the selling price and the cost.

 Divide the markup by the selling price to get

the difference and then multiply it by 100%,
to get the rate of markup.

26
 Find the amount of markup and the percent of
markup (based on SP ) for the following items:

 A dog collar which costs $4 and sells for $10.

Answer: $6 and 60%

 A notebook which costs $1.25 and sells for

$2.
Answer: $.75 and 37.5%

27
 Find the selling price when the amount
of markup and the percent of markup
based on the selling price are known

 Subtract the percent of markup from 100% to

obtain the rate of cost.

 Divide the markup by the rate of markup based

on SP

28
 Find the cost and selling price
if a handbag is marked up $5 with a
20% markup rate based on selling price

Cost ? RC ?

+ MU $5 +RMU 20%

= SP ? = RSP 100 %

29
 Find the selling price and
the amount of the markup

 SP = Markup
Rate of Markup based on selling price

 SP = $5
20% or [0.2]

 SP = $ 25

30
 Find the selling price and
amount of markup based on
selling price for the following items:

 A cell phone which has been marked up $50 and

with a markup rate of 33% based on selling
price.
Answer: $150

 A pair of socks which has been marked up $3

and with a markup rate of 60% based on selling
price.
Answer: $5

31
 Find the selling price when the
cost and the percent of markup
based on selling price are known

 Subtract the rate of markup from 100% to

determine the rate of cost.

 Selling price = Cost [divided by]

Rate of Cost based on SP

32
 Find the selling price and markup for
a pair of jeans which costs the retailer $28

What is the selling price?

Cost $28 RC ?

+ MU ? + RMU 30%

= SP ? = RSP 100%

33
 To find the selling price,
divide the cost by the rate of cost

 SP = Cost
Rate of cost

 SP = $28
70% [ = 0.7]

 SP = $40

34
 Find the selling price and markup (based
on selling price) for the following items:

A handheld calculator that costs the retailer $2

and is marked up 60%.
Answer: $5 and $3

A box of gourmet chocolates that costs $8 a box

and is marked up 75%.
Answer: $32 and $24

35
 Find the cost when the selling
price and percent of markup
based on selling price are known

Subtract the rate of markup from the rate

of selling price to determine the rate of
cost.

Cost = Rate of Cost x Selling Price

36
 Find the markup and cost of a box of pencils
that sells for $2.99 and marked up 25% of the
selling price

First, find the rate of cost.

Cost ? RC ?

+ MU ? +RMU 25%

= SP $2.99 = RSP 100

%
37
 Compare the markup based on cost
with markup based on selling price
Find the markup based on cost and the
markup based on selling of a computer that
costs $1,500 and sells for $2,000.

Cost 1500 RC 100 Cost 1500 RC ?

%
+MU 500
+R ? +MU 500 +R ?
MU MU
= SP 2000 =RSP ? =SP 2000 =RS 100
P %
38
 What is the difference?

 The percentage of markup based on cost is

33.33%.

 The percentage of markup based on selling

price is 25%.

 What accounts for the difference?

39
 Converting a markup based on
selling price to a markup based on
cost

The markup rate based on cost is

equal to the markup rate based on
selling price divided by 100% minus
the markup rate based on selling price.

40
 Converting a markup
based on cost, to a markup
based on selling price

The markup rate based on selling price is

equal to the markup rate based on cost
divided by the markup rate based on cost
plus 100%.

41
 Markdown, Series of Markdowns
and Perishables

 Find the amount of markdown, the reduced

(new) price, and the percent of the
markdown.
 Find the final selling price for a series of
markup and markdowns.
 Find the selling price for a desired profit on
perishable and seasonal goods.

42
Find the amount of markdown,
the reduced (new) price and
the percent of the markdown

The original selling price

is always 100%

43
 Find the markdown and
rate of markdown

 The markdown is found by subtracting the new

price from the original price.

 The markdown rate is found by dividing the

markdown by the original price and multiplying
that figure by 100%.

44
A lamp originally sold for $36 and is
marked down to sell for $30. Find the
markdown and rate of markdown.

$ %

Original Selling
Price (S) $36 100%

-Markdown $6 ?
= New Price $30 ?

45
 Find the final selling price for a series
of markup and markdowns

 Each new price becomes the base.

 For markups based on cost, multiply the

base by 1 + the rate of markup.

 For markdowns, multiply the base by the

complement of the rate of markdown.
46
 Find the final selling price

Find the final price for an item that cost

$18, marked up by 20% and then, was
marked down 33%, and subsequently
marked up 10% and finally marked down
by 50% for clearance.
Answer: $7.91

47
 Find the selling price for a desired
profit on perishable and seasonal goods

 Determine the cost by multiplying the unit price

by the quantity.

 Determine the markup rate and amount and add

to the cost.

 Establish the expected to sell amount.

 Divide the total selling price by the expected to

sell amount.
48
 Find the per pound selling price

 Mr. Green buys 100 pounds of tomatoes at $.15

lb. and establishes a markup rate of 120%
based on cost. What is the total cost?
 TC = $15 + MU=$18 =Total SP =$33
 He expects to sell 90%. How many pounds is
he expected to sell?
 Expected to sell = 90
 Divide the TSP by “expected to sell” number.
 SP = $0.37 lb. (rounded)
49
PAYROLL, COMMISSION
AND TAXES

1
 Gross Pay
 Find the gross pay per paycheck based on
salary.
 Find the gross pay per weekly paycheck
based on hourly wage.
 Find the gross pay per paycheck based on
piecework wage.
 Find the gross pay per paycheck based on
commission.

2
 Find the Gross Pay
Per Paycheck Based on Salary

Pay periods
 Weekly: once a week or 52 times a year.
 Biweekly: every two weeks or 26 times a
year.
 Semimonthly: twice a month or 24 times
a year.
 Monthly: once a month or 12 times a
year.
3
 Find the gross
earnings per pay period

 Nicole earns $36,000 a year. If she is

paid on a weekly basis, what is her gross
pay per week?
 Divide $36,000 by 52 pay periods.
 $692.31
 What if she is paid on a semimonthly
basis?
 $1,500.00 4
 Try these examples
Find the gross earnings for:
 Carolyn, who earns $15,000 a year and is paid
weekly.
 $288.46

 Martha, who earns $48,000 a year and is paid

biweekly.
 $1,846.15

 Bill, who earns $35,000 a year and is paid

semimonthly.
 $1,458.33
5
 Key Terms
 Gross earnings (gross pay): the amount
earned before deductions.

 Net earnings (net pay/take-home pay):

the amount of your paycheck.

6
 Key Terms

 Hourly rate or hourly wage: the amount

of pay per hour worked based on a standard
40 hour work week.

 Overtime rate: rate of pay for hours

worked that exceed 40 hours per week.

 Time and a half: standard overtime rate

that is 1½ (or 1.5) times an hourly rate.

7
Key Terms

 Regular pay: earnings based on an

hourly rate of pay.

 Overtime pay: earnings based on

overtime rate of pay.

8
 Find the Gross Pay Per Week
Based on Hourly Wages

1. Find the regular pay by multiplying the

number of hours (40 or less) by the hourly
wage.
2. Find the overtime pay by multiplying the
hourly rate by the overtime rate (usually
1.5) and then multiply that rate by the
number of hours that exceed 40.
3. Add the figures from steps 1 and 2.

9
 Here’s an example
 Theresa worked 45 hours last week. If her
hourly rate is $10.50 per hour, find her total
gross earnings.
 Multiply 40 x $10.50 = $420.00
 To calculate the overtime amount, multiply her
hourly rate by 1.5: $10.50 x 1.5 = $15.75
 Multiply the overtime rate ($15.75) x the
number of overtime hours (5): $15.75 x 5 =
$78.75
 Add the regular and overtime pay: $498.75 10
 Try these examples

 The regular hourly rate in the production department

for these employees is $6.50, and overtime is paid
at 1.5.

 Find the weekly earnings for these employees:

 Marcus worked 48 hours.
 $338
 Allison worked 44 hours.
 $299

11
 Find the Gross Pay Per
Paycheck Based on Piecework

 Piecework rate: amount of pay for each

acceptable item produced.
 Straight piecework rate: piecework rate
where the pay per piece is the same no
matter how many items are produced.
 Differential piece rate (escalating piece
rate): piecework rate that increases as more
items are produced.

12
 Here’s an example

 Jorge assembles microchip boards. He is paid

on a differential piecework basis.
 Rates are as follows:
 From 1-100 $1.32 per board
 From 101-300 $1.42 per board
 301 and over $1.58 per board
 If he assembles 317 boards how much will he
earn?
13
 Jorge’s earnings

 100 x $1.32 = $132.00

 101 to 300 = 200 x $1.42= $284.00
 17 x $1.58 = $ 26.86
 Total earnings: $442.86

14
 Try this example
Jillian gets paid a differential piece rate for each
shirt she sews. Consult the chart below and
calculate her weekly earnings if she sewed 352
shirts last week.
 From 1-100: $0.47 each
 From 101-300: $0.60 each
 301 and above: $0.70 each
 What were her earnings?
 $203.40
15
 Find the Gross Pay Per Paycheck
Based on Commission

 Commission: earnings based on sales.

 Straight commission: entire pay based on
sales.
 Salary plus commission: a set amount of pay
plus an additional amount based on sales.
 Commission rate: percent of sales that are
eligible for a commission.
 Quota: a minimum amount of sales that is
required before a commission is applicable.

16
 Here’s an example
Marisa is a restaurant supplies salesperson and
receives 6% of her total sales as commission.
Her sales totaled $12,000 during a given week.
Find her gross earnings.

 Use the formula: P = R x B to find her earnings.

 P = 0.06 x $12,000 = $720
 Marisa’s earnings equal $720

17
 Try this example

 Melanie Brooks works for a cosmetics company

and earns $200 a week in salary plus 30%
commission on all sales over $500. If she had
sales of $1,250 last week, how much were
her total earnings?
 Her salary would be $200 plus any applicable
commission.
 The commission would be calculated at 30% on
$750 in sales or $225. Add this amount to her
base salary and the total is $425.
18
 Payroll Deductions
 Find federal tax withholding per paycheck
using IRS tax tables.
 Find federal tax withholding per paycheck
using the IRS percentage method.
 Find Social Security and Medicare tax per
paycheck.
 Find net earnings per paycheck.

19
 Key Terms

 Income tax: local, state of federal tax paid on

one’s income.
 Federal tax withholding: the required
amount to be withheld from a person’s pay to be
paid to the federal government.
 Tax-filing status: status based on whether
the employee is married, single, or head of
household; determines the tax rate.
 W-4 form: required form to be held by the
employer for determining the amount of federal
tax to be withheld.
20
 Find Federal Tax Withholding per
Paycheck Using IRS Tax Tables

 To calculate federal withholding tax using the IRS tax

tables, an employer must know:
 The employee’s filing status (single, married or
head of household)
 The number of withholding allowances the
employee claims
 The type of pay period
 The employee’s adjusted gross income

21
 Adjusted gross income
 Allowable adjustments to the gross income,
such as qualifying IRAs, tax-sheltered
annuities, 401Ks, or employee-sponsored
childcare or medical plans.

Tax-free or tax-deferred benefits

22
 Find the withholding tax
Using the tax tables in your text, find the
amount of tax to be withheld for the following
employees:
 LeShonda, single, paid semimonthly, claiming
one allowance, and earning $1,700 per pay
period.
 $220

 Ricardo, married, paid weekly, claiming 4

allowances and earning $585 per pay period.
 $17 23
Find Federal Tax Withholding per
Paycheck Using the IRS Percentage Method

 Instead of using tax tables, many companies

calculate federal tax withholding using tax
rates.
 In order to use tax rates, the employer must
deduct from the employee’s adjusted gross
income a tax-exempt amount based on
the number of withholding allowances
the employee claims.
 The resulting amount is called the
percentage method income.
24
 How to find the withholding tax using
the percentage method

 Find the exempt-per-allowance amount from the

withholding allowance table, identifying the amount
exempt for one withholding allowance according to the
type of pay period.

 Multiply the number of withholding allowances claimed

by the amount found in the previous step.

 Subtract the exempt amount from the employee’s

adjusted gross income for the pay period.

25
 Calculate the amount
 Dollie Calloway’s biweekly gross earnings
are $3,150. She is single, has no
adjustments to income and claims two
withholding allowances on her W-4 form.
 Find the payroll period using figure 10-4 in
your text and multiply the withholding
allowance amount by two.
 Biweekly: $130.77 x 2 = $261.54

26
 Continue with the following
steps

 Subtract the exempt amount ($261.54) from the

adjusted gross income ($3,150.00) and the
result is $2,888.46.
 Consult the tax tables shown in Figure 10-5 in
your text.
 Table 2a is the appropriate table for Dollie’s
earnings: single and paid on a biweekly basis.

27
 Continue
 Identify the appropriate line where her income falls:
“over $1,289 but less than $2,964”
 The tax is $163.70 plus 25% in excess of $1,289.
 $ 2,888.46 (taxable income) - $1,289 =
$1599.46 x 25% = $399.87
 Add $399.87 + 163.70 = $563.57
 The amount of tax to be paid is $563.57.

28
 Find Social Security and
Medicare Tax per Paycheck

 Find the amount of the earnings subject to be

taxed; adjusted gross income less than or
equal to $97,500 annually.

 Social Security taxes are currently capped at

$97,500. (This threshold can change.)

 Multiply the taxable amount by 6.2% or 0.062

to find the amount in Social Security taxes.

29
Find the Medicare tax
amount
 The Medicare tax amount is calculated at
1.45% (or 0.0145) of the adjusted gross
income.
 Unlike Social Security, there is no cap on
income level.
 Example: Joe’s gross pay is $1,654. How
much does he owe in Social Security and
Medicare taxes?
 SS = $102.55 and Medicare = $23.98

30
 Employers pay an equal
amount

 Employers also pay 6.2% for Social Security

and 1.45% for Medicare of each employee’s
gross pay.

 A self-employed person must pay the

equivalent of both amounts: 12.4% in Social
Security and 2.9% in Medicare.

31
 Find the Net
Earnings per Paycheck

 Find the gross pay for the pay period.

 Find the adjustments to income deductions,
such as retirement or insurance.
 Find the Social Security and Medicare tax
based on the adjusted gross income.
(continue on next slide)

32
 Find the net earnings
 Find the Federal withholding tax using one of the two
methods. (tables or percentage)
 Find other withholding taxes, such as state tax.
 Find other deductions such as insurance or union
dues.
 Find the sum of all the deductions and subtract that
amount from the gross pay.
 The resulting amount is the take-home pay.

33
 Try this example

 Beth’s gross weekly earnings are $588. Four

percent of her gross earnings is deducted for
her nonexempt retirement fund and $27.48 is
deducted for insurance.
 Find her net earnings if Beth is married and
claims three withholding allowances.
 See next slide for individual calculations.

34
 Beth’s take-home pay
 Retirement fund = $588 x .04 = $23.52
 Withholding tax from Figure 10-3 = $24
 Social Security = $588 x 0.062 = $36.46
 Medicare = $588 x 0.0145 = $8.53
 Insurance = $27.48
 Total deductions = $119.99
 Net earnings = $588 - $119.99 = $468.01
35
 The Employer’s Payroll Taxes

 Find an employer’s total deposit for

withholding tax, Social Security tax and
Medicare tax per pay period.

 Find an employer’s SUTA and FUTA tax due

for a quarter.

36
 Find the Employer’s
Total Deposit for Withholding Tax,
Social Security Tax and Medicare Tax

 Find the total of withholding tax for all employees for the
pay period.
 Find the Social Security tax for all employees for the period
and multiply by two to include the employer’s portion.
 Find the Medicare tax for all employees for the period and
multiply by two to include the employer’s portion.
 Add the Social Security, Medicare and withholding tax amounts
for total amount.

37
 Find the employer’s total
deposit
Employe Gross Withholdi Social Medicar Net
e Earning ng Securit e Earnings
s y
Plumlee $1,050 $57.73 $65.10 $15.23 $911.94

Powell 2,085 168.05 129.27 30.23 1,757.45

Randle 1,995 174.80 123.69 28.93 1,667.58

Robinson 2,089 350.45 129.52 30.29 1,578.74

38
Find the employer’s
deposit

Employee’s Employer’s
Contribution Contribution Total
Social
Security $447.58 $447.58 $895.16
Medicare $104.68 $104.68 $209.36
Withholding $751.03 0 $751.03
$1,855.
Total Employer Deposit 55

39
 Find the Employer’s SUTA Tax
and FUTA Tax for a Quarter

 FUTA (Federal State Unemployment Tax Act) and

SUTA (State Unemployment tax) are paid entirely
by the employer and do not affect the employee’s
paycheck.
 FUTA is currently 6.2% of the first $7,000 earned
by an employee in a year minus any amount
the employer has paid in SUTA (up to 5.4%).
 FUTA and SUTA are paid on a quarterly basis.

40
 FUTA and SUTA
 The amount a company pays in SUTA will
depend on a company’s unemployment
history.
 If an employer pays 5.4% in SUTA, then the
company will pay 0.8% in FUTA.
 If the amount owed in FUTA in a given
quarter is less than $100, then no payment is
made that quarter and the amount is added
to the following quarter.

41
 Calculate the SUTA and
FUTA
 George earns $40,000 a year. If the SUTA
rate is 5.4%, calculate the amount of SUTA
that George’s employer will pay on his behalf
for the first quarter. Then, calculate the
amount of FUTA. [Remember, it is calculated
only on the first $7,000 in income.]

SUTA = $378
 FUTA = $ 56

42
SIMPLE AND
COMPOUND
INTEREST
1
 Compound Interest
and Future Value
 Find the future value and compound interest by
compounding manually.

 Find the future value and compound interest by using

a $1.00 future value table.
 Find the future value and compound interest using a
formula (optional).

 Find the effective interest rate.

 Find the interest compounded daily using a table.

2
 Simple and Compound
Interest
 In some loans, interest is computed once during
the life of the loan, using the simple interest
formula.
 In other loans, interest is computed more than
once during the life of the loan or investment.
 The interest is added to the principal and that
amount becomes the principal for the next
calculation of interest.
 This process is called compounding interest.
3
 Key Terms

 Interest period: the amount of time which interest is

calculated and added to the principal.
 Compound interest: the total interest that
accumulated after more than one interest period.
 Future value, maturity value, compound amount:
the accumulated principal and interest after one or more
interest periods.
 Period interest rate: the rate for calculating interest
for one interest period-the annual interest rate is divided
by the number of periods per year.
4
 Find the Future Value and Compound
Interest by Compounding Manually

 Dividing the annual interest rate by the annual

number of interest periods gives us the period
interest rate.

 12% annual interest rate divided by 2 interest

periods yields a period interest rate of 6%, for
example.

 Using I = P x R x T, we can calculate the

interest per period, simplifying the formula to
I = P x R, since T is one period.
5
Find the period interest rate

Period interest rate =

Annual interest rate

Number of interest periods per year

6
 Find the period interest rate
for:
 A 12% annual interest rate with 4 interest
periods per year.
 3%

 An 18% annual rate with 12 interest

periods per year.
 1 ½ %

 An 8% annual rate with 4 interest periods

per year.
 2%
7
 Find the future value
Using the simple interest formula
method:
1. Find the end of period principal: multiply
the original principal by the sum of 1 and
the period interest rate.
2. For each remaining period in turn, find the
next end of period principal: multiply by the
previous end of period principal by the sum
of 1 and the period interest rate.
3. Identify the last end-of-period principal as
the future value. 8
 Look at this example
Find the future value of a loan of $800 at 13%
for three years.
 The period interest rate is 13% since it is
calculated annually.
 First end-of-year = $800 x 1.13 = $904
 Second end-of-year =$904 x 1.13 = $1021.52
 Third end-of-year = $1021.52 x 1.13 = $1,154.32
 The FV of this loan is $1,154.32

9
 Find the compound interest
 Compound interest =
future value – original principal
 In the previous example, the compound interest
is equal to the future value – original principal.
 CI = $1,154.32 - $800 = $354.32
 The compound interest = $354.32

10
 Compare the compound interest
amount to the simple interest

 CI = $354.32
 Simple interest for the same loan would be:
 I = PRT
 I = $800 x 0.13 x 3 = $312.00
 Simple interest would be $312.00
 The difference between compound interest and
simple interest for this loan = $354.32 - $312
 The difference is $43.32 11
 Find the FV of an
investment
 Principal = $10,000
 8% annual interest rate, compounded semi-
annually
 Find the FV at the end of three years.
 Find the period interest rate: 8% ÷ 2 = 4%
 Determine number of periods: 3 x 2 = 6
 Calculate each end-of-period principal.
 Period 1 = 10,000 x 1.04 = $10,400
12
 Find the FV of an
investment
 Second end-of-period principal =
$10,400 x 1.04 = $10,816

 Calculate each end-of-principal through the

sixth end-of-period principal.

 What is the final end-of-principal amount?

 $12,653.19

13
 Using a $1.00 FV Table
 Since it would be tedious and time-
consuming to calculate a large number of
periods with the previous method, we can
use Table 13-1, which is the future value or
compound amount of $1.00.
 Find the number of periods and the rate
per period to identify the value by which
the principal is multiplied.

14
 Look at this example

 Using Table 13-1, find the compound interest on $500

for six years compounded annually at 8%.
 Determine the number of periods: 6
 Determine the interest rate per period: 8%
 Locate the value in the intersecting cell: 1.58687
 Multiply the principal, $500, x 1.58687 = $793.44
 The FV of the loan is $793.44.
 Compound interest = $793.44- $500 = $293.44

15
 Try this example
 Using Table 13-1, find the future value and
compound interest on $2,000 invested for
four years compounded semiannually at 8%.
 FV = $2,737.14
 CI = $737.14

 What would the simple interest be for the

same loan?
 $640
16
 Find the Future Value and Compound
Interest Using a Formula (optional)

 The future value formula is:

FV = P (1  R ) N
where FV is the future
value, P is the principal, R is the period
interest rate, and N is the number of
periods.

 The formula for finding future value will

require a calculator that has a power
function.

17
Try this example
 Find the future value and compound interest
of a 3-year $5,000 investment that earns
6% compounded monthly.
 FV = P(1  R)
N

 FV = 5,000(1  .005)36

 FV = $5,983.40
 CI = $5,983.40 – $5,000 = $983.40

18
 Find the Effective
Interest Rate

 Effective interest rate is also called the annual

percentage yield or APY when identifying rate
of earning on an investment.
 It is called APR, annual percentage rate, when
identifying the rate of interest on a loan.
 Effective rate: the equivalent simple interest
rate that is equivalent to a compound rate

19
Look at this example
 Marcia borrowed $600 at 10% compounded
semiannually. What is the effective interest
rate?
 Using the manual compound interest
method:
 Period rate interest = 10% / 2 = 5% = 0.05
 First end-of-period principal = $600 x 1.05 =
$630
 Second end-of-principal = $630 x 1.05 =$661.50
 Compound interest after first year =
$61.50 20
 Effective interest rate
Annual effective interest rate =
$61.50
$600
Multiplied by 100%
= 0.1025 x 100%
= 10.25%
Using the table method (Table 13-1):
The table value is 1.10250. Subtract 1.00 and
multiply by 100%. The effective rate is
10.25% 21
 Find the Interest Compounded
Daily Using a Table

 Table 13-2 gives compound interest for $100

compounded daily (using 365 days as a year.)
 Pay attention to the table value given. Table
13-2 uses $100 as the principal amount;
other tables may use $1, $10 or other amounts.
 Using Table 13-2 is exactly like using Table 11-2
which gives the simple interest on $100.

22
 Look at this example
 Find the interest on $800 at 7.5% annually,
compounded daily for 28 days.
 Divide the principal by $100 as you are using
Table 13-2. [$800 ÷ 100 = 8]
 Find the corresponding value by intersecting the
number of days (28) and annual interest rate
(7.5%) = 0.5769413
 Multiply this value by 8 = $4.62
 The compounded interest is $4.62
23
 Try this example

 Find the interest on $1,000 for 30 days

compounded at a 6% annual rate.
 Answer:
Divide $1,000 ÷ 100 = 10
Locate the cell where 30 days and 6% intersect
to determine the value: 0.4943279
Multiply by 10.
The interest is $4.94

24
 Present Value
 Find the present value based on annual
compounding for one year.
 Find the present value using a $1.00
present value table.
 Find the present value using a formula
(optional).

25
 Find the Present Value Based on
Annual Compounding for One Year

 Suppose you want to go on a long vacation in a

couple of years…or pay for your child’s college
education. How much money would you have to
invest right now to be able to pay for it?
 Using the concepts of compound interest, you
can determine amounts needed now to cover
expenses in the future.
 The amount of money you set aside now is
called present value.
26
 Present value

 The simplest case would be annual

compounding interest for one year:
the number of interest periods is 1 and the
period interest rate is the annual interest rate.

 Principal (present value) = future value

1 + annual interest
rate*

* denotes decimal equivalent

27
 Look at this example
 Find the amount of money that The 7th Inning
needs to set aside today to ensure that $10,000
will be available to buy a new large screen
plasma television in one year if the annual
interest rate is 4% compounded annually.

 PV = 10,000
1.04 = $9,615.38

 An investment of $9,615.38 at 4% would

have a value of $10,000 in one year. 28
 Try these examples
 Calculate the amount of money needed now to
purchase a laptop computer and accessories
valued at $2,000 in a year if you invest the
money at 6%.
 $1,886.79

 John wants to replace a tool valued at $150 in a

year. How much money will he have to put into
a savings account that pays 3% annual interest?
 $145.63
29
 Use a $1.00
Present Value Table

 Using a present value table is the most

efficient way to calculate the money needed
now for a future expense or investment.

 Table 13-3 shows the present value of $1.00 at

different interest rates for different periods.

30
 How to use the table

1. Find the number of interest periods: multiply the time

period in years by number of interest periods per year.
Interest periods = number of years x
number of interest periods per year

2. Find the interest rate: divide the annual interest rate

by the number of interest periods per year.
Period interest rate = annual interest rate
Number of interest periods per year

31
 Using the table (continued)
3. Select the periods row corresponding to the
number of interest periods.

4. Select the rate per period column corresponding

to the period interest rate.

5. Locate the value in the cell where the periods

row intersects the rate-per-period column.

6. Multiply the future value by value from step 5.

32
 Look at this example
 The 7th Inning needs $35,000 in 4 years to buy
new framing equipment. How much should be
invested at 4% interest compounded annually?
 4 periods at 4% shows a value of 0.85480
 Multiply this value by $35,000
 The result is $29,918
 They must invest $29,918 at 4%
compounded annually for four years to
have $35,000
33
 Try these examples
 How much money would you have to invest for
5 years at 6% paid semi-annually to make a
down payment of $20,000 on a house?
 $14,881.80

 How much money would you have to invest for

3 years at 10% paid semi-annually to purchase
an automobile that costs $20,000?
 $14,924.40
34
 Find the Present Value
Using a Formula (optional)

 The present value formula is:

FV
(1  R) N
PV =

where PV is the present value, FV is the

future value, R is the period interest rate,
and N is the number of periods.

35
Try this example
 Find the present value required at 5.2%
compounded monthly to total $8,000 in three
years.
FV
(1  R) N
 PV =

 Period int. rate = 5.2%/12 = .0043333333

8, 000
 PV = = $6,846.78
(1.0043333333)36
36
SIMPLE INTEREST
AND
SIMPLE DISCOUNT

1
The Simple Interest Formula
 Find simple interest by using the simple
interest formula.
 Find the maturity of a loan.
 Convert months to a fractional or decimal
part of the year.
 Find the principal, rate or time using the
simple interest formula.

2
 Key Terms
 Interest: an amount paid or earned for the
use of money.
 Simple interest: interest earned when a loan
or investment is repaid in a lump sum.
 Principal: the amount of money borrowed or
invested.
 Rate: the percent of the principal paid as
interest per time period.
 Time: the number of days, months or years
that the money is borrowed or invested.
3
 The Simple Interest Formula

 The interest formula shows how interest, rate,

and time are related and gives us a way of
finding one of these values if the other three
values are known.

I=PxRxT

4
Find the simple interest using
the simple interest formula

5
 Identify the principal,
rate and time
P=RxB
 The interest is a percentage.
 Principal is the amount borrowed or invested.
 Rate of interest is a percent for a given time
period, usually one year.
 Time must be expressed in the same unit of
time as the rate. (i.e. one year)

6
Find the interest paid on a
loan
 Principal = (P) $1,200
 Interest rate = 8% (or 0.08)
 Time = 1 year
 Interest = P x R x T
 Interest = 1,200 x 0.08 x 1
 Interest = $96
 The interest on the loan is $96.
7
Try these examples

 Find the interest on a 2-year loan of $4,000 at

a 6% rate.
 $480

 Find the interest earned on a 3-year

investment of $5,000 at 4.5% interest.
 $675

8
 Find the Maturity
Value of a Loan

 Maturity value: the total amount of money due

by the end of a loan period; the amount of the
loan and interest.
 If the principal and the interest are known, add
them.
 MV = principal + PRT
 MV = P(1+RT)

9
Look at this example
 Marcus Logan can purchase furniture on a
2-year simple interest loan at 9% interest per
year.
 What is the maturity value for a $2,500 loan?
 MV = P (1 + RT) Substitute known values.
 MV = $2,500 ( 1 + 0.09 x 2)
(See next slide)

10
What is the maturity value?

 MV = $2,500 ( 1 + 0.09 x 2)
 MV = $2,500 (1 + 0.18)
 MV = $2,500 (1.18)
 MV = $2,950
 Marcus will pay $2,950 at the end of two
years.

11
 Try these examples

 Terry Williams is going to borrow $4,000 at 7.5%

interest. What is the maturity value of the loan
after three years?
 $4,900

 Jim Sherman will invest $3,000 at 8% for 5

years. What is the maturity value of the
investment?
 $4,200

12
 Convert Months to a
Fractional or Decimal Part of a Year

 Write the number of months as the

numerator of a fraction.
 Write 12 as the denominator of the fraction.
 Reduce the fraction to lowest terms if using the
fractional equivalent.
 Divide the numerator by the denominator to get
the decimal equivalent of the fraction.

13
 Convert the following to
fractional or decimal part of a year

 Convert 9 months and 15 months, respectively,

to years, expressing both as fractions and
decimals.
 9/12 = ¾ = 0.75
 9 months = ¾ or 0.75 of a year
 15/12 = 1 3/12 = 1 ¼ = 1.25
 15 months = 1 ¼ or 1.25 of a year.

14
 Look at this example

 To save money, Stan Wright invested $2,500 for

42 months at 4 ½ % simple interest. How
much interest did he earn?
 42 months = 42/12 = 3.5
 I=PxRxT
 I = $2,500 x 0.045 x 3.5
 I = $393.75
 Stan will earn $393.75 15
 Try these examples
 Akiko is saving a little extra money to pay for
her car insurance next year. If she invests
$1,000 for 18 months at 4%, how much interest
can she earn?
 $60

 Habib is going to borrow $2,000 for 42 months

at 7% . What will the amount of interest owed
be?
 $490
16
Find the Principal, Rate or Time Using
the Simple Interest Formula

17
 Find the principal using
the simple interest formula

 P = I / RT
 Judy paid $108 in interest on a loan that she
had for 6 months. The interest rate was 12%.
How much was the principal?
 Substitute the known values and solve.
 P = 108/ 0.12 x 0.5
 P = $1,800
18
 Find the rate using the
simple interest formula

 R = I / PT
 Sam wants to borrow $1,500 for 15 months and
will have to pay $225 in interest. What is the
rate he is being charged?
 Substitute the known values and solve.
 R = 225/ $1,500 x 1.25
 R = .12 or 12%
 The rate Sam will pay is 12%.

19
 Find the time using the
simple interest formula
 T = I / RP
 Shelby borrowed $10,000 at 8% and paid $1,600
in interest. What was the length of the loan?
 Substitute the known values and solve.
 T = $1,600/0.08 x $10,000
 T=2
 The length of the loan was two years.
20
 Ordinary and Exact Interest

 Find exact time.

 Find the due date.

 Find the ordinary interest and the exact

interest.

 Make a partial payment before the maturity

date.
21
 Find Exact Time

 Ordinary time: time that is based on

counting 30 days in each month.

 Exact time: time that is based on counting

the exact number of days in a time period.

22
 Examples
 The ordinary time from July 12 to September
12 is 60 days.
 To find the exact time from July 12 to
September 12, add the following:
Days in July (31 - 12 =) 19
Days in August 31
Days in September +12
62 days
23
 Sequential Numbers for
Dates of the Year
 Find the exact time of a loan using the sequential
numbers table.
(Table 11-1 in the text)
 If the beginning and due dates of the loan fall
within the same year, subtract the beginning
date’s sequential number from the due date’s
sequential number.
 Ex.: From May 15 to October 15
 288-135 = 153 days is the exact time
24
 Beginning and due
dates in different years

 Subtract the beginning date’s sequential

number from 365.

 Add the due date’s sequential number to the

result from the previous step.

 If February 29 falls between the two dates,

add 1. (Is it a leap year?)

25
 Look at this example

 Find the exact time from May 15 on Year 1 to

March 15 in Year 2.
 365 – 135 = 230
 230 + 74 = 304 days
 The exact time is 304 days.
 Note: If Year 2 is a leap year, the exact time is
305 days.
26
 Try this example
 A loan made on September 5 is due July 5 of the
following year.
 Find: a) ordinary time
b) exact time in a non-leap year
c) exact time in a leap year.
 Ordinary time = 300 days
 Exact time (non-leap year) = 303 days
 Exact time (leap year) = 304 days
27
 Find the Ordinary Interest
and the Exact Interest

 Ordinary interest: a rate per day that assumes

360 days per year.
 Exact interest: a rate per day that assumes
365 days per year.
 Banker’s rule: calculating interest on a loan
based on ordinary interest and exact time
which yields a slightly higher amount of interest.

28
 Find the ordinary interest
per day

 For ordinary interest rate per day, divide the

annual interest rate by 360.

Ordinary interest rate per day =

Interest rate per year

360

29
Find the exact interest per
day
 For exact interest rate per day, divide the
annual interest rate by 365.

Exact interest rate per day =

Interest rate per year

365

30
 Use ordinary time to find
the ordinary interest on a loan

 A loan of $500 at 7% annual interest rate. The

loan was made on March 15 and due on May 15.
(Principal = $500) I = P x R x T
 Length of loan (ordinary time) = 60 days
 Rate = 0.07/360 (ordinary interest)
 Interest = $500 x 0.07/360 x 60
 Interest = $5.83

31
 Find the ordinary interest using exact
time for the previous loan

 A loan of $500 at 7% annual interest rate. The

loan was made on March 15 and due on May 15.
(Principal = $500) I = P x R x T
 Length of loan (exact time) = 61 days
 Rate = 0.07/360 (ordinary interest)
 Interest = $500 x 0.07/360 x 61
 Interest = $5.93

32
 Find the exact interest using
exact time for the previous loan

 A loan of $500 at 7% annual interest rate. The

loan was made on March 15 and due on May 15.
(Principal = $500) I = P x R x T
 Length of loan (exact time) = 61 days
 Rate = 0.07/365 (exact interest)
 Interest = $500 x 0.07/365 x 61
 Interest = $5.84
33
 Make a Partial Payment Before
the Maturity Date
To find the adjusted principal and adjusted
balance due at maturity for a partial payment
made before the maturity date:
1. Determine the exact time from the date of the
loan to the first partial payment.

2. Calculate the interest using the time found in

Step 1.

(continue on next slide)

34
 Make a Partial Payment Before
the Maturity Date
3. Subtract the amount of interest found in Step 2
from the partial payment.
4. Subtract the remainder of the partial payment
(Step 3) from the original principal. This is the
adjusted principal.
5. Repeat process for additional partial payments.
6. At maturity, calculate interest from the last
partial payment and add to adjusted principal.
This is the adjusted balance due at
maturity.
35
Look at this example
 Tony borrows $5,000 on a 10%, 90 day note.
On the 30th day, Tony pays $1,500 on the note.
If ordinary interest is applied, what is Tony’s
adjusted principal after the partial payment, and
adjusted balance due at maturity?
 $5,000(.1)(30/360) = $41.67
 $1,500 - $41.67 = $1,458.33
 $5,000 - $1,458.33 = $3,541.67 (Adj.
Principal)
 $3,541.67(.1)(60/360) = $59.03 (Interest)
 $3,541.67 + $59.03 = $3,600.70 (Adj.
Balance) 36
 Promissory Notes

 Find the bank discount and proceeds for a

simple discount note.

 Find the true effective interest rate of a

simple discount note.

 Find the third-party discount and proceeds

for a third-party discount note.

37
Find the Bank Discount and Proceeds
for a Simple Discount Note

 For the bank discount, use:

Bank discount = face value x disc. rate x time
[I = P x R x T]

 For the proceeds, use:

Proceeds = face value – bank discount
A=P-I

38
A promissory note

39
 Find the True of Effective Interest
Rate of a Simple Discount Note

To find the true or effective interest rate of a

simple discount note:
1. Find the bank discount (interest).
I = PRT
2. Find the proceeds:
proceeds = principal – bank discount.
3. Find the effective interest rate: R = I/PT
using the proceeds as the principal

40
Try this example
 What is the effective interest rate of a $5,000
simple discount note, at an ordinary bank
discount rate of 12%, for 90 days?
 I = PRT; I = $5,000(.12)(90/360)

 I = $150 (Bank discount)

 Proceeds = $5,000 - $150 = $4,850

 R = I/PT; R = $150/$4,850(90/360)

 R = .1237113402

 R or the effective interest rate = 12.4%

41
 Find the Third Party Discount and
Proceeds for a Third Party Discount
Note

 For the bank discount, use:

Third party discount = maturity value of
the original note x discount rate x discount
period.

 For the proceeds, use:

Proceeds = maturity value of original note –
third-party discount
A=P-I
42
 Look at this example
 Mihoc Trailer made a note of $10,000 with Darcy
Mihoc, owner, at 9% simple interest based on exact
interest and exact time. The note is made on
August 12 and due November 10. Since Mihoc Trailer
needs cash, the note is taken to a third party on
September 5.
 The third-party agrees to accept the note with a 13%
annual discount using the banker’s rule.

 Find the proceeds of the note.

43
 Mihoc Trailer Sales

 To find the proceeds, we find the maturity

value of the original note, then the third-
party discount.
 Exact time is 90 days (314-224)
 Exact interest rate is .09/365
 MV = P(1+ RT)
 MV = $10,000 ( 1 + 0.09/365 x 90)
 MV = $10.221.92
44
 Find the proceeds of the
note

 Exact time of the discount period is 66 days.

(314 - 248) period between Sept. 5 and Nov. 10.
 Ordinary discount rate is 0.13/ 360.
 Third party discount = I = PRT
 Third party discount = $10,221.92 (0.13/360)(66)
 Third party discount = $243.62
 Proceeds = A = P – I
 Proceeds = $10,221.92 - $243.62 = $9,978.30

45
Reference/s:

Business Math, Eighth

Edition Cleaves/Hobbs
© 2009 Pearson Education, Inc. Upper Saddle River, NJ
07458 All Rights Reserved

46