AP Business with Personal Finance flashcards
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Open a card to check your answer. Each one links to the lesson that teaches it.
Unit 1: Businesses, Competition, and New Ideas
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Topic 1.1 · Which one fitsA teen sells custom phone cases online. Her mom buys one as a gift for her little brother. Who is the customer and who is the consumer?
The mom is the customer, because she buys it. The brother is the consumer, because he uses it. A consumer does not have to be the person who pays.
Review: 1.1 What Is a Business?
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Topic 1.1 · Say it in contextA bakery makes cupcakes for $1.10 each and sells them for $3.00, and customers gladly pay it. Where is the value creation, and where is the value capture?
Value creation: the cupcake meets a want customers have, so it is worth something to them. Value capture: the bakery charges more than it cost to produce, keeping $1.90 on each cupcake.
Review: 1.1 What Is a Business?
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Topic 1.2 · Which one fitsWheat farmers all sell nearly identical grain at the prevailing market price. How is one farm most likely to seek competitive advantage?
By producing as efficiently as possible so it can charge the lowest price possible. In a commodity market the products are nearly identical, so features and branding do little to win customers.
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Topic 1.2 · Say it in contextA company holds a patent on the only product that treats a rare condition. What kind of market is this, and how does the company keep it that way?
A monopoly: one business producing a unique product with no competition. It protects that position by maintaining barriers to entry. The patent is one, because it keeps rivals from making the same product.
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Topic 1.3 · Which one fitsClassify each change for a local gym as a PESTEL factor: interest rates on its equipment loan rise; the town's population is getting older; a new app lets members book classes by phone.
Rising interest rates: economic. An older population: social, since consumer demographics changed. The booking app: technological, a change in the tools available for reaching and serving customers.
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Topic 1.3 · Say it in contextThe state starts paying subsidies to companies that install solar panels. What does that do to the viability of a solar installation business?
It raises it. Subsidies are a political factor used to support specific business activities, so solar installers become more viable and the market more attractive, which can also mean more jobs in that field.
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Topic 1.3 · Check the conditionsA farm-to-table restaurant is choosing between two towns. Using PESTEL, what should it check before picking one?
Whether the town's PESTEL factors align with its business model. Socially, are there customers who prioritize locally grown food? Environmentally, can it reach nearby farms? It also weighs the risks each relevant factor poses.
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Topic 1.4 · Check the conditionsAn entrepreneur notices that dog owners in her area seem to struggle to find dog sitters. What must she do before designing an app?
Validate the need. She observes, interviews or surveys potential customers to gather evidence that the problem exists, can be clearly defined, and is experienced by multiple potential customers. Only then does she develop a solution.
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Topic 1.4 · Know the termWhat is a minimum viable product (MVP), and why build one?
The simplest version of a product idea, with only its core features. It can be a sketch, a description or a model. It is shown to potential customers to gather initial feedback and validate the idea before more resources are spent.
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Topic 1.5 · Which one fitsWhich is the vision statement and which is the mission statement? (1) "A neighborhood where everyone has a warm place to gather." (2) "We serve fresh coffee and pastries, baked in-house daily, at prices local families can afford."
(1) is the vision statement: a concise description of core values and aspirations. (2) is the mission statement: what the business does and how it will reach its long-term goals.
Review: 1.5 Vision
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Topic 1.5 · Which one fitsA shoe company donates a pair for every pair it sells and keeps its profits. A food bank must reinvest every extra dollar in its programs. Using the course's terms, which is a social enterprise and which is a nonprofit, and why?
The shoe company is a social enterprise: it seeks profit while also achieving a social objective, here through its financial model. The food bank is a nonprofit: it serves the public good, and any surplus funds must be reinvested in the organization by law.
Review: 1.5 Vision
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Topic 1.6 · Know the termHow do internal stakeholders differ from external stakeholders? Give two examples of each.
Internal stakeholders are directly involved in the business's operations and decisions, such as owners, managers and employees. External stakeholders are not employed by it but care about its decisions, such as customers, government agencies and community members.
Review: 1.6 Business Ethics
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Topic 1.6 · Say it in contextA store manager values transparency, but the owner wants her to stay quiet about a product defect until the old stock sells. What makes this an ethical dilemma, and how might she weigh it?
A core value, transparency, conflicts with a business goal. She can weigh the benefits and costs of each response for every stakeholder group and choose the least total harm, or the option most consistent with the business's vision.
Review: 1.6 Business Ethics
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Topic 1.7 · Which one fitsTwo friends start a lawn care business. They want to keep control and profits but not risk their own savings if the business runs up debt. Which type of business organization fits?
An LLC. The owners keep control over decisions and profits, as in a partnership, but avoid personal liability for business debts. As partners they would be personally liable.
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Topic 1.7 · Spot the mistake"If I turn my business into a corporation, I can raise more money and still make every decision myself." What is wrong?
In a corporation the owner cedes control over decisions to shareholders and an elected board of directors. The trade is greater access to funding and more room to grow, and the company, not the owner, is liable for its debts.
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Topic 1.7 · Which one fitsUsing the course's six departments (sales and marketing, research and development, operations, accounting, finance, human resources), which handles each job: recruiting new workers; preparing financial statements; finding the money for a new warehouse; redesigning an existing product to better meet customer needs?
Human resources recruits. Accounting prepares financial statements. Finance secures and manages funds. Research and development innovates around new and existing goods, services and processes.
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Topic 1.8 · Which one fitsOne guitar maker builds 20 custom guitars a year by hand. A large brand builds 50,000 identical guitars. Which uses an artisan process and which uses mass production, and why?
The custom maker uses an artisan process: skilled labor and attention to detail for customers who value quality and customization. The large brand uses mass production: technology, assembly lines and machinery to make a larger quantity.
Review: 1.8 Supply Chains
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Topic 1.8 · Which one fitsA sneaker company signs a deal that stops its only rubber supplier from selling to rivals. Which route to competitive advantage is this?
Building barriers to entry through the supply chain. Exclusive or restrictive agreements with suppliers or distributors make it harder for rivals to compete.
Review: 1.8 Supply Chains
Unit 2: Marketing
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Topic 2.1 · Which one fitsSort these customer data points into demographic and psychographic: age 16; enjoys hiking; lives in Denver; values sustainability; household income of $60,000.
Demographic, meaning measurable qualities: age 16, lives in Denver, household income of $60,000. The course counts location as demographic, though some sources call it geographic. Psychographic, meaning interests, activities, values and lifestyle: enjoys hiking, values sustainability.
Review: 2.1 Marketing to Customers
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Topic 2.1 · Work it outA tutoring company spent $3,600 on marketing, advertising and sales to gain 120 new customers. What is its customer acquisition cost?
Customer acquisition cost = total marketing, advertising and sales costs / number of customers = $3,600 / 120 = $30 per customer. Referrals from happy customers can push this number down.
Review: 2.1 Marketing to Customers
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Topic 2.1 · Spot the mistake"Tracking customers' locations through our app is fine, since we never sell the data." What is this owner missing?
Collecting data can violate privacy when customers do not know it is collected or how it will be used. Data that is not properly secured can also be breached, leading to fraud and identity theft. The business must weigh these risks to customers and its reputation.
Review: 2.1 Marketing to Customers
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Topic 2.2 · Which one fitsA website flashes "Only 2 left at this price!" next to a jacket. Which of Cialdini's principles of influence is it using?
Scarcity. The rarer an item seems, the more people want it, so the message creates a sense of urgency to buy now.
Review: 2.2 Consumer Behavior
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Topic 2.2 · Which one fitsName the Cialdini principle behind each: (1) free samples at the grocery store; (2) a dentist recommending a toothpaste; (3) "4.8 stars from 10,000 buyers."
(1) Reciprocity: people feel obligated to give something back. (2) Authority: people tend to follow authority figures and experts. (3) Consensus: people tend to follow what most others in their group do.
Review: 2.2 Consumer Behavior
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Topic 2.3 · Which one fitsA smoothie shop wants to learn why its regulars stopped ordering a new flavor. Should it run a large survey or a focus group?
A focus group or one-on-one interviews. The shop needs in-depth qualitative data that explains why, and these methods allow follow-up questions. A survey fits when it needs a large amount of quantitative data.
Review: 2.3 Market Research
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Topic 2.3 · Check the conditionsBefore committing significant resources to a new product, a business uses market research to judge whether the product is desirable, feasible and viable. What does each of those mean?
Whether it is desirable: it creates value by achieving problem-solution fit. Feasible: the business can make it with its resources, technology, expertise and time. Viable: it has the potential to be profitable in the market.
Review: 2.3 Market Research
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Topic 2.3 · Spot the mistakeA restaurant surveys diners with the question "Don't you agree our new menu is amazing?" What is the problem?
The question is not neutral, so it pushes people toward yes and skews the data. Good research asks unbiased questions and uses a sample large enough and drawn from the population being studied.
Review: 2.3 Market Research
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Topic 2.4 · Which one fitsSales of a fitness tracker are rising quickly and rivals are rushing out similar devices. Which stage of the product life cycle is this, and what should marketing focus on?
The growth stage. Marketing focuses on differentiating the product from rivals, improving quality, promoting the brand and advertising to keep sales growing.
Review: 2.4 Product
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Topic 2.4 · Know the termWhat does a value proposition explain, and in which of the six product development stages (ideation, validation, design, messaging, production, launch) is it written?
Who the product intends to serve, what problem or need it addresses, and how it is superior to the alternatives. It is developed in the messaging stage, based on market research insights.
Review: 2.4 Product
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Topic 2.4 · Say it in contextTesting an MVP shows that many people like a product idea, but too few would buy it to cover the costs. Has the product reached product-market fit?
No. Product-market fit means customer demand is sufficient to generate profit. Interest without enough paying customers does not count.
Review: 2.4 Product
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Topic 2.5 · Which one fitsA new streaming service charges $2 a month for its first year, planning to raise the price later. Which pricing strategy is this, and why use it?
Penetration pricing. A low price, possibly below per-unit cost, draws price-sensitive customers away from competitors and grows market share quickly. The business plans to raise the price once it has those customers.
Review: 2.5 Price
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Topic 2.5 · Work it outA teen makes bracelets for $3.40 each and sells them for $8.00. What is her per-unit profit? What happens if she drops her price to $3.40?
Per-unit profit = price - per-unit cost = $8.00 - $3.40 = $4.60. At $3.40 the price equals her per-unit cost, so the bracelets earn no profit no matter how many she sells.
Review: 2.5 Price
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Topic 2.5 · Say it in contextA store finds that its customers buy a lot less whenever it raises prices even a little. What does that say about its pricing power?
Its customers face elastic demand, meaning they are very responsive to price, so the store has little pricing power. Raising prices could lower revenue because customers buy significantly less.
Review: 2.5 Price
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Topic 2.6 · Which one fitsA small hot sauce maker can sell on its own website or through a grocery wholesaler. Which channel gives more control, and which gives more reach?
Its own website is a direct channel: more control over price and the customer experience, but costly to set up and limited in reach. The wholesaler is an indirect channel: a partner's network can cut costs and reach more customers.
Review: 2.6 Place and Channels
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Topic 2.6 · Check the conditionsWhat should a business compare when it chooses among marketing channels?
The cost and potential profitability of each channel, the customer experience each one gives, and whether each can deliver the product to the target customers. Some products, such as prescription medications, must use legally required channels.
Review: 2.6 Place and Channels
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Topic 2.7 · Which one fitsWhich promotional tool fits each case: a car dealer walking one buyer through financing options; a clothing store clearing out winter coats in March?
The dealer uses personal selling, giving detailed information to a customer making a consequential purchase. The store uses a sales promotion, such as a discount, to speed decisions and reduce unsold inventory.
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Topic 2.7 · Say it in contextWhy have so many businesses moved marketing money away from newspaper and TV ads toward social media, email and apps?
Digital tools reach global or targeted audiences with more personalization at lower cost. They also collect big data on how customers respond, which a billboard or TV ad cannot.
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Topic 2.7 · Know the termName the five tools in the course's promotional mix.
Media advertising, personal selling, sales promotion, direct marketing and public relations. A marketing campaign coordinates some or all of them to promote a product.
Unit 3: Personal Saving and Borrowing / Business Finance and Accounting
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Topic 3.1 · Which one fitsJordan has $3,000 he will not touch for two years and wants more interest than a savings account pays. Which savings vehicle fits, and what is the trade-off?
A certificate of deposit (CD). It usually pays a higher rate and is federally insured, but he cannot withdraw the money during the set term, and it often needs a larger minimum deposit.
Review: 3.1 Saving for Future Purchases
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Topic 3.1 · Say it in contextPrices rise 4% this year while Kai's savings account pays 1% interest. What happened to the purchasing power of his savings?
It fell. His balance grew, but inflation means the money now buys fewer goods and services. That expected loss of purchasing power can discourage saving.
Review: 3.1 Saving for Future Purchases
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Topic 3.1 · Spot the mistake"Money in my mobile payment app is just as protected as money in a bank savings account." What is wrong?
Unless they are offered by an insured financial institution, mobile payment and cryptocurrency accounts are not federally insured and usually pay no interest. A bank savings account is federally insured up to a maximum, $250,000 as of 2024.
Review: 3.1 Saving for Future Purchases
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Topic 3.2 · Say it in contextWhy does a car loan usually carry a lower interest rate than an unsecured personal loan of the same size?
The car loan is secured: the car serves as collateral the lender can take if the borrower defaults. An unsecured loan has no collateral, so the lender takes on more risk and charges a higher rate.
Review: 3.2 Borrowing, Credit, and Debt
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Topic 3.2 · Which one fitsMaria owes money on a credit card at 24% interest and on a car loan at 6%. She has an extra $200 a month. Which debt should she pay down first?
The credit card, while still making the required payment on the car loan. Repaying high-interest-rate debt as quickly as possible saves the most in interest, which frees up more income for saving and other expenses.
Review: 3.2 Borrowing, Credit, and Debt
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Topic 3.2 · Work it outSam buys a $20,000 car and makes a 15% down payment. How much does he pay up front, and how much does he borrow?
Down payment = 0.15 x $20,000 = $3,000. He borrows $20,000 - $3,000 = $17,000. A down payment can earn him better loan terms, such as a lower interest rate and lower fees.
Review: 3.2 Borrowing, Credit, and Debt
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Topic 3.3 · Which one fitsA store manager wants a cost analysis before opening a second location. A bank wants the store's year-end financial statements. Which kind of accountant serves each?
A managerial accountant serves the manager, an internal stakeholder, with analysis for planning and decisions. A financial accountant serves external stakeholders such as lenders, investors and shareholders.
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Topic 3.3 · Check the conditionsWhich businesses must follow GAAP disclosure rules, and how often do they report?
Corporations that sell ownership shares to the public. They must consistently disclose all positive and negative financial information for each reporting period, typically every quarter or every year.
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Topic 3.4 · Which one fitsA T-shirt printer pays $1,200 a month in rent, $300 a month for insurance, and $4 for each blank shirt. Which costs are fixed and which are variable?
Rent and insurance are fixed: they stay the same however many shirts are printed. Blank shirts are variable: that cost rises as production rises.
Review: 3.4 Business Expenses
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Topic 3.4 · Which one fitsFor a bakery, are flour and the bakers' wages direct or indirect costs? What about the website and the office manager's salary?
Flour and bakers' wages are direct costs, part of cost of goods sold, because they are tied to producing the goods. The website and office salary are indirect costs, called operating expenses, for running the business.
Review: 3.4 Business Expenses
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Topic 3.4 · Know the termWhat are startup costs? Give examples.
The one-time expenditures of launching a new business or product, plus the initial expenses of getting established. Examples: legal, incorporation and licensing fees, equipment, first inventory, and initial marketing and insurance.
Review: 3.4 Business Expenses
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Topic 3.5 · Work it outA lemonade stand has $120 in fixed costs for the summer. Each cup sells for $2.00 and costs $0.50 to make. How many cups must it sell to break even?
Each cup leaves $2.00 - $0.50 = $1.50 toward fixed costs. $120 / $1.50 = 80 cups. Check: 80 cups bring in $160, and costs are $120 + 80 x $0.50 = $160, so all costs for the period are covered.
Review: 3.5 Financial Capital
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Topic 3.5 · Work it outYou buy a share of stock for $50, receive $2 in dividends, and sell it a year later for $54. What is your annual rate of return?
Total gained = $2 of income + $4 capital gain = $6. Rate of return = $6 / $50 = 0.12, or 12%.
Review: 3.5 Financial Capital
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Topic 3.5 · Which one fitsAn established bakery owner needs $40,000 for new ovens and does not want to give up any control. Should she use a loan or equity financing?
A business loan. She must repay it with interest, which is a business expense, but she keeps full ownership. Equity financing means issuing ownership shares, giving investors some control and part of future profits.
Review: 3.5 Financial Capital
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Topic 3.5 · Say it in contextAlex buys a corporate bond. Priya buys a share of the same company's stock. What is each one's relationship to the company?
Alex is a lender: the bond pays him interest. Priya is an investor and part owner: she may get dividends, though some corporations reinvest instead, and a capital gain if she sells for more than she paid.
Review: 3.5 Financial Capital
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Topic 3.6 · Work it outA sneaker shop has revenue of $200,000 and COGS of $120,000. Find its gross profit and gross profit margin.
Gross profit = revenue - COGS = $200,000 - $120,000 = $80,000. Gross profit margin = gross profit / revenue = $80,000 / $200,000 = 40%.
Review: 3.6 The Income Statement
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Topic 3.6 · Work it outA shop has gross profit of $80,000, operating expenses of $50,000, interest expense of $5,000 and taxes of $6,000. Find operating profit, pretax income and net profit.
Operating profit = $80,000 - $50,000 = $30,000. Pretax income = $30,000 - $5,000 = $25,000. Net profit = $25,000 - $6,000 = $19,000, the bottom line.
Review: 3.6 The Income Statement
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Topic 3.6 · Say it in contextA cafe's gross profit margin held steady this year, but its operating profit margin fell sharply. Where should the owner look first?
At operating expenses: selling costs like advertising and general and administrative costs like rent and office salaries. A steady gross margin says pricing and direct costs are fine, so the drop came from running the business.
Review: 3.6 The Income Statement
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Topic 3.6 · Work it outA shop's revenue grew from $80,000 last year to $92,000 this year. What is the percent change?
Percent change = (current - initial) / initial x 100 = ($92,000 - $80,000) / $80,000 x 100 = $12,000 / $80,000 x 100 = 15%.
Review: 3.6 The Income Statement
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Topic 3.7 · Work it outA bike shop has $150,000 in assets and $90,000 in liabilities. What is its owners' equity?
Assets = liabilities + owners' equity, so owners' equity = $150,000 - $90,000 = $60,000. That is the net worth of the business to its owners.
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Topic 3.7 · Which one fitsClassify each item on a bakery's balance sheet: cash; its ovens; its trademarked name; money it owes suppliers; a 10-year bank loan.
Cash: current asset. Ovens: long-term fixed asset. Trademarked name: intangible asset. Money owed to suppliers: current liability, called accounts payable. The 10-year loan: long-term liability.
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Topic 3.7 · Work it outA household has $8,000 in savings, a $15,000 car and $4,000 in other possessions. It owes $9,000 on the car and $2,000 on a credit card. What is its net worth?
Assets = $8,000 + $15,000 + $4,000 = $27,000. Liabilities = $9,000 + $2,000 = $11,000. Net worth = $27,000 - $11,000 = $16,000.
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Topic 3.7 · Say it in contextA store's balance sheet shows $40,000 in current assets and $55,000 in current liabilities. What does that signal?
It lacks sufficient working capital: its current assets do not cover the liabilities due within a year. It may struggle to fund day-to-day operations, and if it cannot fix that, it could face shutdown or bankruptcy.
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Topic 3.7 · Know the termWhat is liquidity? Which is more liquid for a business: its inventory or its factory?
Liquidity is how easily an asset can be converted into cash. Inventory is a current asset and highly liquid. A factory is a fixed, long-term asset and much less liquid.
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Topic 3.8 · Spot the mistake"Our income statement shows a profit this year, so we can't run out of cash." What is wrong?
A business can have positive net income and still have negative cash flow, for example when customers are slow to pay. Without cash for payroll, suppliers and lenders it could shut down or go bankrupt anyway.
Review: 3.8 The Cash Flow Statement
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Topic 3.8 · Which one fitsCash inflow or outflow: customer payments; a new bank loan; payroll; dividends paid to owners; selling an old delivery van.
Inflows: customer payments, the new bank loan and the money from selling the van. Outflows: payroll and dividends paid.
Review: 3.8 The Cash Flow Statement
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Topic 3.8 · Work it outA business starts the month with $12,000 in cash, takes in $30,000 and pays out $34,500. What is its ending cash balance?
Cash flow for the month = $30,000 - $34,500, a negative $4,500. Ending balance = $12,000 - $4,500 = $7,500. The business stayed afloat, but negative cash flow shrank its cushion.
Review: 3.8 The Cash Flow Statement
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Topic 3.9 · Which one fitsA bookkeeper moves company money into her own account and changes the records to hide it. Which unethical practices are those?
Embezzlement, plus fraud by falsifying information in the financial records. Both are illegal in most countries. Codes of conduct, audit requirements and cash-handling processes help prevent them.
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Topic 3.9 · Say it in contextWhy might a company's financial managers make its finances look better, or worse, than they really are?
Looking better can raise the stock price or win better loan terms. Looking worse can help avoid taxes. Either way, stakeholders and the government get a false picture, which is why public corporations face independent annual audits.
Unit 4: Management and Strategy
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Topic 4.1 · Which one fitsMatch each worker to a compensation scheme: a car salesperson; a factory worker paid for each item finished; an accountant paid $60,000 a year.
Car salesperson: commission. Factory worker: piece rate pay. Accountant: annual salary.
Review: 4.1 Management and Leadership
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Topic 4.1 · Know the termAccording to the course, what four activities make up management?
Planning, organizing, leading and evaluating how a business uses its human, financial and physical resources to meet its goals and objectives.
Review: 4.1 Management and Leadership
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Topic 4.2 · Which one fitsWhich kind of goal does each KPI track: customer acquisition cost; percentage of deliveries received on time; gross profit margin?
Customer acquisition cost: marketing and sales. On-time deliveries: operations. Gross profit margin: financial health.
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Topic 4.2 · Say it in contextA shop delivers 91% of orders on time. Last year it hit 85%, and the industry standard is 95%. How is it doing?
Better than its internal benchmark, its own past performance, but below the external industry standard. A KPI means little until it is compared to a benchmark.
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Topic 4.3 · Work it outA bakery spends $8,000 on a new oven. In its first year the oven brings in $2,000 of additional profit. What is the return on investment for that year?
ROI = additional profit / cost of the investment = $2,000 / $8,000 = 0.25, or 25% for the first year.
Review: 4.3 Strategy and Decision Making
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Topic 4.3 · Know the termWhat four steps make up the course's deliberative decision-making process?
Define the problem or decision, develop alternatives, establish decision-making criteria, and evaluate the alternatives to choose the best approach. This is sometimes called the PACED model.
Review: 4.3 Strategy and Decision Making
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Topic 4.3 · Which one fitsA gym wants more revenue from students. Which is the strategy and which is a tactic: "become the go-to gym for teens" or "offer a $10 student pass"?
Becoming the go-to gym for teens is the strategy, the plan for reaching the goal. The $10 student pass is a tactic, an action that advances that strategy.
Review: 4.3 Strategy and Decision Making
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Topic 4.4 · Which one fitsA coffee shop's customers can easily brew coffee at home or grab an energy drink instead. Which of Porter's Five Forces is strong here?
Threat of substitute products: other goods meet the same need without being direct competitors. It is strongest when the alternatives are cheaper, easier to get or higher quality.
Review: 4.4 Strategic Frameworks: Porter’s Five Forces and SWOT Analysis
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Topic 4.4 · Which one fitsSort these into a SWOT analysis for a local bakery: skilled pastry chefs; outdated ovens; a new office park opening nearby; rising flour prices.
Strength, internal: skilled chefs. Weakness, internal: outdated ovens. Opportunity, external: the office park means market growth. Threat, external: rising input costs.
Review: 4.4 Strategic Frameworks: Porter’s Five Forces and SWOT Analysis
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Topic 4.4 · Say it in contextA Five Forces analysis finds all five forces weak in a market. According to the framework, how attractive is that competitive environment, and why?
Attractive. Weak competitive forces mean higher potential profitability, while strong forces would cut into potential profit. One caution for a business not yet in the market: a weak threat of new entrants means barriers to entry are high, so it must be able to get past them itself.
Review: 4.4 Strategic Frameworks: Porter’s Five Forces and SWOT Analysis
Unit 5: Personal Goals, Budgeting, and Investing
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Topic 5.1 · Work it out · Not on the AP ExamAva earns $1,500 in gross pay this pay period. Her employer withholds $180 for income tax, $115 for payroll taxes and $60 for her health insurance. What is her net pay?
Total deductions = $180 + $115 + $60 = $355. Net pay = $1,500 - $355 = $1,145. That is the amount on her paycheck.
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Topic 5.1 · Which one fits · Not on the AP ExamWhich cuts your taxes more directly: a $1,000 tax deduction or a $1,000 tax credit?
The tax credit. It directly reduces the taxes owed by $1,000. A deduction reduces taxable income, so it saves only part of $1,000, depending on the tax rate.
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Topic 5.1 · Spot the mistake · Not on the AP Exam"As a freelancer, I pay the same payroll taxes a regular employee does." What is wrong?
For employees, the employer pays half of these payroll taxes. Self-employed and contract workers must pay the full amount themselves, and they are also responsible for submitting their own income taxes.
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Topic 5.2 · Which one fits · Not on the AP ExamClassify each insurable risk as personal, property or liability risk: you break your arm skateboarding; a tree falls on your car; you back into a neighbor's fence.
Breaking your arm: personal risk, your own health. The tree on your car: property risk, your own property. The neighbor's fence: liability risk, someone else's property.
Review: 5.2 Managing Personal Risk
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Topic 5.2 · Which one fits · Not on the AP ExamA 22-year-old with solid savings and a high tolerance for risk is buying auto insurance. Is a higher or lower deductible the better fit?
A higher deductible usually fits: a lower premium in exchange for higher out-of-pocket costs if something happens. Someone with low risk tolerance might pay higher premiums for more comprehensive coverage instead.
Review: 5.2 Managing Personal Risk
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Topic 5.2 · Which one fits · Not on the AP ExamA text says your bank account is locked and asks you to reply with your password to fix it. What should you do?
Treat it as likely phishing. Do not share personal or financial information by text or phone under pressure. Check the message's credibility by contacting the bank directly, using a number you already trust. Freezing your credit and seeking legal aid if you have been scammed are further protections.
Review: 5.2 Managing Personal Risk
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Topic 5.3 · Say it in context · Not on the AP ExamTwo friends invest the same amount each month, but one starts at 22 and the other at 35. Why does the early starter usually end up with more?
Compounding. Returns earn their own returns over time, so someone who starts young and holds financial assets longer realizes greater returns.
Review: 5.3 Saving and Investing for Education, Housing, and Retirement Goals
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Topic 5.3 · Which one fits · Not on the AP ExamNia needs her down payment for a house in one year. Should that money be in individual stocks or in a CD?
A CD or savings account. With a short time horizon she might have to sell during a downturn, so safer assets fit. Stocks suit long time horizons, where there is time to wait for values to recover.
Review: 5.3 Saving and Investing for Education, Housing, and Retirement Goals
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Topic 5.3 · Know the term · Not on the AP ExamWhat is diversification, and why do financial advisors recommend it?
Spreading money across a variety of financial assets with different levels of risk and expected return. It lets an investor seek higher long-term returns without taking on excessive risk.
Review: 5.3 Saving and Investing for Education, Housing, and Retirement Goals