AP® Business with Personal Finance Unit 3 flashcardsPersonal Saving and Borrowing; Business Finance and Accounting

Savings account

A deposit account at a bank or credit union that usually pays a little interest and lets you withdraw anytime. It's federally insured up to a limit.

Topic 3.1: Saving for Future Purchases

Money market account

A federally insured account like savings that may pay more interest but often needs a larger minimum balance and may charge higher fees.

Topic 3.1: Saving for Future Purchases

Certificate of deposit (CD)

A federally insured deposit that usually pays more interest than savings, but you can't withdraw for a set time without a penalty.

Topic 3.1: Saving for Future Purchases

Checking account

A federally insured account for everyday spending: deposits, debit card purchases, withdrawals and payments. It pays little or no interest.

Topic 3.1: Saving for Future Purchases

Federal deposit insurance

Government protection for bank and credit union deposits if the institution fails. As of 2026 it covers $250,000 per depositor, per bank, per ownership category.

Topic 3.1: Saving for Future Purchases

Inflation

A general rise in prices. It shrinks what saved money can buy, so savings earning less than the inflation rate lose purchasing power.

Topic 3.1: Saving for Future Purchases

Lifestyle inflation

Spending more as your income rises, so a raise doesn't lead to more savings.

Topic 3.1: Saving for Future Purchases

Secured vs. unsecured loan

A secured loan is backed by collateral, like a car or house, so it usually has a lower rate. Unsecured loans, like most credit cards, have no collateral.

Topic 3.2: Borrowing, Credit, and Debt

Collateral

Property a lender can take if a borrower doesn't repay. A car is the collateral for a car loan.

Topic 3.2: Borrowing, Credit, and Debt

Default

Failing to repay a loan as agreed. Lenders charge higher rates to borrowers more likely to default.

Topic 3.2: Borrowing, Credit, and Debt

Creditworthiness

How likely a borrower is to repay. Lenders judge it from income, savings, existing debt and credit reports.

Topic 3.2: Borrowing, Credit, and Debt

Credit report and credit score

A credit bureau's record of how you've used credit, with a score summarizing it (for example, FICO scores run 300–850). Lenders, landlords and employers may see it.

Topic 3.2: Borrowing, Credit, and Debt

Down payment

Money you pay up front on a big purchase like a car or home. You borrow less, so you pay less interest.

Topic 3.2: Borrowing, Credit, and Debt

Bankruptcy

A legal process that wipes out some debts and sets up a repayment plan for others when debt becomes unmanageable.

Topic 3.2: Borrowing, Credit, and Debt

GAAP

Generally accepted accounting principles: the rules companies that sell shares to the public follow to report all results, good and bad, each quarter and year.

Topic 3.3: Accounting and Financial Management

Managerial vs. financial accounting

Managerial accountants give numbers to people inside the business for planning. Financial accountants report mainly to outsiders like investors and lenders.

Topic 3.3: Accounting and Financial Management

Budget

A plan for expected income and how it will be spent and saved. It helps you see spending patterns and stay on track toward goals.

Topic 3.3: Accounting and Financial Management

Startup costs

One-time costs to launch a business, like legal and license fees and some equipment, plus first spending on rent, marketing, insurance and inventory.

Topic 3.4: Business Expenses

Direct costs and COGS

Costs tied to making or delivering specific products. For goods, they're called cost of goods sold (COGS); for services, cost of sales.

Topic 3.4: Business Expenses

Operating expenses

Indirect costs of running a business, like office salaries, rent, advertising, utilities and insurance. They're usually fixed.

Topic 3.4: Business Expenses

Fixed vs. variable costs

Fixed costs stay the same no matter how much you produce, like rent. Variable costs rise as you produce more, like raw materials.

Topic 3.4: Business Expenses

Bootstrapping

Starting a business with your own savings, personal loans or personal credit instead of outside money.

Topic 3.5: Financial Capital

Break-even point

The sales level where revenue covers all costs for a period. Example: $8,250 fixed costs ÷ $3.40 per drink above variable cost ≈ 2,427 drinks.

Topic 3.5: Financial Capital

Equity financing

Raising money by selling ownership shares. Investors become part owners and get some control and a share of future profits.

Topic 3.5: Financial Capital

Bonds vs. stocks

A bond is a loan to a business or government, so the bondholder is a lender who earns interest. A stock is a share of ownership in a business.

Topic 3.5: Financial Capital

Dividends and capital gains

A dividend is a share of profits paid to stockholders. A capital gain is the profit from selling an asset for more than you paid.

Topic 3.5: Financial Capital

Rate of return

(Income + capital gain) ÷ price paid. Example: a $50 stock that pays $2 and ends at $56 returns ($2 + $6) ÷ $50 = 16%.

Topic 3.5: Financial Capital

Income statement

A statement comparing revenue with costs over a period to show profit or loss. It's also called a profit and loss statement.

Topic 3.6: The Income Statement

Gross, operating and net profit

Revenue − COGS = gross profit. − operating expenses = operating profit. − interest = pretax income. − taxes = net profit (the bottom line).

Topic 3.6: The Income Statement

Profit margin

A profit ÷ revenue. Gross, operating and net profit margins show what share of each sales dollar is left at each step.

Topic 3.6: The Income Statement

Percent change

(New value − old value) ÷ old value × 100. Example: sales from $800,000 to $950,000 is an 18.75% increase.

Topic 3.6: The Income Statement

Balance sheet

A snapshot of what a business owns (assets), owes (liabilities) and is worth to its owners (owners' equity) at one moment.

Topic 3.7: The Balance Sheet and Net Worth

Assets = liabilities + owners' equity

The balance sheet equation. It always balances, so owners' equity = assets − liabilities.

Topic 3.7: The Balance Sheet and Net Worth

Working capital

Current assets minus current liabilities. If it's positive, the business can pay its bills due within a year.

Topic 3.7: The Balance Sheet and Net Worth

Net worth

Total assets minus total liabilities, for a household or a business. Using savings to pay off a debt leaves net worth unchanged.

Topic 3.7: The Balance Sheet and Net Worth

Cash flow statement

A record of cash coming in and going out over a period and the cash balance that results. Negative cash flow can sink even a profitable business.

Topic 3.8: The Cash Flow Statement

Accounts receivable

Money customers owe a business for products it has already delivered. Collecting it faster improves cash flow.

Topic 3.8: The Cash Flow Statement

Embezzlement

Stealing money you've been trusted to handle, such as an employee secretly keeping company cash.

Topic 3.9: Ethics and Financial Reporting

Independent audit

A yearly check of a company's financial records by an outside accounting firm. U.S. law requires it for public companies, to protect investors from fraud.

Topic 3.9: Ethics and Financial Reporting

Internal controls

A business's own rules to prevent wrongdoing, such as codes of conduct, audit requirements and splitting cash-handling duties among employees.

Topic 3.9: Ethics and Financial Reporting