BFM- Test #1 Study Packet

What is a pay stub?

• A document that shows your total earnings and deductions.

• A list of your monthly expenses.

• A receipt for your purchases.

• A summary of your bank transactions.

Answer explanation

A pay stub is a document that details your total earnings and deductions for a specific pay period, making it the correct choice. The other options do not accurately describe a pay stub.

What does the pay period on a pay stub indicate?

• The total amount of money you earned.

• The time frame for which you are being paid.

• The amount of taxes deducted.

• The number of hours you worked.

Answer explanation

The pay period on a pay stub indicates the specific time frame for which you are being compensated for your work, making it clear when the earnings were accrued.

How is gross pay different from net pay?

• Gross pay is the amount you take home, while net pay is the total earnings.

• Gross pay includes bonuses, while net pay does not.

• Gross pay is the amount after deductions, while net pay is the total earnings before deductions.

• Gross pay is the total earnings before deductions, while net pay is the amount after deductions.

Answer explanation

Gross pay refers to total earnings before any deductions, such as taxes or benefits, while net pay is what you actually take home after those deductions are applied.

Which of the following is NOT a type of deduction from your paycheck?

• Medicare tax

• Federal income tax

• Social Security tax

• Grocery expenses

Answer explanation

Grocery expenses are personal costs and not deducted from your paycheck. In contrast, Medicare tax, federal income tax, and social security tax are mandatory deductions taken from your earnings.

Match each account type with its primary purpose.

• Checking account

• To cover daily expenses.

• 401(k) account

• To save for retirement.

• 529 Plan (College Savings)

• To pay for education.

• Health Savings Account (HSA)

• To pay for medical expenses.

Answer explanation

A 401k account is specifically designed to help individuals save for retirement by allowing them to invest a portion of their income tax-deferred until withdrawal, making it the correct choice.

What should you do if you find an error on your pay stub?

• Ignore it.

• Report it to your supervisor or payroll department immediately.

• Wait until the next pay period.

• Try to fix it yourself.

Answer explanation

If you find an error on your pay stub, you should report it to your supervisor or payroll department immediately. This ensures the issue is addressed promptly and prevents further complications.

Why is it important to understand your pay stub?

• To get a promotion.

• To ensure you are being paid correctly and to manage your finances better.

• To impress your friends.

• To avoid paying taxes.

Answer explanation

Understanding your pay stub is crucial to ensure you are being paid correctly and to manage your finances better. It helps you verify deductions, taxes, and overall compensation, which is essential for financial planning.

What can you do to lower your taxable income?

• Contribute to a pre-tax retirement account.

• Work fewer hours.

• Ignore your pay stub.

• Spend more money.

Answer explanation

Contributing to a pre-tax retirement account reduces your taxable income because the contributions are deducted from your gross income, lowering the amount you owe taxes on. This is a strategic way to save for retirement while minimizing taxes.

How can understanding your deductions help you?

• Make better financial decisions and plan for the future.

• Avoid working altogether.

• Increase your gross pay.

• Reduce your working hours.

Answer explanation

Understanding your deductions allows you to see how much money you actually take home, helping you make informed financial decisions and plan for future expenses effectively.

What is the benefit of knowing the length of your pay period?

• To plan your work hours and budget effectively.

• To increase your deductions.

• To avoid paying taxes.

• To take more vacations.

Answer explanation

Knowing the length of your pay period helps you plan your work hours and budget effectively, ensuring you manage your finances and time better.