3. Develop Financial Statements, Ratios, and Spending Plans (10%) Flashcards
What is the primary purpose of a cash flow statement?
A. To measure net worth
B. To track income and expenses over a specific period
C.To set financial goals
D.To establish credit limits
B. To track income and expenses over a specific period.
A cash flow statement helps clients understand their financial inflows and outflows.
What is the maximum number of free credit reports a consumer can request annually under federal law?
A. One
B. Two
C.Three
D. Unlimited
C. Three.
The Fair Credit Reporting Act allows one free credit report per year from each of the three major credit bureaus.
What is the Rule of 72 used for?
A. Calculating retirement income
B. Estimating how long it takes to double an investment at a fixed interest rate
C. Determining credit card interest rates
D. Evaluating tax liabilities
B. Estimating how long it takes to double an investment at a fixed interest rate.
Divide 72 by the annual interest rate to approximate doubling time.
Which of the following is considered a secured loan?
A. Credit card
B. Personal loan
C. Mortgage
D. Payday loan
C. Mortgage.
Secured loans are backed by collateral, such as a home in the case of a mortgage.
What does BAH stand for in a military pay structure?
A. Base Allotment Housing
B. Basic Allowance for Housing
C Benefits And Housing
D.Basic Allocation for Homeownership
B. Basic Allowance for Housing.
BAH is a military benefit to help with housing costs.
A client earns $50,000 annually and spends $45,000. What is their basic liquidity ratio if they have $10,000 in savings?
A. 0.22
B. 0.50
C. 2.00
D. 0.83
C. 2.00.
Basic liquidity ratio = Savings / Monthly expenses ($10,000 / $45,000 ÷ 12 = 2.00).
A client is trying to prioritize debt repayment. They have a credit card with 18% interest, a student loan at 6%, and a car loan at 5%. Which should they pay off first based on the avalanche method?
A. Credit card
B. Student loan
C. Car loan
D. Make equal payments
A. Credit card.
The avalanche method targets the highest-interest debt first.
What advice should you give to a client who wishes to improve their credit score quickly?
A. Close unused credit accounts
B. Pay off the smallest debt first
C. Reduce credit utilization below 30%
D. Apply for new credit cards
C. Reduce credit utilization below 30%.
Lowering credit utilization improves credit scores efficiently.
A client is considering purchasing a home with a 20% down payment on a $300,000 property and financing the remainder. Their monthly mortgage payment is estimated at $1,200, and monthly insurance and taxes are $300. If their gross monthly income is $5,000, what is their front-end ratio?
A. 30%
B. 24%
C. 40%
D. 36%
B. 24%.
Front-end ratio = (Mortgage + Taxes/Insurance) / Gross Monthly Income = ($1,200 + $300) / $5,000.
A client with $20,000 in an emergency fund faces a sudden expense of $5,000. How should they allocate their remaining funds to maintain liquidity and manage ongoing expenses?
A. Invest in stocks for higher returns
B. Use the remaining amount to pay off debt entirely
C. Retain the balance as-is
D. Split between replenishing savings and paying high-interest debt
D. Split between replenishing savings and paying high-interest debt.
This balances maintaining liquidity and managing financial priorities.
A client’s financial ratios indicate a debt-to-income ratio of 45% and a basic liquidity ratio of 0.5. What course of action should be recommended?
A. Focus on increasing savings first
B. Pay down debt to reduce the debt-to-income ratio
C. Apply for a consolidation loan to lower interest rates
D. Ignore ratios and focus on income growth
B. Pay down debt to reduce the debt-to-income ratio.
A high debt-to-income ratio suggests prioritizing debt repayment for financial health.
What is the primary purpose of a spending plan?
A. To calculate net worth
B. To identify financial risks
C. To allocate income toward needs, wants, and savings
D. To determine credit scores
C. To allocate income toward needs, wants, and savings.
A spending plan helps organize financial priorities.
Which budgeting method categorizes expenses into fixed, variable, and discretionary?
a. Envelope method
b. Zero-based budgeting
c. 50/30/20 rule
d. Line-item budgeting
D. Line-item budgeting.
This method organizes expenses by type.
What is a common characteristic of a Health Savings Account (HSA)?
A. It is only available to individuals without insurance.
B. Contributions are taxable, but withdrawals are tax-free.
C. It requires enrollment in a high-deductible health plan (HDHP).
D. It is a form of credit financing for medical costs.
C. It requires enrollment in a high-deductible health plan (HDHP).
HSAs are tied to HDHPs and offer tax benefits.
Which of the following is an example of a risk management strategy?
A. Reducing discretionary spending
B. Investing in high-risk assets
C. Obtaining insurance coverage
D. Refinancing loans
C. Obtaining insurance coverage.
Insurance mitigates potential financial losses.