3. Develop Financial Statements, Ratios, and Spending Plans (10%)

Question 1

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

Answer 1

B. To track income and expenses over a specific period.

A cash flow statement helps clients understand their financial inflows and outflows.

Question 2

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

Answer 2

C. Three.

The Fair Credit Reporting Act allows one free credit report per year from each of the three major credit bureaus.

Question 3

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

Answer 3

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.

Question 4

Which of the following is considered a secured loan?

A. Credit card
B. Personal loan
C. Mortgage
D. Payday loan

Answer 4

C. Mortgage.

Secured loans are backed by collateral, such as a home in the case of a mortgage.

Question 5

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

Answer 5

B. Basic Allowance for Housing.

BAH is a military benefit to help with housing costs.

Question 6

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

Answer 6

C. 2.00.

Basic liquidity ratio = Savings / Monthly expenses ($10,000 / $45,000 ÷ 12 = 2.00).

Question 7

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

Answer 7

A. Credit card.

The avalanche method targets the highest-interest debt first.

Question 8

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

Answer 8

C. Reduce credit utilization below 30%.

Lowering credit utilization improves credit scores efficiently.

Question 9

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%

Answer 9

B. 24%.

Front-end ratio = (Mortgage + Taxes/Insurance) / Gross Monthly Income = ($1,200 + $300) / $5,000.

Question 10

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

Answer 10

D. Split between replenishing savings and paying high-interest debt.

This balances maintaining liquidity and managing financial priorities.

Question 11

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

Answer 11

B. Pay down debt to reduce the debt-to-income ratio.

A high debt-to-income ratio suggests prioritizing debt repayment for financial health.

Question 12

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

Answer 12

C. To allocate income toward needs, wants, and savings.

A spending plan helps organize financial priorities.

Question 13

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

Answer 13

D. Line-item budgeting.

This method organizes expenses by type.

Question 14

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.

Answer 14

C. It requires enrollment in a high-deductible health plan (HDHP).

HSAs are tied to HDHPs and offer tax benefits.

Question 15

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

Answer 15

C. Obtaining insurance coverage.

Insurance mitigates potential financial losses.

Question 16

What does the term ‘amortization’ refer to in loan repayment?

A. Paying only the interest on a loan
B. Gradually paying off a loan over time through scheduled payments
C. Refinancing a loan to lower the interest rate
D. Taking out additional loans to cover payments

Answer 16

B. Gradually paying off a loan over time through scheduled payments.

Amortization includes both principal and interest payments.

Question 17

A client wants to save $10,000 in five years. If their savings account earns 3% annual interest, how much should they save monthly?

A. $166.67
B. $180.45
C. $200.00
D. $212.50

Answer 17

B. $180.45.

This calculation requires the use of the future value of an ordinary annuity formula.

Question 18

A client earns $60,000 annually but is struggling with $20,000 in credit card debt at 18% interest. They are considering a debt consolidation loan at 10% interest. What should you recommend?

A. Keep the current credit card debt
B. Consolidate the debt for a lower interest rate
C. File for bankruptcy
D. Ignore the debt and focus on savings

Answer 18

B. Consolidate the debt for a lower interest rate.

This reduces the overall interest cost.

Question 19

A client has three job offers. One pays $80,000 with no benefits, the second pays $75,000 with benefits worth $7,000, and the third pays $70,000 with benefits worth $10,000. Which offer provides the highest total compensation?

A. $80,000
B. $75,000 + $7,000
C. $70,000 + $10,000
D. All offers are equal

Answer 19

B. $75,000 + $7,000 = $82,000.

Comparing salary plus benefits gives the best financial choice.

Question 20

A client is deciding between renting and purchasing a home. What factors should they consider in their decision?

A. Rental agreement terms only
B. Maintenance costs, property taxes, and lifestyle flexibility
C. Mortgage interest rates only
D. None of the above

Answer 20

B. Maintenance costs, property taxes, and lifestyle flexibility.

These are critical to understanding long-term affordability.

Question 21

A client with a $50,000 income has set a savings goal of 20%. How much should they save monthly?

A. $500
B. $833
C. $1,000
D. $1,200

Answer 21

B. $833.

20% of $50,000 is $10,000 annually, or $833 per month.

Question 22

A client’s retirement plan consists of 60% stocks and 40% bonds. Due to market changes, the allocation shifts to 70% stocks and 30% bonds. What action should they take to maintain their desired allocation?

A. Sell stocks and buy bonds
B. Increase bond purchases only
C. Leave the allocation as-is
D. Reallocate fully into stocks for higher growth

Answer 22

A. Sell stocks and buy bonds.

This rebalances the portfolio to the desired allocation.

Question 23

A client is considering leasing a car versus purchasing one. If the lease payments are $300/month for three years and purchasing the car costs $20,000 with a resale value of $10,000 after three years, which is more cost-effective?

A. Leasing
B. Purchasing
C. Both are equal
D. More information is needed

Answer 23

B. Purchasing.

Total lease cost is $10,800, compared to the $10,000 net cost of purchasing.

Question 24

A couple has combined debts of $100,000 and annual income of $120,000. Their debt-to-income ratio (DTI) is:

A. 75%
B. 50%
C. 83%
D. 42%

Answer 24

B. 50%.

DTI = (Debt / Income) x 100 = ($100,000 / $120,000) x 100.

Question 25

A client wishes to prioritize retirement savings. They currently save 5% of their income in a 401(k) with no employer match. What adjustment would you suggest?

A. Max out an IRA first
B. Increase 401(k) contributions to 10%
C. Invest in a taxable account
D. Rely on Social Security

Answer 25

A. Max out an IRA first.

This captures tax advantages and potential growth before increasing 401(k) contributions without a match.

Question 26

A client’s net worth statement shows $200,000 in assets and $150,000 in liabilities. If they want to improve their net worth, what should be their priority?

A. Increase liabilities
B. Focus on saving and debt repayment
C. Liquidate all assets
D. Take on more loans for investments

Answer 26

B. Focus on saving and debt repayment.

Increasing assets and decreasing liabilities improves net worth. HHNH