Ch. 4 Flashcards
Which of the following would not be considered an investment asset?
A money market account
A new automobile loan for 60 months is an example of a …
Long term liability
Which of the following is the formula to calculate Net Discretionary Cash Flow?
NDCF = Income - Savings - Expenses - Taxes
Which transactions are likely to appear in the statement of net worth…3
1 inheriting property other than cash
2 employer contributions made to a retirement savings account
3 Appreciation in value of primary residence
After generating financial statements for a client, Doug, you list each line item on the income statement as a percentage of total income and each item on the balance sheet as a percentage of total assets. Which comparative financial statement tool are you utilizing?
Vertical Analysis
List 3 major assets on balance sheet
1 cash and cash equivalents
2 investment accounts
3 personal use assets
Investment assets include retirement accounts, brokerage accounts, education savings and…
Cash value of life insurance policy
Personal use assets include…5
1 personal residence 2 automobile 3 furniture 4 clothing 5 vacation home
Sole ownership
Complete ownership of property by one individual who possesses all ownership rights
Tenancy in common
Ownership of an undivided, not necessarily equal interest in property by 2 or more elated or unrelated persons
Joint Tenancy with right of survivorship (JRWROS)
Typically how spouses own joint property, where decedent so interest transfers to joint tenants outside probate process
Tenancy by entirety is similar to property owned by JTWROS between spouses
Property is automatically transferred to surviving spouse upon death
Community property is a civil law statutory regime where…
Married individuals own an equal undivided interest in all property accumulated during their marriage
Income is recurring income statement inflow represented by client…6
1 salary 2 interest income 3 dividend income 4 pension income 5 retirement account withdraws 6 business income
Recurring savings contributions are income statement outflows represented by…5
1 401K plan 2 403b plan 3 IRA savings 4 education savings 5 reinvested dividends
Fixed expenses include
Debt and loan payments
Variable expenses include 4
1 entertainment expenses
2 vacation expenses
3 travel expenses
4 charitable contributions
Net discretionary cash flow is the amount of cash flow available after all…
Savings expenses and taxes have been paid
Net discretionary cash flow equation =
Income - savings - expenses - taxes
4 examples of transactions listed on the statement of net worth
1 giving or receiving property other than cash
2 inheriting property other than cash
3 employer contributions to retirement savings accounts
4 appreciation or depreciation of assets
Forecasted financial statements should reflect…
Inflation adjusted income and expenses
The purpose of creating a budget is to evaluate the client’s…3
Spending and saving behavior
Establish spending and saving plan to help client reach financial goals
The purpose of financial statement analysis is to measure the client’s progress towards…3
1 attaining financial goals
2 meeting short term obligations
3 managing debt
Vertical analysis lists each line item on the income statement as…
A percentage of total income
Vertical analysis of the balance sheet presents each line item as…
A percentage of total assets
Horizontal analysis lists each line item as a percentage of…
The base year and reveals a trend over time
Ratio analysis is the process of…
Calculating key financial ratios and comparing those ratios to benchmarks
Housing ratios 1 and 2 are debt ratios that are established by the banking industry to determine if…
The debt is affordable
The benchmark for housing ratio 1 is…
28%
Housing ratio 2 (principal, interest, taxes, insurance and other debt payments), the benchmark is…
36%
The savings rate is a ratio for financial security goals that measures the amount…
A client is saving towards a retirement goal
