Ch. 4

Question 1

Which of the following would not be considered an investment asset?

Answer 1

A money market account

Question 2

A new automobile loan for 60 months is an example of a …

Answer 2

Long term liability

Question 3

Which of the following is the formula to calculate Net Discretionary Cash Flow?

Answer 3

NDCF = Income - Savings - Expenses - Taxes

Question 4

Which transactions are likely to appear in the statement of net worth…3

Answer 4

1 inheriting property other than cash

2 employer contributions made to a retirement savings account

3 Appreciation in value of primary residence

Question 5

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?

Answer 5

Vertical Analysis

Question 6

List 3 major assets on balance sheet

Answer 6

1 cash and cash equivalents

2 investment accounts

3 personal use assets

Question 7

Investment assets include retirement accounts, brokerage accounts, education savings and…

Answer 7

Cash value of life insurance policy

Question 8

Personal use assets include…5

Answer 8

1 personal residence
2 automobile
3 furniture
4 clothing
5 vacation home

Question 9

Sole ownership

Answer 9

Complete ownership of property by one individual who possesses all ownership rights

Question 10

Tenancy in common

Answer 10

Ownership of an undivided, not necessarily equal interest in property by 2 or more elated or unrelated persons

Question 11

Joint Tenancy with right of survivorship (JRWROS)

Answer 11

Typically how spouses own joint property, where decedent so interest transfers to joint tenants outside probate process

Question 12

Tenancy by entirety is similar to property owned by JTWROS between spouses

Answer 12

Property is automatically transferred to surviving spouse upon death

Question 13

Community property is a civil law statutory regime where…

Answer 13

Married individuals own an equal undivided interest in all property accumulated during their marriage

Question 14

Income is recurring income statement inflow represented by client…6

Answer 14

1 salary
2 interest income
3 dividend income
4 pension income
5 retirement account withdraws
6 business income

Question 15

Recurring savings contributions are income statement outflows represented by…5

Answer 15

1 401K plan
2 403b plan
3 IRA savings
4 education savings
5 reinvested dividends

Question 16

Fixed expenses include

Answer 16

Debt and loan payments

Question 17

Variable expenses include 4

Answer 17

1 entertainment expenses
2 vacation expenses
3 travel expenses
4 charitable contributions

Question 18

Net discretionary cash flow is the amount of cash flow available after all…

Answer 18

Savings expenses and taxes have been paid

Question 19

Net discretionary cash flow equation =

Answer 19

Income - savings - expenses - taxes

Question 20

4 examples of transactions listed on the statement of net worth

Answer 20

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

Question 21

Forecasted financial statements should reflect…

Answer 21

Inflation adjusted income and expenses

Question 22

The purpose of creating a budget is to evaluate the client’s…3

Answer 22

Spending and saving behavior

Establish spending and saving plan to help client reach financial goals

Question 23

The purpose of financial statement analysis is to measure the client’s progress towards…3

Answer 23

1 attaining financial goals

2 meeting short term obligations

3 managing debt

Question 24

Vertical analysis lists each line item on the income statement as…

Answer 24

A percentage of total income

Question 25

Vertical analysis of the balance sheet presents each line item as…

Answer 25

A percentage of total assets

Question 26

Horizontal analysis lists each line item as a percentage of…

Answer 26

The base year and reveals a trend over time

Question 27

Ratio analysis is the process of…

Answer 27

Calculating key financial ratios and comparing those ratios to benchmarks

Question 28

Housing ratios 1 and 2 are debt ratios that are established by the banking industry to determine if…

Answer 28

The debt is affordable

Question 29

The benchmark for housing ratio 1 is…

Answer 29

28%

Question 30

Housing ratio 2 (principal, interest, taxes, insurance and other debt payments), the benchmark is…

Answer 30

36%

Question 31

The savings rate is a ratio for financial security goals that measures the amount…

Answer 31

A client is saving towards a retirement goal