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Question 1

Liquidity Ratio

Answer 1

Liquid Assets / Total Debts

• Tells financial adviser if there is a sudden loss/reduction in client income if they may have difficulty paying off debts
• Client may have too much liquidity and adviser could advise to re-allocate funds to a different account

Question 2

Solvency Ratio

Answer 2

Net Worth / Total Assets
May indicate the extent to which the market value if a clients total assets could decline before wiping out all of the clients net worth.

Question 3

Debt Ratio

Answer 3

Mortgage Payments + Debt Repayment / Net income

May indicate if the client can make current debt payments out of income

Question 4

Savings ratio

Answer 4

(Net Cash Flow + Amount Saved or Invested) / Annual After-Tax Income

Question 5

If a client has negative cash flow, what alt courses of action are avail to increase income or reduce expenses

Answer 5

Reallocation of assets to other financial assets yielding higher return
reducing discretionary expenses
reducing amount of certain fixed expenses to extent possible
Refinancing home mortgage to lower interest rate
reducing income taxes through greater use of tax-advantaged retirement accounts and tax-exempt bonds

Question 6

Advantages of positive cashflow

Answer 6

increased assets and reduce liabilities, increasing net worth

Question 7

Fixed Expenses

Answer 7

Those payments made for require/essential goods (food/clothing) and meet obligations established by a contract of law (mortgage/rent)

Question 8

Discretionary Expenses

Answer 8

Those expenses that the client has a considerable choice (payments for a vacation, education, recreation, charity)

Question 9

Cash Flow Analysis

Answer 9

Process of gathering data and presenting it in an organized format to identify the strength, weaknesses and important patterns

Question 10

Cash Flow Planning

Answer 10

Identifying courses of action to optimize cash flow

Question 11

Budgeting

Answer 11

Process of creating and following an explicit plan for spending and investing the resources available to the client

Question 12

What is a cash flow statement

Answer 12

Used to summarize client financial activities over a specified period of time.
Can be positive or negative
Net cash flow = Income - Expenses

Question 13

Explain how a financial position statement is used

Answer 13

to show an individuals wealth as a specified time, also known as a balance sheet

Question 14

Financial Assets:

Answer 14

Cash and cash equivalents and other financial assets

Question 15

Nonfinancial Assets

Answer 15

Items bought primarily for the creature of the comforts they provide. (Primary residence, car, jewelry, antiques and hobby equipment)

Question 16

Key components of a financial position statement

Answer 16

assets
liabilities
net worth

Question 17

How to increase clients net worth

Answer 17

appreciate of assets
additions of assets through retirement income
addition of clients assets through gifts or inheritances
decrease in clients inabilities through debt forgiveness