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ChFC HS 300: Financial Planning: Process and Environment > Ch.4 - Gathering Data and Preparing Financial Statements > Flashcards

Ch.4 - Gathering Data and Preparing Financial Statements Flashcards

1
Q

Comprehensive fact finders focus on both __________ data and __________data.

A

quantitative

qualitative

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2
Q

If a client is married, should both spouses participate in the completion of the fact finder?

A

Yes

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3
Q

What are the sections of a comprehensive fact finder?

POOAIR

A 
Personal information
Objective(s): Financial and non-financial
Obstacle(s): Bills, barriers, habits
Assets and liabilities
Income and expenses
Risk/return profile
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4
Q

What type of profile provides a quick assessment of the clients risk tolerance?

A

Risk/return profile

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5
Q

True or false

Risk/return profile is easy to measure.

A

False

It’s difficult to measure

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6
Q

Described the risk/return pyramid investments, bottom to top.

A 
Bottom to top: 
Cash/equivalents
Fixed income (bonds)
Equities (stocks)
Speculative 
As you go up you increase your risk
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7
Q

What is another way of saying a “Statement of Financial Position”?

A

Balance sheet

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8
Q

This document reflects a family net worth for a specific time.

A

Financial Position Statement (Balance sheet)

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9
Q

What is the formula used in your financial position statement (balance sheet)? Describe each part.

A

Assets - Liabilities = Net Worth

Owned - Owed = Ours

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10
Q

On the balance sheet, assets are divided into two categories what are they?

A

Financial

Non-financial

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11
Q

What are some things that are considered liquid assets?

A

Cash
Cash Equivalents
CDs
Cash value life insurance

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12
Q

What are some assets that could be considered investment assets?

A 
Stocks, bonds, mutual funds, ETFs
Retirement accounts
Trust
Notes receivable
Commodities, royalties, oil and gas interest
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13
Q

What type of asset is typically illiquid and held for services they provide to the individual?

A

Non-financial assets (personal assets)

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14
Q

Name some items that could be considered non-financial assets (personal assets).

A
  • Primary residence, furniture, cars
  • Farms and land
  • Equity in businesses, partnerships, closely held corporation’s
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15
Q

How are liabilities divided what a balance sheet?

A

Short-term liabilities

Long-term liabilities

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16
Q

This type of liability is typically incurred to purchase “use” assets (houses, cars, land, businesses,).

A

long-term liability

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17
Q

If cash is used to pay off a debt or purchase an asset, the family’s net worth will remain…

A

the same.

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18
Q

What is the liquidity ratios?

A

Liquid assets / (current liabilities + annual loan payments)

19
Q

What is the ideal liquidity ratio?

A

Between 1 and 2

20
Q

If your liquidity ratio is too high what should you do?

A

Put some of the extra money in some form of investment.

21
Q

What is the solvency ratio formula?

A

Net Worth / Total Assets

22
Q

The cash flow statement summarizes cash inflows and outflows for a…

A

period of time.

23
Q

What does the cash flow management consist of?

APB

A

– Analysis (gather data and identify strengths and weaknesses)
– Planning (create a goal to optimize your cash flow)
– Budgeting (create a spending plan)

24
Q

What is the starting point in preparing a cash flow statement?

A

Identify your gross income

25
Q

What are your fixed expenses?

A

Basic needs (mortgage/rent, food, utilities, taxes, medical)

26
Q

What are your discretionary expenses?

A

Vacations, charity contributions, education tuition, savings, furniture, investing, gifts

27
Q

What is the formula for your net cash flow?

A

income - expenses = net cash flow

28
Q

If a client’s cash flow is positive, what could be their next steps?

A

Reduce liabilities

Increase investment

29
Q

If a client has a negative cash flow what should you do?

3Rs

A

Reduce - discretionary expenses, income tax
Reallocate - low yielding assets to a higher return
Refinance - loans for a lower interest rate

30
Q

What is the most important reason for saving according to various surveys?

A

The accumulation of funds for retirement.

31
Q

When creating a budget for clients, what are the things you should include the budget?
(FSCSEE)

A 
Flexibility
Simplicity
Content consistency
Specific goals
Eliminate unneeded info
Estimate insignificant items
32
Q

A typical disclosure includes:

PECC

A

Philosophy/Ethics
Educational background
Certification/License
Compensation format

33
Q

What is the role of the projected financial statements

A

Facilitates ease of monitoring the client’s plan. Allows comparison of financial statements to their corresponding projection, this offers an opportunity for recalibration.

34
Q

What are ways to increase Net Worth

A

Appreciation of assets
Additional assets through income retention
Additional assets through a gift
Removal of debt through forgiveness

35
Q

Why does paying off a debt not impact Net Worth

A

The amount paid from the Assets side is equivalent to the amount paid on the Liabilities side.

36
Q

Why does purchasing an Asset with cash not impact Net Worth

A

The amount paid from Cash on the Assets side is equivalent to the new Asset added to the Asset side.

37
Q

How are the Assets and Liabilities valued in a Financial Position Statement

A

Assets: Fair market values as of date of statement
Liabilities: Amount owed as of date of statement

38
Q

What does the Liquidity Ratio indicate

A

Whether the client may face difficulty in paying their debts if their income were to cease.

39
Q

What does the Solvency Ratio indicate

A

Indicates how much assets can decline before the client has no wealth

40
Q

How is the Savings Ratio calculated

A

(net cash flow + amount saved + amount invested) / annual after-tax income

41
Q

What does the Savings Ratio indicate

A

indicates whether the client is saving enough

42
Q

How is the Debt Service Ratio calculated

A

(Mortgage + Debt payments) / Net Income

43
Q

What does the Debt Service Ratio indicate

A

indicates if current debts can be sufficiently paid by income alone

ChFC HS 300: Financial Planning: Process and Environment (12 decks)

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