Ch.4 - Gathering Data and Preparing Financial Statements

Question 1

Comprehensive fact finders focus on both __________ data and __________data.

Answer 1

quantitative

qualitative

Question 2

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

Answer 2

Yes

Question 3

What are the sections of a comprehensive fact finder?

POOAIR

Answer 3

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

Question 4

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

Answer 4

Risk/return profile

Question 5

True or false

Risk/return profile is easy to measure.

Answer 5

False

It’s difficult to measure

Question 6

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

Answer 6

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

Question 7

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

Answer 7

Balance sheet

Question 8

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

Answer 8

Financial Position Statement (Balance sheet)

Question 9

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

Answer 9

Assets - Liabilities = Net Worth

Owned - Owed = Ours

Question 10

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

Answer 10

Financial

Non-financial

Question 11

What are some things that are considered liquid assets?

Answer 11

Cash
Cash Equivalents
CDs
Cash value life insurance

Question 12

What are some assets that could be considered investment assets?

Answer 12

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

Question 13

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

Answer 13

Non-financial assets (personal assets)

Question 14

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

Answer 14

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

Question 15

How are liabilities divided what a balance sheet?

Answer 15

Short-term liabilities

Long-term liabilities

Question 16

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

Answer 16

long-term liability

Question 17

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

Answer 17

the same.

Question 18

What is the liquidity ratios?

Answer 18

Liquid assets / (current liabilities + annual loan payments)

Question 19

What is the ideal liquidity ratio?

Answer 19

Between 1 and 2

Question 20

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

Answer 20

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

Question 21

What is the solvency ratio formula?

Answer 21

Net Worth / Total Assets

Question 22

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

Answer 22

period of time.

Question 23

What does the cash flow management consist of?

APB

Answer 23

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

Question 24

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

Answer 24

Identify your gross income

Question 25

What are your fixed expenses?

Answer 25

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

Question 26

What are your discretionary expenses?

Answer 26

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

Question 27

What is the formula for your net cash flow?

Answer 27

income - expenses = net cash flow

Question 28

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

Answer 28

Reduce liabilities | Increase investment

Question 29

If a client has a negative cash flow what should you do? | 3Rs

Answer 29

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

Question 30

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

Answer 30

The accumulation of funds for retirement.

Question 31

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

Answer 31

``` Flexibility Simplicity Content consistency Specific goals Eliminate unneeded info Estimate insignificant items ```

Question 32

A typical disclosure includes: | PECC

Answer 32

Philosophy/Ethics Educational background Certification/License Compensation format

Question 33

What is the role of the projected financial statements

Answer 33

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

Question 34

What are ways to increase Net Worth

Answer 34

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

Question 35

Why does paying off a debt not impact Net Worth

Answer 35

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

Question 36

Why does purchasing an Asset with cash not impact Net Worth

Answer 36

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

Question 37

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

Answer 37

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

Question 38

What does the Liquidity Ratio indicate

Answer 38

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

Question 39

What does the Solvency Ratio indicate

Answer 39

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

Question 40

How is the Savings Ratio calculated

Answer 40

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

Question 41

What does the Savings Ratio indicate

Answer 41

indicates whether the client is saving enough

Question 42

How is the Debt Service Ratio calculated

Answer 42

(Mortgage + Debt payments) / Net Income

Question 43

What does the Debt Service Ratio indicate

Answer 43

indicates if current debts can be sufficiently paid by income alone