Ch.4 - Gathering Data and Preparing Financial Statements Flashcards
Comprehensive fact finders focus on both __________ data and __________data.
quantitative
qualitative
If a client is married, should both spouses participate in the completion of the fact finder?
Yes
What are the sections of a comprehensive fact finder?
POOAIR
Personal information Objective(s): Financial and non-financial Obstacle(s): Bills, barriers, habits Assets and liabilities Income and expenses Risk/return profile
What type of profile provides a quick assessment of the clients risk tolerance?
Risk/return profile
True or false
Risk/return profile is easy to measure.
False
It’s difficult to measure
Described the risk/return pyramid investments, bottom to top.
Bottom to top: Cash/equivalents Fixed income (bonds) Equities (stocks) Speculative As you go up you increase your risk
What is another way of saying a “Statement of Financial Position”?
Balance sheet
This document reflects a family net worth for a specific time.
Financial Position Statement (Balance sheet)
What is the formula used in your financial position statement (balance sheet)? Describe each part.
Assets - Liabilities = Net Worth
Owned - Owed = Ours
On the balance sheet, assets are divided into two categories what are they?
Financial
Non-financial
What are some things that are considered liquid assets?
Cash
Cash Equivalents
CDs
Cash value life insurance
What are some assets that could be considered investment assets?
Stocks, bonds, mutual funds, ETFs Retirement accounts Trust Notes receivable Commodities, royalties, oil and gas interest
What type of asset is typically illiquid and held for services they provide to the individual?
Non-financial assets (personal assets)
Name some items that could be considered non-financial assets (personal assets).
- Primary residence, furniture, cars
- Farms and land
- Equity in businesses, partnerships, closely held corporation’s
How are liabilities divided what a balance sheet?
Short-term liabilities
Long-term liabilities
This type of liability is typically incurred to purchase “use” assets (houses, cars, land, businesses,).
long-term liability
If cash is used to pay off a debt or purchase an asset, the family’s net worth will remain…
the same.
What is the liquidity ratios?
Liquid assets / (current liabilities + annual loan payments)
What is the ideal liquidity ratio?
Between 1 and 2
If your liquidity ratio is too high what should you do?
Put some of the extra money in some form of investment.
What is the solvency ratio formula?
Net Worth / Total Assets
The cash flow statement summarizes cash inflows and outflows for a…
period of time.
What does the cash flow management consist of?
APB
– Analysis (gather data and identify strengths and weaknesses)
– Planning (create a goal to optimize your cash flow)
– Budgeting (create a spending plan)
What is the starting point in preparing a cash flow statement?
Identify your gross income
What are your fixed expenses?
Basic needs (mortgage/rent, food, utilities, taxes, medical)
What are your discretionary expenses?
Vacations, charity contributions, education tuition, savings, furniture, investing, gifts
What is the formula for your net cash flow?
income - expenses = net cash flow
If a client’s cash flow is positive, what could be their next steps?
Reduce liabilities
Increase investment
If a client has a negative cash flow what should you do?
3Rs
Reduce - discretionary expenses, income tax
Reallocate - low yielding assets to a higher return
Refinance - loans for a lower interest rate
What is the most important reason for saving according to various surveys?
The accumulation of funds for retirement.
When creating a budget for clients, what are the things you should include the budget?
(FSCSEE)
Flexibility Simplicity Content consistency Specific goals Eliminate unneeded info Estimate insignificant items
A typical disclosure includes:
PECC
Philosophy/Ethics
Educational background
Certification/License
Compensation format
What is the role of the projected financial statements
Facilitates ease of monitoring the client’s plan. Allows comparison of financial statements to their corresponding projection, this offers an opportunity for recalibration.
What are ways to increase Net Worth
Appreciation of assets
Additional assets through income retention
Additional assets through a gift
Removal of debt through forgiveness
Why does paying off a debt not impact Net Worth
The amount paid from the Assets side is equivalent to the amount paid on the Liabilities side.
Why does purchasing an Asset with cash not impact Net Worth
The amount paid from Cash on the Assets side is equivalent to the new Asset added to the Asset side.
How are the Assets and Liabilities valued in a Financial Position Statement
Assets: Fair market values as of date of statement
Liabilities: Amount owed as of date of statement
What does the Liquidity Ratio indicate
Whether the client may face difficulty in paying their debts if their income were to cease.
What does the Solvency Ratio indicate
Indicates how much assets can decline before the client has no wealth
How is the Savings Ratio calculated
(net cash flow + amount saved + amount invested) / annual after-tax income
What does the Savings Ratio indicate
indicates whether the client is saving enough
How is the Debt Service Ratio calculated
(Mortgage + Debt payments) / Net Income
What does the Debt Service Ratio indicate
indicates if current debts can be sufficiently paid by income alone
