Chapter 2

Question 1

Total Assets

Answer 1

Are the things that you own. An item is classified as an asset whether it was purchased with cash or financed using debt

Question 2

What are ways to group assets?

Answer 2

Liquid assets, investments, real property, and personal property

Question 3

What is an Investment?

Answer 3

Assets acquired to earn a return rather than provide a service. These assets are mostly intangible financial assets (stock, bonds, mutual funds, and other types of securities)

Question 4

What is a Real Property?

Answer 4

Tangible asset that are immovable: land and anything fixed to it, such as a house.

Question 5

What is a Personal property?

Answer 5

Tangible assets that are movable and used in everyday life. Such as automobiles, recreational equipment, household furnishing and appliances, clothing, jewelry etc.

Question 6

What is fair market value?

Answer 6

The actual value of an asset, or the price for which it can reasonably be expected to sell in the open market

Question 7

What are liabilities?

Answer 7

Debts such as credit card charges, loans, and mortgages. What you owe.

Question 8

What is current, short-term liability

Answer 8

Any debt due within 1 year of the date of the balance sheet

Question 9

What is long-term liability?

Answer 9

Any debt due 1 year or more from the date of the balance sheet. (Real estate mortgages, most consumer installment loans, and margin loans used to purchase securities)

Question 10

What are variable expenses?

Answer 10

Expenses for which the amount of the payments change from period to period. Examples include: groceries, clothing, utilities, entertainment, and medical expenses.

Question 11

What are fixed expenses?

Answer 11

Expenses that are usually contractual with a predetermined payment amount. Typically, payment is made in equal, periodic payments (for example, monthly rent) Examples are: mortgage payments, rent, contract cell phone fees, insurance, auto loans, and other installment-type loans.

Question 12

The cash inflows refers to your …?

Answer 12

Income

Question 13

The cash outflows refers to your ….?

Answer 13

Expenses

Question 14

How is the cash surplus or deficit calculated in the income statement?

Answer 14

Subtracting the total income from the total expenses.

Question 15

What is a cash deficit?

Answer 15

An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.

Question 16

What is a cash surplus?

Answer 16

An excess amount of income over expenses that results in increased net worth.

Question 17

What is the equation for debt service ratio?

Answer 17

Total monthly loan payments/monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly.

Question 18

What is insolvency?

Answer 18

The financial state in which net worth is less than zero.

Question 19

What is the equation for the liquidity ratio?

Answer 19

Total liquid asset/Total current debts; measures the ability to pay current debts.

Question 20

How can we determine the net worth?

Answer 20

Subtracting total liabilities from total assets.

Question 21

What is the equation for the savings ratio?

Answer 21

Cash surplus/Net income (after tax); indicates relative amount of cash surplus achieved during a given period.

Question 22

What is the equation for the solvency ratio?

Answer 22

Total net worth/total assets; measures the degree of exposure to insolvency.

Question 23

What are variable expenses?

Answer 23

Expenses involving payment amounts that change from one time period to the next (varies)

Question 24

What are fixed expenses?

Answer 24

Contractual, predetermined expenses involving equal payments each period.

Question 25

What is the meaning of liquidity?

Answer 25

Liquidity is the ease and cost at which you can convert an asset into cash.

Question 26

What are the different levels of liquidity?

Answer 26

Very liquid, less liquid and illiquid.