Chapter 2 using Financial Statements and Budgets

Question 1

Annuity

Answer 1

A fixed sum of money that occurs annually.

Question 2

Assets

Answer 2

Items that one owns.

Question 3

Balance Sheet

Answer 3

A financial statement that describes a person’s financial position at a given points in time.

Question 4

Budget Control Schedule

Answer 4

A summary that shows how actual income and expenses compare with the various budget categories and where variances (surpluses and deficits) exist.

Question 5

Budgets

Answer 5

A detailed financial report that looks forward, based on expected income and expenses.

Question 6

Cash basis

Answer 6

A method of preparing financial statements in which only transaction involving actual cash receipts or actual cash outlays are recorded.

Question 7

Cash Budget

Answer 7

A budget that takes into account estimated monthly cash receipts and cash expenses for the coming years.

Question 8

Cash deficit

Answer 8

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

Question 9

Cash Surplus

Answer 9

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

Question 10

Compounding

Answer 10

when interest earned each year is left in the account and becomes part of the balance on which interest is earned in subsequent years.

Question 11

Current or short-term liabilities

Answer 11

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

Question 12

Debt service ratio

Answer 12

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

Question 13

Discounting

Answer 13

The Process of finding present value; the inverse of compounding to find future value.

Question 14

Equity

Answer 14

The actual ownership interest in a specific asset or group assets.

Question 15

Expenses

Answer 15

Money spent on living expenses and to pay taxes, purchase assets, or repay debt.

Question 16

Fair market value

Answer 16

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

Question 17

Fixed Expenses

Answer 17

Contractual, predetermined expenses involving equal payments each period.

Question 18

Future Value

Answer 18

The value to which an amount today will grow if it earns an specific rate of interest over a given period.

Question 19

Income

Answer 19

Earnings receives as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets.

Question 20

Income and expense statement

Answer 20

A financial statement that measures financial performance over time.

Question 21

Insolvency

Answer 21

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

Question 22

Investments

Answer 22

Assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service.

Question 23

Liabilities

Answer 23

Debts, such as credit cards charges, loans and mortgages.

Question 24

Liquid Assets

Answer 24

Assets that are held in the form of cash or can readily be converted to cash with little or no loss in value.

Question 25

Liquidity Ratio

Answer 25

Total liquid assets divided by total current debts; measures the ability to pay current debts.

Question 26

Long-term liabilities

Answer 26

Any debt due 1 year or more from the date of the balance sheet.

Question 27

Net worth

Answer 27

An individual’s or family’s actual wealth; determined by subtracting total liabilities from total assets.

TOTAL ASSETS – TOTAL LIABILITIES= NETWORTH

Question 28

Open account credit obligations

Answer 28

Current liabilities that represent the balances outstanding against establishing credit lines.

Question 29

Personal Financial Statements

Answer 29

Balance Sheets and income and expense statements that serve as planning tools that are essential to developing and monitoring personal financial plans.

Question 30

Personal Property

Answer 30

Tangible assets that are movable and used in everyday life.

Question 31

Present Value

Answer 31

The value today of an amount to be received in the future, it is the amount that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount.

Question 32

Real Property

Answer 32

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

Question 33

Savings Ratio

Answer 33

Cash surplus divided by net income(after tax); indicated relative amount of cash surplus achieved during a given period.

Question 34

Solvency Ratio

Answer 34

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

Question 35

Time value of money

Answer 35

the concept that a dollar today is worth more than a dollar received in the future.

Question 36

Variable Expenses

Answer 36

Expenses involving payment amounts that change from one time period to the next.