Chapter 3

Question 1

explain the term personal cash flow statement?

Answer 1

• a financial statement that measures a persons income and expenses

Question 2

what are some factors that affect income?

Answer 2

• Stage in your career path
• type of Job
• Number of income earners in your household

Question 3

What are factors affecting expenses?

Answer 3

• size of family
• age
• personal consumption behaviour

Question 4

Define the term budget?

Answer 4

Cash flow statement based on forecasted cash flows for a future time

Question 5

Budgets are useful for identifying either cash surpluses or cash deficits T OR F

Answer 5

True, cash surpluses may be then used to build emergency fund, invest in additional assets or make extra payments

Question 6

What is the formula to find expected Net cash flows

Answer 6

Expected income - expected expenses

Question 7

List the steps involved in creating a budget note?

Answer 7

• Anticipate cash shortages
• assess the accuracy of the budget
• forecast net cash flows over several months
• budget with a biweekly pay period, if applicable
• create an annual budget, by extending budget out for longer periods
• Improve budget

Question 8

What are some alternative budgeting strategies?

Answer 8

• Envelope method

- Pay yourself first method

Question 9

explain the envelope method

Answer 9

• forces you to stick to a cash only budget for expense categories that are hard to control
• create separate envelopes for each category
• only allowed to spend the money in the envelope for that category

Question 10

Explain the pay yourself method

Answer 10

• Arrange for an automatic transfer of money from chequing to savings, that coincides with when you receive a paycheque

Question 11

What are the sections found in a personal balance sheet

Answer 11

• Assets
• Investments
• liabilities
• Net worth

Question 12

In investment, there is a low low relationship with risk + return. So the less risk, the less return. T OR F

Answer 12

True. The higher the risk, the higher the return

Question 13

What type of investment is the riskiest and what type is the least risky?

Answer 13

Stocks are the riskiest, bonds are the least risky

Question 14

How is liquidity measured

Answer 14

It is measured by the current ratio and the liquidity ratio

Question 15

the higher the current ratio _________? Fill in the blank

Answer 15

the higher the degree of liquidity

Question 16

formula for current ratio?

Answer 16

Liquid assets / current liabilities

Question 17

what is the formula for liquidity ratio?

Answer 17

liquid assets / monthly living expenses

Question 18

What is the formula for debt to asset ratio

Answer 18

total liabilities / total assets

Question 19

A high debt to asset ratio means what?

Answer 19

An excessive amount of debt, and less financial flexibility

Question 20

We should have no debt when we reach the retirement life stage. T OR F

Answer 20

True

Question 21

What is the formula for the savings ratio?

Answer 21

Savings during the period/ disposable income during the period