Chapter 5 MC

Question 1

The liquidity ratio is

Answer 1

liquid assets divided by total current debts

Question 2

Which of the following statements best describes cash flow planning?

Answer 2

It involves identifying courses of action that will help optimize net cash flow.

Question 3

Other things being equal, a client’s net worth will increase as a result of which of the following actions? I. the addition to assets through retaining income II. a decrease in liabilities through forgiveness

Answer 3

Both I and II

Question 4

Which of the following statements concerning a client’s net cash flow is (are) correct? I. A client should have a positive net cash flow in the long run if he or she wants the flexibility to fund additional financial objectives. II. A client who has a negative net cash flow will have to invest (spend) additional resources in order to balance income and expenses.

Answer 4

I only

Question 5

Which of the following statements concerning net worth on the financial position statement is (are) correct? I. Net worth is the key to understanding the nature of the client’s assets and liabilities. II. Net worth is what remains if all the client’s assets are sold at their fair market values and all debts are paid.

Answer 5

II only
I is incorrect because net worth reveals little about the nature of assets or liabilities; it is simply a residual-the difference between total assets and total liabilities.

Question 6

Assets classified as nonfinancial (personal) assets include all the following EXCEPT

Answer 6

irrevocable trusts with an equity interest

Trusts with an equity interest are classified as investment assets for financial position statement purposes.

Question 7

All the following typically are considered discretionary expenses for cash flow statement purposes EXCEPT

Answer 7

household maintenance costs

Household maintenance costs are considered to be a fixed expense for cash flow statement purposes.

Question 8

Cash flow management consists of all the following components EXCEPT

Answer 8

cash flow implementation
Cash flow implementation is not one of the recognized components of cash flow management. Cash flow analysis, cash flow planning, and budgeting are its three basic components.

Question 9

All the following statements concerning a client’s individually owned insurance policies are correct EXCEPT

Answer 9

Property insurance coverage amounts are a factor in the client’s liquidity position
Property insurance coverages should be analyzed to see if they provide adequate protection against potential property losses. They are not a factor in the client’s liquidity position.