Chapter 5 TF

Question 1

Assembling complete, accurate, and up-to-date information about the client is the single most important task in financial planning

Answer 1

True

Question 2

A client’s risk tolerance is easy to measure.

Answer 2

False. A client’s risk tolerance is actually very difficult to measure.

Question 3

The Risk/Return Investment Pyramid arranges investment media so that the riskiest and highest-yielding media are at the base of the pyramid.

Answer 3

False. The Risk/Return Investment Pyramid arranges the investment media so that the least risky and lowest yielding media are at the base of the pyramid

Question 4

Most advisors choose fact finders that are designed to be used with specific planning software to simplify data entry.

Answer 4

True

Question 5

In theory, the liabilities section of the financial position statement should show all liabilities as of the date of the statement

Answer 5

True

Question 6

In developing a client’s financial position statement, the financial advisor is required to use the standard two-column format

Answer 6

False. Financial advisors can choose from many different formats for the financial position statement since there is no standard. The format, however, is often determined by the software system used for analyzing data and producing reports.

Question 7

Assets should be listed on a client’s personal financial position statement at their historical cost adjusted for depreciation.

Answer 7

False. Assets should be listed on the client’s personal financial position statement at their fair market value as of the date the statement is being prepared.

Question 8

The values of many types of personal assets can be estimated using Internet websites.

Answer 8

True

Question 9

The final step in the preparation of a financial position statement involves recording the values of assets and liabilities in an appropriate format that shows the client’s net worth as the difference between total assets and total liabilities.

Answer 9

True

Question 10

The cash flow statement reflects the results of a client’s past financial activities at a specified time.

Answer 10

False. The cash flow statement summarizes a client’s financial activities over a specified period of time by comparing cash inflows and cash outflows and indicating whether the net cash flow for the period is positive or negative.

Question 11

The cash flow statement has three basic components: assets, liabilities, and net cash flow.

Answer 11

False. The cash flow statement has three basic components: income, expenses, and net cash flow.

Question 12

Savings, investments, household furnishings, and an education fund are all classified as fixed expenses.

Answer 12

False. Savings, investments, household furnishings, and an education fund are all classified as discretionary expenses.

Question 13

Cash flow management is essentially a euphemism for the budget planning and control process.

Answer 13

True

Question 14

Cash flow planning involves identifying courses of action that will help maximize net cash flow.

Answer 14

False. Cash flow planning involves identifying courses of action that will help optimize–not maximize–net cash flow.

Question 15

Cash flow planning is interwoven through almost all aspects of financial planning

Answer 15

True

Question 16

Budgeting is the process of creating and following an explicit plan for spending and investing the resources available to the client.
Answer

Answer 16

True

Question 17

Budgeting provides both a means of financial self-evaluation and a guideline to measure actual performance.

Answer 17

True

Question 18

The liquidity ratio compares the amount of the client’s liquid assets with the amount of the client’s total assets.

Answer 18

False. The liquidity ratio compares the amount of the client’s liquid assets with the amount of the client’s total current debts.

Question 19

The solvency ratio compares the value of the client’s net worth with the amount of the client’s total current debt

Answer 19

False. The solvency ratio compares the value of the client’s net worth with the value of the client’s total assets.

Question 20

The savings ratio compares the client’s net cash flow plus amounts already being saved or invested with the client’s annual after-tax income.

Answer 20

True

Question 21

The debt service ratio compares the client’s total debt payments with the client’s total liabilities.

Answer 21

False. The debt service ratio compares the client’s total debt payments with the client’s gross (before-tax) income.

Question 22

Normally the advisor meets with the client at least once each year to review the plan or more frequently if changing circumstances warrant it.

Answer 22

True