Chapter 5 TF Flashcards
Assembling complete, accurate, and up-to-date information about the client is the single most important task in financial planning
True
A client’s risk tolerance is easy to measure.
False. A client’s risk tolerance is actually very difficult to measure.
The Risk/Return Investment Pyramid arranges investment media so that the riskiest and highest-yielding media are at the base of the pyramid.
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
Most advisors choose fact finders that are designed to be used with specific planning software to simplify data entry.
True
In theory, the liabilities section of the financial position statement should show all liabilities as of the date of the statement
True
In developing a client’s financial position statement, the financial advisor is required to use the standard two-column format
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.
Assets should be listed on a client’s personal financial position statement at their historical cost adjusted for depreciation.
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.
The values of many types of personal assets can be estimated using Internet websites.
True
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.
True
The cash flow statement reflects the results of a client’s past financial activities at a specified time.
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.
The cash flow statement has three basic components: assets, liabilities, and net cash flow.
False. The cash flow statement has three basic components: income, expenses, and net cash flow.
Savings, investments, household furnishings, and an education fund are all classified as fixed expenses.
False. Savings, investments, household furnishings, and an education fund are all classified as discretionary expenses.
Cash flow management is essentially a euphemism for the budget planning and control process.
True
Cash flow planning involves identifying courses of action that will help maximize net cash flow.
False. Cash flow planning involves identifying courses of action that will help optimize–not maximize–net cash flow.
Cash flow planning is interwoven through almost all aspects of financial planning
True
Budgeting is the process of creating and following an explicit plan for spending and investing the resources available to the client.
Answer
True
Budgeting provides both a means of financial self-evaluation and a guideline to measure actual performance.
True
The liquidity ratio compares the amount of the client’s liquid assets with the amount of the client’s total assets.
False. The liquidity ratio compares the amount of the client’s liquid assets with the amount of the client’s total current debts.
The solvency ratio compares the value of the client’s net worth with the amount of the client’s total current debt
False. The solvency ratio compares the value of the client’s net worth with the value of the client’s total assets.
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.
True
The debt service ratio compares the client’s total debt payments with the client’s total liabilities.
False. The debt service ratio compares the client’s total debt payments with the client’s gross (before-tax) income.
Normally the advisor meets with the client at least once each year to review the plan or more frequently if changing circumstances warrant it.
True
