EXAM #1 Flashcards
How is wealth built?
By using net cash flows to invest in assets or pay down liabilities
What happens when assets increase?
net worth increases
What happens when liabilities decrease?
net worth increases
What is a personal cash flow statement?
a financial statement that measures a persons inflows and outflows
What are some examples of cash inflows?
Salaries, interest, dividends and all other forms on income
What are some examples of cash outflows?
all expenses both large and small
how do you calculate net cash flows?
Inflows - outflows
How do you calculate net worth?
assets - liabilities
What happens in liabilities > assets?
Negative net worth and insolvent
What happens in liabilities < assets?
positive net worth
The main takeaways from time value of money?
Calculate future value
calculate present value
determine payments
solve for rates
marginal tax rates
the amount of additional tax paid for every additional dollar earned as income
Steps to determining your tax liability
- Identify filing status
- determine marginal tax rates
- apply tax rate to taxable income
Tax credits vs deduction
tax credits are far better and more valuable
What is a standard deduction?
a fixed amount that can be deducted from adjusted gross income to determine taxable income
Standard deduction is…
not affected by income
What are itemised deductions?
a specific expense that can be deducted to reduce taxable income
Interest expense is…
Interest paid on borrowed money- primarily interest mortgages
State income tax is…
An income tax imposed by some states on people who receive income from employers in that state
Local income tax…
Also is deductive when itemising
Progressive tax
Tax burden increases as income increases
ex. US income tax
Regressive tax
tax burden decreases as income increases
ex. sales tax
What are the three types of income tax?
Federal, State, Local
What is the IRS?
The IRS stands for Internal Revenue Service
What does the IRS do?
The IRS is the government agency responsible for collecting federal taxes.
What is the Internal Revenue Code?
Tax laws passed by congress
- The code governs all judicial proceedings and tax disputes
When must tax returns be filed by?
April 15th
When does the tax year for federal income tax end?
December 31
If you want to file an automatic extension, it must be by …
April 15th but it gives you until October 15th to file without penalties
Who must file personal income taxes?
US citizens
income over filing requirement
Net earnings from self- employment
Payroll tax
FICA
FICA
Federal Insurance Contribution Act
What is FICA?
Taxes payed to fund the social security system and medicare
Tax payers must file a status for their tax return because different rates are associated with each status
single, married filing jointly, married filing separately, head of household, qualifying widow(er) with dependent child.
Simple interest is…
interest calculated on original principal only
Compounding interest is…
The process of earning interest on interest
How often can you compound?
quarterly, monthly, daily or even on a continuous basis
Money grows ______ as teh compounding period becomes _______
Faster, shorter
Discounting
the process of obtaining present values
Annuity
regular payments
Monthly compounding
12 compounding period
