Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

CFP 3/17 > Financial Planning Process > Flashcards

Financial Planning Process Flashcards

1
Q

Methods to value a business

A
  1. Book Value
    Uses balance sheet
    book value assets- book value liabilities = net worth of business
  2. Capitalization of Income
    Projected flow of income converted to PV
    Income/Capitalization rate (given) = Capitalized Value
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Pro Forma Statement

A

projects the expected results over the next year for business
estimates excess income over expenses
like a budget

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Emergency Fund

A

3 months married jt income
6 months single or single income (alimony, trust income, very wealthy)

can consist of:
checking (current months expenses must be subtracted from value)
gov money market
CD's < 90 days
laddered CD's < 6 months
savings accounts

Emergency fund ratio (EFR) = liquid assets ÷ nondiscretionary monthly expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Current Ratio

A

Current Ratio= Current Assets/Current Liabilities

Ability to meet short term obligations 1 or higher is good
(always use credit card debt even if paid off monthly)
(only use taxes when material says “taxes due” or “taxes payable”
(mortgage if say current amount due)

current assets can be converted to cash in 1yr or less

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Housing Cost Ratio

A

aka Housing Expense Ratio (PITI)

Principal interest, taxes, insurance/ gross monthly income

< or = 28%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Debt to Income Ratio

A

Consumer and housing debt/ gross monthly income

< or = 36%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Consumer Debt Ratio

A

non housing monthly payments (no PITI) / NET monthly income

(not gross income like other ratios)

< or = 20%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Savings Ratio

A

Savings per Yr/ Gross Income

5-8% increasing with age

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Behavioral Finance Stages

A

Denial
Ambivalence - use charts, graphs and spreadsheets to teach consequences for behavior)
Preparation
Action

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Banks

A

Establishment that performs financial transactions like receiving, investing and lending money.

3 federal agencies oversee
1. Comptroller of Currency (fed and national banks)
(state banks are subject to authority in that state)
2. Federal Reserve
3. Federal Deposit Insurance Corp (FDIC)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Savings and loan (S&L or Thrift)

A

Acquire funds through time deposits

Regulated by FDIC and Federal Home Bank Board

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

FDIC - Deposit Insurance Fund

A

Coverage depends on titling
$250,000 per titling not account

Trust $250,000 per bene unless trustee can direct funds elsewhere

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Negotiable CD’s

A

marketable deposit
holder receives deposit plus interest at maturity
can be sold before maturity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Credit Union

A

non profit financial organization
members have common affiliation
National Credit Union Insurance Fund (like FDIC)
most do not offer commercial loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Insurance Companies

A

Mechanism for risk sharing and risk transfer

also:
underwriting, rate making, reinsurance, investing, claims adjusting.

regulated by the state

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Regulation of insurance Companies

A

3 branches of State Gov:

  1. maintain solvency
  2. protect policyholders
  3. maintain competition
  4. assure coverage is avail to all who want it

regulate licensing, policy forms, rebating, insolvencies and liquidation, competence, reserves, twisting and access

Federal - COBRA/HIPPA, Standardization of Medicare Policy, Taxation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Securities Act 1933

A

Purchasers of New Issues need to be provided a prospectus. Full and Fair disclosure

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Securities Act 1934

A

Provides regulation of secondary market trading.

Created SEC to enforce securities law.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Investment Company Act 1940

A

Authorized by SEC to regulate (through FINRA):
Unit Investment Trusts (UIT)
Investment companies (closed end and open end)
Variable Life Insurance

20
Q

Securities Investor Protection Act 1970

A

Established SIPC insurance

limited protection against failure of brokerage firms

21
Q

Trust companies

A

Regulated by the State

Organization that acts as trustee, fiduciary or agent for individuals.

Engage in fiduciary investment management, estate planning, administration, stock registration and transfer, etc..

Can be named as executor or representative in will

22
Q

Inflation Adjusted Rate

A

((After tax rate/Inflation rate)-1)x 100
Example
((1.09/1.06)-1)x100= 2.8302%

23
Q

Home Sale Exclusion

A

Married $500,000

Single $250,000

24
Q

Alimony

A

Deductible by payor
Taxable to Payee

Can’t file joint tax return or live together
Can’t be used in place of child support
End at recipient spouse death or when court mandated

No transfers of non cash items, services, property or use of property, or promissory notes

Payments to maintain property owned (PITI) by payor and used by payee are not alimony i.e Mortgage unless owned by payee.

Premium Payments of life insurance owned by payee and payee is bene- on life of payor are alimony if made under divorce decree. Payor can’t own!

Tuition and rent pursuant to divorce decree qualify

25
Child Support
Not deductible by Payor Not taxable to Payee Payments that continue after occurrence or contingency tied to a child end are not child support example: $1000 mo until child is 18 then $400. $400 is alimony.
26
Divorce Property Settlements
Gift tax free | Basis is carried over
27
Dependency Exemption after Divorce
Awarded to custodial parent or parent having custody longer. More than 1/2 support from parent unless divorce decree says otherwise.
28
Disability Insurance Options
``` Disability Insurance Policy (employer or private) Long Term Care Ins SSI Disability Worker Compensation Medicare/Medicaid ```
29
Compensatory Damages
Generally tax free Discrimination award-taxable Damages up to medical cost for emotional distress is tax-free Nothing vague like headaches or stomach disorders. Need details of auto accident to prove comensatory
30
Punitive Damages
Taxable punish wrongdoing wrongful death-tax free
31
Prizes and Awards
full value included in gross income | if annuity is over 10 years or more then taxable as recieved
32
Long Term vs Short Term Debt
Long term - all non-consumer and auto debt; i.e. Home equity, mortgage Short term- auto loan, line of credit, credit card balance Collateralized...something backing it...home, car, business
33
Buying vs Renting
Buying Advantages - higher marginal tax bracket, tax deduction, cap gains on sale over exemption Disadvantages- Down payment, closing costs, PITI, utilities, maintenance. Renting Advantages - Rent is lower than mortgage; favor shorter time periods; no closing costs, lower maintenance and utilities Disadvantages- security deposit, no ultimate ownership
34
FHA Loan
Guaranteed by government but not originated by gov. If borrower defaults FHA makes good on the loan. Typically lower income borrowers who lack sufficient down payment. VA loan - similar but for veterans (less stringent than traditional mortgage)
35
Qualified Residence Interest Deduction
Home indebtedness $1M Home Equity Indebtedness $100K interest over indebtedness limit is not deductible 1/2 if married filing seperately
36
Refinancing
Consider: length of time will remain in home and cash flow.
37
Reverse Mortgage
Accessing equity in home until death, event or conclusion of term. Nursing home - not a barrier under $500,000. Is sold to satisfy reverse mortgage-remaining cash proceeds are barrier. If distributed as annuity may be consider income for SSI Better to do line of credit Rules: 1. 62 or older 2. no income qualifications 3. property is re-titled and can still live there as long as needed 4. No mortgage payments during life of loan(can still have mortgage) 5. Tax free proceeds 6. Amt depends on age, value, interest rates, reverse mortgage selected 7. No repaid until move out of home 8. Repayment can't exceed home value 9. Any remaining equity distributed to homeowner or estate
38
Registered Investment Advisor
``` Investment Advisor Act 1940 <100M Assets Register in state office of domicile May need to register in several states Registers with ADV $150min Records kept 5 years ``` Definition: All 3 Person who provides Advice Is in the Business of providing advice Provides advice for Compensation Exceptions: Bank Lawyer, Engineer, Teacher, Accountant - incidental Broker dealer- incidental to broker dealer business- no compensation Publisher - newspaper Advice in Gov securities ``` Exemptions: intrastate adviser - unlisted securities insurance companies family office venture capital funds Foreign advisers outside US ```
39
Family Office
Advice only to family members (trusts and charities) Wholly controlled by family Does not hold itself out as advisor
40
FINRA Must be notified in writing.....
Must be notified in writing PROMPTLY if firm or advisor: 1. violated securities law 2. written customer complaint -theft, misappropriation or forgery 3. defendant or respondent in any lawsuit alleging violation of Securities Act by regulatory authority 4. indicted, convicted, or pleads guilty to criminal offense.
41
Contract
Agreement between 2 or more parties Offer and acceptance Consideration (something of value) Principal must have legal capacity to execute can't be incompetent or intoxicated (can be voided by incompetent party) minors (food, shelter and clothing only) can't be illegal If does not meet above it is void
42
Chapter 11
Chapter 11 -Those that don't qualify for chapter 13
43
Chapter 13
Chapter 13- Reorganization-payments are reduced. Creditors can't harass, usually not required to relinquish assets
44
Chapter 7 Exemptions
Chapter 7- NOT 13 or 11 - can claim federal or state exemptions 33 States have opted out State Law exemptions: - Homestead (house adjacent to land) - Limited amount personal property - Wages due to head of family-providing more than 1/2 support to child - Limited equity in MV - ERISA plans - Cash value life ins/proceeds annuity - Disability benefits/unemployment/workers comp - Property held TIE Federal Exemptions -Civil Service retirement benefits/ railroad pensions/ veterans benefits.
45
Bankruptcy
Not canceled by bankruptcy: - student/government loans - 3years back taxes - Wage withholding FICA and income taxes - Child support/alimony
46
Chapter 7
``` Mean Test- Average monthly (60months) net income >10,000 Chapter 7 not an option ``` Average monthly (60months) net income <6000 chapter 7 not allowed completed consumer credit counseling w/in 6 months ``` Must provide: tax returns detailed earning projections Retirement account info ESA and 529 - can be protected if opened for 2 years ``` SEP/SIMPLE/ERISA/DC generally protected Traditional and Roth Exempt to 1M Unlimited Rollover Exemption IRA's not exempt if exceeds debtors need

CFP 3/17 (48 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions