financial statements and analysis

Question 1

what are some examples of financial statements?

Answer 1

balance sheet
income and expense statement

Question 2

what will the CFP call a balance sheet?

Answer 2

statement of financial position OR net worth statement

Question 3

what will the CFP call an income and expense statement?

Answer 3

statement of cash flows

Question 4

what is a balance sheet?

Answer 4

a listing of assets, liabilities, and net worth

snapshot of account balances at a “moment in time”

Question 5

formula for networth

Answer 5

assets - liabilities = net worth

Question 6

what is the fair market value?

Answer 6

the price at which a willing buyer is willing to buy and a willing seller is willing to sell

Question 7

cash and cash equivalents / current assets

Answer 7

cash, checking, money market, CD (12 months or less maturity)

does not include EE Savings Bonds

Question 8

invested assets

Answer 8

stocks, bonds, mutual funds, retirement accounts, business ownership and assets maturing in greater than 12 months

Question 9

personal use assets

Answer 9

personal residence, car, furniture, boat and clothing

Question 10

liabilities

Answer 10

debt obligations that are owed by the client

state at PRINCIPAL OUTSTANDING

Question 11

current liabilities

Answer 11

obligations that are due within the next 12 months
excludes interest unless already incurred

ex: credit cards, taxes payable, any unpaid bills like cable, utilities, cell phone bills, etc.

Question 12

long term liabilities

Answer 12

the remaining balance on any outstanding debt beyond 12 months

ex: mortgage, car loan, boat loan

Question 13

what are the limitations to the balance sheet?

Answer 13

doesn’t explain:
- why or how an asset increased in value
- whether the client bought more of the asset or did it appreciate?
- why or how an asset or liability appears on the balance sheet
- changes in net worth

Question 14

what is a statement of income and expenses?

Answer 14

a listing of income, savings, expenses and taxes

presents income and expenses “over a period of time”

Question 15

what all is included in income?

Answer 15

salary, interest, dividends, and business income

Question 16

what are the limitations on a cash flow statement?

Answer 16

does not consider an employer’s contributions to retirement plans

does not capture and report the giving or receiving gifts or inheritances

Question 17

what does a financial statement analysis show us?

Answer 17

gives us insight into a client’s strengths and weaknesses

Question 18

what is the limitation to the financial analysis?

Answer 18

only provides us with a historical perspective, it is not predictive of the future

Question 19

what is the objective of ratio analysis?

Answer 19

gain additional insight into the financial situation and behavior of the client

generate questions for the client to answer to further gain insight

Question 20

what do liquidity ratios measure?

Answer 20

the ability of a client to meet short-term or current liabilties

Question 21

what do debt ratios measure?

Answer 21

how well a person manages their overall debt

Question 22

what do performance ratios measure?

Answer 22

the financial flexibility of the client, as well as the client’s progress towards goals

Question 23

what is the Current Ratio?

Answer 23

a measure of a client’s ability to meet short term obligations

current ratio = current assets/current liabilties

Question 24

ratio for emergency fund?

Answer 24

emergency fund = current assets / monthly nondiscretionary expenses

Question 25

Consumer debt payments should not exceed _____

Answer 25

20% of NET income

Question 26

Housing debt should be less than or equal to _____

Answer 26

28% of GROSS Income

Question 27

housing plus all other recurring debt should be less than or equal to _____

Answer 27

36% of GROSS Income

Question 28

Housing ratio

Answer 28

Monthly Housing Costs (P+I+T+I) / Monthly Gross Income

should be less than or equal to 28% of gross income

Question 29

what does PITI stand for?

Answer 29

principal
interest
taxes
homeowners insurance

Question 30

Housing and all other debt ratio

Answer 30

(PITI + all other recurring debt payments) / monthly gross income

should be less than or equal to 36% of gross income

Question 31

Adjustable Rate Mortgage - (think 2/6) what is it and when is it appropriate

Answer 31

when the client’s time in the property will be short (1-3 years)

a 2/6 ARM means the interest rate cannot increase more than 2% per year or 6% during the term of the loan

Question 32

what is a reverse mortgage?

Answer 32

homeowner receives a monthly payment or lump sum from a bank while retaining the right to live in the house

repayment of the outstanding mortgage occurs at the homeowner’s death

available if the homeowner is age 62 or older

Question 33

savings ratio

Answer 33

annual savings (employer + employee contributions) / annual gross income

Question 34

rate of return equation

Answer 34

ROI = (ending investments - beginning investments - savings - gifts received) / average invested assets

Question 35

average invested assets equation

Answer 35

(beginning investments + ending investments) / 2

Question 36

what are the limitations of financial statement analysis?

Answer 36

inflation - makes it hard to compare statements between periods

use of estimates - base it off of estimated FMV which could change

benchmarks - don’t pertain to every person’s situation