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Fundamentals and Insurance > Financial Statements and Analysis (Lesson 5) > Flashcards

Financial Statements and Analysis (Lesson 5) Flashcards

1
Q

What are financial statements used for

A

as a scoring mechanism for capturing and analyzing an individuals financial position and performance

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2
Q

Financial statements include:

A
  • Balance sheet
  • Income and Expense statement
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3
Q

What is a balance sheet

A

A snapshot of account balances at a moment in time. (As of December 31, 20XX)

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4
Q

CD <= 12 Months is considered

A

Cash

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5
Q

CD >= 12 Months is considered

A

Invested assets

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6
Q

All assets are stated at what value on a Balance sheet

A

FMV

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7
Q

What are the three categories of assets on a balance sheet

A
  • Cash and Cash Equivalents
  • Invested assets
  • Personal Use assets
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8
Q

What value are liabilities stated at

A

principal outstanding

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9
Q

Liabilities are classified as either

A
  • Current liabilities
  • Long Term liabilities
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10
Q

Net worth is the

A

difference between assets and liabilities

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11
Q

A statement of income and expenses (statement of cash flows) is

A

a listing of income, savings, expenses, and taxes

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12
Q

Expenses are both

A

Variable and fixed

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13
Q

Statement of cash flows presents income and expenses over

A

a period of time. For the year of 20XX

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14
Q

A statement of cash flows does not

A
  • Consider an employers contributions to retirement plans
  • Capture and report the giving or receiving of gifts or inheritances
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15
Q

A financial statement of analysis gives us insight to

A

a clients strengths and weaknesses

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16
Q

Financial statement analysis allows the CFP to answer questions related to

A
  • How well the client manages debt
  • How well the client is progressing towards their financial goal
  • How well the client is able to meet short term obligations
17
Q

The objective of ratio analysis is to

A
  • Gain additional insight into the financial situation and behavior of the client
  • Generate questions for the client to answer to further gain insight
18
Q

What does the current ratio measure

A

a measure of the clients ability to meet short term obligations

19
Q

For the Current ratio what do current assets include

A
  • Cash and Cash equivalents
  • CDs less than 12 months in maturity
  • Money market
  • Savings
  • Cash and accounts receivable
20
Q

For the Current ratio what do current liabilities include

A
  • Credit cards
  • short term debts less than 12 months
21
Q

What is the formula for the current ratio

A

Current assets divided by current liabilities

22
Q

What are considered current assets

A
  • cash
  • checking
  • money market
  • savings
  • short term CD
  • US T-Bill
  • Life insurance cash value
  • money market
23
Q

what is the formula for emergency fund

A

Current Assets / Monthly nondiscretionary expenses

24
Q

Consumer debt should not exceed

A

20% of NET income

25
Q

Housing debt should be less than or equal to

A

28% of GROSS income (PITI/Monthly gross Income)

26
Q

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

A

36% of GROSS income (PITI + all recurring debt / Monthly Gross Income)

27
Q

When is appropriate to rent?

A

Clients time in the property is going to be short 1 to 3 years

28
Q

When is it appropriate to buy

A
  • Clients time in the property is going to be long (>3 years)
  • Clients goal is to build equity
  • Client is in a high marginal tax bracket because of the income tax deduction for interest expense associated with the clients primary residence
29
Q

When is an adjustable rate mortgage appropriate

A

When the clients time in the property will be short 1-3 years

30
Q

What does a 2/6 ARM mean

A

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

31
Q

What is a reverse mortgage

A

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

32
Q

When is a reverse mortgage appropriate and who is it available to?

A
  • appropriate to generate income for elderly homeowners
  • available if the home owner is age 62 or older
33
Q

How are points calculated?

A

Equal to 1% of the loan balance and can be spread over the loan in a refinance

34
Q

What is the annual saving ratio formula

A

Annual savings (Employee + Employer contributions) / Annual gross income

35
Q

What is the formula for average invested assets for ROI formula

A

(Beginning investments + Ending Investments) / 2

36
Q

What is the formula for ROI

A

(EI - BI - S - GR) / Average invested assets

EI = Ending investments

BI = Beginning Investments

S = Savings

GR = Gifts Received

37
Q

What are some limitations of financial statements

A
  • Inflation (Difficult to compare year to year)
  • Use of estimates
  • Benchmarks (very few benchmarks)

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