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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
Housing debt should be less than or equal to
28% of GROSS income (PITI/Monthly gross Income)
26
Housing plus all other recurring debt should be less than or equal to
36% of GROSS income (PITI + all recurring debt / Monthly Gross Income)
27
When is appropriate to rent?
Clients time in the property is going to be short 1 to 3 years
28
When is it appropriate to buy
- 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
When is an adjustable rate mortgage appropriate
When the clients time in the property will be short 1-3 years
30
What does a 2/6 ARM mean
the interest rate cannot increase more than 2% per year or 6% during the term of the loan
31
What is a reverse mortgage
the homeowner receives monthly payments or lump sum from a bank while retaining the right to live in the house
32
When is a reverse mortgage appropriate and who is it available to?
- appropriate to generate income for elderly homeowners - available if the home owner is age 62 or older
33
How are points calculated?
Equal to 1% of the loan balance and can be spread over the loan in a refinance
34
What is the annual saving ratio formula
Annual savings (Employee + Employer contributions) / Annual gross income
35
What is the formula for average invested assets for ROI formula
(Beginning investments + Ending Investments) / 2
36
What is the formula for ROI
**(EI - BI - S - GR) / Average invested assets** EI = Ending investments BI = Beginning Investments S = Savings GR = Gifts Received
37
What are some limitations of financial statements
- Inflation (Difficult to compare year to year) - Use of estimates - Benchmarks (very few benchmarks)

Fundamentals and Insurance (10 decks)

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