Financial Statements, Ratios

Question 1

balance sheet definition

Answer 1

a listing of assets, liabilities, and net worth all with balances at a moment in time

Question 2

proper dating layout for a balance sheet

Answer 2

“As of December 31, 20xx”

specific date

Question 3

what are all assets valued at on the balance sheet

Answer 3

fair market value

Question 4

fair market value (FMV)

Answer 4

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

Question 5

3 categories of assets

Answer 5

1. cash and cash equivalents (current assets)
2. invested assets
3. personal use assets

Question 6

examples of cash and cash equivalents (current assets)

Answer 6

cash, checking account, money market, CD maturing in less than 12 months, laddered CDs set to mature every 6 months, anything the client expects to convert to cash within 1 year

does NOT include EE savings bonds

Question 7

examples of invested assets

Answer 7

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

Question 8

examples of personal use assets

Answer 8

residence, car, furniture, boats, clothing, any assets used to maintain the client’s lifestyle

Question 9

liabilities definition

Answer 9

debt obligations that are owed by the client

Question 10

how are liabilities valued on the balance sheet

Answer 10

stated at principal outstanding

Question 11

current liabilities (and examples)

Answer 11

obligations due within the next 12 months

examples: credit cards, taxes payable, unpaid bills

Question 12

long-term liabilities (and examples)

Answer 12

remaining balance on any outstanding debt beyond 12 months

examples: client’s house loan

Question 13

net worth

Answer 13

difference between assets and liabilities

Question 14

statement of income and expenses (aka cash flows statement)

Answer 14

a listing of income, savings, expenses, and taxes

Question 15

fixed expenses

Answer 15

mortgage, car payment, boat loan, student loan payment, and generally any expense that remains constant each month

Question 16

variable expenses

Answer 16

car repairs, entertainment expenses, utilities, charitable contributions, and generally any expense over which the client can exercise control

Question 17

proper dating layout for a statement of income and expenses

Answer 17

“For the Year 20xx”

over a period of time

Question 18

liquidity ratios (definition, list of the liquidity ratios)

Answer 18

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

ratios: current ratio, emergency fund

Question 19

debt ratios (definition, list of the debt ratios)

Answer 19

indicate how well a person might manage their overall debt

ratios: housing ratio, housing and all other debt ratio

Question 20

performance ratios (definition, list of the performance ratios)

Answer 20

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

ratios: savings ratio, rate of return on investments

Question 21

current ratio definition

Answer 21

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

Question 22

current ratio formula

Answer 22

(current assets) / (current liabilities)

Question 23

emergency fund benchmark

Answer 23

3-6 months of non-discretionary expenses

Question 24

non-discretionary expenses

Answer 24

includes those expenses that do not go away if you lose your job, such as mortgage, utilities, food, car loan, property taxes, insurance premiums

does NOT include income taxes, payroll taxes, and contributions to a retirement savings account

Question 25

emergency fund ratio formula

Answer 25

(current assets) / (monthly non-discretionary expenses)

Question 26

housing ratio (formula and benchmark)

Answer 26

formula: (monthly housing costs) / (monthly gross income)
benchmark: should be less than or equal to 28% of gross income

Question 27

PITI stands for what?

Answer 27

Principal, Interest, Property Taxes, and Homeowners Insurance

Question 28

housing and all other debt ratio (formula and benchmark)

Answer 28

formula: (monthly housing costs + all other recurring debt payments) / (monthly gross income)
benchmark: should be less than or equal to 36% of gross income

Question 29

Adjustable Rate Mortgage (ARM)

Answer 29

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

Question 30

Reverse Mortgage

Answer 30

the 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

appropriate when needing to generate income for elderly homeowners (62+)

Question 31

savings ratio (formula and benchmark)

Answer 31

formula: (annual savings) / (annual gross income)
benchmark: 10-12% of gross income is the target range if a client starts saving before 32 years old (20-25% if saving starts around age 45-50)

Question 32

rate of return on investments (ROI) (formula)

Answer 32

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

average invested assets = (beginning investments + ending investments) / 2