Fundamentals Lesson 6

Question 1

Balance Sheet (Statement of Financial Position or Net Worth Statement)

Answer 1

Net worth = assets - liabilities

Question 2

Assets:
Stated at ___?
3 Categories?

Answer 2

FMV

Cash/Cash Equivalents/Current Assets, Invested Assets, Personal Use Assets

Question 3

Liabilities:
Stated at ___?
2 Categories?

Answer 3

Principal outstanding

Current (<1 year), Long Term (>1year)

Question 4

Cash & Equivalents Examples:

Answer 4

Cash, MM, CD <12 months

Question 5

Invested Assets Examples:

Answer 5

IRA, Brokerage Account, CD>12 months (EE savings bonds included here)

Question 6

Personal Use Asset Examples:

Answer 6

Car, House, Jewelry, Furniture

Question 7

Current Liabilities Examples:

Answer 7

Credit cards, taxes payable, unpaid bills

Question 8

Long Term Liabilities Examples:

Answer 8

Outstanding balance on mortgage, vehicle, or any other outstanding loan

Question 9

Example Exam Question:
Which of the following is not a current asset or current liability?
1. Laddered CDs maturing within the year
2. Credit card debt
3. EE savings bonds
4. IRA
5. Taxes payable

A. 1,2,3,5
B. 3,4
C. 1,2,3,4,5
D. 1,2,4

Answer 9

B

Question 10

Balance sheet does not explain ___?

Answer 10

Changes in net worth

Question 11

Example Exam Question:
What is the change in net worth:
Purchased $10k furniture on credit cards
Stocks increased by $5k
Spent $2k on vacation
Purchased $30k car with 10% down & financed remaining

A. $0
B.
C. $3k
D. $5k

Answer 11

C

Question 12

Example Exam Question:
Client purchased new bedroom suite for $6,500. Purchase would appear as:
1. Use asset on net worth statement
2. Investment asset on net worth statement
3. Variable outflow on cash flow statement
4. Fixed outflow on cash flow statement

A. 1,2,3
B. 1,3
C. 2,4
D. 4
E. 1,2,3,4

Answer 12

B

Question 13

Example Exam Question:
Net worth increased from $600k to $750k this year. Inherited $50k in stocks/bonds, earned salary of $80k. Saved 10% of salary in 401k. Contributed $3k to IRA. Used $5k from MM to purchase new furniture. Investments grew by $75k. What was the reduction in liabilities?

A. $5k
B. $10k
C. $15k
D. $20k
E. $25k

Answer 13

C

Question 14

Statement of Income & Expenses (Cash Flow Statement):
Fixed expenses:
Variable expenses:

Answer 14

Fixed expenses remain constant
Ex: mortgage, car payment
Variable expenses are controlled by client
Ex: car repairs, entertainment, utilities, charitable giving

Question 15

Cash Flow Statement does not:

Answer 15

Consider employer’s contributions

Capture/report giving/receiving gifts or inheritances

Question 16

Example Exam Question:
During data gathering phase, client provides cash flow statement. This will provide advisor with understanding of all of the following except:

A. 401k contributions
B. Income taxes payable
C. Variable expenses
D. Discretionary cash flow

Answer 16

B

Question 17

Ratio Categories

Answer 17

Liquidity
Debt
Performance

Question 18

Liquidity Ratios:
Current:
Emergency:

Answer 18

Current=current assets/current liabilities
Emergency Fund=current assets/monthly non discretionary expenses
3-6 months non discretionary expenses

Question 19

Example Exam Question:
EE Bonds $6k
Checking $5k
Bills due in 10 days: $1.5k
CD 6 months: $1k
IRA: $25k
Cash: $500
Credit Card balance: $1.5k
MM: $10k

What is current ratio?

A. 3.0
B. 2.1
C. 5.5
D. 6.5

Answer 19

C

Question 20

Example Exam Question:
Current assets: $15k
Monthly non discretionary: $5k
Monthly discretionary $3k
What is emergency fund?

A. 3.0 months
B. 2.1 months
C. 5.5 months
D. 6.5 months

Answer 20

A

Question 21

Consumer debt payments should not exceed __% of __ income

Answer 21

20%

Net income

Question 22

Housing debt should be less than or equal to __% of __ income

Answer 22

28%

Gross income

Question 23

Housing plus all other debt should be less than or equal to __% of __ income

Answer 23

36%

Gross income

Question 24

Housing ratio:

Answer 24

PITI/monthly gross income

Question 25

Housing + All Other Debt Ratio:

Answer 25

PITI+other debt/monthly gross income

Question 26

Appropriate to rent/lease if time is ___ | Appropriate to buy if ___, ___, ___.

Answer 26

Rent if short (1-3 years) | Buy if long (>3 years)/goal is build equity/in high marginal tax bracket

Question 27

Adjustable Rate Mortgage (ARM) Short or Long? 2/6 means?

Answer 27

Short | Interest cannot increase more than 2% per year or 6% during term

Question 28

Reverse mortgage: Repayment of outstanding mortgage occurs at __? Appropriate to __? Available to homeowner at age __?

Answer 28

Homeowner’s death Generate income for elderly homeowners 62

Question 29

Example Exam Question: Option 1: 10.5% with 5 discount points at closing Option 2: 11% with 2 discount points at closing Assuming qualify for both, what should be considered in deciding? 1. Gross income 2. Estimated length of ownership 3. Real estate tax liability 4. Cash currently available ``` A. 1,2 B. 2 C. 2,4 D. 4 E. 1,2,3,4 ```

Answer 29

C

Question 30

Example Exam Question: Owns $3M home. 10 years ago put 20% down. Financed remainder at 4.25% for 15 years. Offered refinance options: 1. Remaining balance plus $80k for 15 years at 3.75% 2. Remaining balance plus 80k for 15 years at 3.68% with 2 point Which results in lower monthly payment? A. Option 1 B. Option 2

Answer 30

A

Question 31

Savings Ratio:

Answer 31

Annual Savings (ee&er)/annual gross income <32: 10-12% 45-50; 20-25%

Question 32

Rate of Return on Investments (ROI):

Answer 32

ROI= (end inv-bgn inv-svg-gifts)/avg invested assets | Avg inv assets = (bgn inv+end inv)/2

Question 33

``` Lesson 6 Review: What is impact on net worth? Bought furniture for $5,000 on credit Investments appreciated $10,000 Bought car for $20,000, put $5,000 down out of MM & financed rest ``` A. Increased by $25,000 B. Decreases by $15,000 C. Increased by $10,000 D. No impact

Answer 33

C

Question 34

``` Lesson 6 Review: Current assets: $23,100 Current liabilities: $7,000 Monthly non discretionary: $2,000 Annual income: $140,000 Mortgage, Interest, Taxes: $1,300/mo Total non discretionary including mortgage: $3,300/mo ``` What is emergency fund? What is current ratio? What is housing ratio? What is housing+other debt ratio?

Answer 34

Emergency: 7 Current: 3.3 Housing: 11.14% Housing+other: 28.29%

Question 35

Lesson 6 Review: Which is not a personal use asset? A. Automobile B. Primary residence C. Furniture D. Pension plan

Answer 35

D

Question 36

Lesson 6 Review: The value of client’s house will be listed at what price in the personal use asset section of balance sheet? A. Cost B. Insured price C. Outstanding mortgage balance D. Fair market value

Answer 36

D

Question 37

Lesson 6 Review: Salary of $50k. Contributes $2,500 to 401k. Employer contributes $2,500 to 401k. Which is true? A. Savings rate is 5%, below benchmark B. Savings rate is 10%, on target with benchmark

Answer 37

B

Question 38

Lesson 6 Review: Which is most accurate regarding variable rate mortgage? A. Most appropriate time is when interest rates are expected to increase B. When future interest rate movements are uncertain C. When income is expected to significantly increase in the future or you plan on staying in house for short period of time D. When income is expected to increase or plan to stay in house for long period of time

Answer 38

C

Question 39

Lesson 6 Review: When preparing statement of financial position, which is true? A. Reserve liability for taxes owed on sale of assets should be listed B. Assets with more volatility should be listed first in investment assets section C. All expenditures should be categorized as fixed or variable D. Anticipated liabilities such as potential car purchase in 10 years should be reported & recorded at NPV

Answer 39

A

Question 40

``` Lesson 6 Review: Pays $3k/mo on credit card outstanding balance or $45k. Home has FMV of $500k with outstanding mortgage or $280k. Has following investments: Life insurance cash value: $10k MM earning 1%/yr: $35k CD earning 1.25%/yr: $20k ``` Which do you recommend to eliminate cc debt & max overall cash flow? A. Liquidate CD 1st, then payoff balance using MM mutual fund B. Borrow $45k against home equity C. Use MM mutual fund & borrow remainder from cash value D. Liquidate MM then use CD

Answer 40

D