Fundamentals Lesson 6 Flashcards
Balance Sheet (Statement of Financial Position or Net Worth Statement)
Net worth = assets - liabilities
Assets:
Stated at ___?
3 Categories?
FMV
Cash/Cash Equivalents/Current Assets, Invested Assets, Personal Use Assets
Liabilities:
Stated at ___?
2 Categories?
Principal outstanding
Current (<1 year), Long Term (>1year)
Cash & Equivalents Examples:
Cash, MM, CD <12 months
Invested Assets Examples:
IRA, Brokerage Account, CD>12 months (EE savings bonds included here)
Personal Use Asset Examples:
Car, House, Jewelry, Furniture
Current Liabilities Examples:
Credit cards, taxes payable, unpaid bills
Long Term Liabilities Examples:
Outstanding balance on mortgage, vehicle, or any other outstanding loan
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
B
Balance sheet does not explain ___?
Changes in net worth
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
C
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
B
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
C
Statement of Income & Expenses (Cash Flow Statement):
Fixed expenses:
Variable expenses:
Fixed expenses remain constant
Ex: mortgage, car payment
Variable expenses are controlled by client
Ex: car repairs, entertainment, utilities, charitable giving
Cash Flow Statement does not:
Consider employer’s contributions
Capture/report giving/receiving gifts or inheritances
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
B
Ratio Categories
Liquidity
Debt
Performance
Liquidity Ratios:
Current:
Emergency:
Current=current assets/current liabilities
Emergency Fund=current assets/monthly non discretionary expenses
3-6 months non discretionary expenses
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
C
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
A
Consumer debt payments should not exceed __% of __ income
20%
Net income
Housing debt should be less than or equal to __% of __ income
28%
Gross income
Housing plus all other debt should be less than or equal to __% of __ income
36%
Gross income
Housing ratio:
PITI/monthly gross income
Housing + All Other Debt Ratio:
PITI+other debt/monthly gross income
Appropriate to rent/lease if time is ___
Appropriate to buy if ___, ___, ___.
Rent if short (1-3 years)
Buy if long (>3 years)/goal is build equity/in high marginal tax bracket
Adjustable Rate Mortgage (ARM)
Short or Long?
2/6 means?
Short
Interest cannot increase more than 2% per year or 6% during term
Reverse mortgage:
Repayment of outstanding mortgage occurs at __?
Appropriate to __?
Available to homeowner at age __?
Homeowner’s death
Generate income for elderly homeowners
62
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
C
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
A
Savings Ratio:
Annual Savings (ee&er)/annual gross income
<32: 10-12%
45-50; 20-25%
Rate of Return on Investments (ROI):
ROI= (end inv-bgn inv-svg-gifts)/avg invested assets
Avg inv assets = (bgn inv+end inv)/2
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
C
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?
Emergency: 7
Current: 3.3
Housing: 11.14%
Housing+other: 28.29%
Lesson 6 Review:
Which is not a personal use asset?
A. Automobile
B. Primary residence
C. Furniture
D. Pension plan
D
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
D
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
B
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
C
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
A
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
D
