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CFP > General Principles: Chapter 3 > Flashcards

General Principles: Chapter 3 Flashcards

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CFP® flashcards
1
Q

What is the formula for Net Worth?

A

Assets - Liabilities = Net Worth

or

Assets = Liabilities + Net Worth

or

Liabilities = Net Worth - Assets

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2
Q

What are included in the cash and cash equivalent category?

A
  1. Cash
  2. Checking Accounts
  3. Money Market Deposit Account
  4. Money Market Mutual Fund
  5. Savings Accounts
  6. CDs close to maturity
  7. Laddered CDs

*Life insurance cash values are not cash equivalents because insurance companies can delay distributing the funds for up to 6 months

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3
Q

What are included in the investments category of the statement of financial position?

A
  1. Variable and Fixed Annuities
  2. Business Interests
  3. Real Estate Owned for Investment purposes
  4. Collectibles owned for investment purposes
  5. Pensions, IRAs and Roth IRAs
  6. Mutual Funds
  7. Stocks/Bonds
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4
Q

What are included in the use assets category of the statement of financial position?

A
  1. Home
  2. Personal Property
  3. Collectibles for Personal Enjoyment
  4. Vacation Home
  5. Automobiles or Recreational Vehichles

*These assets are generally shown at FMV

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5
Q

What are included in the liabilities category of the statement of financial position?

A
  1. Credit card balances
  2. Personal Loans
  3. Auto Loan Balances
  4. Mortgage Loan Balances
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6
Q

On the statement of cash flows, what is savings equal to?

A

Inflows - Outflows

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7
Q

What are included as inflows or gross income?

A
  1. Salaries
  2. Capital Gains
  3. Rental Income
  4. Trust fund income
  5. Inheritance
  6. Interest and dividend income
  7. Alimony received
  8. Social security benefits
  9. Child support
  10. Gifts
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8
Q

What are included as fixed outflows?

A
  1. Note/Car Payments
  2. Insurance premiums
  3. Alimony paid
  4. Mortgage payments, rent
  5. Property tax
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9
Q

What are included as variable outflows?

A
  1. Food
  2. Clothes
  3. Entertainment
  4. Gifts
  5. Home maintenance
  6. Car maintenance
  7. Utilities
  8. Vacation
  9. Charity
  10. Miscellaneous
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10
Q

What are the two types of taxes on a cash flow statement?

A

Income Taxes (Federal & State)
FICA taxes and self-employment taxes

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11
Q

When looking at financial statements on the exam, what should you always read?

A

The footnotes!

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12
Q

What is book value on a corporate balance sheet?

A

It is the businesses net worth. Assets - Liabilities.

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13
Q

What is the capitalization of income?

A

It is the projected flow of income from a business converted into present value or the capitalized value.

Capitalized value = Annual Income / Capitalization Rate

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14
Q

What is the use of a pro forma statement?

A

It projects the expected profitability or return of the next year or longer

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15
Q

What are some typical guidelines for establishing a budget?

A

Typically it is done for 12 months but sometimes it can be shorter.

Make it flexible. Keep it long enough. Modify a simple budget to fit the client. Make it simple. Estimate unknowns. Estimate variables.

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16
Q

What should an emergency fund be invested in?

A
  1. Checking accounts
  2. Government money market accounts
  3. CDs close to maturity
  4. Savings accounts
  5. Laddered CD’s <= 6months
17
Q

What is the general rule for if a checking account can be used as a source for emergency funds?

A

If the current checking account balance exceeds the normal monthly expenses subtract one month of expenses, if the monthly expenses exceeds the funds in the checking account ignore the negative value.

18
Q

What are the typical lengths of time needed to pay fixed, variable and real estate taxes in an emergency fund.

A

3 months. If one of the criteria is met below.
-Single with a second source of income
- Married both work and have similar wages
- Married only one spouse works but has second source of income

6 months if the criteria below is met
- Single wage earner
- Married but only one spouse works

19
Q

What is generally considered a second source of income?

A
  1. One party receives alimony
  2. One party is significantly wealthy
  3. One party has a large trust fund providing income and rights of withdrawal of
    principal
20
Q

What does PITI stand for?

A

Principal, Interest, Taxes (property only) and Insurance (homeowners only)

21
Q

How much should PITI reflect of gross income?

A

<= 28%

22
Q

How much should total monthly debt reflect of gross income?

A

<=36%

23
Q

How much should consumer debt reflect net income?

A

<=20%

24
Q

What is the current ratio?

A

Current Assets/Current Liabilities

25
Q

When should you use credit card debt, taxes payable or mortgage info when calculating current ratio?

A

Use credit card debt even if the cards are paid off monthly. Only use taxes payable when the material indicates the taxes are due or it says the taxes are payable. Only use mortgage info when the data tells you the current amount

26
Q

What are current assets?

A

Cash equivalents
Marketable Securities
Accounts Receivable
Inventory

27
Q

What are current liabilities?

A

Cash Owed
Accounts Payable
Credit Card Debt
Taxes Payable

28
Q

What is the ideal savings amount a client should have?

A

5-8% of gross income.

CFP (20 decks)

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