Module 2 (1) Personal Financial Statements

Question 1

How can the relationship between the components of the statement of financial position be expressed?

Answer 1

Assets = liabilities + net worth

or

Net Worth= Assets - liabilities

Question 2

What 3 major categories can assets be separated into?

Answer 2

cash/cash equivalents

invested assets

use assets

Question 3

Typically, what does the “cash/cash equivalents” category include?

Answer 3

assets such as:

checking accounts

savings accounts

money market funds/accounts

short-term certificates of deposit (CDs) with a maturity date of 90 days or less

Question 4

What does the “invested assets” category include?

Answer 4

stocks

bonds

mutual funds

gold

gems & precious metals

collectibles

investment real estate

fine art

ownership interests in closely held businesses

vested pension benefits & similar assets

longer term CDs

Question 5

What does the “use assets” include?

Answer 5

the client’s residence

automobiles

boats

recreational real estate

personal effects including furnishings, clothes, jewelry, etc

Question 6

What is the definition of fair market value?

Answer 6

the price at which a willing and knowledgeable buyer would purchase an asset from a willing and knowledgeable seller

Question 7

What do “inflows” include?

Answer 7

gross salaries & wages

interest and dividend income

rental income

tax refunds

other monies received by the client

Question 8

If funds are withdrawn from savings or if invested assets are liquidated how should these be listed re: inflow?

Answer 8

the planner should list such inflows under a special inflow category of savings and investments to identify clearly the source of the cash

Question 9

When assets are liquidated and are listed as an inflow how may this also be recorded?

Answer 9

Because it’s a record of cash flows, amounts to be invested (e.g., dividends), could be recorded as an inflow when received as well as an outflow when reinvested (in the savings and investments category)

Question 10

How should outflows be divided into?

Answer 10

savings

investments

fixed outflows

variable outflows

Question 11

What are fixed outflows?

Answer 11

relatively predictable and recurring expenses over which the client does not have much control

Question 12

What are variable outflows?

Answer 12

those over which the client can exercise some degree of control, such as expenditures for food, transportation, clothes, and entertainment

Question 13

Where should savings and investments be on the list of outflows?

Answer 13

at the head of the list, because the “pay yourself first” theory can be re-inforced with the client