Module 2 - Quiz

Question 1

Assets listed on a statement of financial position are normally divided into which three categories?

Answer 1

Cash/cash equivalents,
Invested assets, and
Use assets are the three categories of assets found on a statement of financial position.

Question 2

David is planning to provide $50,0000 as financial backing for his coworker’s business, which they have been discussing over lunch for the past year. David does not want to participate in the day-to-day operations, just earn a return for his investment. Which one of the following business forms would you suggest as a best choice to begin?

1) sole proprietorship
2) general partner
3) limited partnership
4) C corporation

Answer 2

3) limited partnership - A limited partnership would allow one partner to run the business and the other to remain with limited duties (just investment in this case).

A sole proprietor is for one business owner, which is reflected on that owner’s tax return. With a general partnership, both partners participate in the business operations. While the C corporation may be viable for the business setup, it is a much more complex form of business than a limited partnership and not generally used for a small startup. An S corporation is more startup friendly, but still more complex to set up than a partnership.

Question 3

In general, assets are shown on a statement of financial position at…

Answer 3

their current market values.

Question 4

Which one of the following assets would be classified as a cash/cash equivalent?

1) certificate of deposit
2) bond mutual fund
3) salaries and wages
4) common stock

Answer 4

1) certificate of deposit - because it can be converted to cash quickly with little, if any, loss of principal.

A bond mutual fund is an invested asset. Salaries and wages are not an asset; this category belongs on the cash flow statement, not the statement of financial position. Common stock is an invested asset.

Question 5

The financial statement that summarizes actual cash receipts and cash disbursements for a specified period of time is the…

Answer 5

cash flow statement

Question 6

Which one of the following is a correct listing of the major asset components of net worth?

1) personal property, travel expenses, and retirement benefits
2) home equity, personal property, and retirement benefits
3) retirement benefits, home equity, and jewelry
4) home equity, investments, and jewelry

Answer 6

2) home equity, personal property, and retirement benefits

Home equity, personal property, and retirement benefits generally compose the largest portion of an individual’s net worth.

Question 7

Which one of the following is normally considered a fixed outflow item?

1) auto note payments
2) taxes
3) utility expenses
4) transportation expenses

Answer 7

1) auto note payments

Question 8

A cash flow statement is similar to a budget in that both show

1) projected inflows
2) additions to net worth
3) patterns related to spending
4) historical cash flows

Answer 8

3) patterns related to spending

Question 9

Which one of the following is generally considered a healthy savings ratio?

1) 5% or higher
2) 10% or higher
3) 20% or higher
4) 30% or higher

Answer 9

2) 10% or higher - A savings ratio of 10% or higher is considered to be healthy.

Question 10

The ratio of annual debt repayments to gross income is known as the…

Answer 10

back-end debt-to-income ratio

Question 11

To still be considered adequate, the highest a front-end debt-to-income ratio should be is…

Answer 11

28% - A front-end debt-to-income ratio compares annual payments to repay housing costs, and should be 28% or lower to be considered adequate.

Question 12

What is the most likely source for finding financial information on a client’s vested pension benefits?

1) administrator or human resources
2) professional appraiser
3) lending agencies
4) K-1s

Answer 12

1) administrator or human resources

Question 13

Calculate the savings ratio based on the following financial statement.

total inflows - 124,725
savings - 7,000
investments - 5,000

Answer 13

Savings and investments / total income = savings ratio

12,000 / 124,725 = 0.0926 (9.62%)

Question 14

T/ F - Monthly total housing costs tend to remain stable.

Answer 14

False - Monthly mortgage payments do tend to remain stable, especially since most mortgages are fixed-rate mortgages; however, home upkeep is variable.

Question 15

T / F - There are tax advantages in owning a home.

Answer 15

True - There are several tax advantages in owning a home, including the deductibility of mortgage loan interest and real estate taxes.

Question 16

T / F - Creditors look less favorably at homeowners than they do renters.

Answer 16

False - Creditors look more favorably at homeowners than they do renters because homeowners tend to be more stable and therefore better credit risks.

Question 17

T / F - A home tends to be a depreciating asset.

Answer 17

True - Over time, homes tend to appreciate in value.

Question 18

Which one of the following is not a budget item?

1) auto note payments
2) vacations
3) medical care expenses
4) house appreciation

Answer 18

4) house appreciation

House appreciation is not a budget item because it cannot be determined and it is not a cash flow item.

Question 19

Which one of the following credit protection legislations established the annual percentage rate (APR) as a way to standardize percentage rates for comparison?

1) Consumer Credit Protection (Truth in Lending) Act
2) Consumer Credit Reporting Reform Act (an update of the Fair Credit Reporting Act)
3) Fair Credit Billing Act
4) Equal Credit Opportunity Act

Answer 19

1) The Consumer Credit Protection (Truth in Lending) Act established the annual percentage rate (APR) as a way to standardize percentage rates for comparison, where previously a confusing mix of percentage rates were given.

Question 20

Net worth is the difference between…

Answer 20

Net worth is the difference between total assets (which includes cash/cash equivalents, invested assets, and use assets) and total liabilities.

Question 21

What is the recommended minimum number of months’ expenses that a working couple’s emergency fund should cover?

Answer 21

An emergency fund for a working couple should be able to cover at least three months of expenses. Planners generally recommend that an emergency fund cover six months of expenses for a single person or a couple with only one person working

Question 22

T / F - An education grant is money given outright to a student, with no expectation of repayment.

Answer 22

True - Grants, such as Pell Grants, are funds given outright to the student and do not need to be repaid. Student loans, such as PLUS and Stafford loans, do require repayment.

Question 23

T / F - An education grant must be repaid, but the interest rate being charged is lower because it is a government subsidized rate.

Answer 23

False - Grants, such as Pell Grants, are funds given outright to the student and do not need to be repaid.

Question 24

T / F - An education grant is usually awarded based on the athletic ability of the student, similar to a football or golf scholarship.

Answer 24

False - Grants, such as Pell Grants, are funds given outright to the student and do not need to be repaid. They are based upon financial need, not athletic ability.

Question 25

T / F - A closely held company, especially early in formation, usually favors bringing in additional shareholders or partners, instead of relying on loans (debt).

Answer 25

False - A small business owner often commingles personal and business dealings. Accounting for the business should be well separated from personal finances, and this should be straightened out right away if commingling is occurring. Closely held business owners typically do not want to bring in additional shareholders because of obligations that would come from that. Typically, especially in the early years of operation, a business will rely on debt to finance its operations.

Question 26

T / F - Managers of closely held companies are naturally financially savvy and will need little help from a financial planner.

Answer 26

False - A small business owner often commingles personal and business dealings. Accounting for the business should be well separated from personal finances, and this should be straightened out right away if commingling is occurring. Because managers of the business may not have the necessary skills in this area, planners may be especially helpful in identifying cash flow problems and recommending solutions.

Question 27

T / F - Closely held company owners commonly commingle personal and business finances, which is a problem a financial planner should monitor.

Answer 27

True - Small business owners commonly commingle personal and business dealings. Accounting for the business should be well separated from personal finances, and this should be straightened out right away if commingling is occurring.

Question 28

The nonmortgage debt-to-income ratio is considered healthy when that ratio is…

Answer 28

A nonmortgage debt-to-income ratio of 20% or lower is considered healthy.

Question 29

The Fair Credit Billing Act pertains to which of the following?

1) debit cards
2) credit cards
3) auto loans

Answer 29

The Fair Credit Billing Act pertains to when errors occur with revolving credit, which includes credit cards.

Question 30

T / F - Generally the lower one’s FICO score, the higher the interest rate for borrowing will be.

Answer 30

True - FICO scores impact both the ability to obtain credit and the interest rate charged. Generally, the higher one’s FICO score, the better terms (lower interest rate) they will receive. FICO scores range from 300 to 850.

Question 31

T / F - An individual’s FICO score will impact whether they can obtain a credit, but has little impact on the interest rate that will be charged.

Answer 31

False - The FICO score will have an impact on the interest rate that will be charged. FICO scores impact both the ability to obtain credit and the interest rate charged. Generally, the higher one’s FICO score, the better terms (lower interest rate) they will receive. FICO scores range from 300 to 850.

Question 32

T / F - An individual’s FICO score has little bearing on whether they can obtain credit, but has a substantial impact on the interest rate that will be charged.

Answer 32

False - An individual’s FICO score can impact whether credit is available or not. FICO scores impact both the ability to obtain credit and the interest rate charged. Generally, the higher one’s FICO score, the better terms (lower interest rate) they will receive. FICO scores range from 300 to 850.

Question 33

Which of the following is a reason to consider buying rather than leasing?

1) affordability
2) convenience
3) build equity

Answer 33

In order to build equity one must own the asset, not lease (rent) it. Affordability (cost) and convenience are two primary factors usually considered when deciding to lease rather than buy.

Question 34

The Fair Credit Billing Act…

1) requires creditors to send a statement to the consumer that describes procedures to follow when billing errors occur.
2) provides guidelines for debt collectors.
3) prohibits credit discrimination.
4) requires creditors to give a full disclosure of the costs of borrowing.

Answer 34

1) The Fair Credit Billing Act requires creditors to send a statement to the consumer that describes procedures to follow when billing errors occur.

• The Fair Debt Collection Practices Act provides guidelines for debt collectors.
• The Equal Credit Opportunity Act prohibits credit discrimination.
• The Consumer Credit Protection Act (Truth in Lending Act) requires creditors to give a full disclosure of the costs of borrowing.

Question 35

What is the net worth on your client’s statement of financial position as shown below?

Assets
Total Cash - $31,000
Total Invested Assets - $208,000
Total Use Assets - $634,000

Liabilities
Total Liabilities - $94,000

Answer 35

Net worth = assets - liabilities

Assets (31,000 + 208,000 + 634,000) - 94,000 = $779,000

Question 36

Which of the following is an advantage that a 15-year mortgage has over a 30-year mortgage?

1) build equity slower
2) less interest charged over the life of the loan
3) lower monthly payments

Answer 36

Since the loan is for a shorter period of time, and there is a shorter amortization schedule, one would pay less in interest with a 15-year mortgage compared to a 30-year mortgage.

Question 37

Full bankruptcy (Chapter 7) calls for the immediate liquidation of available assets to pay down any outstanding debt as much as possible, and then cancels the remaining debt outstanding, but it does not cancel which one of the following?

1) government guaranteed student loans
2) credit card debt
3) debt secured using a personal note (private debt)

Answer 37

1) Although Chapter 7 bankruptcy calls for the immediate liquidation of available assets, not all of the remaining debts are canceled. Child support, alimony, certain types of tax claims, government funded or guaranteed education loans, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, claims for malicious acts, and any debt not listed in the bankruptcy proceedings will not be discharged.

Question 38

What general percentage of income allocated to rent do landlords consider preferable for a potential renter?

Answer 38

Landlords generally consider 20% to 40% of income to be a reasonable amount to allocate toward rent, and many landlords will not go above 40% of income.

Question 39

T / F - In order to reach a set of financial goals, a rigid budget must be established and strictly followed.

Answer 39

False - Financial environments are dynamic. Budgets must be flexible enough to adjust to changes in financial position. Although flexible, budgets must also be based on a realistic assessment of a true financial situation.

Question 40

T / F - Budgets are based on a “best case scenario” and idealistic approach, and as such they are very fluid and constantly changing.

Answer 40

False - Budgets should be realistic, not idealistic. Financial environments are dynamic. Budgets must be flexible enough to adjust to changes in financial position, but not constantly changing.

Question 41

T / F - Budgets must be based on realistic assumptions, but still flexible enough to adapt to changes in financial position.

Answer 41

True - Financial environments are dynamic. Budgets must be flexible enough to adjust to changes in financial position. Although flexible, budgets must also be based on a realistic assessment of a true financial situation.