Module 3 Flashcards
Which components of the FICO credit score calculation have the greatest impact on the total score?
I.Credit mix
II. Payment history
III.Amounts owed
IV. Length of credit history
A)
II and III
Your client, Andy, is in need of assistance in preparing his statement of financial position and statement of cash flows. He earns $150,000 annually and pays $1,000 monthly in alimony to his ex-wife, Debbie. Andy owns a condo valued at $230,000, which currently has an outstanding mortgage balance of $100,000. He pays annual property taxes of $3,000, and the condo insurance costs $180 per month. All of the following statements are CORRECT except
B)
taxes paid on his property would be a liability on his statement of financial position.
Before any of the transactions below, Sid had a net worth of $200,000.
- Took out a $24,000 loan to pay for a European vacation
- Paid off his student loan of $8,000 using funds from his money market deposit account
- Purchased an antique car valued at $18,000 for $15,000 with checking account funds
What is Sid’s net worth after these transactions?
C)
$179,000
Which of these are reasons a client should consider purchasing a home rather than renting one? I. Mortgage interest is generally income tax deductible II. Adequate liquid assets are available for a down payment III. Client plans to live in the home five years or longer
I, II, and III
Which of the following statements regarding a client’s credit score is CORRECT?
- Using a high percentage of available credit will positively affect a credit score.
- Considering a client’s credit history only, the longer the history, the higher credit score.
II only
Which of the following financial statements provides a snapshot of a client’s net worth at any given point in time, usually at the end of a calendar year?
- Statement of cash flows
- Statement of financial position
- Personal tax return
- Net worth statement
2 & 4
What is the appropriate date to identify the statement of financial position of a calendar-year client for the year 2021?
On December 31, 2021
What assets should typically NOT be used to establish an emergency fund? A) Cash in a basement safe B) Checking accounts C) U.S. government bonds D) A money market deposit account
C)
U.S. government bonds
Which of the following statements regarding a client’s credit score is CORRECT?
- Too many credit inquiries may lower a credit score, but likely not by much.
- Opening several new accounts in a short amount of time reflects a good use of credit and therefore can increase a credit score.
1 only
Which of these is characteristic of the snowball technique of debt reduction?
- The debt with the lowest balance is eliminated first.
- Clients are encouraged by paying off the first debt quickly.
Both 1 & 2
Joe and Mary believe in stress management. Several times each year, they take a short vacation to relax and recharge as part of their overall approach to maintaining good health. Their regularly planned vacations are an example of what type of expense?
A)
Variable discretionary expense
Which of the following statements regarding liabilities on the statement of financial position is CORRECT?
They are categorized as fixed or variable.
Any outstanding mortgage balance is reported as its original amount.
Neither 1 or 2
Which is a true statement about reducing debt?
A)
It is always better to maintain a mortgage over the normal life of the loan in order to take advantage of other investment opportunities that may arise.
B)
The client’s desires and wishes will determine which course of action to take.
C)
Increasing income is more important than reducing debt.
D)
It is always better to pay off a mortgage as soon as possible.
B)
The client’s desires and wishes will determine which course of action to take.
Which components of the FICO credit score calculation have the greatest impact on the total score?
- New credit
- Length of credit history
- Amounts owed
- Payment history
3 & 4
Allyson would like to pay off her debt, reducing the debt with the highest interest rate first. Compared to the snowball approach of debt reduction, which of the following statements are CORRECT?
- Compared to the snowball approach, it is relatively more difficult to pay off the first debt with a high balance quickly.
- This approach increases the total amount of interest paid during the debt reduction process.
1 only
All of the following items should be included on an individual's statement of financial position except A) mutual fund balance. B) mortgage payment. C) fair market value of a home. D) mortgage balance.
B Mortgage Payment
Which of the following actions would most likely decrease an individual’s credit score?
A)
Have several different types of credit accounts, such as a car loan, a mortgage, and credit cards
B)
Pay off a balance on a credit card that the individual has had for 10 years
C)
Take advantage of several offers for new credit cards
D)
Make just the minimum payment on time each month
C)
Take advantage of several offers for new credit cards
Which of these are savings strategies a financial planner can recommend to clients?
- Forgo premium cable channels
- Use an overdraft feature on debit cards
- Choose an economical cell phone plan
- Decrease deductibles on automobile insurance policies
- Forgo premium cable channels
3. Choose an economical cell phone plan
Alex has a personal emergency requiring him to immediately access $50,000. He expects this need will last for several months. Which of the following assets shown on his statement of financial position is the best choice to pay for his emergency?
A) A money market mutual fund worth $35,000 B) A credit union account totaling $60,000 C) A life insurance cash surrender value in the amount of $55,000 D) Aggressive stocks currently trading at a market value of $65,000
B)
A credit union account totaling $60,000
Which of the following items should NOT be included in an individual’s statement of cash flows?
- Home value
- Mortgage balance
- Mortgage payment
- Mutual fund balance
- Home value
- Mortgage balance
- Mutual fund balance
What is the key to successfully using the snowball technique to eliminate debt?
A)
Begin with the debt that has the highest interest rate
B)
Begin with the debt that has the highest payment
C)
Start with the debt that has the highest account balance
D)
Developing a plan that the client can commit to executing
D)
Developing a plan that the client can commit to executing
Some rule-of-thumb ratios are helpful in understanding how a client’s debt will be assessed by lenders, which can determine interest rates. Which of these is NOT correct regarding ratio descriptions and the related benchmark?
A)
Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 28% of the prospective borrower’s net income.
B)
The minimum required payments should be used in the calculation.
C)
Consumer debt is all nonmortgage debt. It should be no more than 20% of monthly net income.
D)
Total monthly payment on all debts should be no more than 36% of gross monthly income.
A)
Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 28% of the prospective borrower’s net income.
Andy and Debbie are working with their financial planner to develop a budget. The financial planner told them to list all their discretionary and nondiscretionary expenses. Which of the following would be considered a nondiscretionary cash outflow for planning purposes?
- Utility bills
- Loan payments
- Mortgage payments
- Travel and entertainment expenses
- Utility bills
- Loan payments
- Mortgage payments
Which of the following has the least impact on a client’s total FICO score?
A) Credit mix B) Payment history C) Length of credit history D) Amounts owed
A)
Credit mix
