Module 3: Financial Statements, Cash Flow Management, and Financing Strategies

Question 1

What is the statement of financial position?

Answer 1

Also known as the net worth statement, is a profile of what is owned (assets) and what is owed (liabilities or debts) at a given point in time

assets = liabilities + net worth
OR
net worth = assets - liabilities

Question 2

Types of Assets

Answer 2

1. Current Assets
2. Invested Assets
3. Personal Use Assets

Question 3

Current Assets and Examples

Answer 3

Low-risk assets that may be readily converted to cash.

short-term CD’s (90 days or less), money markets funds, checking accounts, and savings account.

Question 4

Invested Assets and Examples

Answer 4

Stocks, bonds, mutual funds, gems, gold and other precious metals, collectibles, investment real estate, fine art, ownership interests in closely held businesses, vested pension benefits, longer term CD’s.

Question 5

Personal Use Assets

Answer 5

client’s residence, auto, boats, recreational real estate and personal effects like jewelry

Question 6

Asset Valuation

Answer 6

fair market value

Question 7

Types of Liabilities

Answer 7

1. Current (short-term liabilities)

2. Long-term liabilities

Question 8

Current Liabilities

Answer 8

Liabilities that are due within one year from the statement date

Question 9

Pay attention to the footnotes, the answer could be found in them

Answer 9

that is all

Question 10

Cash flow statement

Answer 10

what a client’s cash receipts and disbursements of a specific period of time

Question 11

Inflows

Answer 11

Gross Salaries and Wages, interest and dividend income, rental income, tax refunds and other amounts received by the client. If funds are withdrawn from a savings or if invested assets are liquidated, the planner should list such inflows under a special inflow category of savings and investments to identify clearly the source of the cash.

Question 12

Outflows

Answer 12

Two types of outflows:

1. Fixed outflows
2. Variable Outflows

Question 13

Fixed Outflows

Answer 13

note payments, mortgage payments, and insurance premiums

Question 14

Variable Outflows

Answer 14

food, transportation, clothes and entertainment

Question 15

Pro Forma Cash Flow Statement

Answer 15

What a future cash flow will look like after implementing your recommendations

Question 16

Consumer Debt Ratio

Answer 16

monthly consumer debt payments/monthly net income

Should not exceed 20%

Question 17

Housing Cost Ratio (“Front End Ratio”)

Answer 17

monthly housing costs/monthly gross income

Should not exceed 28%
monthly housing costs include property tax, homeowners insurance and HOA fees.

Question 18

Total Debt Ratio (“Back end Ratio”

Answer 18

total monthly debt/monthly gross income

Should not exceed 36%

Question 19

Current Ratio

Answer 19

current assets/current (short-term liabilities)

Hope to be more than 1

Question 20

Net-Investment-to-net-worth ratio

Answer 20

net investment assets/net worth

net investments exclude equity in home. An older individual should have a higher % of net investments to net worth as they get older.

Question 21

What is the contributing factor to if someone should have 3 or 6 months in an emergency savings?

Answer 21

The number of wage earners in the pair. If they both earn a decent wage, only need 3 months.

Question 22

Sources of Borrowing (4)

Answer 22

• Personal Loans
• Credit Cards
• Auto Loans
• Retirement Plans

Question 23

Installment Loan

Answer 23

a loan for which the client borrows a single amount of oney and repays the balance with interest at stated intervals.

Question 24

Single payment (bridge) loan

Answer 24

a loan that provides a short-term, temporary financing that is repaid with interest in one lump sum at the end of the term.

Question 25

Two approaches to debt reduction

Answer 25

Snowball and Avalanche Technique

Question 26

Credit Score Categories and Their Weighting

Answer 26

Payment History - 35%
Amounts Owed - 30%
Length of History - 15%
New Credit - 10%
Credit Mix - 10%

Question 27

Closed-End Lease

Answer 27

The lessee agrees to pay a stated monthly fee for the use of the asset for a specified period.

Question 28

FHA Mortgage Loans

Answer 28

Federal Government Guarantees to those who may not meet the financial underwriting requirements for a conventional home loan and has mortgage insurance

Question 29

VA Loans

Answer 29

for service members, federal guarantee of loan, no mortgage insurance required

Question 30

Conforming vs. Non-Conforming Loans

Answer 30

Conforming loans conform to the dollar limit requirements, anything over a certain amount is considered a “jumbo” or “non-conforming loan”

Question 31

Types of Mortgages

Answer 31

• Fixed Rate
• Adjustable Rate
• Interest-only rate
• Balloon Mortgages
• Graduated Payment Mortgages
• Reverse Mortgages

Question 32

Balloon Mortgage

Answer 32

a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage. However, payments are made only for a short duration and then the borrower is required to pay off the remained of the mortgage in a lump sum

Question 33

Graduated Payment mortgage

Answer 33

The payments are lower for the first few years of mortgage repayment, then they adjust to a higher fixed payment that continues for the remainder of the loan.