Ch.4 - Personal Financial Statements

Which of the following would not generally be considered a short-term liability? A) An automobile loan B) Credit card bills C) Medical expenses D) Unpaid taxes

A) An automobile loan

Craig's financial planner is preparing his balance sheet. Which of the following would not generally be considered "cash and cash equivalents?" A) Cash value in life insurance B) Money market account C) Certificate of deposit with a 6 month maturity D) Checking account

A) Cash value in life insurance *The cash value in life insurance is generally considered an investment asset except when the client intends to withdraw it within the year. The other three are typical "cash and cash equivalents."

While meeting with your new client about his retirement needs you have made several assumptions regarding income growth, savings rate, inflation rates, and investment returns. You engage in the process of changing some of the key assumptions to determine the overall impact of those changes on the financial plan. What is this process called? A) Sensitivity Analysis B) Objectivity Analysis C) Monte Carlo Analysis D) Las Vegas Analysis

A) Sensitivity Analysis *This process is called sensitivity analysis. Monte Carlo analysis is a mathematical simulation to determine the probability of an outcome. The other choices are simply distractors.

Your client, Tom, asked you to prepare his financial statements. He believes that his wife is the root of all of their financial problems because of her spending habits. His wife, on the other hand, believes that most of their money goes to pay routine expenses like, house, auto, etc. Which financial statement will help them resolve this disagreement? A) Balance Sheet B) Income Statement C) Statement of Net Worth D) Statement of Financial Position

B) Income Statement *The income statement details the income and expenses of the household. The balance sheet identifies the assets the family owns, liabilities and the family's net worth. The statement of net worth explains the changes in net worth between two balance sheets by reporting financial transactions that are not reported on the other statements. The statement of financial position is another name for the balance sheet.

Nathan and Evan (two brothers) are joint property owners. Nathan owns 60% and Evan owns 40%. How is this property owned? A) Sole Ownership B) Tenants in Common C) Joint Tenancy D) Tenancy by the Entirety

B) Tenants in Common The property cannot be owned as Sole Ownership because there is more than one owner. It cannot be Joint Tenancy because the brothers have unequal ownership interests. It cannot be Tenancy by the Entirety because the joint owners are not married to each other. Therefore, the brothers own the property as Tenants in Common.

Jay purchased a new home for $100,000. He put $20,000 down and financed the $80,000 balance. What is the impact of this transaction on his net worth? A) His net worth increases B) His net worth decreases C) His net worth remains the same D) The net worth will decrease with each mortgage payment made

C) His net worth remains the same

Your client, Meg, asked you several questions about her balance sheet. She doesn't understand how the assets, liabilities and net worth are related. Which of the following statements is true? A) Net Worth = Assets + Liabilities B) Assets = Net Worth - Liabilities C) Liabilities = Assets - Net Worth D) A balance sheet reflects how the assets, liabilities, and net worth changed over the year

C) Liabilities = Assets - Net Worth

Which of the following property ownership regimes has a right of survivorship feature? A) Sole Ownership / Fee Simple B) Tenancy in Common C) Tenancy by the Entirety D) Community Property

C) Tenancy by the Entirety *Tenancy by the Entirety has a right of survivorship feature. The other types of ownership do not have a survivorship feature. Note that some community property states do allow for some right of survivorship features, but that is not consistent with this type of ownership.

A client, Marie, age 35, came into a financial planner's office today. She provides the planner with the following information for the upcoming year:• Income - $100,000 Principal and Interest payments on home mortgage - $14,000 Homeowners insurance - $1,000 Property taxes - $5,000 Living Expenses - $40,000 Credit Card Debt Payments - $12,000• Savings - $5,000 Student Loan Payments - $5,000 Car Payment - $6,000 When considering the targeted benchmarks, which of the following statements is the planner most likely to make during the next meeting? A) Both the basic and broad housing ratio are within the normal range B) Both the basic and broad housing ratio are outside the normal range C) The basic housing ratio is within the normal range, but the broad housing ratio is not D) The broad housing ratio is within the normal range, but the basic housing ratio is not

C) The basic housing ratio is within the normal range, but the broad housing ratio is not The basic ratio is at 20% which is within the normal range of 0 - 28%. PITI / gross pay = [($14,000 + $1,000 + $5,000) / $100,000]. The broad housing and debt percentage is 43%

Roger and Julie are married. Roger is a police officer and earns $50,000 per year. He contributes 10% of his salary to his retirement plan. His employer also makes a 5% match contribution. Julie stays at home with their children and contributes $5,000 to an IRA. What is their total saving rate? A) 10.0% B) 20.0% C) 20.5% D) 25.0%

D) 25.0% *For married people, you add both spouses' contributions and income plus any employer match.Savings Rate = (Employee Contributions + Employer Contributions) / Gross Pay25% = [(Roger's Contribution of $5,000 + Employer Contribution of $2,500 + Julie's IRA Contribution of 5,000) / $50,000].

Craig's financial planner is preparing his balance sheet. Which of the following would be considered an "investment asset?" A) A certificate of deposit with a maturity of exactly 1 year. B) The unvested portion of a pension plan. C) A vacation home. D) An education fund

D) An education fund *The education fund is an investment asset. CDs with maturity of 1 year are considered "Cash and cash equivalents." The unvested portion of a pension plan is potentially forfeitable, there- fore should not be included on the balance sheet. The vacation home is a personal use asset. (Note that a vacation home may be primarily rental which would make it an investment asset - but the planner should assume it is personal unless told otherwise.)

Which of the following statements concerning the valuation of assets on the balance sheet is correct? A) Since a financial planner has access to all of the client financials, a privately-held small business is easier to value than a publicly traded company. B) Assets should be valued on the balance sheet using replacement cost. C) An actuary should be retained to value all personal use assets. D) Money market accounts are unlikely to lose value over time.

D) Money market accounts are unlikely to lose value over time *Money market accounts are considered "cash equivalents" and are unlikely to lose value over time. A publicly traded company is easier to value than a privately-held small business. Assets should be valued on the balance sheet using the current fair market value. The value of personal use assets is generally determined by client estimation.

A financial planner is currently preparing a client's cash flow statement. Which of the following would the planner classify as a financing activity? A) The purchase of a new residence B) A contribution to a retirement account C) A cash inheritance D) Paying a credit card debt

D) Paying a credit card debt *Paying credit card debt is a financing activity. The other three are examples of investing activities.

Which of the following statements concerning income and expenses listed on the Income Statement is correct? A) Charitable contributions are always a discretionary expense B) Reinvested dividends is an example of income C) Entertainment expenses is an example of a fixed expense D) Social Security taxes withheld is an example of a fixed expense

D) Social Security taxes withheld is an example of a fixed expense