Money Management Skills

What are the main components of a personal balance sheet and a cash flow statement? What is the main purpose of each of these personal financial statements?

A balance sheet reports the current financial position of an individual or family; it includes assets, liabilities, and net worth. A cash flow statement is designed to report the actual inflow and outflow of cash during a given time period for a person; it includes current income and cash payments.

Diane Rossiter lives with her two sons, ages 6 and 9. They have had difficulty managing their finances. What purposes could a budget serve for the Rossiters? What actions would you suggest for the budgeting process to be successful?

A budget can help a person or family live within their income, spend money wisely, reach financial goals, prepare for financial emergencies, and develop wise financial management habits. A successful budget should be well-planned, realistic, flexible, and clearly communicated.

What types of financial records and documents should be kept in a safe-deposit box?

A safe-deposit box should be used to store financial records that are difficulty to replace and that are not needed on a day-to-day basis. Examples of items stored in a safe-deposit box include stock certificates, contracts, insurance policies, a record of personal belongings, mortgage papers, rare coins, collectibles, and other rare and valuable items.

During the past month, Jennifer Ernet had income of $3,000 and a decrease in net worth of $200. This means Jennifer's payments for the month were A) $3,200. B) $3,000. C) $2,800. D) $200.

A) $3,200.

Liabilities are amounts representing A) debts. B) items of value. C) living expenses. D) taxable income. E) current assets.

A) debts.

Changes in the cost of living are A) different in various geographic areas. B) the same for different locations. C) constant from month to month. D) the same for all goods and services. E) not a factor when preparing a budget.

A) different in various geographic areas.

Payments that do not vary from month to month are ____________ expenses. A) fixed B) current C) variable D) luxury E) budgeted

A) fixed

A broker statement is an example of a(n) ____________ record. A) investment B) insurance C) estate planning D) tax E) consumer purchase

A) investment

A person's net worth would increase as a result of A) reduced amounts owed to others. B) reduced earnings. C) increased spending for current living expenses. D) decreased value of personal possessions. E) decreased value of investments.

A) reduced amounts owed to others.

If a family planned to spend $370 for food during March but only spent $348, this difference would be referred to as a A) surplus. B) deficit. C) fixed living expense. D) budget reduction. E) contribution to net worth.

A) surplus.

A family with $45,000 in assets and $22,000 of liabilities would have a net worth of A) $45,000. B) $23,000. C) $22,000. D) $67,000. E) $41,000.

B) $23,000.

Which of the following would be considered a long-term liability? A) A charge account payment B) A mortgage C) An installment loan D) An amount due for taxes E) The amount due on a credit card

B) A mortgage

Which of the following are considered to be personal financial statements? A) Budget and credit card statements B) Balance sheet and cash flow statement C) Checkbook and budget D) Tax returns E) Bank statement and savings passbook

B) Balance sheet and cash flow statement

A budget deficit would result when a person's or family's A) actual expenses are less than planned expenses. B) actual expenses are greater than planned expenses. C) actual expenses equal planned expenses. D) assets exceed liabilities. E) net worth decreases.

B) actual expenses are greater than planned expenses.

A cash flow statement reports a person's or a family's A) net worth. B) current income and payments. C) plan for spending. D) value of investments. E) balance of savings.

B) current income and payments.

Money management refers to A) preparing personal financial statements. B) day-to-day financial activities. C) trade-offs that occur with financial decisions. D) storing financial records for easy access. E) spending money on current living expenses.

B) day-to-day financial activities.

A decrease in net worth would be the result of A) income greater than expenses for a month. B) expenses greater than income for a month. C) assets greater than expenses. D) increased earnings on the job. E) income and expenses equal for a month.

B) expenses greater than income for a month.

A home file should be used for A) storing all financial documents and records. B) financial records for current needs. C) documents that require maximum security. D) obsolete financial documents. E) records that are difficult to replace.

B) financial records for current needs.

liquid assets refer to A) amounts that must be paid soon. B) items that are easily converted to cash. C) total income available to a family for spending. D) the value of investments. E) amounts on which taxes must be paid.

B) items that are easily converted to cash.

Items of value less amounts owed to others equals A) net assets. B) net worth. C) total liabilities. D) total income. E) budgeted expenses.

B) net worth.

A common deduction from a person's paycheck is for A) interest. B) taxes. C) rent. D) unemployment. E) current liabilities.

B) taxes.

Ed Bostrom wants to reduce his fixed expenses. What action would be appropriate? A) Get a part-time job B) Eat more meals at home than in restaurants C) Find a place to live with a lower rent D) Save more money for the future E) Buy on credit for items than might cost more later

C) Find a place to live with a lower rent

An example of a personal and employment document is a A) budget. B) passbook. C) Social Security card. D) property tax bill. E) lease.

C) Social Security card.

The current financial position of an individual or family is best presented with the use of a(n) A) budget. B) cash flow statement. C) balance sheet. D) bank statement. E) time value of money report.

C) balance sheet.

When it comes to savings, most Americans A) have an adequate emergency fund. B) use several different savings techniques. C) find saving difficult. D) keep substantial amounts in a regular savings account. E) reduce the amount they save during their working life.

C) find saving difficult.

The payment items that should be budgeted first are A) variable expenses. B) investment funds. C) fixed expenses. D) unplanned living expenses.

C) fixed expenses.

Improvements in a person's financial position are the result of A) increased liabilities. B) reductions in earnings. C) increased savings and investments. D) increased purchases on credit. E) lower amounts deposited in savings.

C) increased savings and investments.

An individual retirement account is an example of a(n) ____________ asset. A) liquid B) common C) investment D) household E) budgeted

C) investment

The Crown family has a difficult time staying on a budget. In an effort to actually see what funds are available for various expenses, a ____________ budget would be most appropriate. A) written B) computerized C) physical D) deficit E) mental

C) physical

A person's net worth is computed by A) adding assets and liabilities. B) deducting current living expenses from total assets. C) subtracting total liabilities from total assets. D) subtracting assets from current liabilities. E) adding liabilities and budgeted expenses.

C) subtracting total liabilities from total assets.

Which of the following presents a summary of income and outflows for a period of time? A) A balance sheet B) A bank statement C) An investment summary D) A cash flow statement E) An asset report

D) A cash flow statement

Which of the following situations is a person who could be insolvent? A) Assets $56,000; annual expenses $60,000 B) Assets $78,000; net worth $22,000 C) Liabilities $45,000; net worth $6,000 D) Assets $40,000; liabilities $45,000 E) Annual cash inflows $45,000; liabilities $50,000

D) Assets $40,000; liabilities $45,000

To determine a person's solvency, which financial document should be consulted? A) Cash flow statement B) Budget C) Debt consolidation statement D) Balance sheet E) Credit report

D) Balance sheet

The difference between the amount budgeted and the actual amount is called a A) financial plan. B) current liability. C) change in net worth. D) budget variance. E) variable living expense.

D) budget variance.

An example of a long-term goal for a young couple may be A) a new car. B) reduction of amounts owed on credit cards. C) increased savings. D) income for retirement. E) funds for a vacation.

D) income for retirement.

A personal balance sheet presents A) amounts budgeted for spending. B) income and expenses for a period of time. C) earnings on savings and investments. D) items owned and amounts owed. E) family financial goals.

D) items owned and amounts owed.

Which of the following financial documents would most likely be stored in a safe-deposit box? A) W-2 forms B) personal financial statements C) warranties D) savings certificates E) checking account statements

D) savings certificates

opportunity cost refers to A) current spending habits. B) changing economic conditions that affect a person's cost of living. C) storage facilities to make financial documents easily available. D) trade-offs associated with financial decisions. E) avoiding the use of consumer credit.

D) trade-offs associated with financial decisions.

Current liabilities differ from long-term liabilities based on A) the amount owed. B) the financial situation of the creditor. C) the interest rate charged. D) when the debt is due. E) current economic conditions.

D) when the debt is due.

Darlene Elkin has the following financial amounts: checking accounts $850, savings account $3,500, credit card balance $300, jewelry $1,600, real estate valued at $78,000, a mortgage on the restate of $23,000. What is the total of Darlene's assets? What actions could she take to increase her net worth?

Darlene's total assets amount to $83,950. For Darlene to increase her net worth, she should increase her income, decrease her living expenses, increase the amount in savings, or reduce amount owed.

Which of the following payments would be considered a variable expense? A) Rent B) An installment loan payment C) A mortgage payment D) A monthly parking fee E) A telephone bill

E) A telephone bill

Ben Chase needs to pay off some of his debts over the next few months. Which item on his balance sheet would help him decide what amounts are due in the near future? A) The budget variance B) Investment assets C) Long-term liabilities D) Current assets E) Current liabilities

E) Current liabilities

Items with a monetary worth are referred to as A) liabilities. B) variable expenses. C) net worth. D) income. E) assets.

E) assets.

Warranties are commonly associated with ____________ purchases. A) investment B) insurance C) credit D) financial service E) consumer

E) consumer

Total earnings of a person less deductions for taxes and other items is called A) budgeted income. B) gross pay. C) net worth. D) total revenue. E) take-home pay.

E) take-home pay.

A major expenditure for most families is A) insurance. B) contributions. C) clothing. D) utilities. E) transportation.

E) transportation.

A budget is a record of how a person or family has spent their money.

False

A personal balance sheet reports your income and expenses.

False

Definite financial obligations are referred to as variable expenses.

False

Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box.

False

Furniture, jewelry, and an automobile are examples of liquid assets.

False

If expenses for a month are greater than income, an increase in net worth will result.

False

Medical expenses, clothing, and telephone are examples of fixed expenses.

False

Money management activities refers to long-term investment decisions.

False

Most Americans have an adequate savings for emergencies.

False

Most income tax documents and records should be kept in a safe-deposit box.

False

Opportunity costs are only associated with money management decisions involving long-term financial security.

False

"Pay yourself first" is an attitude that can assure building savings for the future.

True

A person's lifestyle is a reflection of his or her values, goals, career, and family situation.

True

A person's net worth is the difference between the value of the items owned and the amounts owed to others.

True

A personal cash flow statement can serve as the basis for the budget categories used by an individual or family.

True

A personal cash flow statement presents income and outflows of cash for a given time period, such as a month.

True

Current liabilities are amounts that must be paid within a short period of time, usually less than a year.

True

If budgeted spending is less than actual spending, this is referred to as a deficit.

True

Insolvency is a result of having more liabilities than assets.

True

Personal records include birth certificate, marriage license, and social security card.

True

Take-home pay is a person's earnings after deductions for taxes and other items.

True

When one money management decision is selected, something else must be given up.

True