Personal Finance: chapter 2

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What is a balance sheet?

A financial statement that reports what an individual or a family own and owes; also called a net worth statement.

What are liabilities?

Amounts owed to others.

The equation to calculate net worth is:

Assets - liabilities = net worth

According to the Bureau of Labor Statistics, a working, single adult without children should allocate what percentage of their budget to housing: a. 25-40% b. 20-25% c. 30-35% d. 15-25% e. 25-35%

C. 30-35%

What are liquid assets?

Cash and items of value that can easily be converted to cash.

What is liquidity/why is it important?

Cash and items of value that can easily be converted to cash. Examples of this are checking and savings accounts or life insurance can be borrowed from. This is important because you can convert this quickly compared to assets; which are cash and property with a monetary value.

Long-term liabilities

Debts that are not required to be paid in full until more than a year from now.

What are current liabilities?

Debts that must be paid within a short time, usually less than a year.

What is net worth?

The difference between total assets and total liabilities

The budgeting process consists of all of the following steps except: a. Assess investment risks b. Estimate income c. Budget an emergency fund and savings d. Record spending amounts e. Set financial goals

a. Assess investment risks

Your text recommends monthly savings ratio of at least ____ of gross income for students. Select one or more: a. 15% b. 0-10% c. 20% d. 25-35% e. 50%

b. 0-10%

Which of the following is NOT a liquid asset? a. Cash withdrawn from an ATM b. Cash value of life insurance c. Checking account balance d. Coins in a jar at home e. Retirement investments

e. Retirement investments

What is insolvency?

The inability to pay debts when they are due because liabilities far exceed the value of assets.

All of the following are ways to increase net worth except: A. Increase your savings b. Increase the value of investments and other possessions c. Increase accessible cash by taking out a personal loan d. Reduce spending e. Reduce amounts owed

c. Increase accessible cash by taking out a personal loan

What are assets?

cash and property with a monetary value.

Which of the following situations describes 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

When creating a personal balance sheet, which of the following is a current liability? a. Checking account b. Net worth c. Auto loan that wouldn't be paid off for four more years d. Money your sister owes you in two years e. credit card account

e. credit card account

What are the types of financial worksheets?

personal balance sheet and the cash flow statement, also called personal financial statements.

Methods for savings and how much should be saved?

3 to 6 months worth of living expenses. Methods: -Write a check each payday to deposit in savings account - Payroll deduction through direct deposit. -Saving coins, avoid buying coffee and snacks, bring lunch to work.

Which of the following is considered a fixed expense: Select one or more: a. groceries b. car insurance c. personal allowances d. transportation expenses e. emergency fund savings

b. car insurance

Individuals and households use various types of budget systems, such as all of the following except: Select one or more: a. digital b. circular c. physical d. written e. mental

b. circular


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