C4: Personal Financial Statements: Preparation & Analysis | Multiple Choice Problems
Jay purchased a new home for $100,000. He put $20,000 down and finance 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 mean
C His net worth will remain the same. His cash account will decrease by $20,000, his personal use assets will increase by $100,000. His liabilities will increase by $80,000. Therefore, using the formula: Assets - Liabilities = Net Worth [($100,000 - $20,000) - $80,000 = $0] it becomes clear that 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 time
C Option a is incorrect because Net Worth = Assets - Liabilities, which can also be written as Assets = Net Worth + Liabilities or Liabilities = Assets - Net Worth. Balance sheets reflect the assets, liabilities, and net worth at a particular point in time. A financial planner would need more than one balance sheet to measure how the assets, liabilities, and net worth changed over a period of time
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 has a right of survivorship feature. The other types of ownership do not have a survi- vorship 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
Róger and Julie are married. Roger is a police officer and earns $50,000 per year. He contributed 10% of his salary to his retirement plan. His employer also makes a 5% match contributions. Julie stays at home with their children to contribute $5000 to an IRA. What is their total savings rate? A. 10% B. 20% C. 20.5% D. 25%
D For married people, you add both spouses' contributions and income plus any employer match. Savings Rate = (Employee Contributions + Employer Contributions) /Gross Pay 25% = [(Roger's Contribution of $5,000 + Employer Contribution of $2,500 + Julie's IRA Contribution of 5,000) /$50,000].
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. 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 costs C. An actuary should be retained to value our personal use assets. D. Money market accounts are unlikely to lose value over time.
D 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 esti- mation.
