EXAM 1-FINANCE
Gross income less Adjustments to Income equals
adjusted gross income
2) Subtract adjustments to get ________
adjusted gross income (AGI)
A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends future financial activities is a(n)
financial plan
If Diane was in a 25% tax bracket and received a $1,000 tax credit, by how much would her taxes be reduced?
$1000 (explanation: Taxes would be reduced by the full amount of the tax credit: $1,000.)
The 'borrowing' component in a financial plan relates to
Maintaining control over credit-buying habits
Which of the following is an example of a financial opportunity cost?
Forgoing wages to attend school
AGI equation
Gross income- adjustments
An investor should expect to receive a risk premium for
Higher uncertainty about getting his/her money back
________ _________ is a dollar-for-dollar reduction in the actual tax bill. • A few credits are even refundable, which means that if a taxpayer owes $250 in taxes but qualifies for a $1,000 credit, she/he gets a check for $750. (Most tax credits, however, aren't refundable.) • The most important tax credits for tax year 2018 (as established by the Tax Cuts and Jobs Act(TCJA) of 2017) are: • For families with young kids. • For students investing in education. • For big ticket "green" purchases.
a tax credit
If I can invest a dollar today and earn interest on it, then it should be worth _________ in the future.
more
This type of problem compounds a series of equal paymentsinto a future value. Example: At a 7.5% interest rate, which amount needsto be deposited at the end of each year over the next 10 years to grow to be exactly $50,000? Known: FV, I/Y and N. To be found: PMT
payments needed to achieve future value
The statement that includes liquid assets, real estate, personal possessions, and investment assets is known as a
personal balance sheet
Which of the following are two personal financial statements that you create yourself?
personal balance sheet and cash flow statement
Which of the following would increase the interest rate for a loan?
poor credit rating
Rhonda Miller wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments?
present value of an annuity
The tax that is a major source of revenue for local governments is called a(n)
real estate property tax
When creating a personal balance sheet, which of the following is an investment asset?
retirement account such as a 401k
Taxes on earnings that fund old age, survivor, and disability insurance benefits are called
social security taxes
_______ or __________ Deductions • The standard deduction is basically a flat-dollar, no-questions-asked reduction in your adjusted gross income. • Itemized deductions are essentially expenses or disbursements allowed by the IRS that can decrease your taxable income.
standard or itemized
Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next?
subtract his itemized deductions
Which of the following is NOT an action that can reduce your taxes? Owning a home. Taking out a consumer loan. Correct Paying certain work expenses such as union dues. Depositing money into a flexible spending account (FSA). Investing in municipal bonds.
taking out a consumer loan
If Brenda wants to pay her fair share of taxes, no more and no less, she should practice
tax avoidance
Income that is not subject to tax is called
tax-exempt income
Disposable income equals
the amount a person or household has to spend
Evan is not concerned about immediate tax benefits but instead wants his investment to grow in value on a tax-free basis. Which of these would be the best for him to invest in today?
A Roth IRA
Exclusions of gross income include:
Certain employer provided fringe benefits and contributions. • Some contributions to qualified retirement accounts. • Gifts and inheritances, life insurance proceeds, grants not in excess of college expenses. • Municipal bond interest.
A debt ratio of 0.5 indicates
For every dollar of net worth, debt equals $0.50.
To develop financial goals, one should
Identify specific, realistic goals that are measurable along with a time frame and an action plan
Which of the following long-term goals is stated most clearly using the SMART approach?
Invest $50 per month for the next 12 years for my nephew's college fund
A personal balance sheet reports
Items owned, amounts owed, and your net worth.
When creating a personal balance sheet, which of the following is a current liability?
Medical bill
Shannon is working on her federal income tax form and wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction?
Miscellaneous expenses that exceed 2% of AGI
An advantage of investing in a 401(k) plan is the
Possibility of receiving an employer match on your contributions.
3) Estimate deductions. Compare the _________ with the _________-
Standard with the Itemized Deduction
1) Add all income from all sources to get
Gross income
insolvent means:
unable to pay debt
A budget deficit would result when a person's or family's
actual spending exceeds planned spending
Which of the following appears as a cash outflow on a cash flow statement? Liquid assets Variable expenses Correct Net worth Personal possessions Real estate assets
variable expenses
The saving component of financial planning focuses on long-term security and includes:
A regular savings plan for emergencies
example of Medical and dental deducation
Adjusted gross income is $40,000. 7.5% of Adjusted gross Income is $ 3,000. • Anything beyond the first $3,000 of the medical bills is deductible. If the taxpayer has $10,000 in medical bills, $7,000 of it could be deductible in this example. If the medical bills add to $ 2,800, nothing can be claimed as a medical deduction.
Which of the following situations describes a person who could be insolvent? Assets $56,000; annual expenses $60,000 Assets $78,000; net worth $22,000 Liabilities $45,000; net worth $6,000 Assets $40,000; liabilities $55,000 Correct Annual cash inflows $45,000; liabilities $50,000
Assets $40,000; liabilities $55,000
The equation to calculate net worth is
Assets - Liabilities = Net Worth
Opportunity cost refers to
What you give up by making a choice.
A current ratio of 2 means
$2 in liquid assets are available for every $1 of current liabilities.
If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would his taxes be reduced?
$250 (explanation: Taxes would be reduced by (Tax deduction) × (Tax rate) = $1,000 × 25% = $250.)
Rebecca Wilson budgeted $395 for a new wardrobe in June. She actually spent $425. What is her budget variance?
$30 deficit
Which of the following is a component of money management?
-Storing and maintaining personal financial records and documents. -Creating a balance sheet. -Creating and implementing a plan for spending and saving. -Creating a cash flow statement. All of these choices are components of money management.
Place the following steps for a personal financial plan in the proper order: 1. Review and revise the financial plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate alternatives 6. Develop your financial goals
4, 6, 2, 5, 3, 1 (determine your current financial situation, develop your financial goals, identify alternative courses of action, evaluate alternatives, create and implement your financial action plan, create and implement your financial action plan, review and revise the financial plan)
Using the following table, calculate the taxes for an individual with taxable income of $30,000. 10% Up to $8500 15% $8500-$34000
4075 (explanation: Taxes = (10% × $8,500) + {15% × ($30,000 − $8,500)} = $850 + $3,225 = $4,075.)
Money management refers to
Day-to-day financial activities.
The main purposes of personal financial statements are to
Report your current financial position. Measure your progress toward financial goals. Maintain information about your financial activities. Provide data for preparing tax forms or applying for credit. All of these choices are correct
Compounding is about moving money forwardsin time.It'sthe process of determining the future value of an investment made today or the future value of a series of equal payments(PMT) made over time (periodic payments: each year, for example). Discounting is about moving money backwardsin time. It'sthe process of determining the present value of money to be received in the future (as a lump sum or as periodic payments PMT)
TVM
4. Subtract deductions from AGI to get ___________ _____________
Taxable Income
taxable income equation
Taxable Income = Adjusted Gross Income - Deductions
_______ Deduction • If the total amount of your medical and dental expenses exceeds 7.5% of your Adjusted Gross Income (AGI), you may deduct the excess. • If your total expenses are below the 7.5% floor, they are not deductible at all.
The Medical and Dental
The consumer price index measures:
The average change in prices of a fixed basket of goods and services of urban consumers
Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year?
accelerate deductions
5. Look up tax table to estimate _________ ________ depending on filing status
Total Tax
6. Subtract Tax Credits to get ________________
Total Tax Owed
Total Tax before Tax Credits equation
Total Tax before Tax Credits = Taxable Income x Blended Tax Rate
________________________-is estimated from tax tables provided by the IRS each year. • The estimated tax due is indicated in the tables by income ranges and filing status. But, it also can be calculated from the tax bracket tables. • Taxpayers pay taxes on their taxable income at a blended or graduated rate. • Tax rates are progressive: the higher the income, the higher the rate. The minimum tax rate is 10%, the maximum is 37%
Total Tax before tax credits
___________ income for tax purposes is all income from all sources, unless specifically excluded or deferred. include: • Wages and salaries, commissions. • Interest, dividends, capital gains. • Self-employment income and income from business entities. • Rents and most other forms of income.
Total or gross income
The Rule of 72 is:
Used to estimate how fast prices will double using a given annual inflation rate
All of the following can reduce your taxes today except investing in Municipal bonds. A tax-deferred annuity. A Section 529 savings plan. A 401(k) plan. A Roth IRA.
a Roth IRA
alimony
a husband's or wife's court-ordered provision for a spouse after separation or divorce.
are deductions from total income allowed by the IRS to get your Adjusted Gross Income (AGI): • Qualified medical savings contributions (flexible spending accounts) • Contributions to individual retirement accounts (IRA) that are not Roths • Contributions to Health Savings Accounts (HSAs) • Student loan interest and tuition and fees deduction (within limits) • One-half self employment tax, etc. • Losses include net capital losses (up to $3,000), sole proprietorship losses, and active participation real estate losses
adjustments
When calculating federal income taxes, what increases "gross income"?
alimony received
The tax based on the total tax due divided by taxable income is called the
average tax rate
Another name for a statement of financial position is a
balance sheet
The document that would be most useful to plan spending and saving to achieve financial goals is the
budget
The difference between the amount budgeted and the actual amount received or spent is called the
budget variance
Adjustments to income include all of the following except
charity contributions
Future value computations are often referred to as
compounding
Which of the following ratios indicates the amount of a person's earnings that goes for payments for credit cards, auto loans, and other debt (except mortgage)?
debts payment ratio
Which of the following will increase the net worth of a household?
decrease amount owed on credit cards
Individuals can file their federal taxes using all of the following except Use tax preparation software to file online. Use tax preparation software to print and mail. Electronic filing using Free File Alliance. Deliver in person. Correct All of these can be used.
deliver in person
Present value computations are also referred to as
discounting
When calculating federal income taxes, "gross income" includes all of the following except
earned income credit
A tax imposed on the value of a person's property at the time of death is called a(n)
estate tax
Every decision involves uncertainty, which is referred to as
evaluating risk
A tax due on the purchase of gasoline is called a(n)
excise tax
This type of problem compounds an annuity to a future value.Example:If you deposit $12,000 at the end of each yearfor 10 years earning 8% annually, how much money will be in the account at the end of year 10? Known: PMT, I/Y and N. To be found: FV
future value of a series of payments
Paul Davis wants to deposit a lump sum of money today for a vacation that he plans to take to Asia after he graduates from Graduate School. Which formula should he use to determine the amount of money he will have available for his vacation?
future value of a single amount
Tim Taylor received a $500 gift from his grandparents. He wants to invest this money for the down payment of a house that he plans to purchase in 3 years. What type of computation should he use?
future value of a single amount
This type of problem compounds a single amount to a future value.Example:Whatwill $100,000 invested today for 7 years growto beworth if compounded annually at 5% per year? Known: PV, I/Y and N. To be found: FV
future value of a single sum
Jennifer Rodriguez plans to attend graduate school in 5 years. She thinks that she will need a total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use?
future value of an annuity
Steve Wilson wants to deposit $150 per month into an account earning 4 percent for the next 3 years, so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have accumulated for his purchase?
future value of annuity
This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels.
income tax
An advantage of effective personal financial planning is:
increases control of financial affairs
The rising or falling of prices that causes changes in buying power is referred to as ____________ risk.
inflation
Common stock and bond brokerage statements are an example of a(n) ____________ record.
investment
The most common _______ deductions are: • Casualty and theft losses: losses due to theft, vandalism, fires, storms and car accidents (with limits) • Charitable Contributions: all donations to qualifying organizations (usually non-profits) • Home Mortgage Interest: the interest paid on mortgage loans used to buy, build, or improve your home. • Medical and Dental Expenses: qualified medical expenses that are more than 7.5% of your AGI. • State and Local taxes (with limits)
itemized
After having established a spending plan, it is important to
keep track of actual income and expenses
The difficulty of converting savings and investments to cash is referred to as ____________ risk.
liquidity
Which of the following ratios indicates the number of months in which living expenses can be paid if an emergency arises?
liquidity ratio
Which of the following appears as a cash outflow on a cash flow statement? Home value Loan payment Correct Net worth Balance of mortgage Cash value of life insurance
loan payment
The rate used to calculate the tax due on the next dollar of income is referred to as the
marginal tax rate
Deductions reduce taxable income, over which taxes are estimated. At the end, deductions reduce the tax liability. • The taxpayer can take either the standard deduction or itemized deductions on her/his tax return. Rule: • If standard deduction is less than the itemized deductions, the taxpayer should claim the itemized deduction. • If the standard deduction is more than the itemized deductions, the standard deduction is applied.
taxable income
According to Tax Service Warnings, who is responsible for supplying accurate and complete information for completing a tax return?
taxpayer
