FIN 3330 Exam 1

Tax Liability

To determine the amount of tax owed, taxable income is based on the tax tables or tax rate schedules.

Liquidity Ratio =

Total Liquid Assets / Total Current Debts

Debt Service Ratio =

Total Monthly Loan Pmts / Monthly Gross Income

Solvency Ratio =

Total Net Worth / Total Assets

Total Assets =

Total liabilities + Net Worth

Contraction periods tend to end with a X , while expansion periods tend to end with a X.

Trough Peak

In situations where an annual budget deficit exists, cutting expenses from the budget is optimal.

True

To finalize the budget, compare projected income to projected expenses. When income equals or exceeds total expenses, it is considered a balanced budget.

True

To remedy a short-term budget surplus, shift additional income to a month where a deficit exists. True

True

When estimating income, include amounts that you can control, like bonuses and rental income.

True

Financial planner

A financial professional who provides financial evaluations and advice to individuals and families and who receives compensation in the form of commissions, fees, or some combination thereof.

Which of the following statements accurately describe the phases of a business cycle?

A peak level of business activity occurs at the end of the expansion phase and the beginning of the contraction phase. A contraction phase is when an economy exhibits decreasing levels of production and consumption. A trough occurs at the end of the contraction phase and the beginning of the expansion phase.

Passive income

A special category of income that includes earnings derived from real estate, limited partnerships, and other forms of tax shelters.

Inflation

A steady and sustained increase in general price levels across economic sectors. This phenomenon is measured by the changing cost over time of goods and services that a typical household might purchase.

Progressive tax structure

A tax structure in which additional taxable income is taxed at a higher rate

As it is currently written, the U.S. tax code recognizes several types of taxable income, including:

Active, or ordinary , income Passive income Portfolio, or investment income Tax-deferred and/or tax-free income

Liability acquisition planning

Addresses how you are going to pay for your asset purchases using liabilities, or borrowed money. The disadvantage of liabilities is that, by law, the money must be repaid.

Assets

Are classified regardless of whether they were purchased for cash or financed with debt. A useful way to group assets is on the basis of their underlying categories: liquid assets, investments, real property, and personal property.

Budgets

Are forward-looking reports , which are based on expected income and expenses. These reports are used to monitor and control spending habits.

Tangible assets

Are physical assets, such as a car or house

Adjustments

Are taken against gross income and include certain employee, personal retirement, insurance, and support expenses. They are usually non-business in nature. Some examples include educator expenses, higher education tuition costs, IRA contributions, self-employment taxes paid, self-employment health insurance paid, penalty on early withdrawal of savings, alimony paid, and moving expenses.

A ledger has sections where data is recorded for what you own or your X ; what you owe or your X; your cash inflows or your income ; and your cash outflows or your X.

Assets Liabilities Expenses

How do businesses contribute to conditions in the economic environment?

Businesses sell to consumers and government organizations, providing them with goods and services in return for monetary payments . To accomplish this, businesses transform the inputs inputs to the production process provided by consumers (namely land, labor, equipment, managerial talent, and a willingness to take risks) into finished products and services. In return, consumers are paid money in the form of rent, wages, interest, and profits. Businesses, or sellers are probably the most constrained participant in the economy, because in the long term their choice of goods and services produced is dictated by the purchasing preferences of consumers and government organizations, or buyers. In addition, businesses are also constrained by the laws and regulations imposed by federal, state, and local government organizations.

PVA =

CFn [1-1/(1+i)^N)/i]

FV =

CFn(1+i)^N

Savings Ratio =

Cash Surplus / Income after taxes

Keeping good financial records will save you time and make you money. If your records are organized, you'll have an easier time:

Compiling a budget Pulling together an updated financial statement Accessing your records in an emergency Preparing your taxes Preparing for an IRS audit Defending a credit report

Savings and investment planning

Considers the type and characteristics of the investment vehicles used to generate future investment income and returns, using both previously accumulated income and unspent income from the current period.

Long-term liabilities

Debts more than one year from the date of the balance sheet.

Current liabilities/short liabilities

Debts payable within the year of the balance sheet. Examples are: a washer/dryer loan due this year or your water bill.

Think about the characteristics of the expansion and contraction periods in a business cycle. How might the characteristics of these two phases affect your efforts to manage your financial resources?

During the early stage of an economic expansion, finding a job generally tends to be easier, because manufacturers and retailers generate relatively higher levels of production and output.

Liquid assets are X and are held either to consume and use or to generate a return or income as an investment. An example of a liquid asset is X

Easily convertible into cash Cash or money in a savings account

In overseeing the economy, the goals of the federal government are...

Economic stability and a high employment level.

Which of the following is a principal tool used by government organizations to constrain the activities of businesses and consumers?

Enacting fiscal policy

Variable expenses

Expenses for which the amount of the payments changes from period to period. Examples include: groceries, clothing, utilities, entertainment, and medical expenses.

Fixed expenses

Expenses that are usually contractual with a predetermined payment amount. Typically, payment is made in equal, periodic payments (for example, monthly rent). Examples are: mortgage payments, rent, contract cell phone fees, insurance, auto loans, and other installment-type loans.

CFn =

FVA / [(1+I)^n-1/i]

All assets listed on the balance sheet should be recorded at

Fair Market Value

When estimating expenses, developing an amount that one can live within is the best approach.

False

Sale of a home

Homeowners receive special tax treatment on the sale of a principal residence. Single taxpayers can exclude from income the first $250,000 of gain ($500,000 for married taxpayers). To qualify, the taxpayer must own and occupy the residence as a principal residence for at least two of the five years prior to the sale.

The purpose of most long-term savings activity is to accumulate funds for...

Important and expensive expenditures and retirement

Gross income

Includes any and all income subject to federal taxes: wages, salaries, bonuses, commissions, interest, dividends, alimony received, business and farm income, gains on the sale of assets, pension income, annuity income, rental income, partnership income, prizes, lottery winnings, and winnings from gambling.

Active income

Income earned on the job, such as wages and salaries, bonuses and tips, and other forms of noninvestment income (such as pension income and alimony received).

In general, the cost and value of your tangible, personal, and real assets tend to X with your age, income, and wealth, all other things remaining constant. The value of your financial and liquid assets, on the other hand, tends to be a function of economic conditions and your investment returns.

Increase

In general, it is desirable to X the return earned on your invested funds (assuming you are not significantly increasing risk), to earn compound interest on your funds, and to X the fees associated with the accounts.

Increase Reduce

If the federal government wants to increase production and purchasing activity levels in the economy, which of the following policy tools could it use?

Increase the money supply. Increase government spending.

The benefits of effective and efficient personal financial planning include:

Increased flexibility and ability to accommodate significant life changes and events. Better informed and deliberate decision making regarding current and deferred spending.

Financial assets

Intangible and return-earning assets, such as stocks or bonds.

Tax planning

Involves evaluating your current and projected earnings and developing strategies that can legally defer and/or reduce your tax liability.

Employee benefit planning

Involves selecting, coordinating, and managing employer-provided compensation that does not take the form of cash payments, such as wages, salaries, and commissions. These benefits can include sick leave, vacation, and personal time; life, health, and disability insurance; tuition reimbursement programs; pension, profit-sharing, and401(k) retirement plans; and flexible spending accounts (FSAs) forchild care and health care expenses.

Retirement planning

Is designed to achieve and maintain your desired standard of living and quality of life after you stop working. To achieve the best results, it is critical that you begin your retirement planning long before your retirement. Most Americans, however, don't start thinking about retirement until well into their40s and 50s The cost of this postponed planning is a substantially lower level of retirement income.

Financial goals describe the desired outcomes of your financial planning activities. Most financial advisors recommend developing goals with three broad categories of completion dates

Long-term goals, which identify wants and needs that are expected to be realized 6-40 years from now. Short-term goals, which address more immediate needs and wants, such as those occurring within the next 12 months. Intermediate-term goals, which identify wants and needs that occur between the other two categories.

An expansion period is characterized by the following attributes: businesses that are operating higher productive capacity, X unemployment, increasing retail sales, X prices and interest rates, a rising stock market, and expectations of X business profits.

Low Low or decreasing Higher

A couple in which each spouse files his or her own return is called

Married filing separately

The two principal policy tools that the federal government uses to manage economic conditions are monetary policy and fiscal policy.

Monetary policy is used to control the size of the money supply to stimulate or moderate business activity levels in the economy. In contrast Fiscal policy uses government spending and taxation to do the same.

Who are consumers and how do they affect the economic environment?

Most people recognize that, as a group, consumers are the pivotal participants in the economy. The purchasing decisions made by consumers determine which goods and services will be produced by businesses, just as their investment and saving decisions will strongly influence conditions in the financial markets. Another indication of the importance of consumers is the effect their collective spending has on the economic activity level observed in the economy.An increase in the level of consumer spending is usually credited with causingeconomic growth and all benefits or costs that go with it.

In general, it is best to begin the six planning activities—asset acquisition, liability and insurance, savings and investment, tax, employee benefit, and retirement and estate—planning as soon as possible. However, at what age is it generally recommended that you begin your retirement and estate planning activities?

My early-20s

Insolvency

Net worth is less than zero

Capital gain

Occurs whenever an asset (such as a stock, a bond, or real estate holding) is sold for more than its original price. Additionally, capital gains are taxed at different rates, depending on the holding period of the asset.

Asset acquisition planning

One of the earliest financial activities you undertake in life. It involves the purchase ofthings we own , including tangible and financial assets, liquid assets, investments, and personal and real property.

Loans

Only the latest outstanding loan balance is shown on the balance sheet. The initial loan balance is not what is currently owed but what was originally borrowed

CFn =

PVA / [1-(1+I)^n/i]

Real Estate or Limited Partnership Expenses

Passive income cannot be combined with portfolio or active income, and these expenses can be used only to offset the passive income to which they relate.

Movable objects

Personal property, such as clothing or furniture.

Investment Expenses

Portfolio income cannot be combined with passive or active income, and these expenses can be used only to offset the portfolio income to which they relate.

Tax planning is closely related to savings and investment planning, because tax-reducing strategies often involve the use of tax-deferred or tax-free investments. Tax-free investments are so called because the interest or other income paid to their owners is free of federal, and, perhaps, state taxes. Owners of tax-deferred investments, on the other hand, are allowed to....

Postpone paying taxes on any returns generated by the investment.

Insurance planning

Provides a way of reducing your financial risks and protecting your income and assets. Improper insurance planning can be expensive and can lead to unprotected possessions.

Federal, state, and local government organizations fulfill several roles within the economy. Which of the following are roles provided by government organizations?

Providing essential public services Regulating economic activity

Government organizations have a significant role within the U.S. economy. Among the roles it fulfills are:

Providing essential public services Regulating economic activity Employing consumers Acting as a consumer of goods and services

Immovable objects

Real property, such as land or the structures on it.

Liabilities

Represent the debts for an individual or family. They are incurred by charging items on a credit card, securing an installment loan (for example, to purchase a car), or obtaining a mortgage to buy a house or other real estate. As stated, liabilities are classified according to maturity.

Which of the following are important steps in financial record keeping?

Safely disposing of unneeded documents Maintaining records for tax and insurance purposes

Which of the following are tasks included in the process of employee benefit planning?

Select the most appropriate benefits and plans. Coordinate self-purchased policies and coverages with benefits provided by your and your spouse's employer.

The financial planning process

Step 1: Define your financial goals. Step 2: Develop the financial plans and strategies needed to achieve those goals. Step 3: Implement your financial plans and strategies. Step 4: Develop and implement budgets to control your progress toward your goals. Step 5: Develop and use financial statements to evaluate the results of your plans and budgets. Step 6: As your personal circumstances change, redefine your goals and revise your plans and strategies.

Equity

The amount left after selling assets and paying off all liabilities

Adjusted gross income (AGI)

The amount of income remaining after subtracting all allowable adjustments to income from gross income. Many itemized deductions are based on a percentage of AGI.

Taxable Income

The amount of income subject to taxes. It includes all income subject to tax and subtracting adjustments, deductions, and exemptions.

Which of the following activities also contributes to your financial success?

The development of personal financial goals and target dates that are consistent with your values, attitudes, and behaviors. The development of an effective plan that is consistently applied until it is revised in accordance with changes in your goals and life circumstances. Self-awareness and knowledge of your own values, as well as attitudes and behaviors regarding money, spending, and saving. Knowledge of what other average people believe and how they behave, because they affect the same financial markets and economic conditions that affect you.

Net worth

The fair market value of assets owned less liabilities owed

Business cycle/economic cycle

The irregularly occurring wavelike pattern of economic activity, generally depicted as an undulating wave of expansions, peaks, contractions, and troughs.

Standard of living

The material well-being and peace of mind that individuals and groups desire and seek to attain, to maintain if attained, to preserve if threatened, and to regain if lost.

Money

The medium of exchange used as a measure of the value of financial transactions. It is used to purchase goods and services and the utility (or satisfaction) that these goods and services provide.

Average tax rate

The overall rate at which income is taxed, determined by dividing the tax liability by the taxable income

Average propensity to consume (APC)

The percentage of each dollar of income, on average, that is spent for current needs and wants, rather than saved. For example, Mary's APC is 95%; on average, she spends $0.95 and saves only a nickel of every dollar earned.

Loan amount

The portion of a loan listed as a liability on the balance sheet is only the loan's principal.

Financial Plans

The road maps used on the journey to financial security.

utility

The satisfaction received from buying and using certain types or quantities of goods and services. Utility will result from consuming free as well as costly goods and services. A basic economic goal is to achieve the maximum amount of utility per dollar of income spent.

Estate planning

The second half of retirement planning, involves the method by which your wealth will be passed on to your heirs, often by way of wills, trusts, and gifts.

Marginal tax rate

The tax paid on the next dollar of taxable income

Wealth

The total value of all items owned by an individual or family, including tangible and financial assets. Therefore, wealth includes the value of home(s), personal belongings, car(s), and other tangible assets, as well as intangible assets like cash, checking and savings accounts, stocks, bonds, and other financial assets. Remember, it is possible that these assets may also have outstanding debts associated with them.

One of the first savings accumulations recommended by financial advisors is an emergency fund, which should contain...

Three to six months' worth of income.

Purchasing power

Used to characterize the value of a currency by describing the amount of goods and services that can be purchased by a dollar at a given time. Inflation tends to decrease this value; deflation, the opposite of inflation, tends to increase this value.

Budget

a short-term report that helps achieve financial goals. A cash budget is a valuable money management tool that helps you: Maintain the necessary information to monitor and control your finances Decide how to allocate your income to reach your financial goals Implement a system of disciplined spending, as opposed to just existing from paycheck to paycheck Reduce needless spending, so you can increase the funds allocated to savings and investments Achieve your long-term financial goals

Employee benefit

any non-monetary benefit provided by employers to employees. This form of compensation comes in a form other than wages, salary, commissions, or other cash payments. Employee benefits may include health, disability, and life insurance; retirement, pension, and profit-sharing plans; child and elder care; and/or educational assistance programs.

Balance Sheet

comprised of assets (things that are owned) less debts (things that are owed). Assets less debts equates to an individual's net worth.

Income (or cash in)

includes common sources of income such as wages, salaries, self-employment income, bonuses, and commissions. In addition, interest earned, dividends paid, and proceeds from sales (stock, autos, and homes) would be placed in the cash in column. Other income includes pensions and annuities, Social Security income, rental and lease income, alimony and child support, scholarship and grants, and tax refunds.

Portfolio income

includes interest, dividends, and capital gains (on the sale of investments) generated from investment holdings. This category also includes income from savings accounts, stocks, bonds, mutual funds, options, and futures.

One good record-keeping tip is to prepare your financial statements at least

once a year

Expenses (or cash out)

represent monies paid to satisfy debts. Expenses can be categorized into four major groups: (1) living expenses (housing, food, clothing, medical, transportation, and utilities); (2) tax payments; (3) asset purchases (autos, furniture, appliances, and the loans on these purchases); and (4) other payments for personal care, recreation, and entertainment.

Keeping a ledger will help you

summarize all your transactions.