FINC 2400 Chapter 2

A budget will not do which of the following? A) Help determine if cash outflows will be sufficient to cover cash inflows B) Anticipate cash shortages C) Determine the excess you have to invest D) Determine the additional payments you can make to reduce personal debt

A

Long term liabilities include all of the following except A) the amount due on a credit card. B) the mortgage on a home. C) three year car loan. D) a student loan.

A

The amount you would receive if you sold an asset today is called the asset's A) market value. B) book value. C) sales value. D) cost. Answer:

A

Bill's annual savings rate is 9%. If Bill currently saves $6,750 annually, how much more will he need to save to increase his savings rate to 11%? A) $8,250 B) $135 C) $1,500 D) more information needed to determine the answer

C

Creating a cash flow statement requires that you determine A) assets. B) liabilities. C) cash used for expenses. D) market value of investments.

C

Debts that are to be paid off within a year are called A) intermediate-term liabilities. B) one-year liabilities. C) current liabilities. D) insignificant debts.

C

In the balance sheet, a(n) ________ in assets ________ net worth. A) increase; increases B) decrease; increases C) Both A and D are correct. D) decrease; decreases

C

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

C

Which of the following is not a key budgeting influence for a personal financial plan? A) Change investments from risky stocks to more conservative stocks B) Improve near term net cash flow C) Reduce debt payments by 50% D) Improve long term net cash flow

A

Why is it important to monitor your debt level? A) So it does not become so high that you cannot cover the monthly payments B) So that you maintain a liquidity ratio of at least 2.5 C) In order to qualify for another credit card to capture the introductory points D) So that your total debt does not exceed your annual income

A

Your current liquidity ratio is 2.0. If you take money out of your savings account to pay off a credit card your liquidity ratio will A) increase. B) decrease. C) stay the same. D) More information is needed to determine what effect this action will have.

A

If you have liquid assets of $20,000 and current liabilities of $10,000, then you A) have a current liquidity ratio of 2. B) are in poor financial shape with a liquidity ratio of 0.5. C) may have trouble paying your bills depending on their due dates. D) are over-extended by $10,000.

Answer: A Explanation: A) $20,000/$10,000 = 2

David's liquidity ratio is 3.0. He has $1,000 in current liabilities. Therefore, he has ________ worth of liquid assets. A) $3,000 B) $333 C) $4,000 D) $700

Answer: A Explanation: A) x/$1,000 = 3.0 x = $3,000

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

Answer: B Explanation: B) $45,000 - $22,000 = $23,000

Allison expects her monthly cash inflow after taxes to be $3,000. She also has the following monthly expenses: Rent, $750; student loan payment, $200; utilities, $150; food, $300; recreation, $600; car expenses, $200; clothing, $150. What is Allison's net cash flow for the current month? A) $2,350 B) $650 C) ($650) D) $3,000

B

An investment company that sell shares to individuals and then invests the proceeds in stocks or bonds is called a A) current liability. B) mutual fund. C) stocks. D) bonds.

B

If Jo Ann has $4,000 in liquid assets and $1,000 in current liabilities, her liquidity ratio is A) 0.25. B) 4.0. C) 1,000. D) 4,000.

B

If Kim's current debt ratio is 45%, this means that ________ of Kim's assets are purchased on credit. A) 55% B) 45% C) 50% D) Not enough data to determine the answer

B

If you sell stock from your portfolio to pay off your car loan, your debt ratio of 0.5 will A) increase. B) decrease. C) stay the same. D) More information is needed to determine what effect this action will have.

B

Investment assets include all of the following except A) stocks. B) automobiles. C) bonds. D) rental property

B

Liabilities can be calculated by A) adding assets to net worth. B) subtracting net worth from assets. C) adding assets to income. D) subtracting expenses from assets.

B

Property such as a person's home, car, and furniture is called A) liquid assets. B) household assets. C) major property assets. D) investment assets

B

The personal cash flow statement measures A) the rate of cash flow. B) cash outflows only. C) cash inflows and outflows. D) cash inflows only.

C

When a person owns corporate stocks, government or corporate bonds, or mutual funds, these are called A) liquid assets. B) household assets. C) investment assets. D) retirement assets.

C

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

B

) The primary goal of financial planning is to A) increase earnings. B) maximize cash inflows. C) maximize wealth. D) minimize financial risk.

C

A low liquidity ratio means that A) you have very few debts. B) liquid assets are increasing faster than current debt. C) you probably will have trouble paying your current bills. D) you have too many liquid assets.

C

All of the following affect cash outflows except A) the size of your family. B) your age. C) your education level. D) your personal consumption behavior.

C

Allison anticipates an additional car expense two months from now of $400 for new tires that she has not previously budgeted for. What action should Allison take? A) Nothing; wait another month to consider the expense since she doesn't need the tires for another two months. B) Plan to use her credit card to purchase the tires. Then she won't have to use her excess cash. C) Revise her car expenses over the next two months to allow for the additional cost of the new tires. D) Ask her parents for the money for the new tires.

C

A personal balance sheet summarizes A) income and expenses. B) cash inflows and outflows. C) assets, net worth, and income. D) assets, liabilities, and net worth.

D

Margaret has $5,000 in her checking account, a home with a market value of $175,000, and stocks valued at $10,000. Margaret also has a credit card debt of $15,000. Margaret's liquidity ratio is A) 1.00. B) 12.00. C) 12.67. D) .33.

D

Nancy has $40,000 of annual disposable income and saves $8,000 a year. Her savings rate is A) 5%. B) 12%. C) 17%. D) 20%. Answer:

D

Cash inflows tend to be higher for younger individuals and lower for individuals in their 50s.

FALSE

For most people, the first step in finding where their money goes each month is to correctly assess their true net income.

FALSE

The most common error people make is to underestimate cash inflows and overestimate cash outflows

FALSE

A personal cash flow statement is usually the starting point for an individual's or family's budget.

TRUE

Your net worth can change even if your net cash flows are zero.

TRUE

You save the same dollar amount from each paycheck during your career. As your income increases, your savings rate will A) increase. B) decrease. C) stay the same. D) More information is needed to determine what effect this action will have.

B

If both a husband and wife are employed, their consumption will tend to A) increase. B) decrease. C) stay the same. D) None of the above; the employment of spouses is unrelated to consumption behavior

A

Jennifer has assets of $100,000 and $10,000 of debt. She could A) borrow more money, since her debt ratio is low. B) apply for a bank loan, but expect to be turned down. C) borrow approximately $200,000 at below market rates. D) not borrow more money until she pays off her current debt.

A

Jim has $1,000 income from his job and $200 stock dividend income this month. This month Jim has rent and utilities of $300 and he spent $300 on groceries and $200 on clothing. What is his cash inflow this month? A) $1,200 B) $400 C) $600 D) $500 Answer:

A

Lucky Louie has the following cash inflows and outflows: $500 rent, $200 car payment, $100 car repair, $100 discretionary purchases, $300 food, $150 electric bill, $3,500 monthly salary after deductions for tax, etc., $200 cell phone, $400 repayment of loan to dad, and $500 planned spending on weekend fun. What is Lucky's net cash flow? A) $1,050 B) $200 C) $1,150 D) Not enough information regarding paycheck

A

Lucky Louie just inherited $50,000 from his great aunt, has $1,500 in his checking account, owns a car with a value of $8,000, and has $20,000 in his 401(k) at work. Louie owes $6,000 on his car, $12,000 on school loans and $3,000 on his credit card. What is Louie's net worth? A) $58,500 B) $58,000 C) $38,500 D) He has no net worth since he does not own a house.

A

If your cash outflows are $600 and your cash inflows are $1,000, you can increase your net worth by A) $1,000. B) $600. C) $1,600. D) $400.

Answer: D Explanation: D) $1,000 - $600 = $400

The term "liquid assets" refers to A) the earnings on savings. B) financial assets that can be easily sold without a loss in value. C) the amount of insurance coverage a person has. D) a person's inability to pay his or her debt.

B

Which of the following is not a true statement about mutual funds? A) They are managed by professional managers. B) Proceeds are only invested in stocks. C) A minimum investment is required. D) The value of shares is reported in The Wall Street Journal.

B

Which of the following usually affects cash inflows the most? A) The education and income of your parents B) Your job skills C) Your personal consumption behavior D) The size of your family

B

Jerry has assets of $200,000, a net worth of $150,000, and an annual income of $100,000. What are Jerry's liabilities? A) $100,000 B) $250,000 C) $50,000 D) $450,000

C

Jim has $1,000 of salary and $100 of dividend income this month. This month he also has rent and utilities of $300 and he spent $200 on groceries and $100 on clothing. What is Jim's net cash flow this month? A) $400 B) $600 C) $500 D) $1,100

C

Paying off a credit card with cash will have which of the following effects on net worth? A) Increase B) Decrease C) No effect D) Insufficient data to determine the answer

C

Which of the following statements about stocks is not true? A) Stocks represent partial ownership of a firm. B) Corporations issue stocks to obtain money for various projects. C) Investments in stocks are considered liquid assets. D) The market value of stocks changes daily.

C

A cash flow statement that is based on forecasted cash flows for a future time period is called a(n) A) cash outflow. B) net cash flow. C) income statement. D) budget.

D

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.

D

Balance sheet assets should be valued at A) original purchase price. B) replacement value. C) insured value. D) market value.

D

Corporations issue stocks for all of the following reasons except A) to purchase new machinery. B) to expand into new markets. C) to fund a plant expansion. D) to loan money to shareholders.

D

Forecasting for more than a month at a time is not helpful because you can't plan for unexpected expenses in the future.

FALSE

Getting financial help from family and friends is easy and should be your first option in case of an emergency.

FALSE

Long-term liabilities are debts that will be paid at least three years into the future.

FALSE

Stocks are considered liquid assets since they are easy to sell without a loss in value.

FALSE

Your cash outflows are the same as your liabilities such as the amount you owe on your car or home.

FALSe