PERSONAL FINANCE Ch. 1 Test Study Guide

Mike and Mary Jane Lee have a yearly income of ​$82,608 and own a house worth ​$109,600, two cars worth a total of $22,264 and furniture worth ​$10,139. The house has a mortgage of ​$71,907 and the cars have outstanding loans of ​$2,809 each. Utility​ bills, totaling ​$192 for this​ month, have not been paid. Calculate or use Worksheet 4 to determine their net worth and explain what it means. How would the​ Lees' age affect your assessment of their net​ worth? The value of Mike and Mary​ Jane's total assets are ​$__ The value of Mike and Mary​ Jane's total liabilities are ​$__ The value of Mike and Mary​ Jane's net worth is ​$__ How would the​ Lees' age affect your assessment of their net​ worth? A. If the Lees sold off all their assets and paid off all their​ debts, they would have ​$64,286 in cash. You would expect net worth to increase with age. B. If the Lees sold off all their assets and attempted to pay off all their​ debts, they would still owe ​$146,894. You would expect net worth to decrease with age.

$142,003 $77,717 $64,286 A. If the Lees sold off all their assets and paid off all their​ debts, they would have ​$64,286 in cash. You would expect net worth to increase with age

Income Statement

A financial statement showing the revenue and expenses for a fiscal period.

Inflation

A general and progressive increase in prices

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

progressive tax

A tax for which the percentage of income paid in taxes increases as income increases

Which of the following statements describe a​ good, or​ effective, job​ interview? ​(Choose all that​ apply.) A. Gain a thorough knowledge of the company. B. Develop answers to the most common interview questions. C. Find as much information as possible about the interviewer. D. Look and act with professional confidence.

A, B, & D

Why is financial​ planning, or just plain money​ management, a challenge for most​ people? ​(Choose all that​ apply.) A. Learning financial planning skills​ isn't always easy. B. Good financial management can only be achieved by a professional analyst. C. Financial planning is challenging for some people due to a lack of financial knowledge. D. Financial planning skills have to be learned. E. In many families a fear of finance may develop from disagreements about money.

A, C, D, & E

Your friend Dario heard about your personal finance class and asked for your help. Explain to Dario why he should establish a budget and what information he needs. Which of the following statements describe the importance of a​ budget? (Choose all that apply) A. A​ well-planned budget prepares someone for the future and the unforeseen events that the future holds. B. With a​ well-planned budget, money will seem to go farther and he will be able to do more with what he has. C. A​ well-planned budget accurately matches a​ household's abilities with its financial goals. D. A​ well-planned budget reduces a​ household's expenses while increasing its revenue.

A. A​ well-planned budget prepares someone for the future and the unforeseen events that the future holds. B. With a​ well-planned budget, money will seem to go farther and he will be able to do more with what he has. C. A​ well-planned budget accurately matches a​ household's abilities with its financial goals.

Which of the following would be included on a personal income​ statement? A. Making a payment to your credit card company B. Buying a flat−screen TV on credit C. Your​ 401(k) balance D. All of the above

A. Making a payment to your credit card company

What financial strategies should you develop as a result of studying personal financial planning? What financial problems might you avoid?

A. Save for retirement B. Invest intelligently C.Minimize your tax payments D. Manage unplanned events E. Use insurance to cover assets F. Accumulate wealth for special goals.

What financial strategies should you develop as a result of studying personal financial​ planning?

A. Save for retirement B. Invest intelligently C. Minimize your tax payments D. Manage unplanned events E. Use insurance to cover assets F. Accumulate wealth for special goals.

Which of the following are the steps that make up the financial planning​ process? ​(Choose all that​ apply.) A. Developing a plan of action. B. Defining your financial goals. C. Evaluating your financial health. D. Implementing your plan. E. Reviewing your​ progress, reevaluating, and revising your plan.

All of these steps make up the financial planning process.

Why do​ "ethical violations end​ careers"? ​(Select the best answer​ below.) A. Although ethical behavior has always been a professional​ expectation, recent national attention on the​ "transparency" of corporate and individual actions has increased the importance of ethical behavior. A boost of confidence by the boss or other​ co-workers in individual professional integrity can end a career. B. Although ethical behavior has always been a professional​ expectation, recent national attention on the​ "transparency" of corporate and individual actions has increased the importance of ethical behavior. A loss of confidence by the boss or other​ co-workers in individual professional integrity can end a career. C. Although ethical behavior has always been a professional​ expectation, recent national attention on the​ "transparency" of corporate and individual actions has decreased the importance of ethical behavior. A loss of confidence by the boss or other​ co-workers in individual professional integrity​ doesn't usually end a career. D. Recent national attention on the​ "transparency" of corporate and individual actions means it is harder to hide unethical behavior. Most corporations now have a professional expectation of ethical​ behavior, which should be upheld unless you are sure no one will find out about your unethical behavior.

Although ethical behavior has always been a professional​ expectation, recent national attention on the​ "transparency" of corporate and individual actions has increased the importance of ethical behavior. A loss of confidence by the boss or other​ co-workers in individual professional integrity can end a career.

________________means that an investor buys several​ investments, each with a unique level of​ risk, instead of putting all the money in one investment. _________________ refers to the speed and ease associated with turning noncash​ assets, such as investments or other​ tangibles, into cash. ​(Select the best answer: diversification or liquidity.) For​ example, the _________of​ exchange-traded stocks is much higher than collections​ (e.g., baseball​ cards, stamps,​ jewelry, etc.) and _______occurs when an investor chooses a combination of​ stocks, bonds, and mutual funds.​(Select the best answers: diversification or liquidity)

Answers in order of blanks. diversification liquidity liquidity diversification

Financial security comes from balancing what you _____with what you ____to meet the needs of today and tomorrow. Financial planning is critical to making that happen. Principle 4 cautions that the tax implications of earning and investing require Jeremiah and Bethany to consider how to______ the money available after paying their taxes. Principles 5 and 7 parallel the other principles of plan development. _______events in life demand access to cash and ______in the​ budget, or financial​ plan, to accommodate those costs. _______insures access to savings without a loss of value.​ Likewise, planning ahead by purchasing insurance _____provides coverage in the event the loss exceeds what can comfortably be paid from personal savings due to a major​ (or minor) catastrophe.

Answers in order of blanks. earn spend maximize unexpected flexibility liquidity protection

Short-term, intermediate-term, and​ long-term goals are similar in that all represent important financial objectives to be accomplished in the future. They differ in time horizon. A __________goal can be accomplished within a​ 1-year period. An ____________goal may take from 1 year to 10 years to accomplish. A __________goal is one for which it takes more than 10 years to accumulate the money. ​(short-term, intermediate-term, and​ long-term goals.) Saving enough money for a down payment on a home is an example of an___________​goal, saving enough money for retirement is an example of a ________​goal, and paying off a credit card is an example of a ___________goal. ​ (short-term, intermediate-term, and​ long-term goals.)

Answers in order of blanks. short-term intermediate-term long-term intermediate-term long-term short-term

deadline for filing?

April 15

net worth

Assets - Liabilities

Balance Sheet

Assets = Liabilities + Owner's Equity A financial statement that reports assets, liabilities, and owner's equity on a specific date.

Young professionals can insure success in their chosen careers​ by: ​(Select all that​ apply.) A. doing whatever it​ takes, legal or​ illegal, to get to the top. B. understanding and using the organizational power structure to their​ benefit, including being loyal and supportive of the boss. C. developing a strong network of people knowledgeable of their character and capabilities. D. updating and maintaining marketable​ skills, especially those that are not easy to duplicate. .E. building a visible reputation for good​ work, a willingness to take on new​ challenges, and an image that fits the organization. F. highlighting their ability to​ multi-task by talking on the phone with their friends while working.

B, C, D, & E

List five tips for Bethany to keep in mind when preparing for interviews. ​(Select all that​ apply.) A. Ask family and friends to call the interviewer to let​ him/her know you are a good worker. B. Thank the interviewer and immediately send a​ follow-up letter. .C. Make a good impression by getting a good​ night's sleep, dressing​ appropriately, and arriving early. .D. Use the​ library, the​ Internet, or other sources to learn about the company. .E. Look and act​ confident, but relaxed. .F. Find a friend to go to the interview with you for moral support. G. Review the commonly asked​ questions, prepare and practice a succinct answer for each.

B, C, D, E, & G

There are five basic steps to personal financial planning and their related tasks. Arrange these steps and examples of related tasks in the order of their presence during the financial planning process. A. Develop a plan of action. Develop a budget matching income and projected expenses for the remainder of this academic year. B. Evaluate your financial health. Record all expenses for a month to compare income and expenses. C. Review progress on the​ plan, reevaluate the​ plan, and revise the plan or start over with a new one. Based on this​ year, develop a revised budget for next year based on projected income and expenses. D. Define your financial goals. Pay off credit​ card(s) by the end of this school term. E. Implement the plan. Reduce expenses in problem areas so amounts do not exceed budgeted projections

B->D->A->E->C

FICA taxes

Based on the Federal Insurance Contributions Act; tax withheld from employees' paychecks and matched by employers for Social Security and Medicare.

Suppose that​ Jacob's assets include a motorcycle worth​ $12,000 and a checking account with a​ $3,000 balance, while his liabilities include a credit card balance of​ $4,000 and a motorcycle loan balance of​ $7,000. What is his net​ worth? A. $7,000 B. $12,000 C. ​$4,000 D. $5,000

C. ​$4,000

Invest intelligently so that you can avoid the problem of ...?

Choosing poor investments and investment products.

Fixed & Variable Expenses

Costs that stay the same from month to month versus costs that change from month to month

Which financial planning document should you use to measure your current financial​ condition? A. Statement of financial ratios B. Cash budget C. Budget D. Balance sheet E. Income statement

D. Balance sheet

A physical asset such as a high−​definition, flat−screen TV or a Harley Davidson motorcycle is called​ a(n) A. financial asset. B. liability. C. investment. D. tangible asset.

D. tangible asset.

Deductions vs. Credits

Deductions and credits both help to decrease how much income tax you pay. A tax credit is always worth more than a dollar-equivalent tax deduction, because deductions are calculated using percentages.

Use insurance to cover your assets so that you can avoid the problem of ...?

Driving a car with a badly dented fender because you couldn't afford the repair bill.

Jorge has a debt ratio of 37 percent and Jose has a ratio of 102 percent. They both have the same take−home pay every month. How can we describe their current financial​ situation? A. Jorge probably has more money available to enjoy every month. B. Jorge is currently solvent. C. Jose is currently insolvent. D. Jose probably​ doesn't have much money available to enjoy every month. E. All of the above

E. All of the above

Which of the following might be found on an income​ statement? A. Interest and dividends B. Payroll taxes paid C. Wages and salaries D. Income taxes paid E. All of the above

E. All of the above

​Hector's month's living expenses covered ratio is 0.25 months. He just broke his leg and will not be able to work for six weeks. Without a paycheck for six​ weeks, what will Hector most likely​ experience? A. He may have to liquidate some of his tangible or investment assets to keep current on his monthly bills. B. He​ doesn't have to worry because he has plenty of money in his savings accounts. C. He may have to borrow some money to keep current on his monthly bills D. There is not enough information to answer this question. E. Both A and C are realistic possibilities.

E. Both A and C are realistic possibilities.

From the Keown​ book, you have learned that a budget A. is a process of setting spending goals for the upcoming month or year. B. includes both actual and estimated expenses. C. is a plan for controlling cash inflows and outflows. D. can be simple or sophisticated. E. all of the above.

E. all of the above.

An expenditure over which you have no control and are obligated to make is a A. constant expenditure. B. contractual expenditure. C. repeating expenditure. D. long−term expenditure. E. fixed expenditure.

E. fixed expenditure.

financial planning is critical to _____success as the process is repeated throughout ______ in response to changing financial and life situations. Through financial planning, _____ are accomplished and new ___ are identified. The five-step process begins and ends with ____.

Financial planning is critical to financial success as the process is repeated throughout the life cycle in response to changing financial and life situations. Through financial​ planning, goals are accomplished and new goals are identified. The​ five-step process begins and ends with evaluation.

Manage unplanned events so that you can avoid the problem of...?

Going to a coin laundry mat because washer broke and you have no emergency funds.

Save for retirement so that you can avoid the problem of ...?

Having to work your golden years or having to sell your home.

Which of the following typically occurs during stage one of the financial life cycle?

Initial goal setting Insurance planning Home purchase

What is diversification?

It means that an investor buys several investments, each with a unique level of risk, instead of putting all the money in one investment.

Record Keeping

Maintaining accurate and complete records of all financial activities in your business.

Accumulate wealth for special goals so that you can avoid the problem of?

Never taking that trip to Australia

Minimize your tax payments so that you can avoid the problem of ...?

Paying more taxes than necessary on income or investments.

Why is Principle 10 the most important​ principle? Why is it equally relevant to financial and career​ planning? ​(Select the best answer​ below.) A. Principle​ 10, "just do​ it", means that Jeremiah and Bethany must avoid commitments and procrastinate​ - both critical strategies for success in financial or career planning.​ Furthermore, making progress toward their​ goals, their careers and their finances should provide momentum even without committment. B. Principle​ 10, "just do​ it", means that Jeremiah and Bethany must make a commitment and avoid procrastination​ - both critical strategies for success in financial or career planning.​ Furthermore, positive reinforcement from making progress toward their goals and taking control of their careers and their finances should provide momentum to keep them committed and successful.

Principle​ 10, "just do​ it", means that Jeremiah and Bethany must make a commitment and avoid procrastination​ - both critical strategies for success in financial or career planning.​ Furthermore, positive reinforcement from making progress toward their goals and taking control of their careers and their finances should provide momentum to keep them committed and successful.

What is liquidity?

Refers to the speed and ease associated with turning noncash assets, such as investments or other tangibles, into cash.

Net Income

Revenues - Expenses

What's on the Schedule A (specifically, which itemized deductions)?

Schedule A is divided into seven sections: Medical and dental expenses, taxes you paid, interest you paid, gifts to charity, casualty and theft losses, other itemized deductions and a section for your total itemized deductions.

List the 5 steps in the financial planning process in order.

Step 1: Evaluate your financial health. Task includes recording all expenses for a month to compare income and expenses. Step 2: Define your financial goals. Task includes pay off credit cards by the end of the school term. Step 3: Develop a plan of action. Task includes developing a budget matching income and projected expenses for the remainder of this academic year. Step 4: Implement the plan. Task includes reducing expenses in problem areas so amounts don't exceed budgeted projections. Step 5: Review progress on the plan reevaluate the plan and revise the plan or start over with a new one. Task includes providing n budget.

Judge whether the following statement is true or false.​ "Since the​ accumulation-of-wealth stage extends into the​ mid-50s, financing the cost of education could remain important to me should I choose to continue my education or for the education of others who are important to me​ (spouse, child,​ etc.). It is not until Stage​ 2: Approaching Retirement​ - The Golden Years that the goal of educating children is usually accomplished. During Stage​ 3: The Retirement​ Years, estate planning issues are​ significant, and leaving part of my estate to fund education for my grandchildren could become​ important."

TRUE

What four common concerns should guide the development of their financial​ plan? ​(Select the best answer​ below.) A. The four principles of​ flexibility, liquidity,​ protection, and minimization of retirement years should guide the development of any financial plan. B. The four principles of​ flexibility, liquidity,​ protection, and maximization of retirement savings should guide the development of any financial plan. C. The four principles of​ flexibility, liquidity,​ protection, and minimization of taxes should guide the development of any financial plan. D. The four principles of​ flexibility, liquidity,​ protection, and maximization of taxes should guide the development of any financial plan.

The four principles of​ flexibility, liquidity,​ protection, and minimization of taxes should guide the development of any financial plan.

Present Value (PV)

Value today of a future cash flow

cash budget

a budget that estimates cash inflows and outflows during a particular period like a month or a quarter

personal exemption

a set amount that taxpayers may subtract from their gross income for themselves, their spouse, and any dependents

What strategies will you develop as a result of studying personal financial planning?

accumulate wealth for special goals, invest intelligently, save for retirement, use insurance to cover your assets, minimize your tax payments, manage unplanned events.

invest intelligently so that you can avoid the problem of: A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. .E. paying more taxes than necessary on your income or your investments.

choosing poor investment advisers and investment products.

Current Ratio

current assets divided by current liabilities

Debt Ratio Equation

debt ratio = total liabilities / total assets

Net worth

difference between value of your assets and your liabilities

Use insurance to cover your assets so that you can avoid the problem of? A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. E. paying more taxes than necessary on your income or your investments.

driving a car with badly dented fender because you couldn't afford the repair bill.

The five steps in the financial planning process​ are: ​(Select the best answer​ below.) A. evaluate your financial​ goals, define your career​ goals, develop a plan of​ action, implement your​ plan, and​ finally, review your​ progress, reevaluate, and revise your plan. B. evaluate your financial​ health, define your financial​ goals, develop a plan of​ action, implement your​ plan, and​ finally, review your​ progress, reevaluate, and revise your plan. C. evaluate your financial​ health, define your financial​ goals, develop a plan of​ action, implement your​ plan, and​ finally, review your progress to see that you have achieved all your goals. Then your financial planning process is complete. D. evaluate your financial​ health, define your career​ goals, develop a plan of​ action, obtain a​ full-time job, and​ finally, review your​ progress, reevaluate, and revise your plan

evaluate your financial​ health, define your financial​ goals, develop a plan of​ action, implement your​ plan, and​ finally, review your progress, reevaluate, and revise your plan.

Some of the common disagreements experienced by couples like Jeremiah and Bethany include first and most important to this class​ are:

finances, in addition to annoying​ habits, children,​ relatives, and jobs.

Intermediate​ goals, within the next one to ten​ years, important to Jeremiah and Bethany might​ include: ​(Select the best answer​ below.) A. beginning to save for an emergency fund and changing careers. B. funds for a home purchase as well as other assets to support their lifestyle. With children come additional financial planning needs for​ savings, insurance, and estate planning. C. saving for retirement. D. paying off any debt they brought to the​ marriage, reviewing their insurance​ coverage, and beginning to save for an emergency fund.

funds for a home purchase as well as other assets to support their lifestyle. With children come additional financial planning needs for savings, insurance, and estate planning.

You should manage unplanned events so that you can avoid the problem of? A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. E. paying more taxes than necessary on your income or your investments.

going to the coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one.

save for your retirement so that you can avoid the problem of? A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. E. paying more taxes than necessary on your income or your investments.

having to work during your "golden years" or having to sell your home because you can no longer afford it.

In order for you r financial plan to be realistic and attainable it needs to be based upon your ...?

income level

compound interest

interest earned on both the principal amount and any interest already earned

Schedule A

itemized deductions used with form 1040

You should accumulate wealth for special goals so that you can avoid the problem of? A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. .E. paying more taxes than necessary on your income or your investments.

never taking that trip to Australia that you once promised yourself.

minimize your tax payments so that you can avoid the problem of: A. having to work during your​ "golden years" or having to sell your home because you can no longer afford it. B. never taking that trip to Australia that you once promised yourself. C. choosing poor investment advisors and investment products. D. going to the​ coin-operated laundry because your washer is beyond repair and you have no emergency funds for buying a new one. E. paying more taxes than necessary on your income or your investments.

paying more taxes than necessary on your income or your investments.

As​ newlyweds, short-term goals important to Jeremiah and Bethany might​ include: ​(Select the best answer​ below.) A. purchasing a home and starting a college fund for any children they might have. B. paying off any debt they brought to the​ marriage, reviewing their insurance​ coverage, and beginning to save for an emergency fund. C. saving for retirement. D. paying off any debt they brought to the marriage and planning their second honeymoon for their 25th anniversary.

paying off any debt they brought to the marriage, reviewing their insurance coverage, and beginning to save for an emergency fund.

annuity

payment received every year

A long term goal that should be important to Jeremiah and Bethany​ is: ​(Select the best answer​ below.) A. saving for retirement. B. paying off any debt they brought to the​ marriage, reviewing their insurance​ coverage, and beginning to save for an emergency fund. C. beginning to save for an emergency fund and changing careers. D. calculating how much they will receive from Social Security when they​ retire, so they can retire as soon as possible

saving for retirement.

Time Value of Money (TVM)

the concept that money available today is worth more than the same amount tomorrow

discount rate

the minimum interest rate set by the Federal Reserve for lending to other banks.

Future Value (FV)

the value of a cash flow that is moved forward in time

Adjusted Gross Income (AGI)

total income before subtracting any deductions or expenses

(t/f) "A successful budget can only be derived from accurate record​ keeping."

true

(t/f) An estimate of your anticipated after−tax income available for living expenses is commonly called take−home pay.

true

Liabilities

what you owe - mortgage

Assets

what you own