Personal Finance Chapter 1-7
A financial goal that would be important in all stages of the life cycle is creating and maintaining an emergency fund. True False
T
Alimony received is included in gross income for the receiver and a tax deduction for the payer. True False
T
Assets listed on your balance sheet must have monetary value. True False
T
Businesses are a key part of the circular flow of income that sustains our free enterprise system. True False
T
Consumers affect businesses by their choices of what goods and services to purchase and by choosing whether they will spend or save their incomes. True False
T
Mortgage interest and paid home property taxes are both itemized deduction items. True False
T
Most families find it difficult to discuss money matters. True False
T
Most types of personal property depreciate, or decline in value, shortly after being put into use. True False
T
Russ and Lois got married December 30. Although they were single for most of the year, they can legally file as married taxpayers in the year of the wedding. True False
T
Tax avoidance is legal, tax evasion is illegal. True False
T
The Federal personal income tax is a progressive tax. True False
T
The Medicare portion of the Social Security tax is paid on 100% of earnings. True False
T
The income and expenditures statement provides a measure of financial performance over a period of time. True False
T
The income and expenditures statement is a summary of actual income and expenditures over a specific point of time. True False
True
Your auto loan payments would be listed as an expense on the income statement. True False
True
____ would be an example of a periodic expense. Food Vacation Utilities Taxes none of these
Vacation
Pete and Pam are married with four dependent children. Pete and Pam can legally file using which of the following filing statuses? married filing separately married filing jointly head of household a and b a, b, and c
a and b
The most important financial planning for young people concerns career. insurance. investment. taxes. retirement.
career
Your ____ is an example of a liquid asset. home car checking account charge account life insurance cash value
checking account
A cash budget should help you to achieve your short-term financial goals. implement disciplined spending. eliminate impulse spending. allocate funds to savings and investments. do all of these
do all of these
Martha is 80 and has a very high net worth. Her most important financial concern is probably her career. employee benefits. estate. insurance. savings.
estate.
When Phil lists his house on his balance sheet, he should record the actual purchase price. replacement value. insured value. sale price. fair market value.
fair market value.
Which of the following is NOT one of the three basic categories for individual income? active income passive income gross income portfolio income
gross income
The amount of money we set aside for future consumption will be determined by our level of current wealth. how much we currently earn and spend. our education level. the current needs of our family. the cost of life's necessities.
how much we currently earn and spend
The federal government gets the majority of its revenue from the ____ tax. sales property excise income estate
income
You would not include ____ on an income and expenditures statement. the value of your stock portfolio taxes withheld utilities paid mortgage payments charitable payments
the value of your stock portfolio
The income shifting tax strategy is least effective when income producing gifts are given to persons over age 65. over age 50. under age 19. under age 25. Age is not an issue.
under age 19.
A primary determinant of your quality of life is a tax bill. tangible property. wealth. motivation. income potential.
wealth
A cash budget helps you: Monitor and control your finances. Decide how to allocate your income to reach your financial goals. Achieve your long-term financial goals. All of the above. a and b only.
All of the above.
Which of the following offer tax preparation services? National and local tax services Certified Public Accountants (CPAs) Enrolled Agents (EAs) Tax Attorneys All of these can offer tax preparation services
All of these can offer tax preparation services
Investment assets include items such as boats or automobiles. True False
False
A balance sheet shows your financial condition as of the time the statement is prepared. True False
T
A budget is a detailed financial forecast. True False
T
A budget is an orderly estimate of income and expenditures. True False
T
A cash deficit decreases net worth. True False
T
A cash surplus will typically produce a positive savings ratio. True False
T
Dividends received from the stock you own will be taxable income. True False
T
Estimated tax payments must be made by those who do not have taxes deducted from their earnings. True False
T
Financial assets are intangible assets acquired to achieve long-term personal financial goals. True False
T
Financial assets are paper assets, such as savings accounts and securities. True False
T
Financial planning can improve your standard of living. True False
T
Government controls consumers and businesses by regulation and taxation. True False
T
State income taxes and real estate taxes are both itemized deduction items. True False
T
The level of the debt service ratio would indicate your ability to meet loan payments out of current income. True False
T
The most effective way to achieve financial objectives is through financial planning. True False
T
The sale of your home will rarely result in a taxable capital gain. True False
T
Using time value of money is important when planning for long-term goals. True False
T
Utility refers to the amount of satisfaction a person gets from buying certain items. True False
T
When preparing a cash budget, estimating expenses using actual expenses from previous years and by tracking current expenses makes the task easier. True False
T
You have a balanced budget when total income for the year equals or exceeds total expenditures for the year. True False
T
You may be under-budgeting for food if you continually have monthly deficits in the food category. True False
T
Your house is an example of a tangible asset. True False
T
Your net worth and your equity in owned assets are the same basic concept. True False
T
Your personal value system will shape your attitude toward money and wealth accumulation. True False
T
____ income is subject to federal taxes. Gross Adjusted gross Net Take-home Taxable
Taxable
The balance sheet equation is: Total Assets / Total Liabilities = Net Worth. Total Assets ´ Total Liabilities = Net Worth. Total Assets - Total Liabilities = Net Worth. Total Assets + Total Liabilities = Net Worth. Total Liabilities - Total Assets = Net Worth.
Total Assets - Total Liabilities = Net Worth.
The most common budgeting period is a week. month. quarter. semi-annually. bi-weekly.
month
This is a measure of inflation based on changes in the cost of a market basket of consumer goods and services: inflation consumer price index (CPI) purchasing power none of these
consumer price index (CPI)
The expenditure categories for your budget should be determined by the BLS Urban Family Budget categories. purchased budget book headings. those used in previous years. current and expected future spending. itemized tax deductions.
current and expected future spending.
Balance sheet liabilities should be recorded at their original outstanding balance. year-end outstanding balance. average outstanding balance. current outstanding balance. none of these.
current outstanding balance.
Medical and dental expenses may be included as itemized deductions when they exceed 4% of adjusted gross income. up to a maximum of $7,500 per individual per tax year. only if they do not exceed 7% of gross income. only in the amount in excess of 7.5% of adjusted gross income. always.
only in the amount in excess of 7.5% of adjusted gross income.
A savings ratio expresses the percentage of gross income saved. ability to cover immediate debt when there is an interruption in income. percentage of after-tax income saved. percentage of tax-deferred income earned annually. none of these.
percentage of after-tax income saved.
The income and expenditures statement examines your financial level. performance. position. assets. objectives.
performance.
The amount of goods and services each dollar buys at a given point in time is: inflation consumer price index (CPI) purchasing power none of these
purchasing power
Family financial goals should be very general in nature. realistically attainable. individually determined. set once for a lifetime. reserved for retirement planning.
realistically attainable.
If you do not wish to itemize deductions, you can use the pay-as-you-go amount. bracket deduction. standard deduction. exemption. withholding allowance.
standard deduction.
The term most closely associated with quality of life is wealth. consumption. education. standard of living. money.
standard of living.
Itemized deductions are listed on Schedule A. B. C. D. F.
A.
For tax purposes, head-of-household refers to the person with the larger income when a couple is filing a joint return. a single individual with dependents. a single individual who owns a home. the spouse who has the only income for a couple filing a joint return. a widow(er) with no dependents but with debts from death of spouse three years earlier.
a single individual with dependents.
A progressive tax system is one in which higher-income people pay ____ than lower-income people. a higher dollar amount in taxes tax at a higher rate a lower dollar amount in taxes tax at a lower rate tax at the same rate
tax at a higher rate
Tax credits reduce your tax liability. adjusted gross income. tax refund. tax withholding. taxable income.
tax liability.
Government places controls on the personal financial environment by use of taxation and fiscal policy. taxation and regulation. taxation and competition. regulation and competition. regulation and fiscal policy.
taxation and regulation
Connie is a 20 year old college student who earned $8,000 and spent it all on her support during the year. Her parents may claim her as a tax dependent as long as they contribute more than half her support for the year. she is under 21. she makes under $10,000. she lives at home. all these things are true.
they contribute more than half her support for the year.
On which of the following types of income would you normally have income tax withheld? Tips Interest Dividends Capital gains Self-employment income
tips
Jamil and Vicki have one child, age 3, for which they paid $2,500 in child care expenses this year. If they are eligible for the 20% dependent care credit plus the child tax credit, how much will these two credits reduce their tax liability? $ 500 $1,500 $2,000 $2,500 $3,000
$1,500
Mandy and Jeff have a net worth of $25,000 and total assets of $140,000. If their revolving credit and unpaid bills total $2,200, what are their total liabilities? $115,000 $140,000 $142,200 $165,000 $167,200
$115,000
Murray (age 68, single) just sold his home of 35 years so that he could relocate nearer his grandchildren. He realized a $400,000 capital gain on the home. How much of this gain will Murray have to pay taxes on? $400,000 $300,000 $250,000 $150,000 $ 0
$150,000
The three key groups in the economic environment are government, regulation, and business. government, consultants, and business. consumers, economists, and business. consumers, business, and managers. government, consumers, and business.
government, consumers, and business.
By filing a tax extension, one does not have to pay his income tax liability until August 15. True False
F
Child support received is included in gross income. True False
F
Marginal tax and average tax rate refer to the same thing. True False
F
Mary and Tom purchased their home for $150,000, and it is now worth $175,000. Its asset value is $150,000. True False
F
Money I loaned to a friend is a liability on my balance sheet. True False
F
Using time value of money is most important when planning for short-term goals. True False
F
You should itemize deductions when total itemized deductions are less than the standard deduction. True False
F
Which of the following cannot be (an) adjustment(s) to gross income on the 1040 form? Health insurance premiums paid by self-employed individuals Alimony paid Moving expenses Traditional IRA contributions Child care deductions
Child care deductions
____ would not be considered taxable income. Child support payments Proceedings from an employer retirement plan Dividend income a and b a, b, and c
Child support payments
Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it take for the account to double in value? 8 9 10 11 12
10 - 72/7
You made an error when you filed your tax return last year. You can correct this error by filing Form 1040ES. 1040X. 1040E. Schedule A. Schedule D.
1040X.
Your total cash income is $40,000. You pay $5,000 in taxes and $30,000 in other expenses. Your savings ratio is 7.5% 10.0% 12.5%. 13.3%. 14.3%.
14.3%.
You are preparing your own tax return. The least costly source for answering your questions would be IRS 800 numbers. private preparation service. tax accountant. tax lawyer. local post office.
IRS 800 numbers.
A tax audit is a(n) IRS revision of previously filed return. IRS attempt to verify accuracy of return. IRS charge of illegal action. U.S. Tax Court action. U.S. Tax Court decision.
IRS attempt to verify accuracy of return.
____ is the financial goal most people think is least important. Living well now Being financially independent Sending children to college Providing for retirement Leaving a large estate
Leaving a large estate
Which of the following goals is stated in a way that is most useful for developing a financial plan? Make a $12,000 down payment on an automobile in 4 years Retire with a comfortable lifestyle in 25 years Buy a $125,000 house in 6 years Purchase a $40,000 boat Join the country club when retired in 20 years
Make a $12,000 down payment on an automobile in 4 years
Elena purchased a stamp collection for $5,000 thirty years ago. If it appreciated 8% annually, what is it worth today? $ 17,000 $ 36,400 $ 50,313 $123,023 $150,000
PV = 5,000, N = 30, i = 8, FV = 50,313
Jackson is a 25 year old college student whose parents contribute to his support. His parents may claim him as a tax dependent in 2010 as long as they contribute more than half of his support for the year. he is under 30. he makes under $3,650. a and c. a, b, and c.
a and c.
On an income statement covering January 1 to June 30, ____ would not be included as income. wages and salaries received in that six months interest received on June 30 auto sold with payment received May 15 inheritance granted in April, to be paid in September income tax refund received April 14
inheritance granted in April, to be paid in September
The total amount that you owe for income tax in one year is your tax withholdings. credit. rate. refund. liability.
liability.
Itemized non-business expenses do not include charitable contributions. state income taxes. residential mortgage interest. medical expenses. life insurance premiums.
life insurance premiums.
A personal computer could not be used to prepare detailed budgets. analyze investment possibilities. store and retrieve financial information efficiently. make financial decisions. keep insurance coverage inventories.
make financial decisions.
Personal financial management is important because it controls inflation. limits consumption. uses money as an end. makes personal financial goals easier to achieve. lessens economic differences among individuals.
makes personal financial goals easier to achieve.
The last step in the financial planning process is to develop financial plans and strategies to achieve goals. use financial statements to evaluate results of plans and budgets, taking corrective action as required. implement financial plans and strategies. redefine goals and revise plans and strategies as personal circumstances change periodically develop and implement budgets to monitor and control progress toward goals.
redefine goals and revise plans and strategies as personal circumstances change
The best approach to solving the problem of an annual budget deficit is generally to liquidate enough savings to make up the deficit. sell stock to make up the deficit. reduce flexible expenditures. reduce fixed expenses. get a part time job.
reduce flexible expenditures.
Inflation refers to rising prices. declining interest rates. the opposite of wealth. the opposite of stagflation. declining prices.
rising prices.
A capital gain is the result of selling an asset for less than purchase price. holding an asset that has appreciated. selling an asset at the same price of purchase. selling an asset for more than purchase price. None of these.
selling an asset for more than purchase price.
Financial planning can help us to control inflation. spend wisely. control unemployment rates. a and b. a, b, and c.
spend wisely
The four stages of an economic cycle would not include depression. expansion. recession. recovery. stagnation.
stagnation
Kim's net worth is $85,000 and her total assets are $100,000. What is Kim's solvency ratio? 15% 25% 65% 85% 100%
85%
Mike and Teresa Garza have a monthly gross income of $5,000, but they pay $1,000 per month in taxes. They also pay $2,000 per month in various loan payments. What is their debt service ratio? 20% 30% 40% 50% 60%
40%
The current FICA withholding rate is 5.65%. 6.75%. 7.25%. 7.5%. 7.65%.
7.65%.
Mindy and Lou had liquid assets of $10,000 and current debts of $30,000. What is their liquidity ratio? 25% 33% 67% 150% 300%
33%
Your marital status will affect the amount of social security you must pay in a year. True False
F
Jacque's total monthly loan payments are $1,020 while her gross income is $3,000 per month. What is her debt service ratio? 34% 43% 50% 75% 82%
34%
Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take for the account to double in value? 8.8 9.7 10.8 11.4 14.4
14.4 - 72/5
If your total assets equal $50,000 and your total liabilities equal $15,000, your debt ratio is 30%. 70%. 143%. 233%. 333%.
30%.
Tax practitioners that are Federally licensed are called Certified Public Accountants Certified Financial Planners Tax Attorneys Enrolled Agents None of these
Enrolled Agents
A budget is a detailed statement of what income and expenses occurred over a past period. True False
F
A person making $35,000 and spending $30,800 has an average propensity to consume of 80%. True False
F
About 20% of Americans say retirement planning is their most pressing financial concern. True False
F
All assets are recorded on the balance sheet at their original cost. True False
F
All taxpayers have an equal probability of having their tax returns audited. True False
F
An income statement deficit would increase net worth. True False
F
An investment must be owned over two years in order to qualify for long-term capital gains treatment. True False
F
As a single taxpayer with no dependents, one is generally eligible to file as "head of household." True False
F
Average propensity to consume refers to how much of your money you plan to save in your financial plan. True False
F
Budgeting and record keeping are really the same activity. True False
F
Cities with higher costs of living also experience higher rates of inflation. True False
F
Gifts received from family and friends are included in gross income. True False
F
If you obtain a loan to purchase a car in June, this loan amount would be included as income for June. True False
F
Income shifting refers to the process of transferring income from the taxpayer to the IRS. True False
F
One's home must typically be owned at least three years to receive the most favorable capital gains treatment. True False
F
Opening a traditional IRA would allow you to take advantage of tax free earnings. True False
F
Persons who work for more than one employer in any year will owe more Social Security taxes than if all their income was earned from a single employer. True False
F
Portfolio-related expenses can be written off against passive income. True False
F
Social security taxes are deducted from all wages and salaries earned in a year. True False
F
Spending for your child's private-school education is an example of deferred consumption. True False
F
Tax preparers must be licensed by either the state of federal government. True False
F
The Consumer Price Index (CPI) is the amount of goods and services each dollar buys at a given point in time. True False
F
The Federal personal income tax is a flat tax. True False
F
The alternative minimum tax is an issue only for high-income taxpayers. True False
F
The balance sheet equation is assets plus liabilities equals net worth. True False
F
The best place to keep a budget is in a safe deposit box. True False
F
The equity in your home is the difference between the loan balance and the purchase price. True False
F
The first step in the financial planning process is to develop financial plans and strategies to achieve goals. True False
F
The income statement only includes information on your latest paycheck. True False
F
There is no limit on the amount of Social Security withheld annually. True False
F
The need for budget adjustments is indicated when income is stable. account deficits and surpluses balance out. account deficits are more than surpluses. a new calendar year begins. short-term financial goals are achieved.
account deficits are more than surpluses.
Employee benefits may include retirement plans health insurance employee discounts tuition reimbursements all of these
all of these
The standard deduction is a blanket deduction that depends on the taxpayers filing status age vision all of these
all of these
If your ____, your net worth on the balance sheet would have increased from one period to the next. liabilities increased and assets remained constant liabilities increased and assets decreased assets increased and liabilities remain constant income increased none of these
assets increased and liabilities remain constant
Net worth is measured by bank card balances. house mortgage balances. amount owed on an automobile loan. assets minus liabilities. insurance premium.
assets minus liabilities.
In order to minimize the difficulty associated with meeting monthly loan payments, the debt service ratio should be above 50%. below 50%. at 35%. below 35%. above 20%.
below 35%.
When a cash surplus exists on your income and expenditure statements, you can acquire assets. pay off existing debts. increase your savings. increase your investments. do any of these.
do any of these
In 2018, the total FICA tax rate was: a) 6.0%. b) 6.75%. c) 7.25%. d) 13.4%. e) 15.3%.
e) 15.3%. Rationale: In 2018, the total FICA tax rate was 15.3%, allocating 12.4% to Social Security and 2.9% to Medicare. See 3-1: Understanding Federal Income Tax Principles.
While you are still working, you should be managing your finances for retirement planning. Which of the following is not a goal of your retirement planning? maintaining your standard of living effectively passing wealth on to heirs a vacation home or boat travel
effectively passing wealth on to heirs