Personal Finance Test 1

You tax rate is 15% and you have $350 of deductible expenses. You expect your income will increase in the next tax year but also that you will still be in the same tax bracket while your deductible expenses will double. What would be your tax savings in deductibles next year?

$105

If you are in the 25% or higher tax brackets, your tax rate on long-term capital gains (on assets held more than one year) is

15%

The Accounting Equation states that

Assets = Liabilities + Equity

Serena wants to see how her money from all sources came in and went out for all uses during each month of the past year. Which kind of financial statement does she need?

Cash flow statement

Businesses and industries are equally vulnerable to economic cycles.

False

Income tax is a regressive tax; the higher the income the lower the rate.

False

Once set, budgets should be followed without deviation.

False

Self-employed people and entrepreneurs report their business income on Schedule B.

False

Sound financial planning can help you avoid opportunity costs.

False

The time value of money can be understood but not calculated concretely.

False

To avoid disappointments, you should not be too conservative in your expectations.

False

If you had a budget surplus, which of the following choices would best increase that surplus?

Save and invest

Megan's balance sheet shows that on February 7, 2010 she had assets totaling $27,600 and debts totaling $32,500. Which of the following statements best describes her situation?

She had negative net worth.

A budget deficit is not sustainable; it is not financially viable.

True

A budget is a process that mirrors the financial planning process.

True

A budget should never be merely followed, but should constantly be revised to reflect new information.

True

Both budget deficits and budget surpluses need to be addressed by making financial decisions.

True

Budgets are usually created with a specific goal in mind, such as cutting spending.

True

Creating a budget involves projecting realistic behavior and evaluating your assumptions.

True

Depending on your tax bracket, your income is taxed at a rate of between 10% and 38%.

True

Evaluating alternatives for financial decisions always involves speculation.

True

Financial decisions are based on personal goals, opportunities, and risks.

True

Financial statements, such as balance sheets, are as useful in personal finance as they are in business finance.

True

Good financial decision making requires that you recognize sunk costs and their consequences.

True

Head-of-Household filing status is for a family of one adult with dependents.

True

In personal finance, income and expenses are recorded as cash flows at the time they occur.

True

Investing in or buying corporate stock is an example of selling capital in exchange for a share of the company's future value.

True

Opportunity costs and sunk costs are hidden expenses that affect financial decision making.

True

Opportunity costs are foregone choices or sacrificed alternative uses of wealth.

True

Personal financial planning includes decision making about education, employment, housing, transportation, and lifestyle.

True

Stock dividends and distributions from trusts are taxed as individual income.

True

The "natural" rate of unemployment tends to be consistently high, affecting the productivity of the economy.

True

The U.S. tax code is based on the idea that everyone should help finance the government according to ability to pay.

True

The capital budget accounts for capital expenditures or non-recurring items.

True

The filing status Married refers to two married adults who combine their incomes and file as one individual.

True

The most common accounting method used in personal finance is cash accounting.

True

The present value of a series of cash flows is simply the sum of the present values of each cash flow.

True

The purpose of pro forma financial statements is to show the consequences of choices.

True

The result shown on an income statement is personal profit or loss over a period of time.

True

Three commonly used financial statements are the income statement, the cash flow statement, and the balance sheet.

True

Time creates risks, uncertainties, opportunities, and opportunity costs.

True

Time discounts value.

True

U.S. form 1040 or 1040EZ is the form for an individual tax return.

True

Whatever his or her professional classification, any financial advisor you choose to work with should be certified in your state.

True

Your Adjusted Gross Income is further adjusted by deductions, exemptions, and credits.

True

Ewen's monthly cash flows typically total $3,000, of which operating cash flows total $2,150 and debt repayments total $650, giving him a free cash flow of $200. What financial decisions could he make about his free cash flow?

Whether to save or spend more, Whether to invest or finance more, & Whether to increase equity or reduce debt

To see what percentage of your total income is used for each expense you would create

a common-size income statement.

A period of declining productivity lasting less than half a year is called

a contraction

Cash or an asset that can be easily and quickly converted to cash is called

a liquid asset.

A kind of annuity that consists of cash flows of equal amounts occurring at regular intervals and that continues indefinitely is

a perpetuity.

A summary of income and expenses over a period of time is called

an income statement

Robin uses her checkbook register to record and balance each cash flow, in and out, as it occurs. This activity is called

bookkeeping & cash accounting

Understanding your current financial situation requires the ability to

calculate returns on investment, follow basic accounting procedures, & create financial statements

Your can claim exemptions for dependents, including

children., elderly parents, & disabled siblings.

Taxable individual income includes

distributions from trusts., stock dividends., & interest from banks.

The U.S. government offers tax deductions for all of the following items EXCEPT

gains from the sale of assets.

Dylan earns $24,500 a year as an office worker. He pays $1,000 a month for rent, $300 a month toward his car, and his other expenses come to around $1,200 a month. Dylan

has a budget deficit & should reduce expenses

Systemic or "macro" factors that affect financial thinking include all the following EXCEPT

life stages

Examples of recurring expenditures are

living expenses.

The purpose of pro forma financial statements is to show

projected future value., consequences of choices., & scenarios for financial planning.

The Consumer Price Index is a measure of

purchasing power

Periods of contraction in the economy often lead to

reduced returns on investment

The cash budget's greatest value is in clarifying

risks and choices in the timing of cash flows.

An example of a non-discretionary expense shown on an income statement is

taxes

Bankruptcy occurs when

there is negative net worth & debts are greater than asset

The best way to eliminate a deficit is

to increase income & to reduce expenses

Your career choice will have the greatest impact on your

wealth accumulation & income

The U.S. government levies taxes on income from all of the following sources EXCEPT

welfare benefits.

The existence of a budget variance indicates that

your estimate was inaccurate., factors changed unexpectedly, & your budget needs readjusting.