AFS192 II
Which item would appear as an itemized deduction on Schedule A, Form 1040?
Medical and dental expenses
On what basis are cash budgets generally prepared?
Monthly basis
Why does unsecured debt represent more risk to an individual than secured debt?
Unsecured debt lacks collateral as a secondary source of repayment
In the UCA model, what is an increase in inventory?
Use of Cash
What is the individual's adjusted net worth if his personal financial statement lists total assets of $2,000,000 and total liabilities of $500,000? Also assets include a 5% ownership in a real estate venture valued at $100,000; marketable securities of $40,000; cash surrender value of life insurance of $20,000 that is pledged against a policy loan; and a residence purchased one year ago and valued at $80,000 higher than the purchase price.
$1,300,000 = $1,500,000 - $100,000 - $20,000 - $80,000
Assuming a lender is operating with a 40 percent debt-to-income guideline, what is the maximum additional monthly debt service that can be allowed if an individual has Current Assets of $700,000; Total Assets of $2,000,000; Current Liabilities of $75,000; Total Liabilities of $1,200,000; Monthly Gross Income of $40,000; and Monthly Debt Service of $5,000?
$11,000 Maximum Additional Debt Service derived from Monthly Income x 40% - Existing Debt Service = $40,000 x 40% - $5,000 = $16,000 - $5,000 = $11,000
What is this individual's gross personal cash flow available for debt service if an individual's personal tax returns list: Wages and salaries are $80,000; Non-taxable amount of retirement distribution is $4,000; Taxable amount of retirement distribution is $21,000; Net profit from a sole proprietorship is $8,000; Depreciation within the sole proprietorship is $7,000; Annual living expenses on the individual's personal financial statements are $16,000.
$120,000 = $80,000+$4,000+$21,000+$8,000+$7,000
What should the amount of a required short-term loan be if Greebes Inc.'s cash budget for 20x6 shows Total Cash Receipts of $170,000; Total Cash Paid Out of $175,000; and a Minimum Cash Balance Requirement of $15,000?
$20,000 is the amount of the required short-term loan. (This is the sum of the net cash position of a negative $5,000 and the minimum cash of $15,000.)
What is the amount of Cash after External Financing or actual change in cash if Greebes Inc. has Cash from Sales of $600,000 for the fiscal year 20x6 fiscal year; a Cash Balance of $160,000 at December 31, 20x5; and a Cash Balance of $360,000 at the end of December 31, 20x6?
$200,000 is the actual change in cash or cash after external financing derived by finding the difference between the Beginning Cash of $160,000 and the Ending Cash Balance of $360,000.
What is an individual's total net worth if he has current assets of $500,000, total assets of $1,000,000, current liabilities of $200,000, and total liabilities of $750,000?
$250,000
What is the applicant's outside net worth if she is fully guaranteeing a $50,000 loan to a business that she owns, and the business is valued at $200,000 on her personal financial statement? Also her personal financial statement lists total assets of $2,000,000 and total liabilities of $1,500,000.
$300,000 = $500,000 - $200,000
What is the ending balance of cash for the current years if Greebes Inc. has the following totals from its traditional statement of cash flows: Beginning Cash of $160,000 for the current year; Cash from Operations of $70,000; Cash from Investing Activities of negative $20,000, and Cash from Financing Activities of $150,000?
$360,000 derived from Beginning cash of $160,000 + Cash from Operations of $70,000 - Cash from Investing Activities of $20,000 + Cash from Financing Activities of $150,000.
What is the individual's total net worth if she has Marketable Securities of $200,000; Retirement Assets of $350,000; Total Assets of $1,500,000; Current Liabilities of $87,500; and Total Liabilities of $1,100,000?
$400,000 Total Net Worth derived from Total Assets of $1,500,000 - Total Liabilities of $1,100,000.
What is the amount of Cash from Sales for the 20x6 fiscal year if Greebes Inc. has the following partial cash flow data for that fiscal year: Net Sales of $525,000; decrease in Accounts Receivable of $25,000; and increase in Accounts Payable of $10,000?
$550,000 is the amount of Cash from Sales for 20x6 derived from Net Sales of $525,000 + decrease in Accounts Receivable of $25,000.
What is the individual's net personal cash flow available for debt service if her personal tax return and financial statement report Wages and Salaries of $95,000; Nontaxable Interest Income of $1,000; Taxable Interest Income of $500; Nonrecurring Capital Gain of $9,000, showing cash proceeds of $5,000; Rental Real Estate Net Profit of $6,500; Real Estate Interest Expense of $3,500; and Annual Living Expenses of $42,500?
$64,000 Net Personal Cash Flow Available for Debt Service derived from $95,000 + $1,000 + $500+ $6,500 + $3,500 - $42,500. (The capital gain and related cash proceeds are not included since the transaction is non-recurring.)
What is the individual's adjusted net worth (ANW) if the following items appear on her personal financial statement: Total Assets of $2,000,000; Total Liabilities of $650,000; Assets include a privately held business valued at $550,000 without an appraisal or valuation method disclosed; Amounts Due from the same business of $150,000; Cash of $40,000; Cash Surrender Value of Life Insurance of $20,000 that is not pledged; and Listed Securities of $100,000 that are traded on a major stock exchange and valued at current market price at date of the financial statements?
$650,000 Adjusted Net Worth derived by $1,350,000- $550,000 - $150,000
How much is projected accounts receivable for the current year if projected days accounts receivable is 45 days and project credit sales total $700,000?
$86,301 derived by multiplying the projected accounts receivable of 45 days by the projected credit sales of $700,000 and then dividing by 365 days
How much is Global Debt Service Coverage [GDSC] if Global Cash Flow Available for Debt Service is $25,000; business debt service is $15,000, and personal debt service is $10,000?
1.0x
What is the individual's unsecured debt ratio if he has consistent Monthly Income of $15,000; Annual Unsecured Debt Service of $5,000; Total Assets of $550,000; Secured Debt of $426,000; and Total Liabilities of $444,000?
10% unsecured debt ratio derived from Total Unsecured Debt / Annual Income. (Total Unsecured Debt = Total Liabilities of $444,000 - Total Secured Debt of $426,000 = $18,000. Annual Income = Monthly Income x 12 = $15,000 x 12 = $180,000. The resulting Unsecured Debt Ratio is $18,000 ÷ $180,000 = 10 %.)
What is the individual's unsecured debt ratio if her personal financial statement shows the following selected information: annual income of $90,000; cash of $4,000; total assets of $200,000; unsecured debt of $29,700; and total liabilities of $150,000?
33% = $29,700/$90,000
What is an individual's debt-to-income ratio if she has current assets of $500,000; total assets of $1,000,000; current liabilities of $200,000; total liabilities of $750,000; monthly income of $8,000; and monthly debt service $3,000?
37.5% = $3,000/$8,000
What is the individual's liquidity ratio if she has the following assets listed on her personal financial statements: Cash of $7,000; Marketable Securities of $5,000; Investment Real Estate of $500,000; Cash Surrender Value of Life Insurance of $18,000; and Other Personal Assets of $200,000?
4.1% liquidity ratio derived from Liquid Assets / Total Assets = $30,000 ÷ $730,000 = 4.1%. (Liquid assets = $7,000 + $5,000 + $18,000 = $30,000. Total assets = $30,000 + $500,000 + $200,000 = $730,000.)
How is a business debt service coverage (DSC) ratio different from a consumer debt to income (DTI) ratio?
A consumer DTI usually is based on gross income prior to income taxes and living expenses.
Which statement identifies a unique feature of a contingent claim or a contingent liability?
A contingent claim goes beyond the face amount of a loan guarantee.
For which business legal structure is the global cash flow analysis least beneficial?
A large publicly traded C corporation
What is the benefit of using an abbreviated cash flow report?
A lender can determine how cash profits were used or cash losses were financed by the business.
What level of cash does every business need to operate?
A minimum amount that is sufficient to maintain the current operating cycle
Which situation represents a guarantor's contingent claim within a global analysis?
A real estate project with weak DSC and weak overall financial condition
For which entity does a business owner automatically own 100 percent or have total control?
A sole proprietorship
What does the dollar amount of outside net worth represent?
An individual's net worth beyond the borrowing business
What do operating activities measure through net income and accounts receivable?
Cash generated by the current operating cycle.
Which statement describes how to correctly derive the Beginning Cash for a 20x6 cash budget?
Beginning cash is derived from the actual ending cash on the firm's balance sheet at the end of the 20x5 fiscal year
Which statement correctly describes a similarity between a personal financial statement [PFS] and a business financial statement [BFS]?
Both PFS and BFS records current assets in order of liquidity
For what type of business are cash budgets primarily used?
Businesses that are seasonal
What is the Cash after Debt Amortization (CADA) for 20x6 if Greebes Inc. has the following partial cash flow data for the 20x6 fiscal year: Net Cash Income of $100,000; Current Maturity of Long-term Debt (CMLTD) at the end of 20x5 of $40,000; and CMLTD at the end of 20x6 of $30,000?
CADA of $60,000 derived from Net Cash Income of $100,000 - the CMLTD of $40,000 from the prior year, not the current year.
Which statement best describes how lenders tend to look at loan repayment?
Cash (and cash only) repays loans
In a direct method statement of cash flows, what phrase is used in reference to cash expenditures for acquiring materials and making payments to trade creditors?
Cash Paid to Suppliers
Which item will have the same value on both the cash budget and the proforma balance sheet for the same fiscal period?
Cash balance at the end of the fiscal period
Which component of the UCA cash flow model includes dividends paid to owners?
Cash flow from Operating Activites
What is the first amount listed in a cash budget?
Cash on hand
Which option identifies amounts an individual is not directly liable for but may need to pay in the near future based on events that may or may not be within the individual's control?
Contingent Liabilities
Which option identifies amounts a borrower is not directly obligated to repay, but may need to repay in the future based on events the borrower may not control?
Contingent liabilities
In situations where a person has a minority ownership in a business, what will a global cash flow analysis generally include?
Credit only for distributions (net of contribution) from the business
Which situation is a common adjustment to a personal liability in order to develop adjusted net worth?
Debt shown on other sources of financial information, but not on the personal balance sheet
Which ratio is calculated to determine if personal debt service levels are excessive?
Debt-to-income ratio
When comparing the cash budget and a proforma income statement, which line item is a unique feature of the proforma income statement?
Depreciation for the budget year
Which method of preparing the traditional statement of cash flows clearly shows cash received from customers for a given fiscal period?
Direct method
Which item appears in the financing section of a statement of cash flows?
Dividends
When analyzing personal income, which key question should a business banker address?
Does the income provide cash to the borrower?
Which term represents the actual dollar amount of global cash flow available to service additional debt?
Excess global cash flow after debt service
Which statement is correct regarding the relation between gross wages and cash flow from business interest?
Gross wages are decreased by cash flow from business interests if sole proprietorship income is negative even after adjusting for depreciation
A debt-to-income ratio allows a lender to compare current income to existing debt service. What else can be determined from the DTI of an individual?
How much additional debt can be supported
Which question can be answered from a properly prepared statement of cash flows at fiscal year end?
How was the need for financing created?
What does the UCA model assist a business banker to determine about a business?
If internally generated funds can cover debt service
Where does financing surplus (or requirement) appear?
In the UCA model only
Which aspect of a personal financial statement analysis includes questions such as "is it material, is it verifiable?
Income Analysis
From a regulatory perspective, what information about guarantors should be included in a global analysis?
Income and cash flow
Which list correctly includes all the financial statements needed to prepare a traditional statement of cash flow for the current year?
Income statement for the current year, balance sheets for the prior year, and balance sheet for the current year
Which income item on a personal tax return can give a business banker an idea of the average level of deposits during the year?
Interest income based on current market rates
If a company purchased equipment for business use, where should the amount spent to acquire it appear in a properly prepared statement of cash flows?
Investing Activities Section
Which question is important to evaluate cash flow for personal income beyond wages and salaries reported on a tax return?
Is the income available for future debt service?
What is the result if a business debt service is included in a global debt service coverage ratio of a business owner and business loan guarantor?
It excludes debt service arising from amounts due from the business to the owner/guarantor.
Which option correctly describes a characteristic of a global debt service coverage ratio?
It is based on annual income or cash flow and annual debt service
Which statement correctly identifies a justification for obtaining global cash flow?
It is difficult to separate a small business and its owner on a financial basis in many lending situations
What is a key reason for developing a global cash flow analysis?
It is often difficult to separate business and personal assets and income.
Why is interest expense added back to the reported income from rental real estate when developing cash flow?
It prevents double counting with debt service
Which item relates to whether the applicant can generate enough cash to pay personal living expenses and other obligation s as they come due?
Liquidity
Borrowers, investors, and lenders often differ on how they look at or evaluate loan repayment. Which perspective is most closely associated with a lender?
Loans are evaluated based on the availability of cash for repayment
Which item is included in liquid assets on a personal balance sheet?
Marketable Securities
When preparing a cash budget, what is included in beginning cash?
Marketable securities
Under the UCA cash flow model, which term identifies the difference between cash from operating expenses and gross cash profit?
Net cash after operations (NCAO)
When calculating debt service coverage, what is the appropriate personal cash flow or income measure for a business owner?
Net personal cash flow available for debt service
What should you expect to see on an individual's properly prepared personal financial statement (PFS) if she has $250,000 of equity in a privately held business?
Non-readily marketable security must be at least $250,000.
How should a 401(k) or retirement plan balance be classified on a personal financial statement if an applicant is much younger than retirement age?
Noncurrent Assets
In which part of the cash flow statement section should a quarterly tax payment appear?
Operating Activities Section
Which net worth computation is of primary importance to a lender when a loan to a firm is being guaranteed by the owner of that firm?
Outside net worth
Which item is used to verify income?
Personal tax return
In the UCA model, what must net cash after operations be in order to repay debt?
Positive
Which financial statement best identifies the cause, timing, and magnitude of a company's future peak borrowing needs and repayment capabilities on short-term debt?
Pro forma Cash budget
Which listed financial statement shows cash inflow and outflow but not the peaks or low points of debt or cash during a given fiscal period?
Pro forma Statement of cash flows
How do pro forma financial statements differ from historical financial statements?
Pro forma financial statements are based primarily on assumptions regarding the future while historical financial statements are not based primarily on assumptions.
Which listed event appears in the Financing Activities section of the traditional statement of cash flows?
Proceeds from issuance of long-term debt
For the sale of assets that generates capital gains or losses, what should a business banker determine when developing a personal cash flow?
Proceeds net of any debt repaid
What kind of financial statements is a business banker analyzing if, along with the dependability of the firm's performance, the banker is particularly focused on the statements' assumption and any internal or external factors that may affect them?
Proforma financial statements
For what type of loans are cash budgets primarily used to determine repayment?
Short-term loans
Which listed event affects both the Operating Activities and Investing Activities sections of a traditional statement of cash flows that was prepared using the indirect method?
Sale of fixed assets for a gain or loss
Which factor contributes to negative cash after operation on the statement of cash flow?
Sales Growth
Which tax return form or schedule is not submitted along with the personal tax return, but is important for a lender to obtain for determining cash flow?
Schedule K-1
Which component is excluded from the personal tax returns submitted to the Internal Revenue Service?
Schedule K-1 (Form 1065)
On which tax return form or schedule is the balance sheet reported for businesses such as C corporations, partnerships, LLCs, and S corporations?
Schedule L
Based on the indirect method, which option correctly classifies an increase in accounts payable?
Source of Cash
How is a consumer debt-to-income (DTI) ratio different from a business debt service coverage (DSC) ratio?
Target levels for a business DSC usually are 1.25x or higher while target levels for a consumer DTI ratio generally are 40 percent or lower.
In a statement of cash flows, what is the total of all transactions over the course of a fiscal year?
The Change in cash and cash equivalent during the year
Which statement correctly identifies a difference between the UCA cash flow model and the traditional cash flow model?
The UCA model does not include CMLTD from the prior year end in the computation of financing cash flow as does the traditional cash flow model.
Which option identifies an advantage of the UCA model over a traditional statement of cash flows?
The UCA model provides more information about the cash flow impact of sales, gross margin, and operating expenses.
What should the applicant do if there are no contingent liabilities to report on a personal financial statement?
The applicant should insert "$0" or "none" in that section of the financial statement
Which situation is a correct approach to determine capital expenditures?
The change in net fixed assets, adjusted by depreciation expense
What statement is a correct conclusion about Greebes, Inc.'s financing needs for the 20x6 fiscal year if the firm had Gross Cash Profit of $195,000; Cash after Debt Amortization (CADA) of $100,000; and Total Long-term Investments of $95,000?
The firm had a financing surplus of $5,000 for the 20x6 fiscal year.
Which statement correctly states a difference between the direct method and the indirect method of the traditional statement of cash flows?
The direct method reports a major item in the operating activities section called Cash Received from Customers and the indirect method does not
Which statement is a correct conclusion about Greebes Inc. ability to generate cash if the firm has a cash coverage ratio of 0.25x for 20x6?
The firm was unable to generate enough cash from operations to pay for both the prior year's CMLTD and current year's interest expense
Which statement identifies one of the key differences between the direct method and the indirect method of the statement of cash flows?
The indirect method begins with net income
Which example is a typical personal financial statement representation or warranty?
The information is true and correct
When determining cash flow from financing activities, what is a key difference between the UCA model and the traditional statement of cash flows?
The placement of current maturities of long-term debt
Why is it difficult to create a single format for global cash flow analysis?
There are differences between types of business ownerships and how cash moves between businesses and owners.
Why are contingent liabilities important for a business banker to understand?
They may impair an individual's ability to service debt if they are large as compared to income.
Why is other information requested on a personal financial statement important, such as whether the individual has prepared a financial plan?
This information can provide cross-selling opportunitites
Why do most bankers develop an adjusted net worth?
To account for any inaccuracies or omissions among assets and liabilities
For what reason is interest expense not deducted from income to create a personal cash flow available for debt service?
To avoid double counting with interest expense as a part of personal debt service
Which item can cause a difference between adjusted gross income (AGI) on a personal tax return and the actual cash flow of the individual?
Types of income that can be deferred
Why is the concept of outside net worth important when assessing the financial strength of a business loan guarantor?
Value assigned to the borrowing business will likely be negligible in a problem loan situation.
Which option identifies a key use of personal tax returns in personal financial analysis?
Verification of income
For which income line item on a personal tax return is a W-2 a key form of verification?
Wages and salaries
When analyzing personal expenditures, what question should a business banker address?
What are the terms of any debt payments?
Which situation would benefit most from a cash budget?
When a business banker is considering a short-term loan request from a borrower with seasonal borrowing needs
When developing a personal cash flow, what should a business banker determine for a sale of assets that generates capital gains (or losses)?
Whether such a transaction will be recurring
Which situation is a key cash flow consideration for distributions from retirement accounts?
Whether the amount is a rollover
Which situation is a shortcoming of analyzing an annual forecasted financial statement?
it does not reveal any funding needs that might arise between the start and end of the fiscal year
Which basis is usually the best to consider when judging the reasonableness of projection assumptions?
past performance
Which financial records represent management's best guess as to how the business will perform in the future?
pro forma financial statements
When preparing a financial statement projection, what is usually the first item forecasted?
sales
