Chapter 7 Finance 407, Chapter 1 Finance 407, Chapter 4 Finance 407

A Federal Perkins loan is provided to undergraduate and graduate students that have no financial need.

False- A Federal Perkins loan is a loan that is provided to undergraduate and graduate students that have exceptional financial need.

A financial mission includes specific goals that identify the client's purpose for wanting a financial plan.

False- A financial mission is a broad and enduring statement that identifies the client's purpose for wanting a financial plan.

A statement of financial position shows the client's anticipated financial condition at year-end.

False- A statement of financial position shows a financial snapshot at a moment in time.

Assets are completely owned property.

False- Assets are property owned completely or partially.

The savings ratio examines the relationship between employer retirement plan and contributions to annual gross income.

False- The savings ratio examines the relationship between personal savings and employer contributions to annual gross income.

Which of the following is NOT listed on the statement of changes in net worth? A. Ann gave her mother $2,000 B. Sarah received a watch worth $500 from her father. C. Bill's automobile depreciated by $1,200. D. Lisa gave her $1,000 stock portfolio to her church.

A. Gifts of cash would be listed on the personal statement of cash flows.

Which of the following lender thresholds will Darren and Kathy meet, assuming their monthly housing costs will be $1,500? I. The 28% benchmark II. The 36% benchmark A. I only B. II only C. Both I and II D. Neither I nor II

A. The 28% test states that monthly housing costs / monthly gross income must be less than or equal to 28%: ($1,500 / $5,833.3333 = 25.7%). The 36% test states that monthly housing costs plus other monthly debt payments / monthly gross income must be less than or equal to 36%: [$1,500 + ($22,084 / 12)] / $5,833.3333 = 57.3%.

Which of the following equations for the personal statement of cash flows is CORRECT? A. Income - expenses = net cash flow B. Expenses - income = net cash flow C. Income + expenses = net cash flow D. Income x expenses = net cash flow

A. The basic equation for the personal statement of cash flows is income - expenses = net cash flow.

What is Darren and Kathy's current ratio? A. 1.2430 B. 1.3355 C. 1.9695 D. 3.1697

B. Current ratio = current assets / current liabilities. $9,243 / $6,921 = 1.3355 months.

Which of the following statements regarding the personal statement of cash flows is CORRECT? A. Savings increase income available for expenses. B. Income may include wages, alimony, and tax refunds. C. Entertainment is an example of a fixed expense. D. Insurance premiums are an example of a discretionary expense

B. Savings decreases income available for expenses. Entertainment is an example of a variable expense. Insurance premiums are an example of a fixed expense.

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A. $122,000 B. $130,000 C. $138,000 D. $150,000

B. The statement of financial position formula is assets - liabilities = net worth. Therefore, $150,000 - liabilities = $20,000, where liabilities = $130,000.

A Coverdell ESA can be established for any child under the age of 21 by a parent, grandparent, other family members of friends, or even by the child.

False- A Coverdell ESA can be established for any child under the age of 18 by a parent, grandparent, other family members or friends, or even by the child.

What is Darren and Kathy's emergency fund ratio? A. 1.2430 months B. 1.3355 months C. 1.9695 months D. 3.1697 months

C. Emergency fund ratio = current assets / monthly non-discretionary expenses. $9,243 / $4,693 = 1.9695 months

What is Darren and Kathy's net cash flow plus savings to annual gross income percentage? A. .0263 B. .0670 C. .1955 D. .3155

C. Net cash flows plus savings to annual gross income ratio = (net cash flow + savings) / annual gross income

The statement of financial position equation is A. Total assets / total liabilities = net worth B. Total assets x total liabilities = net worth C. Total assets - total liabilities = net worth D. Total assets + total liabilities = net worth

C. The statement of financial position formula is assets - liabilities = net worth

A Federal Pell Grant is a grant from the federal government that requires repayment.

False- A Federal Pell Grant is a grant from the federal government that does not require repayment.

Which of the following would not be listed as a liability on the statement of financial position? A. Taxes owed B. Loan balances C. Bank credit card charges D. Savings accounts

D. A savings account is an asset.

When Bennett lists his house on his personal statement of financial position, it should be calculated at A. Actual purchase price B. Actual value less debt C. Insured value D. Fair market value

D. Assets and liabilities are stated at fair market value on a personal statement of financial position.

Another term sometimes used for net worth is A. Assets B. Net debts C. Long-term liabilities D. Equity

D. Net worth is the amount of wealth or equity a client has in owned assets.

Statement of financial position liabilities should be recorded at A. Their original outstanding balance B. Their year-end outstanding balance C. Their average outstanding balance D. Their current outstanding balance

D. Statement of financial position liabilities are stated at their current outstanding balance.

The three parts of a personal statement of financial position are A. Income, liabilities and net worth B. Assets, expenditures, and discretionary cash flow C. Assets, liabilities, and balance D. Assets, liabilities, and net worth

D. The statement of financial position formula is assets-liabilities= net worth

One of the drawbacks of Coverdell ESAs is that, if the beneficiary/child taxes a tax-free distribution from the ESA, the beneficiary/child cannot also receive either the American Opportunity Tax Credit or Lifetime Learning Credit in the same year.

False- Both Coverdell ESAs and American Opportunity Tax or Lifetime Learning Credits can be used in the same year, as long as they are used fro different expenses.

Personal use assets include personal residences, personal property, collectibles, automobiles, and boats.

False- Collectibles are investment assets.

College Savings Plans are similar to Coverdell ESAs, and have the same attributes, rules, and tax ramifications.

False- College Savings Plans are similar to Coverdell ESAs, but have different attributes, rules, and tax ramifications.

Comprehensive personal financial planning is defined solely as the process of implementing financial goals.

False- Comprehensive financial planning is the process of formulating, implementing, and monitoring multifunctional decisions that enables an individual or family to achieve financial goals.

Financial goals are only long-term, high-level statements of financial desires.

False- Financial goals are short-term or long-term, high-level statements of financial desires.

Financial planning guarantees a sound financial future.

False- Financial planning does not guarantee a sound financial future.

Financial planning is about making financial choice and allocating abundant resources.

False- Financial planning is about making financial choices and allocating scarce resources.

Interest paid on student loans for undergraduate and graduate education may not be deduced as an adjustment to the taxpayer's AGI.

False- Interest paid on student loans for undergraduate and graduate education may be deducted as an adjustment to the taxpayer's AGI.

Liquidity is money owed to specific creditors.

False- Liability is money owed.

Marketability describes the length of time expected for an asset to be converted back to cash.

False- Liquidity describes the length of time expected for an asset to be converted back to cash.

Liquidity ratios indicate the ability of a client to meet long-term financial obligations.

False- Liquidity ratios indicate the ability of the client to meet short-term financial obligations.

Many state universities and all private colleges allow for prepayment of tuition at current prices for future enrollment.

False- Many state universities and certain private colleges allow for prepayment of tuition at current prices for future enrollment.

Most financial aid packages do not depend upon the financial need of the student.

False- Most financial aid packages depend heavily upon the financial need of the student.

Parents should be reminded that families are in a better position to fund college expenses over a short time period.

False- Parents should be reminded that families are in a better position to fund college expenses over a long time period.

Prepaid Tuition Plans are plans where prepayment of tuition is allowed at inflated prices for enrollment in the future.

False- Prepaid Tuition Plans are plans where prepayment of tuition is allowed at current prices for future enrollment.

QTPs generally require an increase in the risk level of investments that the closer the child gets to the targeted year to begin college.

False- QTPs generally require a decrease in the risk level of investments the closer the child gets to the targeted year to begin college.

Repayment of Stafford Loans begins after a grace period of 3 years following graduation, leaving school, or dropping below half-time enrollment.

False- Repayment of Stafford Loans begins after a grace period of 6 months following graduation, leaving school, or dropping below half-time enrollment.

In 2016, Roth IRAs allow up to $5,000 of annual contributions for individuals below the age of 50.

False- Roth IRA contributions of up to $5,500 are permitted for 2016 (excluding any age 50+ catch-up amounts).

Coverdell ESAs currently permit up to $5,500 in annual contributions, whereas QTPs allow large contributions reaching as high as $100,000 and above.

False- The Coverdell ESAs currently permit up to $2,000 (2016) to annual contributions, whereas QTPs allow large contributions reaching as high as $100,000 and above.

The Federal Supplemental Education Opportunity Grant (FSEOG) is awarded to undergraduate students with high EFC's.

False- The FSEOF is awarded to undergraduate students with low EFC's and gives priority to students who receive Federal Pell Grants.

The Life time Learning Credit can only be claimed for a limited number of years.

False- The Lifetime Learning Credit can be claimed for an unlimited number of years.

The emergency fund ratio generally should be 3 to 6 months of discretionary cash flows to accommodate unemployment, losses of significant assets, or other unexpected major expenditures.

False- The emergency fund ration generally should be 3 to 6 months of non-discretionary cash flows to accommodate unemployment, losses of significant assets, or other unexpected major expenditures.

The highest-valued alternative not chosen is called the utility curve.

False- The highest-valued alternative not chosen is called the opportunity cost.

The owner-contributor in a college savings plan has the right to specifically direct which individual securities will be purchased within the plan.

False- The owner-contributor of a savings plan does not have the right to choose how contributions are invested. The Internal Revenue Code states that neither contributor nor the beneficiary can direct the investment. However, the account owner can change the investment strategy selection once per year.

The statement of financial position includes information on earnings.

False- The personal statement of cash flows includes information on earnings.

The personal statement of cash flows is a listing of assets, liabilities, and net worth.

False- The statement of financial position is a listing of assets, liabilities, and net worth.

Only a few forms of scholarships are awarded by groups that are separate and apart from the school, state, or federal government.

False- There are many forms of scholarships that are awarded by groups that are separate and apart from the school, state, or federal government.

No vehicles are available that allow the family or taxpayer who bear the burnt of education expenses to realize tax savings and benefits.

False- There are various vehicles that allow the family or taxpayer who bear the burnt of education expenses to realize tax savings and benefits.

There is a maximum EFC allowed to qualify for financial aid.

False- There is no maximum EFC because the EFC is used in a calculation depending on where the student attends school and the cost of attendance at that school.

Time series analysis of financial statements presents each statement in percentage terms.

False- Vertical analysis presents each financial statement in percentage terms.

When the debt is long term, the current portion due is listed under long-term liabilities.

False- When the debt is long term, the current portion due is listed under current liabilities.

While objectivity tends to dominate the client's thinking and financial success, subjectivity should dominate the planner's thinking about financial planning.

False- While subjectivity tends to dominate the client's thinking about financial success, objectivity should dominate the planner's thinking about financial planning.

QTPs provide significant tax savings, allow for substantial investment for a child's education, and provide a tool for avoidance of gift and estate taxes.

True

The American Opportunity Tax Credit is a tax credit available for qualified tuition, enrollment fees, and course materials incurred in the first 4 years of post-secondary education for the taxpayer, spouse, or dependent.

True

A common method for reducing a family's EFC is creating a trust for the child and diminishing the family's estate through gifts.

True

A comprehensive personal financial plan helps to establish realistic goals.

True

A consolidation loan provides borrowers with a way to consolidate various types of federal student loans with separate repayment schedules into one loan.

True

A financial plan integrates a financial mission, goals, and objectives into one cohesive plan.

True

A subsidized loan is based on the financial need of the student is determined by the EFC formula.

True

Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher education expenses.

True

Current assets are assets expected to be converted to cash within one year.

True

Debt ratios indicate how well the person manages debt.

True

Fair market value is defined as the price at which an exchange will take place between a willing buyer and a willing seller, both reasonably informed and neither under duress to exchange.

True

Federal work-study programs enable undergraduate and graduate students to earn money for education expenses through jobs that pay at least minimum wage.

True

Financial objectives are statements of financial desires that are supportive of goals, but which are more specific than goals in that they place time and measurement attributes to the goals.

True

If a client has a low risk tolerance for fluctuating mortgage payments, the client should select a fixed-rate mortgage.

True

If a portion or all of the withdrawal from a QTP is spent on anything other than qualified higher education expenses, the owner-contributor will be taxed at her own tax rate on the earnings portion of the withdrawal.

True

If used to pay for qualified higher education expenses at an eligible institution or state tuition plan, Series EE Savings Bonds provide significant tax savings, that is, no federal income tax on the interest.

True

Indebtedness is another word for liability.

True

Investment assets include stocks, bonds, mutual finds, real estate held for investment, and interests in closely held corporations or businesses.

True

Many adjustable-rate mortgages limit the amount by which the interest rate can change on a monthly and yearly basis.

True

Most states have programs that are similar to federal student financial aid.

True

Net worth is the amount of wealth or equity a person has in owned assets.

True

Once expenses have been identified and adjusted for inflation, one can determine the estimated 4- year cost of a college education.

True

People hire professional financial planners because they believe that doing so is more effective and efficient than attempting to create and implement a financial plan on their own.

True

Personal financial planning involves the management of personal financial risks through a cost benefit analysis.

True

QTPs allow individuals to either participate in Prepaid Tuition Plan whereby tuition credits are purchased for a designated beneficiary for payment or waiver or higher education expenses, or participate in College Savings Plan whereby contributions of money are made to an account to eventually pay for higher education expenses of a designated beneficiary.

True

QTPs are attractive to states because they can provide incentives to residents and nonresidents to invest in higher education and into that state's educational system.

True

The EFC formula takes into account various factors, including the number of children in private school or college, the size of the family, the amount of years until the parent's retirement, and large financial burdens, such as medical bills.

True

The EFC indicates how much of a student's family's resources ought to be available to assist in paying for the student's education.

True

The Financial Accounting Standards Board (FASB) is a nongovernmental board that sets the standards for financial statements and generally accepted accounting principals (GAAP).

True

The Lifetime Learning Credit is a tax credit available to pay for tuition and enrollment fees for undergraduate, graduate, or professional degree programs.

True

The Stafford loan in the primary type of financial aid provided by the U.S. Department of Education.

True

The U.S. Armed Forces have numerous programs and scholarships available to pay for tuition.

True

The Uniform Gift to Minors Act (UGMA) allows parents the option to put assets in a custodial account for a child.

True

The current ratio examines the relationship between current assets and current liabilities.

True

The debt to net worth ratio examines the relationship between equity and current liabilities,

True

The financial aid process is initiated by filling out financial aid forms available from high schools, the U.S. Department of Education, or from the college the student will attend.

True

The financial planning process offers financial order and discipline to clients.

True

The long-term debt to net worth ratio examines the relationship between long-term debt and net worth.

True

The personal statement of cash flows generally does not consider the sale or purchase of assets during the period.

True

The planner should have an understanding of objective environmental risks, such as the risks of untimely death, health issues, disability, property loss, and negligence suits and awards.

True

The purpose of budgeting is to project, as well as control, future income and expenditures.

True

The statement of changes in net worth is used to summarize non-cash flow changes in net worth that would not have been recorded on statement of cash flows.

True

The statement of financial position represents the financial picture of the individual at a moment in time, setting forth assets, liabilities, and net worth.

True

Time value of money is the concept that money received today is worth more than the same amount received sometime in the future.

True

Under the Employer's Educational Assistance Program, an employer can pay for an employee's undergraduate or graduate tuition, enrollment fees, book, supplies, and equipment while these employer benefits are excluded from the employee's income up to $5,250.

True

Unpaid credit card balances, taxes payable, bank loans, and other debts that will or should be paid off within one year are considered current liabilities.

True

When formulating a college education savings plan, one of the most significant considerations is how much time exists before the child enters college.

True