EVERYTHING FOR CHAPTER 3 FINANCIAL LIT!
The purpose of a revolving savings fund is to
accumulate funds for large, irregular expenses and meet occasional deficits.
Disposable income is income
after all employer withholding including taxes.
There should be enough money in a revolving savings fund to
avoid running out of money.
The two most useful financial statements are _____ and _____.
cash-flow statements; balance sheets
To construct a balance sheet, you need to compile dollar values for your assets and liabilities. Good sources from which to begin are
checkbook or savings account records. receipts of various payments. investments. Correct answer all of these.
Using a budget design that keeps a declining balance helps one
monitor unexpended balances.
A person who has a negative net worth is technically insolvent.
T
A surplus demonstrates that you are managing your financial resources successfully and do not have to use savings or borrow to make financial ends meet.
T
Both IRAs and real property are investment assets.
T
By analyzing financial statements, a person can assess his or her financial condition and progress.
T
Financial planning begins by examining one's values.
T
For most people, the only way to increase net worth is to spend less than their income; people must save and invest.
T
Good recordkeeping is a prerequisite for effective financial planning.
T
Households dependent on the income from a self-employed person may need a larger emergency cash reserve than others.
T
Tangible assets are assets whose primary purpose is to provide maintenance of a lifestyle.
T
The debt service-to-income ratio provides a view of total debt burden of an individual or family by comparing the dollars spent on gross annual debt repayments with gross annual income.
T
The degree of detail included in a balance sheet depends on the person(s) for whom it is prepared.
T
To make realistic estimates of income and expenses, reliable financial information is critical. The more accurate the estimates, the more effective the budget.
T
Variance analysis is the process of comparing one's actual expenditures with budgeted amounts.
T
When budgeting, it is useful to use actual income and expenditure information for two or three months to refine budget estimates in the future.
T
You can use the basic liquidity ratio to determine the number of months that you could continue to meet your expenses using only your monetary assets should all income cease.
T
Vincent and Paula Farelli have decided to pay off their $875 MasterCard debt by taking $875 out of their money market savings account. This transaction will
not change their net worth on their balance sheet.
The starting point for financial planning is (are)
personal values.
The primary purpose of setting long-term financial goals is to help
provide direction for overall financial planning.
The first step in the budgeting process is
setting financial goals.
One of the crisis steps to take if a budget deficit occurs repeatedly is to stop
spending for luxuries. ATM withdrawals for pocket money. using credit cards. Correct answer all of the above.
The formula for calculating surplus (loss) is
total income minus total expenses.
A net surplus at the end of the month could be
used to pay down credit card debt. invested in a retirement account. carried forward to the next month. Correct answer all of the above.
The strictest method of controlling budgets is
using the envelope system.
Discretionary income is used to pay for things like
vacations.
Food, clothing, and entertainment are examples of
variable expenses.
It is not necessary that your values be consistent with your financial and lifestyle goals.
F
It is usually easy to reduce a fixed expense.
F
Once budget estimates are determined, one should not make any changes in the budget for at least one year.
F
Original deeds and mortgage papers should be stored in one's home file.
F
Successful financial planning requires identifying the one best investment asset for an individual, then putting all of the individual's surplus into that asset.
F
Rent and insurance payments are examples of
fixed expenses.
Financial planning begins by acquiring a good job that provides a person with enough extra income to manage.
F
Financial planning is a single, customized plan regarding a person's financial affairs.
F
In general, tangible assets do not depreciate in value over time.
F
The basic liquidity ratio reveals how many months it would take to convert all assets into cash.
F
The debt-payments-to-disposable-income ratio is gross income divided by monthly nonmortgage debt repayments.
F
The liability section of a balance sheet would include money owed to a doctor or a lawyer but would not include money owed to a friend.
F
The use of automated teller machines is recommended as a method of controlling expenditures.
F
Using credit cards to "balance" your budget is a proper budgeting tool.
F
Values are fundamental beliefs regarding what consumer goods are worth.
F
Values have little impact on financial goals.
F
Maria and John Sanchez have just completed their third annual set of financial statements. They met in a personal finance class at State University and still remember their instructor's advice regarding the importance of knowing their financial condition and progress. Even before they got married, they decided that each year on February 2 (Groundhog Day) they would update their income and expense statement and their balance sheet.The following information is taken from their latest financial statements: Monetary assets $4,060 Tangible assets $35,800 Investment assets $15,005 Short-term liabilities $3,690 Long-term liabilities $27,350 Annual gross income $48,000 Annual take-home income $35,000 Annual expenses (including taxes and debt repayment) $46,800 Annual debt repayment $8,700 Reference: Ref 2-1 Calculate and evaluate Maria and John's debt service-to-income ratio.
18 percent—adequate income to easily repay debt
Rita and Jose Hernandez want to track their financial progress over the next few years. They have decided to take a reading of their progress every New Year's Day. Which financial statement would they prepare each year?
Balance sheet
Which of the following provides information about a person's financial condition at a specific point in time?
Balance sheet
Assets on the balance sheet are valued at their
fair market value.
Maria and John Sanchez have just completed their third annual set of financial statements. They met in a personal finance class at State University and still remember their instructor's advice regarding the importance of knowing their financial condition and progress. Even before they got married, they decided that each year on February 2 (Groundhog Day) they would update their income and expense statement and their balance sheet.The following information is taken from their latest financial statements: Monetary assets $4,060 Tangible assets $35,800 Investment assets $15,005 Short-term liabilities $3,690 Long-term liabilities $27,350 Annual gross income $48,000 Annual take-home income $35,000 Annual expenses (including taxes and debt repayment) $46,800 Annual debt repayment $8,700
$1,200
Jason and Larissa would like to accumulate three times their monthly expenses in monetary assets. They currently have $2,800 in their money market account, and their monthly expenses are $4,500. How much more do they need in their money market account to reach their goal?
$10,700
Cindy Estrada is applying for a loan and the bank has asked her for some financial information. Use the following data to calculate Cindy's net worth. Checking account balance $ 1,300 American Express credit card balance $ 650 Money market account $ 2,200 House $ 255,000 Mortgage loan balance $ 140,000 Automobile $ 20,000 Cash on hand $ 575 Auto loan balance $ 8,700
$129,725
Paul is a college student who has the following financial information. He would like your help in figuring his surplus. Income from summer job $ 5,000 Support from parents $ 3,500 Scholarship $ 1,200 Savings account balance $ 1,250 Variable expenses $ 3,500 Fixed expenses $ 4,000 Current liabilities $ 800 What is Paul's surplus?
$2,200
Stephen Scott's monthly pay stub indicates that his monthly gross income is $3,700. However, $800 is withheld for income and Social Security taxes, $100 is withheld for his health and disability insurance, and another $200 is contributed to his pension plan. How much is Stephen's disposable income?
$2,600
Maria and John Sanchez have just completed their third annual set of financial statements. They met in a personal finance class at State University and still remember their instructor's advice regarding the importance of knowing their financial condition and progress. Even before they got married, they decided that each year on February 2 (Groundhog Day) they would update their income and expense statement and their balance sheet.The following information is taken from their latest financial statements: Monetary assets $4,060 Tangible assets $35,800 Investment assets $15,005 Short-term liabilities $3,690 Long-term liabilities $27,350 Annual gross income $48,000 Annual take-home income $35,000 Annual expenses (including taxes and debt repayment) $46,800 Annual debt repayment $8,700
$23,825
Jerry and Gloria Collins expect the following cash surpluses or deficits the first three months of the year. The rest of the year they expect cash surpluses. January $ 100 surplus February $ 200 deficit March $ 150 deficit Their revolving savings fund should be at least
$250.
The Thomas family projects a budget deficit of $250 in January and $450 in February with surpluses the rest of the year. Their revolving savings fund should be at least
$700.
Julie and Alex have compiled their financial records and would like to know if they are living within their level of income. What is their surplus? Salaries $ 48,000 Interest income $ 1,200 Food expenses $ 10,500 Rent $ 14,400 Clothing costs $ 3,600 Auto expenses $ 4,200 Recreation $ 4,800 Miscellaneous expenses $ 3,400
$8,300
Which of the following budget controls would be especially useful?
-Keep track of credit transactions. -Monitor unexpended balances to control overspending. -Avoid using the envelope system. Correct answer a and b.
Janice Leno has the following assets and debts listed on her balance sheet: Liquid Assets $ 3,687 Tangible assets $ 61,241 Investment assets $ 34,289 Short-term liabilities $ 4,631 Long-term liabilities $ 24,134 Janice's asset-to-debt ratio is
3.45.
Maria and John Sanchez have just completed their third annual set of financial statements. They met in a personal finance class at State University and still remember their instructor's advice regarding the importance of knowing their financial condition and progress. Even before they got married, they decided that each year on February 2 (Groundhog Day) they would update their income and expense statement and their balance sheet.The following information is taken from their latest financial statements: Monetary assets $4,060 Tangible assets $35,800 Investment assets $15,005 Short-term liabilities $3,690 Long-term liabilities $27,350 Annual gross income $48,000 Annual take-home income $35,000 Annual expenses (including taxes and debt repayment) $46,800 Annual debt repayment $8,700
1.77
A debt-payments-to-disposable-income ratio with monthly nonmortgage debt repayments of $470 and a disposable income of $3,615 would be ______ percent.
13
Tom and Kelly McDonald have total assets valued at $346,000 and total debt of $168,000. What is Tom and Kelly's asset-to-debt ratio?
2.06
A debt-payments-to-disposable-income ratio of _____ percent or more is considered to be problematic.
20
Robert and Jessica Stein have a gross income of $53,000 a year and annual expenses of $51,500 including taxes. Their annual debt payments total $15,000. According to the recommended standards for the debt service-to-income ratio, the Stein's ratio of
28 percent implies they have the ability to make their debt repayments.
Eric Jones develops computer software for a major company. Eric's salary and bonuses total $82,000, but he pays $29,233 in income and Social Security taxes. If Eric's annual debt repayments are $33,620, what is his debt service-to-income ratio?
41 percent
The Ronselli family has total assets of $460,000 and total liabilities of $186,000. Included in their total assets are monetary assets of $47,000 and investment assets of $253,000. What is the Ronsellis' investment assets-to-total assets ratio?
55 percent
A debt service-to-income ratio of 0.36 or less indicates that disposable income is adequate to make debt repayments.
F
A low asset-to-debt ratio is a positive indicator of financial well-being.
F
Which of the following would be classified as a short-term liability?
Both unpaid rent and credit card debt
A net surplus in your monthly budget can not be carried forward to the next month.
F
Which of the following goals is most clearly stated? -Save enough for a down payment on a house in five years - Save $1,000 in one year for a vacation to San Diego -Pay off all credit card balances -Pay cash for a c
Correct answer Save $1,000 in one year for a vacation to San Diego Pay
Which of the following would be classified as a long-term liability?
Education loan balance
Which of the following is not a characteristic of a cash-flow statement?
It covers a period of time, usually one month or one year. It shows if you were able to live within your income for the period covered. The statement includes three sections: income, expenses, and surplus (or deficit). Correct answer All of these.
Wendy Wilson, a successful graduate of State University, is currently employed in a position paying $37,500 a year. Wendy's annual living expenses are only $33,000 so she has accumulated $4,600 in monetary assets and $27,000 in investment assets since her graduation. Use the basic liquidity ratio to figure how long Wendy could pay expenses if she were to lose her job.
Less than two months
Which of the following types of assets is primarily used for emergencies, maintenance of living expenses, savings, and payment of bills?
Monetary
Which of the following would be included in the category of assets known as monetary assets?
Money market accounts
Which of the following is classified as a tangible asset?
Motorcycle
Tran Phueong has monetary assets valued at $17,500 and monthly expenses of $1,450. Using the basic liquidity ratio, how long could Tran live on his monetary assets if he were to lose his job?
Over 12 months
If you find you have money left over at the end of the month, you might consider which of the following?
Paying off your credit card debt. Investing in a mutual fund. Paying down on a mortgage or other loan Correct answer All of the above.
Hillary and Justin Palmer have a long-term goal of saving $5,000 for a down payment on a new van they would like to buy in three years. Which of the following is a short-term goal that is consistent with this long-term goal?
Save $2,000 this year
Matthew is concerned about his ability to save money regularly and has prepared a budget. Which of the following budget classifications would be most appropriate for Matthew's budget?
Savings withheld from income and deposited directly to savings
Maria and John Sanchez have just completed their third annual set of financial statements. They met in a personal finance class at State University and still remember their instructor's advice regarding the importance of knowing their financial condition and progress. Even before they got married, they decided that each year on February 2 (Groundhog Day) they would update their income and expense statement and their balance sheet.The following information is taken from their latest financial statements: Monetary assets $4,060 Tangible assets $35,800 Investment assets $15,005 Short-term liabilities $3,690 Long-term liabilities $27,350 Annual gross income $48,000 Annual take-home income $35,000 Annual expenses (including taxes and debt repayment) $46,800 Annual debt repayment $8,700
Slightly more than 1 month
Financial plans should include objectives and goals in which of the following areas?
Spending Risk management Capital accumulation Correct answer All of the above
Which of the following is classified as an investment asset?
Stocks
A budget variance is the difference between the amount budgeted and the actual amount spent or received.
T
A debt service-to-income ratio of 0.36 or less is considered manageable for most families.
T
A family with two income earners will always need a greater amount of cash reserves than a family with one earner.
T
Among the intermediate-term goals for capital accumulation is having a fund for emergencies.
T
Budget estimates are the projected dollar amounts in a budget that one plans to receive or spend during the period covered by the budget.
T
Budgeting is narrower in scope than financial planning as it is primarily concerned with projecting future income and expenditures over a period of time.
T
Discretionary income is the money left over once the necessities of living are covered.
T
Disposable personal income is the amount of take-home pay remaining after all deductions are withheld for taxes, insurance, union dues, and other.
T
Keeping track of all income and expenses is very important to achieving your financial objectives.
T
Liquidity is the speed and ease with which an asset can be converted to cash.
T
Monetary assets include cash and near-cash items that can be readily converted to cash.
T
Paying off debts is an example of a financial goal even though it does not involve a direct purchase.
T
Recordkeeping is the process of recording the sources and amount of dollars earned and spent.
T
Reducing the number of bank and credit accounts that each partner brings into the marriage can save money on account fees.
T
Safe-deposit boxes take two keys to open, and the financial institution where the box is located keeps one of these keys.
T
Savings can be categorized as both fixed and variable expenses.
T
Short-term liabilities are obligations to be paid off within one year.
T
Short-term liabilities is a term used for debt obligations to be paid off within one year.
T
Specific financial goals drive the creation of budgets.
T
Specific goals should be measurable, attainable, relevant, and time related.
T
Specific goals should be measurable, attainable, relevant, and time-related.
T
The asset-to-debt ratio compares total assets with total liabilities and is a broad measure of a household's financial liquidity.
T
The concept of "pay myself first," saving and investing before you pay other expenses, is a characteristic of successful money managers.
T
The investment assets-to-total assets ratio compares the value of your investment assets with your net worth.
T
The surplus section on an individual's income and expense statement is similar to net profit for a business.
T
Your goal in financial planning is to manage your income and wealth in such as way that your goals are met in a suitable manner.
T
Which of the following is (are) characteristic of a safe-deposit box?
Takes two keys to open
Which of the following types of assets is primarily used for the maintenance of a lifestyle?
Tangible
The formula for calculating net worth is
assets minus liabilities.
A balance sheet includes _____ , _____ and _____.
assets; liabilities; net worth
Mack and Sherry Williams are making regular contributions of $200 a month from their salaries to a money market account. These transactions will
both increase their net worth on their balance sheet and decrease the surplus on their income and expense statement.
An income and expense statement is also known as a(n) _____ statement.
cash-flow
A budgeting device on which annual estimated income and expenses are recorded for each month in an effort to look at surplus or deficit situations is called a
cash-flow calendar.
A checking account can help control a budget when
checks received are all put into the checking account without receiving a portion in cash.
When estimated expenses exceed estimated income, the choices available are to
cut back expenses. earn more income. create a combination of more income and fewer expenses. Correct answer all of the above.
Canceled checks provide a source of information for the value of
expenditures.
The advantages of having organized financial records include
helping you save money as well as make money. helping you take advantage of all available tax deductions. enabling you to review the results of financial transactions. Correct answer all of these.
To set the stage for financial success, one must
identify financial values and goals.
Child support received, Social Security benefits, and public assistance are all examples of
income.
A surplus on your cash-flow statement indicates that you are
managing your financial resources successfully.
One of the crisis steps to take if a budget deficit occurs repeatedly is to stop or reduce discretionary spending for luxuries such as
meals out. clothing. entertainment. Correct answer all of the above.
If you have money left over at the end of each month, you could save on taxes by
putting it in your employer-sponsored retirement plan.
The process of recording the sources and amounts of dollars earned and spent is called
recordkeeping.
Financial goals
should be explicitly stated. should be consistent with your values. Correct answer all of the above. none of the above.