FINA 369 Chapter 2 Book

T/F: Financial planning is necessary only if an individual earns a lot of money.

False

A ____________ is an example of a tangible asset. a. house b. patent c. copyright d. trademark

a

T/F: It is best to prepare an individual's personal financial statements at least once a year, ideally when drawing up his or her budget.

True

_____ is an example of personal property. a. Jewelry b. A mutual fund c. A corporate bond d. A charge account e. A certificate of deposit

a

Which of the following ratios indicates your ability to meet current debt payments with existing assets that can be converted to cash readily? a. Solvency b. Liquidity c. Cash d. Savings e. Debt service

b

Your investment advisor wants you to purchase an annuity that will pay you $25,000 per year for 10 years. If you require a 7% return, what is the most you should pay for this investment? a. $49,179 b. $175,590 c. $201,000 d. $225,682 e. $250,000

b

___________ are difficult to estimate for an upcoming year. a. Interest payments b. Medical expenses c. Rent payments d. Insurance expenses

b

T/F: A budget is a financial report that forecasts an individual's current income as a percentage of his or her past earnings.

False

T/F: A cash budget has value only if one uses it, reviews it regularly, and keeps careful records of income and expenses.

True

T/F: An inability to reach short-term goals will significantly affect one's ability to reach long-term goals.

True

T/F: An income and expense statement provides a measure of financial performance over a period of time.

True

T/F: An individual can maintain his or her personal financial statements using spreadsheet software.

True

A balance sheet describes a person's: a. financial position at a given point in time. b. financial performance over a period of time. c. financial performance at a given point in time. d. financial goals over a specific period of time. e. financial plans over a period of time.

a

The process of finding present value is called ____________. a. discounting b. calculating c. compounding d. computing

a

A ____________is an example of a liquid asset. a. fixed deposit of three years b. savings account c. recurring deposit of two years d. retirement account

b

A detailed forecast used to monitor and control expenses is called a(n) ____________. a. balance sheet b. profit and loss account c. budget d. income and expense statement

c

Elena purchased a stamp collection for $5,000 thirty years ago. If its value appreciated at 8% annually, what is it worth today? (Round the answer to the nearest unit place.) a. $17,000 b. $36,400 c. $50,313 d. $123,023 e. $150,000

c

There is a need for budget adjustments when: a. income is stable. b. account deficits and surpluses balance out. c. account deficits are more than surpluses. d. a new calendar year begins. e. short-term financial goals are achieved.

c

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? (Round the number of years to the nearest whole number.) a. 8 b. 9 c. 10 d. 11 e. 12

c

Assume that your total income for the current year is $35,000. Your total expenses including taxes of $5,000 is $30,000. Your savings ratio is: a. 7.5%. b. 10.0%. c. 12.5%. d. 13.3%. e. 16.7%.

e

If your total assets equal $87,000 and your total liabilities equal $10,000, your solvency ratio is: a. 11.5%. b. 13.0%. c. 77.0%. d. 87.0%. e. 88.5%.

e

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? (Round off your answer to one decimal place.) a. 8.8 b. 9.7 c. 10.8 d. 11.4 e. 14.2

e

T/F: The best way to balance one's budget is to increase borrowing.

False

T/F: The preparation of an income and expense statement is the first step in the personal financial planning process.

False

T/F: An individual is said to have a balanced budget when his or her total income for the year equals or exceeds his or her total expenditures for the year.

True

T/F: An individual's auto loan payments are listed as an expense on the income and expense statement.

True

T/F: Estimating expenses using actual expenses from previous years and tracking current expenses make the task of preparing a cash budget easier.

True

T/F: Financial plans provide direction to annual budgets.

True

T/F: Future value calculations to estimate the funds needed to meet a goal take compounding into account.

True

T/F: If an individual lists his or her gross salary in the income portion of the budget, the expenditures section will include income taxes and social security taxes.

True

T/F: In a budget, "fun money" is for family members to spend as they like without having to account for how it is spent.

True

T/F: It is recommended that an individual maintains a ledger to summarize all of his or her financial transactions.

True

T/F: Knowing how to prepare and interpret personal financial statements is a cornerstone of personal financial planning.

True

T/F: The balance sheet shows an individual's financial condition as of the time the statement is prepared.

True

You bought a $500 stereo on an installment plan and made two payments of $75 each during the year. On your income and expense statement for the year, you will show an expense of ____________. a. $150 b. $575 c. $650 d. $500

a

Once you define your ____________ financial goals, you can prepare a cash budget for the upcoming year. a. semi-annual b. short-term c. quarterly d. long-term

b

When your assets exceed your liabilities, you are ____________. a. insolvent b. unable to meet your financial targets c. solvent d. in financial distress

c

Which of the following is true of budgets? a. Budgets are meant for poor people only. b. Budgets need expensive software to be effective. c. Budgets are forward looking. d. Budgets are permanent. e. Budgets are unnecessary.

c

Investment assets are required to ____________. a. be used in our everyday lives. b. increase productivity. c. provide a service. d. earn a return.

d

Loans should be recorded as a liability on the balance sheet at their: a. original outstanding balance. b. year-end outstanding balance. c. average outstanding balance. d. current outstanding balance. e. beginning outstanding balance.

d

Phil has $2,000, and he needs it to grow to $4,000 in 8 years. Assuming he does not add any more money to this fund, what rate of interest would he need to earn? (Round off the rate of interest to the nearest whole number.) a. 6% b. 7% c. 8% d. 9% e. 10%

d

Sonny and Cher have a net worth of $35,000 and total assets of $200,000. If their revolving credit and unpaid bills total $2,200, what will their long-term liabilities be? a. $115,000 b. $140,000 c. $142,200 d. $162,800 e. $165,000

d

The three parts of an individual's balance sheet are his or her: a. income, liabilities, and net worth. b. assets, expenditures, and net worth. c. assets, liabilities, and expenses. d. assets, liabilities, and net worth. e. income, liabilities, and assets.

d

When your liabilities exceed your assets, you are ____________. a. solvent b. financially sound c. retired d. insolvent

d

Which of the following is an example of real property? a. Machinery b. A computer c. An automobile d. A garage e. Office furniture

d

Which of the following is listed as an asset on an individual's balance sheet? a. Bank credit card balances b. Education loans c. Outstanding medical bills d. Checking accounts e. Leased automobiles

d

Which of the following is true of a budget? a. It shows the computation of the interest on a loan. b. It is a schedule of personal investments. c. It is a list of prepaid expenses. d. It is a detailed financial forecast. e. It is a set of personal financial objectives.

d

I should record _____ on my income and expense statement for the period of January 1 to June 30. a. an $800 refrigerator I bought on credit on May 30 b. an outstanding education loan account c. jewelry I purchased with an arrangement to pay later d. my checking account balance e. the groceries I bought and paid for in June

e

T/F: An individual should prepare his or her personal financial statements once in five years.

False

T/F: Budgeting and record keeping are the same.

False

T/F: If an individual obtains a loan to purchase a car in June, this loan amount will be included as income for the month of June.

False

T/F: Net income (after taxes) should be used when preparing an income and expense statement.

False

A balance sheet provides a statement of one's financial ____________. a. position b. performance c. goals d. ratios

a

A cash budget helps you: a. monitor and control your finances. b. analyze your financial position. c. calculate your fixed assets ratio. d. calculate your investment turnover ratio. e. analyze the use of debt in a capital structure.

a

A cash budget will have value only if it is actually used and ____________. a. records of actual income and expenses are kept b. spending never deviates from the budgeted amount c. it reflects actual financial position d. it takes into account only credit transactions

a

If your liquid assets equal $15,000 and your current debts equal $50,000, your liquidity ratio is: a. 30%. b. 70%. c. 143%. d. 233%. e. 333%.

a

If your statement of income and expense prepared on a cash basis shows a deficit, you have: a. increased your debts. b. liquidated your investments. c. increased your savings. d. taken a cash loan on your insurance. e. sold some securities.

a

Jacques's total monthly loan payments amount to $1,020, while his gross income is $3,000 per month. What is his debt service ratio? a. 34% b. 43% c. 50% d. 75% e. 82%

a

The Wilsons' short-term goals might include: a. setting up an emergency fund with three months' income. b. buying a house. c. sending the kids to college. d. planning to retire at the age of 60. e. going on a world tour.

a

The first step in financial planning is to ____________. a. define one's financial goals b. set up a budget c. calculate one's liquidity ratio d. prepare a trend analysis

a

The liquidity ratio is designed to show the percentage of ____________ you can cover with your current assets. a. annual credit obligations b. future years' credit obligations c. long-term credit obligations d. potential credit obligations

a

The total amount of salary you earn before taxes are deducted is your ____________. a. gross pay b. after-tax salary c. take-home salary d. net pay

a

What can you do if your budget shows an annual budget deficit? a. You can liquidate investments to meet the total budget shortfall for the year. b. You can increase low-priority expenses on the budget. c. You can invest more in real estate/personal estate. d. You can discourage borrowing. e. You can shift expenses from the surplus months to the deficit months.

a

When estimating income for the income and expense statement, you should: a. use gross income. b. include expected pay increases. c. adjust expenses for inflation. d. use net income less capitalized interest. e. use the income received and earned only.

a

Which of the following is true of budgets? a. Budgets are detailed forward looking financial reports based on expected income and expenses. b. Budgets describe a person's financial position at a given point in time. c. Budgets measure a person's financial performance at a given point in time. d. Budgets describe a person's financial goals over a specific period of time. e. Budgets are historical documents that tell an individual how he or she has performed in the past.

a

____________ value is the value today of an amount to be received in the future. a. Present b. Future c. Intrinsic d. Extrinsic

a

A(n) ____________ is an example of a current liability. a. auto loan b. credit card balance c. mortgage d. education loan

b

An income statement includes: a. income, liabilities, and net worth. b. income, expenses, and cash surplus or deficit. c. expenses, net worth, and cash surplus or deficit. d. net worth, surplus, and profit or loss. e. savings, surplus, and profit or loss.

b

Annual budgets help in monitoring and controlling income, living expenses, purchases, and savings on: a. a weekly basis. b. a yearly basis. c. a quarterly basis. d. a semi-annually basis. e. a monthly basis.

b

If your budget shows a deficit, you are required to ____________ to balance your budget. a. increase your savings b. increase your income c. increase your expenses d. increase your investments

b

The income and expense statement examines your financial: a. obligations. b. performance. c. position. d. assets. e. objectives.

b

Which of the following is a stage in preparing a cash budget? a. Calculating financial ratios b. Estimating expenses c. Calculating depreciation expenses d. Finalizing the balance sheet e. Preparing the bank reconciliation report

b

You are solvent if your: a. total liabilities exceed your total assets. b. total assets exceed your total liabilities. c. total assets exceed your equity. d. total liabilities exceed your equity. e. current liabilities exceed your current assets.

b

A savings ratio calculated from an income and expense statement represents the: a. percentage of gross income saved. b. ability to cover immediate debt when there is an interruption in income. c. percentage of after-tax income saved. d. percentage of tax-deferred income earned annually. e. percentage of asset value salvaged.

c

If your _____, your net worth on the balance sheet will increase from one period to the next. a. liabilities increase and assets remain constant b. liabilities increase and assets decrease c. assets increase and liabilities remain constant d. income and liabilities decrease e. liabilities and expenses increase

c

Mike and Teresa have a monthly gross income of $5,000. They pay $1,000 per month toward taxes and $2,000 per month toward various loans. What is their debt service ratio? a. 20% b. 30% c. 40% d. 50% e. 60%

c

Payments made on your loan obligations should ____________ your net worth. a. increase b. decrease c. maintain d. eliminate

c

Sam and his wife Ann purchased a home in Lubbock, Texas, in 1980 for $100,000. Their original home mortgage payment was $90,000. The house has a current market value of $175,000 and a replacement value of $200,000. They still owe $55,000 of their home mortgage payment. In their current balance sheet, their home will be reflected as: a. a $200,000 asset for the replacement value and a $55,000 liability for the outstanding mortgage. b. a $200,000 asset for the replacement value and a $90,000 liability for the original mortgage. c. a $175,000 asset for the market value and a $55,000 liability for the outstanding mortgage. d. a $175,000 asset for the market value and a $90,000 liability for the original mortgage. e. a $100,000 asset for the purchase price and a $55,000 liability for the outstanding mortgage.

c

The best approach to solve the problem of an annual budget deficit is to: a. liquidate more assets than required to meet the budget shortfall for the year. b. borrow funds on credit cards. c. reduce flexible expenditures on nonessential items. d. reduce fixed expenses. e. reduce high-priority expenses on the budget.

c

Total assets on your balance sheet are $6,000 and liabilities are $2,000. Your solvency ratio will be ____________. a. 30% b. 33% c. 67% d. 65%

c

Your _____ is an example of a liquid asset. a. home b. car c. checking account d. charge account e. life insurance cash value

c

____________ is the most preferred way for one to deal with budget deficits. a. Liquidating one's savings and investments b. Borrowing money from one's relatives c. Cutting one's low-priority expenses d. Increasing one's income

c

A budget helps in: a. setting financial goals. b. calculating discounted cash flows. c. giving feedback on the progress of the set plan. d. monitoring and controlling spending. e. revising depreciation schedules.

d

A cash surplus on an income and expense statement prepared on a cash basis indicates that: a. the net worth is equal to zero. b. investments are less than the cash balance. c. the payments on debts are not met. d. the total expense is less than the total income. e. income and expense are equal.

d

Which of the following is true of an individual's income and expense statement? a. An individual's income and expense statement describes his or her financial position at a given point in time. b. An individual's income and expense statement measures his or her financial performance at a given point in time. c. An individual's income and expense statement describes his or her financial goals over a specific period of time. d. An individual's income and expense statement measures his or her financial performance over a period of time. e. An individual's income and expense statement describes his or her financial position over a period of time.

d

Which of the following portions of a mortgage loan is recorded as a liability on the balance sheet? a. Interest only b. Sum of the interest paid and the outstanding balance c. Sum of the interest due and the outstanding balance d. Outstanding principal portion only e. Principal portion and interest paid

d

Your car has a market value of $4,000, while the balance of the loan against it is now $2,500. Your ownership interest in the car is ____________. a. $2,500 b. $4,000 c. $6,500 d. $1,500

d

When Phil lists his house on his balance sheet, he should record its: a. actual purchase price. b. depreciated value. c. insured value. d. deferred price. e. fair market value.

e

Which of the following is true of an individual's net worth? a. It is the sum of an individual's current assets and his or her current liabilities. b. It is the sum of an individual's take-home pay and his or her payroll taxes. c. It is the difference between an individual's current assets and his or her current liabilities. d. It is the difference between an individual's monthly income and his or her expenses. e. It is the difference between an individual's total assets and his or her total liabilities.

e

You record _____ on an income and expense statement. a. the value of your stock portfolio b. your installment loan balance c. your checking account balance d. your cash on hand e. your charitable payments

e

_____ will be listed as a liability on your balance sheet. a. A money market deposit account b. A checking account c. Equipment d. The cash value of a life insurance policy e. An education loan

e