Chapter 3. Money Management Strategy: Financial Statements and Budgeting

On the balance sheet, credit card bills, medical bills, car loans, and mortgages are all example of___.

liabilities

If Tom and Liz Gomes have liquid assets of $200,000, real estate of $350,000, loans of $250,000, and investment of $30,000, what would their total assets be?

$580,000

Place the steps of budgeting in the correct order. This is found under the budgeting process.

1. Set financial goal. 2.Estimate expected income. 3.Budget for an emergency fund and savings. 4.Budget fixed and variable expenses. 6.Record actual income and spending amount 7.Evaluating spending and saving patterns.

After categorizing assets and calculating total assets, what do you do next when preparing the balance

Calculating liabilities. total the liabilities, and calculate net worth.

True or false: If your debt-payment ratio is 0.25, that means that about 25% of your net pay goes toward debt payments.

True

True or false: Most Americans do not have adequate amounts of money set aside for emergencies

True

True or false: A physical budget can be on paper or in an electronic spreadsheet.

False

The liquidity ratio is calculated as:

Liquid assets divided by monthly expenses

Which of the following provide an accurate explanation of net worth?

The amount you would have if you sold the assets and paid off the liabilities

Flexible payments that change from month to month are called ___ expenses.

Variable

Your goals and budget allocations are revised when ___ shortage occurs.

budget

A common budget format is best described as monthly columns:

comparing budgeted expenses to actual expenses for various expense items.

Discretionary income is what you have left after you have paid for housing, food, and____

other necessities

Budgeting should be well planned,

realistic , flexible, clearly communicated.

The rule of thumb when saving for an emergency fund is to set aside:

three to six months of living expenses.

Which is a popular money management software program that contains a computerized budgeting system?

Quicken

True or False: Financial experts recommend that you save 5% to 10% of your income.

True

When evaluating your budget, you should revise your financial goals and budget allocations and review your financial progress.

True

True or false: Insurance records should include originals of your insurance policies, a list of premiums and due date, copies of claims you have made, and property tax records.

False [Property tax records are not a type of insurance record. Any data regarding property taxes should be kept with housing records and income tax records.]

Which of the following is NOT an activity involved in assessing your current financial situation? This is found in a exhibit in the budgeting process.

Reviewing your financial progress [This is an activity involved with evaluating your budget program.]

A balance sheet is a listing of __as of a certain date.

Your assets, liabilities and net worth. [Income is shown on the income statement. The balance sheet only includes assets, liabilities, and net worth.]

A balance sheet is a personal financial statement that shows?

what you owe and owe as of a certain date [income statement is income and expenses during a certain time period, such as one year]

Expenses that do not vary from month to month are referred to as ____expenses.

Fixed

Which of the following are not estate and retirement planning records?

Tax records and copies of past tax returns Credit card statements [Estate Planning and Retirement Records: Will Pension plan information IRA statements Social Security information Trust agreements]

Which of the following could be intermediate-term goals for a single college student in his senior year? This is found in an exhibit for common financial goals.

-Take a vacation to Europe -Attend graduate school after getting an undergraduate degree -Pay-off student loans in five years or less

True or false: Net worth is found by adding assets and liability.

False

True or false: TOTAL assets minus current liabilities equeal net worth.

False The baance sheet equation is TOTAL assets less total liabilities.

True or false: Medical bills, credit card balances, and home equity loans are all example of current liabilities.

False [Home equity loans are considered long-term liabilities.]

A successful budget should be

well planned, clearly communicated, flexible, realistic

How is saving ratio calculated?

Amount saved each month divided by gross income

Karen James owes $10,000 in medical bulls, $500 to the public utility, $300 on car payment, $15,000 on a 5 year student loan, and $100,000 on a 15 year home mortgage. What is the total of Karen's current liabilities? Look carefully at what constitutes current and long-term liabilities in the discussion of determining amounts owed.

$10.800

If Mary has cash inflow for the year of $120,000 with cash outflows of $135,000, her ash flow statement would show a:

$15,000 deficit

Tommy White has the following financial items on his balance sheet: $10,000 of liquid assets,$15,000 of personal property, $300,000 of real estate, $5,000 of current liabilities, and $120,000 of home mortgages. What is his net worth?

$200,000

Which of the following assets are liquid assets?

Cash Saving Account Cash value of life insurance

Which of the following should be kept in a safe deposit box? This is found in the exhibit on where to keep your financial records.

Certificates of deposit, lists of financial account numbers, and mortgage papers, Birth, marriage and tax records

True or false: A smaller current ratio is best. For example, if last year's current ratio was 3 and this year it is 1, things are improving.

False

True or false: The four categories of assets on most personal balance sheets include liquid assets, personal possessions, investment assets, and net worth.

False

Which of the following is NOT a type of investment record?

Insurance policies [Insurance policies are a type of insurance record, and insurance is an activity separate and distinct from investing.] [Investment record: Records of stock, bond and mutual fund purchases and sales, List of investment certificate numbers, Brokerage statements, Dividend records, Company annual reports]

Based on the following data, calculate the current ratio and select the correct answer. Data: liabilities= $10,000; liquid assets = $3,000; monthly credit payments = $300; monthly savings = $200; net worth = $50,000; current liabilities = $600; take-home pay = $1,100; and gross income = $1900.

Liquid assets divided by current liabilities 5

Which of the following is an example of an opportunity cost?

Lower future investment earnings as a result of purchases

The balance sheet equation is:

Total assets less total liabilities equal net worth

Money management involves financial activities to manage current personal economic resources while planning for the achievement of long-term financial security.

True

People should prepare a personal balance sheet on a periodic basis to evaluate financial progress.

True

True or false: Credit records include payment records, monthly statements, lists of credit account numbers, and telephone numbers of issuers.

True

True or false: Personal property such as automobiles and personal belongings may be difficult to convert to cash.

True

Which if the following are NOT financial services records? This is found in the exhibit on where to keep your financial records?

W-2 forms [These are tax records] [Financial Service Records: Checkbook, unused checks, Bank statements, canceled checks, Saving statements, Location information and number of safe deposit box]

A balance sheet is a listing of ____as of a certain date.

Your assets, liabilities, and net worth. [Your total income, assets, liabilities and net worth- Income is shown on the income statement. The balance sheet only include assets, liabilities, and net worth.

Housing records would include:

[Housing records: Lease(if renting) Property tax records Home repair, home improvement receipts

When you calculate____, you determine the difference between actual expenditures and expected (budgeted) expenditures.

a budget variance

When inflow are greater than outflow during a given period of time the result is a ___.

cash surplus

Debuts due within next 12 months would be classified as__liabilities, while debts that will come due in a period beyond the 12 months would be categorized as ___-term liabilities.

current, long

Cash flow is the ___ of case during a given period of time.

inflow and outflow

Current(shot-term) liability include:

medical bills and credit card balances

All of the following will increase net worth, except:

taking $1,000 cash from your liquid assets and paying down $1,000 of debt [If you reduce your assets by the same amount that you debts, your net worth will remain unchanged.

People create budgets to help them:

-spend money wisely -prepare for emergencies -live within their income -reach their goals

To keep an eye on changes taking place in your financial situation, you probably need it calculate financial___. This is found under financial planning calculations.

ratios

When comparison shopping, you can incur an opportunity cost because:

you spend time and time is money

Which of the following can help you establish an adequate saving account?

-Having saving deducted and automatically deposited into a saving account from each paycheck -Save coins in a jar at the end of each day for deposit at a future time into a saving account -Write a check each payday to deposit into a saving account. -Save between 5% and 10% of each paycheck

Which of the following statements are correct about the various types of budgeting systems that an individual can use to create, implement, and monitor a budget?

A computerized budget can be done in MS Excel. Quicken is a software package that can help you with budgeting. A physical budget could involve placing money in envelopes. A mental budget exist only in our mind.

True or false: Financial goals should be realistic, measurable, have a time frame,and imply the type of action to be taken.

True

True or false: If last year your debt ratio was 1 and this year it is 0.25, that is good news.

True

True or false: The advantage of a mental budget is that it is simple while the drawback is that it can be forgotten.

True

True or false: The amount you budget for various items will depend on your current needs and plans for the future. This is found in the discussion of budgeting fixed expenses.

True

True or false: The size of your household and the ages of its members affect your lifestyle and spending priorities.

True

The balance sheet is a personal financial statement that shows:

what you owe and owe as of a certain date

Which of the following provide an accurate explanation of net worth?

Assets minus liabilities

True or false: The basics of money management include storing and maintaining your records, creating financial goals, and creating a budget.

False [While goals are important, the second activity is actually creating a personal financial statements].

True or false: If the liquidity ratio is 7, that means you have 7 weeks of expenses saved in your liquid assets.

False [7 months]

True or False: Insolvency is defined as having adequate liquid assets.

False. [Insolvency is the inability to pay your bills as they come to due because your liabilities exceed your assets]

Common types of real estate held by individuals include (found in discussion of real estate under listing items of value)

Homes, condominiums, vacation properties, and land

Based on the following data, calculate the debt ratio and select the correct answer. Data: liabilities = $10,000; liquid assets = $3,000; monthly credit card payments = $300; monthly savings = $200; net worth = $50,000; take-home pay = $1,100; and gross income = $1,900.

Liabilities divided by net worth 0.2

Which of the following are NOT records filled under consumer purchases and automobile records? This is found in an exhibit on where to keep financial records.

Personal budget Credit Card [Consumer purchases and automobile records: Warranties Receipts for manuals for major purchases Owner's manual for major appliances Automobile service records Automobile registration Automobile owner's manual]

Which of the following are the basic major money management activities?

Preparing personal financial statements Creating and implementing a plan for saving Storing and maintaining personal financial records

Which of the following is an example of personal and employment records? This is found in the exhibit on where to keep your financial records?

Resume, employee benefit booklet, and social security card [Personal and Employment Records: -Current resume -Employee benefit information -Social Security numbers -Birth certificates]

Which of the following are common sources of income?

Self-employment business income. Gifts, grants, and scholarships. Amounts received from pension and retirement programs. Wages, salaries, and commissions. Savings and investment income (interest, dividends, rent). Government payments, such as Social Security, public assistance, and unemployment benefits. Alimony and child support payments.

Which of the following statements are true about a balance sheet that you are reviewing on 1/15/2018 that shows an "as of" date of 12/31/2017 and assets of $600,00 and liabilities of $425,000?

The net worth is $175,000 as of 12/31/2017

True or false: When saving for a specific goal, you can choose a lump-sum amount or periodic deposits that will grow to the desired amount.

True [Both methods of saving will work, if done properly, to help you reach your financial goal.

True or false: The statement of cash flow is a summary of cash receipts and payment for a given period.

True [Cash flow statements show the inflows(receipts) and outflows(payments).

Which of the following action may be combined to help families save a significant amount of money each month.

Adopting wise grocery shopping habits Switching to a less-expensive phone plan Paying less taxes each month and saving monthly rather than waiting for refund Monitoring energy usage and use less when possible [Household can save money each month by cutting insurance costs, adopting wise grocery shipping habits, using less energy, switching to a less expensive cable or phone plan, and avoiding the fees and high payment that come with debt. They can also choose not to receive a tax refund at the end of the year and, instead, have less taxes withheld every month. These actions may end up saving households an additional $500 a month or more.]

Which of the following are money management records? This is found in the exhibit on where to keep you financial records.

Budgets, financial statements, and a list of financial goals. [Money Management records: -Current budget -Recent personal financials statements(balance sheet, income statement) -List of financial goals -Lost of safe deposit box contents

True or false: Tax records include pay stubs. W-2 forms, receipts of justify tax deductions, and copies of past income tax returns.

True [Tax Records: Paycheck stubs, W-2 forms, 1099 forms Receipts for tax-deductible items Records of taxable income Past income tax returns and documentation]