final bus 122 exam 1 (ch 1-3)

timeline

A graphical presentation of cash flows.

Some taxpayers must make four quarterly installments. These are due on...

April 15, June 15, September 15, and January 15

liquid assets

Assets that are held in the form of cash or that can readily be converted to cash with little or no loss in value.

liabilities

Debts such as credit card charges, loans, and mortgages.

exemptions

Deductions from AGI based on the number of persons supported by the taxpayer's income.

estimated taxes

Tax payments required on income not subject to withholding that are paid in four installments.

Expansion periods tend to end with

a peak

Financial plans

are the road maps used on the journey to financial security.

A balance sheet has three parts

assets, liabilities or debt, and net worth.

The disadvantage of liabilities is that....

by law, the money must be repaid.

As you gather asset information, it is important to identify and record all assets. Regardless of asset category, all assets listed on the balance sheet should be recorded at...

fair market value

Economic growth is..

increasing production and consumption

Real property

is immovable property, such as land, and anything fixed to it, such as a house. In general, real property has a relatively long life and high cost. It may appreciate (or increase) in value (for example, your driveway or your condominium).

Active income

is income earned on the job, such as wages and salaries, bonuses and tips, and other forms of non-investment income (such as pension income and alimony received).

Asset acquisition planning

is one of the earliest financial activities you undertake in life. It involves the purchase of things we own, including tangible and financial assets, liquid assets, investments, and personal and real property.

Wealth

is the total value of all items owned by an individual or family, including tangible and financial assets. Therefore, wealth includes the value of home(s), personal belongings, car(s), and other tangible assets, as well as intangible assets like cash, checking and savings accounts, stocks, bonds, and other financial assets. Remember, it is possible that these assets may also have outstanding debts associated with them.

Monetary policy

is used to control the size of the money supply to stimulate or moderate business activity levels in the economy.

assets

items that one owns.

One good record-keeping tip is to prepare your financial statements at least...

once a year

Single taxpayers

unmarried or legally separated from their spouses by either a separation or final divorce decree

Fiscal policy

uses government spending and taxation to do the same

compounding

when interest earned each year is left in an account and becomes part of the balance (or principal) on which interest is earned in subsequent years.

With a filing extension in hand, a taxpayer must pay any taxes owed

when the extension request is filed

income and expense statement

which measures financial performance over a period of time.

As it is currently written, the U.S. tax code recognizes several types of taxable income, including...

•Active, or ordinary income •Passive income •Portfolio, or investment income •Tax-deferred and/or tax-free income

Key Steps in Record Keeping

•Compiling a budget •Pulling together an updated financial statement •Accessing your records in an emergency •Preparing your taxes •Preparing for an IRS audit •Defending a credit report

Government organizations have a significant role within the U.S. economy. Among the roles it fulfills are...

•Providing essential public services •Regulating economic activity •Employing consumers •Acting as a consumer of goods and services

How do businesses contribute to conditions in the economic environment?

-Businesses sell to consumers and government organizations, providing them with goods and services in return for monetary payments. To accomplish this, businesses transform the inputs to the production process provided by consumers (namely land, labor, equipment, managerial talent, and a willingness to take risks) into finished products and services. In return, consumers are paid money in the form of rent, wages, interest, and profits. -Businesses, or sellers are probably the most constrained participant in the economy because in the long term their choice of goods and services produced is dictated by the purchasing preferences of consumers and government organizations, or buyers. In addition, businesses are also constrained by the laws and regulations imposed by federal, state, and local government organizations.

If the federal government wants to decrease production and purchasing activity levels in the economy, which of the following policy tools could it use?

-Decrease the money supply. -Increase tax rates. -Decrease government spending

Which of the following are tasks included in the process of employee benefit planning?

-Ensure the availability of a minimum necessary level of protection and coverage should you or your spouse lose your employer-provided benefits. -Select the most appropriate benefits and plans. -Coordinate self-purchased policies and coverages with benefits provided by your and your spouse's employer.

Which of the following are important steps in financial record keeping?

-Ensuring that your family and/or executor can locate your financial documents and -Safely disposing of unneeded documents

Who are consumers and how do they affect the economic environment?

-Most people recognize that, as a group, consumers are the pivotal participants in the economy. The purchasing decisions made by consumers determine which goods and services will be produced by businesses, just as their investment and saving decisions will strongly influence conditions in the financial markets. -Another indication of the importance of consumers is the effect their collective spending has on the economic activity level observed in the economy.An increase in the level of consumer spending is usually credited with causing economic growth and all benefits or costs that go with it.

Personal financial statements

-are the umbrella under which important statements and reports reside. -Balance sheets and income and expense statements that serve as essential planning tools for developing and monitoring personal financial plans.

The expansion phase

-is characterized by the following attributes: businesses that are operating with higher levels of production activity, low unemployment, increasing retail sales, low or decreasing prices and interest rates, arising stock market, and expectations of higher business profits. OR -exhibits increasing amounts of business products and consumer purchases. However, because expansions can't continue forever, the economy reaches a peak level of activity and the next phase begins.

Six-Steps Financial Planning Process

1. Define financial goals 2. Develop financial plans and strategies to achieve goals. 3. Implement financial plans and strategies 4. Periodically develop and implement budgets to monitor and control progress towards goals. 5. Use financial states to evaluate the results of plans and budgets, taking corrective actions as required. 6. Redefine goals and revise plans and strategies as personal circumstances changes.

standard deduction

A blanket deduction that depends on the taxpayer's filing status, age, and vision and can be taken by a taxpayer whose total itemized deductions are too small.

Inflation

A steady and sustained increase in general price levels across economic sectors is called _____. This phenomenon is measured by the changing cost over time of goods and services that a typical household might purchase.

amended return

A tax return filed to adjust for information received after the filing date of the taxpayer's original return or to correct errors.

progressive tax structure

A tax structure in which the larger the amount of taxable income, the higher the rate at which it is taxed. -United States tax structure

Head of household

A taxpayer who is unmarried or considered unmarried and pays more than half of the cost of keeping up a home for himself or herself and an eligible dependent child or relative.

income shifting

A technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets

income taxes

A type of tax levied on taxable income by the federal government and by many state and local governments.

rule of 72

A useful formula for estimating about how long it will take to double a sum at a given interest rate.

Each step in completing a tax return

A-Gross income [all income subject to income taxes] B-Adjustments to (gross) income C-Adjusted gross income (AGI) D-Total personal exemptions E-Taxable income F-Tax credits G-Other taxes H-Total tax liability owed

adjustments to (gross) income

Allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses.

tax audit

An examination by the IRS to validate the accuracy of a given tax return.

net worth

An individual's or family's actual wealth; determined by subtracting total liabilities from total assets.

long-term liability

Any debt due 1 year or more from the date of the balance sheet.

current (short-term) liability

Any debt due within 1 year of the date of the balance sheet. Examples are: a washer/dryer loan due this year or this month's principal portion of a mortgage payment.

Individual tax filers must file their annual federal return no later than

April 15

investments

Assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service.

Savings Ratio=

Cash Surplus / Income after taxes

savings ratio

Cash surplus divided by net income (after tax); indicates relative amount of cash surplus achieved during a given period.

Employee Benefits

Consists of any non-monetary benefit provided by employers to employees. This form of compensation comes in a form other than wages, salary, commissions, or other cash payments. Employee benefits may include health, disability, and life insurance; retirement, pension, and profit-sharing plans; child and elder care; and/or educational assistance programs.

Steps to taxable income

Continuing from AGI, the taxpayer determines the allowable personal expenses incurred during the tax year. Based on the amount determined, the taxpayer can take the standard deduction or itemize deductions. Once deductions are taken against AGI, taxpayer exemptions are claimed to further reduce income. AGI, less deductions and exemptions, equals taxable income.

fixed expenses

Contractual, predetermined expenses involving equal payments each period. Examples are: mortgage payments, rent, contract cell phone fees, insurance, auto loans, and other installment-type loans.

open account credit obligations

Current liabilities that represent the balances outstanding against established credit lines.

tax credits

Deductions from a taxpayer's tax liability that directly reduce his or her taxes due rather than taxable income.

How might the characteristics of these two phases affect your efforts to manage your financial resources?

During the early stage of an economic expansion, finding a job generally tends to be easier, because manufacturers and retailers generate relatively higher levels of production and output.

Married filing separately

Each spouse files his or her own return, reporting only his or her income, deductions, and exemptions.

income

Earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets.

Which of the following is a principal tool used by government organizations to constrain the activities of businesses and consumers?

Enacting monetary policy

variable expenses

Expenses involving payment amounts that change from one time period to the next. examples include- groceries, clothing, utilities, entertainment, and medical expenses.

What role do government organizations play in the economic environment?

Federal, state, and local government organizations fulfill several roles within the economy. The following are roles provided by government organizations -Regulating economic activity -Employing consumers

Sale of a home

Homeowners receive special tax treatment on the sale of a principal residence. Single taxpayers can exclude from income the first $250,000 of gain ($500,000 for married taxpayers). To qualify, the taxpayer must own and occupy the residence as a principal residence for at least two of the five years prior to the sale.

tax deferred

Income that is not subject to taxes immediately but that will be subject to taxes later.

Personal property

Is moveable property, such as automobiles, recreational equipment, household furnishings, or collectibles. Personal property is a tangible asset that is used in everyday life (for example, your Rolex Submariner watch or your Ford F-150 truck).

The trough

Is the bottom of the contraction period and is another transition phase. The trough is the phase that occurs between the contraction and the expansion phases. Once the economy begins to improve with expanding levels of production and consumption, the trough ends and the expansion begins.

Business Cycle or Economic Cycle

Is the irregularly occurring wave-like pattern of economic activity, generally depicted as an undulating wave of expansions, peaks, contractions, and troughs. -describes the pattern of expanding and contracting business activity that an economy exhibits over a period of time.

Money

Is the medium of exchange used as a measure of the value of financial transactions. It is used to purchase goods and services and the utility (or satisfaction) that these goods and services provide.

Purchasing power

Is used to characterize the value of a currency by describing the number of goods and services that can be purchased by a dollar at a given time. Inflation tends to decrease this value; deflation, the opposite of inflation, tends to increase this value.

expenses

Money spent on living costs and to pay taxes, purchase assets, or repay debt.

In general, it is best to begin the six planning activities—asset acquisition, liability and insurance, savings and investment, tax, employee benefit, and retirement and estate—planning as soon as possible. However, at what age is it generally recommended that you begin your liability and insurance planning activities?

My early-20s

Real estate or limited partnership expenses

Passive income cannot be combined with portfolio or active income, and these expenses can be used only to offset the passive income to which they relate.

itemized deductions

Personal expenditures that can be deducted from AGI when determining taxable income.

Average Propensity to Consume (APC)

Refers to the percentage of each dollar of income, on average, that is spent on current needs and wants, rather than saved. For example, Mary's APC is 95%; on average, she spends $0.95 and saves only a nickel of every dollar earned. Or total consumption in a given period divided by total disposable income

federal withholding taxes

Taxes—based on the level of earnings and the number of withholding allowances claimed—that an employer deducts from the employee's gross earnings each pay period.

tax avoidance

The act of reducing taxes in ways that are legal and compatible with the intent of Congress.

equity

The actual ownership interest in a specific asset or group of assets.

fair market value

The actual value of an asset, or the price for which it can reasonably be expected to sell in the open market.

adjusted gross income (AGI)

The amount of income remaining after subtracting all allowable adjustments to income from gross income.

taxable income

The amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income.

Capital gains tax categories

The amount of tax to be paid on capital gains (for example, assets such as stocks are sold for more than their purchase price) is determined by the holding period of the asset. In 2014, assets held less than 12 months are taxed as ordinary income. For assets held more than 12 months , the capital gains rate ranges from 15 to 20%.

time value of money

The concept that a dollar today is worth more than a dollar received in the future.

taxes

The dues paid for membership in our society; a cost of living in this country.

insolvency

The financial state in which net worth is less than zero.

tax evasion

The illegal act of failing to report income or deductions accurately and, in extreme cases, failing to pay taxes altogether.

Federal Insurance Contributions Act (FICA, or social security)

The law establishing the combined Old-Age, Survivor's, Disability, and Hospital Insurance tax levied on both employer and employee.

discounting

The process of finding present value; the inverse of compounding to find future value.

average tax rate

The rate at which each dollar of taxable income is taxed on average; calculated by dividing the tax liability by taxable income.

marginal tax rate

The tax rate that you pay on the next dollar of taxable income.

gross income

The total of all of a taxpayer's income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes active, portfolio, and passive income. such as tax from wages, salaries, bonuses, commissions, interest, dividends, alimony received, business and farm income, gains on the sale of assets, pension income, annuity income, rental income, partnership income, prizes, lottery winnings, and winnings from gambling.

future value

The value to which an amount today will grow if it earns a specific rate of interest over a given period.

present value

The value today of an amount to be received in the future; it's the amount that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount.

Itemized deduction example

There are many examples of itemized deductions. Often taxpayers overlook these expenses when preparing their tax returns. The total amount plays a role in determining whether to take the standard deduction or to itemize deductions. Expenses include (but are not limited to) professional organization dues, cost of a safe deposit box, points paid on a mortgage or refinancing, financial management fees, personal property taxes on vehicles, unreimbursed job-related expenses, and certain types of clean-fuel or hybrid cars.

National and local tax services:

These include national services such as H&R Block and independent local firms. These services are best for taxpayers with relatively common types of income and expenditures.

Tax attorneys

These individuals are bar-certified lawyers who specialize in tax planning and related legal issues.

Certified public accountants (CPAs)

These individuals have taken an exam administered by the American Institute for Certified Public Accountants. A subset focuses on taxes and specializes in preparing returns and advising taxpayers on planning.

Enrolled agents (EAs)

This category comprises federally licensed individual tax practitioners who have passed a difficult, two-day, IRS-administered exam. They are fully qualified to handle tax preparation at various levels of complexity.

Tax liability

To determine the amount of tax owed, taxable income is based on the tax tables or tax rate schedules.

balance sheet equation

Total Assets = Total Liabilities + Net Worth OR What you own = What you owe + Your equity or net worth OR Net Worth = Total Assets - Total Liabilities

Liquidity Ratio+

Total Liquid Assets / / Total Current Debts

Debt Service Ratio =

Total Monthly Loan Payments / Monthly Gross Income

Solvency Ratio =

Total Net Worth / Total Assets

liquidity ratio

Total liquid assets divided by total current debts; measures the ability to pay current debts.

debt service ratio

Total monthly loan payments divided by monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly.

solvency ratio

Total net worth divided by total assets; measures the degree of exposure to insolvency.

Steps to AGI

When preparing a tax return, a taxpayer begins with gross income. Defined as all income subject to income tax, gross income is then reduced by adjustments. Adjustments are certain expenses and retirement plan contributions that are subtracted from gross income to arrive at AGI.

annuity

a fixed sum of money that occurs annually.

Ideally, keeping _____ will help you summarize all your transactions.

a ledger

cash basis

a method of preparing financial statements in which only transactions involving actual cash receipts or actual cash outlays are recorded.

budget control schedule

a summary that shows how actual income and expenses compare with the various budget categories and where variances (surpluses or deficits) exist.

Contraction periods end with

a trough

The purpose of most long-term savings activity is to...

accumulate funds for important and expensive expenditures and retirement

Liability acquisition planning

addresses how you are going to pay for your asset purchases using liabilities, or borrowed money.

cash deficit

an excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.

cash surplus

an excess amount of income over expenses that results in increased net worth.

Investments

are assets acquired to earn a return rather than to provide a service. These assets are mostly intangible financial assets (such as stocks, bonds, and mutual funds), typically acquired to achieve long-term personal financial goals. Rental property provides a service (rental income). Business ownership is also considered an investment (for example, your life insurance cash value or some partnership shares).

Liquid assets

are easily converted into cash, such as the balance in a checking or savings account.

Budgets

are forward-looking reports , which are based on expected income and expenses. These reports are used to monitor and control spending habits.

Liquid assets

are low-risk financial assets held in the form of cash or instruments that can readily be converted to cash with little or no loss in value (for example, a certificate of deposit maturing within the year or money orders).

Movable objects

are personal property, such as clothing or furniture.

Tangible assets

are physical assets, such as a car or house.

Immovable objects

are real property, such as land or the structures on it.

Financial assets

are return-earning assets and are held either to consume and use or to generate a return or income as an investment. An example of an intangible asset is stocks or bonds

Tax free investments

are so-called because the interest or other income paid to their owners is free of federal, and, perhaps, state taxes.

Adjustments

are taken against gross income and include certain employee, personal retirement, insurance, and support expenses. They are usually non-business in nature. Some examples include educator expenses, higher education tuition costs, IRA contributions, self-employment taxes paid, self-employment health insurance paid, penalty on early withdrawal of savings, alimony paid, and moving expenses.

Ledger has sections where data is recorded for what you own or your _____ ; what you owe or your _____ ; your cash inflows or your _____; and your cash outflows or your ____.

assets, liabilities, income, expenses

Investment expenses

cannot be combined with passive or active income, and these expenses can be used only to offset the portfolio income to which they relate.

The contraction phase

characterized by declining production and consumption, can worsen into a recession. However, when the contraction reaches its bottom, the economy enters the next phase of the business cycle.

Tax planning is...

closely related to savings and investment planning, because tax-reducing strategies often involve the use of tax-deferred or tax-free investments.

Savings and investment planning

considers the type and characteristics of the investment vehicles used to generate future investment income and returns, using both previously accumulated income and unspent income from the current period.

In the United States, the economy consists of three major types of participants which are

consumers, businesses, and government organizations which are each pursuing their unique goals and objectives.

Economic contraction is

declining production and consumption

Financial planning activities are conducted in a...

dynamic economic environment

In overseeing the economy, the goals of the federal government are...

economic stability and a high employment level.

Portfolio income

includes interest, dividends, and capital gains (on the sale of investments) generated from investment holdings. This category also includes income from savings accounts, stocks, bonds, mutual funds, options, and futures.

Personal financial planning requires you to engage in a variety of different planning activities...

including asset acquisition planning; liability and insurance planning; savings, investment, and tax planning; employee benefit and retirement planning; and estate planning.

Tax planning

involves evaluating your current and projected earnings and developing strategies that can legally defer and/or reduce your tax liability.

Employee benefit planning

involves selecting, coordinating, and managing employer-provided compensation that does not take the form of cash payments, such as wages, salaries, and commissions.

The peak phase

involves the economy transitioning from the expansion phase to the contraction phase. Because economies can't remain at their peak indefinitely, they eventually slow down and enter the next phase.

Financial planner

is a financial professional who provides financial evaluations and advice to individuals and families and who receives compensation in the form of commissions, fees, or some combination thereof.

Passive income

is a special category of income that includes earnings derived from real estate, limited partnerships, and other forms of tax shelters.

What is one of the first savings accumulations recommended by financial advisors?

is an emergency fund, which should contain three to six months' worth of income.

A balance sheet

is an outlines of one's financial position at a given point in time. Essentially, this statement is comprised of assets (things that are owned) less debts (things that are owed), resulting in an individual's net worth .

Taxable income

is defined as the amount of income subject to taxes. It includes all income subject to tax and subtracting adjustments, deductions, and exemptions.

Retirement planning

is designed to achieve and maintain your desired standard of living and quality of life after you stop working.

To achieve the best results, it is critical that you begin your retirement planning...

long before your retirement. Most Americans, however, don't start thinking about retirement until well into their 40s and 50s. The cost of this postponed planning is a substantially lower level of retirement income.

Married Filing Jointly

married couples who combine their income and allowable deductions and file one tax return.

The two principal policy tools that the federal government uses to manage economic conditions are...

monetary policy and fiscal policy.

Capital gains

occurs whenever an asset (such as a stock, a bond, or real estate holding) is sold for more than its original price. Additionally, capital gains are taxed at different rates, depending on the holding period of the asset.

Tax-deferred investments,

on the other hand, are allowed to postpone paying taxes on any returns generated by the investment.

Insurance planning

on the other hand, provides a way of reducing your financial risks and protecting your income and assets. Improper insurance planning can be expensive and can lead to unprotected possessions.

Qualifying widow or widower with dependent child

person whose spouse died within two years of the tax year (e.g., in 2012 or 2013 for the 2014 tax year) and who supports a dependent child may use joint return tax rates and is eligible for the highest standard deduction. (After the two-year period, such a person may file under the head of household status if he or she qualifies.)

Standard of living

refers to the material well-being and peace of mind that individuals and groups desire and seek to attain, to maintain if attained, to preserve if threatened, and to regain if lost.

Utility

refers to the satisfaction received from buying and using certain types or quantities of goods and services. Utility will result from consuming free as well as costly goods and services. A basic economic goal is to achieve the maximum amount of utility per dollar of income spent.

These benefits can include...

sick leave, vacation, and personal time; life, health, and disability insurance; tuition reimbursement programs; pension, profit-sharing, and 401(k) retirement plans; and flexible spending accounts (FSAs) for child care and health care expenses.

In some cases, up to six years from when a return was filed, taxpayers can be notified that they are subject to

tax audit

budget variance

the difference between the budgeted and actual amount paid out or received.

In general, it is desirable to increase...

the return earned on your invested funds (assuming you are not significantly increasing risk), to earn compound interest on your funds, and to reduce the fees associated with the accounts.

Estate planning

the second half of retirement planning, involves the method by which your wealth will be passed on to your heirs, often by way of wills, trusts, and gifts.

In general, your borrowing needs tend to...

to increase as you acquire additional and/or more expensive assets.