Module 6

A physical asset such as a high-definition, flat-screen TV on a Harley Davidson motorcycle is called a(n) A. tangible asset B. financial asset C. investment D. liability

A.

A plan for controlling and forecasting your cash inflows and outflows is called a(n) A. cash budget B. balance sheet C. income statement D. statement of changes in financial position E. none of the above

A.

A statement that records where your money has come from and where it has gone over some period of time is called a(n) A. income statement B. balance sheet C. statement of net worth D. none of the above

A.

A(n) _____________________ is a reserve or rainy-day fund with money set aside for unexpected expenses or when normal income has been disrupted. A. emergency fund B. umbrella fund C. risk fund D. resources fund

A.

According to the Keown​ book, an emergency fund consists of liquid assets that are sufficient to cover​ ________ of expenditures. A. 3 to 6 months B. 1 to 2 months C. 18 to 36 months D. 9 to 12 months

A.

According to the Keown​ book, the most popular personal financial management program for the PC is A. Intuit's Quicken B. Financial Peace C. Crown Financial D. MoneyGuidePro

A.

The term "fair market value" refers to A. how the price of an asset has changed since its original purchase B. what an asset will be worth at some point in the future C. what an asset could be sold for today D. what you paid when you purchased an asset

C.

When including an asset such as a car on your balance sheet A. list the amount it would cost to purchase a new model of this vehicle B. list the original price of the vehicle C. list its current value as indicated in a blue book or site like www.edmunds.com D. none of the above

C.

Which financial planning document should you use to measure your current financial​ condition? A. Income statement B. Budget C. Balance sheet D. Cash budget E. Statement of financial ratios

C.

Having negative net income every once in a while is not such a bad thing as long as you have planned for it.

True

In some cases insolvency can lead to bankruptcy.

True

The interest charge on your credit card statement should be listed on your personal income statement as a variable expense.

True

To calculate your net worth, subtract your total debt from your total assets.

True

Using financial ratios help you quickly compare and analyze the raw data found in your personal income statement and balance sheet.

True

Which of the following statements describes the importance of a budget? A. With a well-planned budget, money will seem to go farther and he will be able to do more with what he has B. A well-planned budget reduces a household's expenses while increasing its revenue C. A well-planned budget accurately matches a household's abilities with its financial goals D. A well-planned budget prepares someone for the future and the unforeseen events that the future holds

A, C, and D

Below are several people and their current ratios. If they were to lose their jobs today, which one would probably experience financial stress and pressures the quickest? A. Elmo has a current ratio of 0.5 times. B. Andy has a current ratio of 2.1 times. C. Dee has a current ratio of 1 time. D. There is not enough information to answer this question.

A.

How would an income statement help you create a financial plan? A. Determines whether you are earning more than you spend B. Spot potential areas of gambling C. Allows you to track future income D. Determines your net worth

A.

If the people below, with their respective current ratios, were to lose their jobs today, which one would have more time and more choices until he or she found another job? A. Rick has a current ratio of 2.5 times B. Christy has a current ratio of 0.85 times C. Andrew has a current ratio of 1 time D. There is not enough information to answer this question

A.

Suppose that you have been operating an online marketing business out of your​ home, and the business has recently expanded beyond belief. Since you have neglected your personal finances for some​ time, what would you do as a first​ step? A. Separate your personal finances from the business finances B. Combine your personal finances and business finances to save time C. Purchase a software program to handle both your business and personal finance at the same time D. Rent a separate office for your business activities

A.

Suppose that you wanted to calculate a financial ratio to measure your liquidity. You would most likely use the _________________ ratio. A. current B. savings C. long-term debt coverage D. debt E. none of the above

A.

The common thread among investment assets is that A. they are purchased for the purpose of generating wealth. B. they are purchased for​ one's personal​ use, like a vehicle or residence. C. they must be easily turned into cash with little or no loss in value. D. they provide the liquidity needed in case of an emergency.

A.

Which of the following would you calculate if you were concerned about your financial resources with regards to unplanned money​ emergencies? A. Current ratio B. Liability ratio C. Long-term debt coverage ratio D. Debt ratio E. None of the above

A.

Which type of expenditure would probably be hardest for an individual to track? A. Cash B. Direct deposits C. Checks written D. Credit card E. Automatic payments

A.

Your​ ________ is found by dividing monetary assets by current liabilities and is a good measure of liquidity. A. current ratio B. net cash flow C. net worth D. debt ratio

A.

An expenditure over which you have control and are not obligated to make, and which may vary from month to month is called a _________________ expenditure. A. vacillating B. flexible C. fixed D. liquid

B.

Assets that you purchase for the purpose of accumulating wealth to satisfy your financial goals are called A. monetary assets B. investment assets C. intangible assets D. all of the above

B.

Bradley went shopping today and used his American Express credit card to buy a new pullover sweater. He used his bank debit card to pay for a video game and bought some snack food with cash. Which of these purchases are difficult to track and monitor on his budget? A. The video games are difficult to track because he did not add a budget category for electronics B. The snacks are difficult to track because cash transactions don't leave a paper trail C. The pullover sweater is difficult to track because it costs more than what he budgeted for clothing this month D. Both A and B

B.

If your liabilities are greater than the value of your assets you are considered A. unbalanced B. insolvent C. unstable D. bankrupt

B.

Which of the following would be included on a personal income statement? A. Your 401(k) balance B. Making a payment to your credit card company C. Buying a flat-screen TV on credit D. All of the above

B.

Your financial situation is insolvent when A. your net worth is positive B. your assets are less than your liabilities C. your debt ratio is too high D. your expenses exceed your income

B.

Your net worth, or your general level of financial worth, is found by A. dividing monthly debt (less a mortgage payment) by monthly income B. subtracting your liabilities from your assets C. subtracting current liabilities from monetary assets D. subtracting your expenses from your income E. dividing your monetary assets by your current liabilities

B.

_____________________ planners charge a fee that is reduced by the amount of the commissions they earn. A. Fee-and-commission B. Fee-offset C. Fee-only D. Commission-based

B.

_______________________ can be more than or less than the price you paid for a given asset, depending on what others are willing to pay for that asset today. A. Net value B. Fair market value C. Sentimental value D. Intrinsic value

B.

The first section of a balance sheet represents your A. net worth B. financial goals C. assets D. liabilities

C.

An expenditure over which you have no control, are obligated to make, and is generally at a constant level each month is called a ______________________ expenditure. A. discretionary B. stationary C. fixed D. flexible E. none of the above

C.

Items on the balance sheet that represent amounts owed to others are termed A. expenses B. revenues C. liabilities D. assets E. none of the above

C.

Liabilities are best described as A. intangible obligations. B. monetary items of value that you own. C. financial debts and obligations that you owe. D. assets that depreciate over time. E. your net worth.

C.

Suppose that you were trying to determine how much income was available for future monetary needs as well as for investments. Which of the following ratios would you most likely use? A. Current ratio B. Debt ratio C. Savings ratio D. Total asset turnover E. None of the above

C.

The current ratio is a measure of liquidity that reflects A. the portion of your total liabilities that are considered current liabilities B. how many current assets you own free and clear C. how many times can you pay off your current liabilities by using your liquid assets D. your debt payments for the current period

C.

A personal income statement is prepared A. on an accrual basis B. on a cash basis C. based on actual cash flows D. Both B and C

D.

A strong record-keeping system allows you to A. know where you're spending your financial resources B. know exactly how much you're spending C. track expenses D. all of the above

D.

According to the Keown book, which Web-based personal financial planning website is known as "the best free way to manage your money?" A. WSJ.com B. YahooFinance.com C. Levelmoney.com D. Mint.com

D.

An expenditure over which you have no control and are obligated to make is a A. contractual expenditure B. repeating expenditure C. long-term expenditure D. fixed expenditure E. constant expenditure

D.

An expenditure that you can control over time and that you can manage is a(n) A. adjustable expenditure B. fixed expenditure C. short-term expenditure D. variable expenditure E. constant expenditure

D.

Planning and budgeting requires A. financial restraint B. discipline C. control D. all of the above

D.

What would happen to your net worth if you sold a tangible asset you owned for $1,000 and used the money to pay off your credit card balance for $1,000? A. Since your liabilities decreased, your net worth would increase by $1,000. B. Since your assets decreased, your net worth would decrease by $1,000. C. Your net worth would increase by $500. D. Your net worth would remain the same.

D.

Which of the following is the best type of record-keeping system to use in maintaining financial records? A. Computer software B. Apps C. Manual method with pencil and notebook D. All of the above

D.

Which of the following items would NOT be included on a balance sheet? A. Automobile loan balance B. Balances owed on your credit card(s) C. Student loan balance D. Mortgage payment paid E. Balances owed on your utility bills

D.

Which questions do financial ratios help you answer? A. Am I saving as much as I think I am? B. Do I have adequate liquidity to meet emergencies? C. Do I have the ability to meet my debt obligations? D. All of the above E. A and B

D.

Your ___________________ is found by dividing total debt or liabilities by total assets. A. net worth B. asset ratio C. current ratio D. debt ratio

D.

Your​ ________include cash, checking and savings account​ balances, and money market funds. A. physical assets B. tangible assets C. investment assets D. monetary assets

D.

From the Keown​ book, you have learned that a budget A. can be simple or sophisticated B. includes both actual and estimated expenses C. is a plan for controlling cash inflows and outflows D. is a process of setting spending goals for the upcoming month or year E. all of the above

E.

Hector's month's living expenses covered ratio is 0.25 months. He just broke his leg and will not be able to work for six weeks. Without a paycheck for six weeks, what will Hector most likely experience? A. He may have to borrow some money to keep current on his monthly bills B. He doesn't have to worry because he has plenty of money in his savings accounts C. He may have to liquidate some of his tangible or investment assets to keep current on his monthly bills D. There is not enough information to answer this question E. Both A and C are realistic possibilities

E.

Jorge has a debt ratio of 37 percent and Jose has a ratio of 102 percent. They both have the same take-home pay every month. How can we describe their current financial situation? A. Jorge probably has more money available to enjoy every month. B. Jorge is currently solvent. C. Jose is currently insolvent. D. Jose probably doesn't have much money available to enjoy every month. E. All of the above

E.

Practical uses of an income statement include A. knowing where your money is going B. determining if money is available for saving or investing C. spotting problem areas of overspending D. determining whether you are spending more than you earn E. all of the above

E.

The purpose of using financial ratios is to A. save space on your financial statements B. share your financial figures with your advisors C. better understand how you are managing your financial resources D. help analyze your raw data to compare how well you are doing E. both C and D

E.

Under what conditions should people hire a professional financial planner? A. When it is apparent their financial planning skills are limited B. When they start receiving their late payment penalties from their creditors C. When they need someone to improve or validate the plan they prepared themselves D. When they run into complex tag or legal issues E. All of the above

E.

When measuring your current financial health it is important to create A. positive net income B. a personal balance sheet C. an income statement D. positive net worth E. both B and C

E.

Which of the following are not typically found on a balance​ sheet? A. Home's current market value B. Mortgage interest payments C. Monetary assets D. Interest earned on a CD E. Both B and D

E.

Which of the following financial documents would you use to create a financial plan? A. Income statement B. Balance sheet C. Budget D. Cash budget E. All of the above

E.

Which of the following is a relevant question to ask a financial planner? A. Would you show us a similar financial plan you have done for someone else? B. Would you provide us with references? C. Will you provide us with a written estimate of your services and their cost? D. What are your credentials and professional designations? E. All of the above

E.

Which of the following might be found on an income​ statement? A. Interest and dividends B. Wages and salaries C. Income taxes paid D. Payroll taxes paid E. All of the above

E.

A debt ratio is aimed at determining if you have adequate liquidity to meet emergencies.

False

A vehicle leased in your name is an example of a tangible asset that you would list on your balance sheet.

False

An emergency fund, or rainy-day fund, is comprised of liquid assets sufficient to cover 3.5 years of expenditures.

False

As long as a financial planner is certified you need not worry about his ability to provide you with the correct financial plan for your situation.

False

Commission-only planners charge fees and collect commissions on products they recommend.

False

Insolvency results from earning more than you spend.

False

Net income is used in calculating one's net worth.

False

The house that you are leasing from a landlord is an example of a tangible asset that you would list on your balance sheet.

False

The term "fair market value" refers how the price of an asset has changed since its original purchase.

False

To determine your net worth, subtract your liabilities from your positive net equity.

False

Interpret a current ratio.

Ojai and Kaya's current ratio is 4. The ratio tells Ojai and Kaya that their monetary assets could pay their current expenses 4.00 times. However, this ratio is not truly accurate since it does not include the monthly student loan payment. The student loan is not considered a current liability.

What does a debt ratio of 52% suggest?

The debt ratio suggests that 52% of Faith's assets are financed through borrowing. As is typical, her home represents the bulk of her liabilities as well as her assets. Over time, this ratio is likely to decline; however, an increasing trend would be cause for concern.

What does a long-term debt coverage ratio of 3 suggest?

The long-term coverage ratio of 3 exceeds the recommended minimum of 2.5, which implies that Faith could meet her mortgage and auto payments, her only long-term debt obligations, 3 times from her current income.

An income statement tracks the amount of money you have coming in and going out over some period of​ time, such as a month or a year.

True

What does Ed and Marta's saving ratio of 6.15% mean?

The ratio tells Ed and Marta that approximately 6.15% of their after-tax income is available for savings after expenses are paid.

Before you can hope to achieve your financial goals, you will need to first measure your current financial health and develop a plan and a budget.

True

A budget is a process of setting spending goals for the upcoming month or year.

True

A successful budget can only be derived from accurate record keeping.

True

According to the Keown book, Mint and Level Money are two of the best smartphone apps for tracking your spending and setting up a budget.

True

According to the Keown book, the median net worth for American families in which the head of the household is less than 35 years old is below $10,000.

True

An estimate of your anticipated after-tax income available for living expenses is commonly called take-home pay.

True

Current liabilities are those that can typically be paid off in full within 12 months.

True

The _________________ the number of wage earners in the household, the ____________ credit available, and the __________________ the stability of employment; the higher the emergency fund should be.

lower, less, lower