FI 460 Test One
Which of the following is true? a. Debt ratios measure the ability to meet short-term obligations. b. Liquidity ratios indicate how well a client manages debt. c. Ratios for financial security determine the progress that the client is making toward achieving short-term financial security goals. d. Performance ratios determine the adequacy of returns on investments given the risks taken.
D. Performance ratios determine the adequacy of returns on investments given the risks taken. Liquidity ratios measure the ability to meet short term obligations. Debt ratios indicate how well a client manages debt. Ratios for financial security determine the progress that the client is making toward achieving long term financial security goals.
Main categories listed on the income statement include income, savings contributions, assets, and expenses. True or False
False Assets are listed on the balance sheet, not the income statement.
If property is owned tenancy by the entirety or as community property then probate is avoided. True or False
False Community property does not usually avoid probate, but tenancy by the entirety and Joint Tenancy with Right of survivorship both generally avoid probate.
Long-term goal planning includes emergency funding, financial security planning, education planning, lump-sum purchase planning, and legacy planning. True or False
False Emergency funding is considered a short-term goal, along with debt management. All of the other planning subjects are included in long-term goal planning.
The income statement is a snapshot in time. True or False
False The balance sheet is snapshot in time, while the income statement usually represents a reporting period, typically a year.
The savings rate calculation includes reinvestments and the employer match. True or False
False The savings rate calculation includes savings plus employer match divided by gross pay
Examples of internal data include current interest rates, housing market status, job market status, local cost of living, and the expected inflation rate True or False
False These items are external data information which can be obtained from education and professional reading. Internal data includes the client's pertinent family information, insurance portfolio, banking, investment, tax, retirement, and estate planning information.
Investment assets are those assets that help to maintain the client's lifestyle. True or False
False This definition is for personal use assets. Investment assets are appreciating assets that are being held to accomplish financial goal(s). Investment assets include retirement accounts, brokerage accounts, education funds, etc.
Community property is an interest in property held by two or more related or unrelated persons. True or False
False This definition is for tenancy in common property ownership. Community property is for married individuals.
The client's balance sheet represents all income earned less expenses incurred for the period being covered. True or False
False This definition is for the statement of income and expenses (income statement). The balance sheet represents the items the client owns (assets), the items that are owed by the client (liabilities), and the difference between the two (net worth).
The cash flow statement captures recurring income and expenses for the period being reported. True or False
False This is the definition of an income statement not a cash flow statement. The cash flow statement explains how cash and cash equivalents were used or generated between two balance sheets.
The emergency fund ratio measures how many times the client can satisfy their short-term liabilities.
False This is the definition of the current ratio. The emergency fund ratio measures how many months of non-discretionary expenses the client has in cash and cash equivalents.
Common performance ratios include net worth to total asset ratio, return on investments, and return on assets. True or False
False. The net worth to total asset ratio is a debt ratio that measures. Another common performance ration is the return on net worth.
The metrics approach provides finite benchmarks for the financial planner to use as a comparison of client actual to client goal. True or False
False. While some benchmarks may be finite (HR1 and HR2) other benchmarks will vary based on the client's goals (savings rate) and age (risk tolerance for investment choices)
The cash flow approach adjusts the cash flows on the balance sheet by forecasting what they would be after implementing all client recommendations. a. True b. False
False. The cash flow approach adjusts the cash flows from the income statement for forecasting purposes.
The life cycle approach utilizes liquidity ratios to analyze the client's financial situation. True or False
False. The life cycle approach is a broad view of the client financial profile and is useful to focus on further financial discussions when the planner only has partial information. The financial statement and ratio analysis approach utilizes the liquidity ratios to analyze the client's financial situation.
Steve Stein, a local CFP® practitioner, recently met with one of his new clients, Merrell. During the course of the meeting Steve did the following things: 1. Steve did not meet with Merrell until 10 minutes after the scheduled start time. 2. In order to establish Merrell's confidence in him, Steve told Merrell the names of several well known clients that currently do business with him. 3. Steve asked Merrell several questions regarding Merrell's family situation, hobbies, and activities. Which of these actions would be considered inappropriate?
I and II
Which of the following would not generally be considered a short-term liability? a. An automobile loan b. Credit card bills c. Medical expenses d. Unpaid taxes
a. An automobile loan
You recently met with your client, Tripp, to discuss his insurance policies. Tripp was reading a book on contracts and wanted to know how his insurance contract related to the material he was reading and to his circumstances. During your conversation, Tripp made several statements to clarify that he understood insurance. Which of the following statements would you have told him was incorrect? a. An insurance contract is unilateral, where both parties agree to a legally enforceable promise. b. The insurance contract is aleatory, where unequal monetary values are exchanged. c. An insurance contract is based on the principal of indemnity, where the insured cannot make a profit from a claim on insurance. d. An insurance contract is a contract of adhesion, where the insured accepts
a. An insurance contract is unilateral, where both parties agree to a legally enforceable promise.
You are a relatively new financial planner. You have been working for an investment firm in the United States and have decided that you would like to add more credibility to your practice. Which of the following professional credentials would provide you with the most credibility since it is the oldest and best known? a. CFP®. b. ChFC. c. EFP. d. ICFP.
a. CFP®.
Craig's financial planner is preparing his balance sheet. Which of the following would not generally be considered "cash and cash equivalents?" a. Cash value in life insurance b. Money market account c. Certificate of deposit with a 6 month maturity d. Checking account
a. Cash value in life insurance
During your work with your new client, Brian, you created several visual representations of how your client spends his money. Which approach to financial planning are you utilizing? a. Pie Chart Approach b. Cash Flow Approach c. Financial Statement Approach d. Metrics Approach
a. Pie Chart Approach
During your recent meeting with Ron, a new client, you discussed the concept of risk. You defined several terms for Ron. Which of the following terms is defined as: the possibility of loss, but no possibility of gain? a. Pure risk b. Perils c. Risk transfer d. Open-perils
a. Pure risk
While meeting with your new client about his retirement needs you have made several assumptions regarding income growth, savings rate, inflation rates, and investment returns. You engage in the process of changing some of the key assumptions to determine the overall impact of those changes on the financial plan. What is this process called? a. Sensitivity Analysis b. Objectivity Analysis c. Monte Carlo Analysis d. Las Vegas Analysis
a. Sensitivity Analysis
Joe wants to purchase a life insurance policy on his own life. He is interested in learning about the various approaches to determine the amount needed. Which of the following is not true regarding the three most common approaches? a. The human life value method estimates the present value of income generated over a person's work life expectancy, after adjusting for the expected consumption of the survivors. b. The financial needs method evaluates the income replacement and lump-sum needs of the survivors after the insured dies. c. The capitalization of earnings method determines need by dividing the client's gross income by the risk-free rate of return. d. In practice, a financial planner would utilize all three methods and then determine the client's needs based on a combination of factors, including affordability.
a. The human life value method estimates the present value of income generated over a person's work life expectancy, after adjusting for the expected consumption of the survivors. I don't think it adjusts for the expected consumption of the survivors?
You recently met with your client, Don, age 40. Don is widowed and has one dependent child. During your meeting with him, you discussed the concept of risk management. Which of the following statements regarding the ways to manage risk is incorrect? a. The selling of Don's Jet Ski is an example of risk reduction. b. Not purchasing life insurance is an example of risk retention. c. Purchasing a warranty is an example of risk transfer. d. Insurance is not necessary for every risk of financial loss.
a. The selling of Don's Jet Ski is an example of risk reduction. Selling the jet ski is an example of risk avoidance
At the introductory meeting, the financial planner will collect data, come to understand the client's values and goals, establish the scope of the engagement, and discuss fees. True or False
True
Cash and cash equivalents are assets that are highly liquid and are either cash or can be converted to cash within the next 12 months. True or False
True
Debt ratios utilized in financial analysis include housing ratio 1, housing ratio 2, debt to total assets ratio, and net worth to total assets ratio. True or False
True
Forecasted financial statements should reflect recommendations and inflation adjusted income and expenses. True or False
True
Long-term liabilities represent client financial obligations that are owed to creditors beyond the next 12 months. True or False
True
Net discretionary cash flow represents the amount of cash flow still available after all savings, expenses, and taxes have been paid. True or False
True
Personal financial planning is the comprehensive process of formulating, implementing, and monitoring financial decisions that guide the client to achieve financial goals. True or False
True
Ratio analysis is the process of calculating financial ratios that are compared to example benchmarks for meaningful interpretation of the client's actual financial status. True or False
True
The client's income statement can be prepared from the client's W-2 information, credit card statement, and other billing statement information. True or False
True
The housing ratio 1 industry benchmark is less than or equal to 28 percent. True or False
True
The pie chart approach provides a pictorial representation of the balance sheet and the statement of income and expenses. True or False
True
The quality of debt assessment is based on the comparison of the term of the debt on an asset and the useful life of the asset. True or False
True
The savings rate benchmark is client goal oriented, while the investment assets to gross pay benchmark is client age dependent. True or False
True
The savings rate is measured to help clients achieve long-term goals including retirement funding, education funding, lump-sum expenditures, and legacy plans. True or False
True
The statement of net worth explains changes to net worth such as employer contributions to retirement savings accounts. True or False
True
The strategic approach is a needs versus wants directed financial plan based on the client's mission statement and goals. a. True b. False
True
The three areas the cash flow approach focuses on are the risk management, the debt management, and the savings and investment management cash flow areas of the client's financial planning. a. True b. False
True
The three-panel approach provides a plan for risk management of personal, property, and liability risks, along with both short-term and long-term savings True or False
True
The two-step approach considers savings and investments as part of the financial plan leading to financial security (and independence). True or False
True
Vertical analysis is a tool for financial statement analysis using a common size comparison of a statement's line items. True or False
True
Which of the following would not be considered a personal risk? a. Becoming disabled due to a car accident. b. Injuring a passenger in your vehicle during an auto accident that was your fault. c. Dying at age 42 given a normal life expectancy of age 80. d. Being diagnosed with a curable form of cancer.
b. Injuring a passenger in your vehicle during an auto accident that was your fault.
After meeting with your new client, Sid, you prepared his current financial statements. Which part of the financial planning process were you engaged in? a. Monitoring the plan. b. Establish and define the client relationship. c. Analyze and evaluate the client's financial status. d. Developing and presenting the financial plan recommendations.
c. Analyze and evaluate the client's financial status.
Jay purchased a new home for $100,000. He put $20,000 down and financed the $80,000 balance. What is the impact of this transaction on his net worth? a. His net worth increases. b. His net worth decreases. c. His net worth remains the same. d. The net worth will decrease with each mortgage payment made.
c. His net worth remains the same.
Nathan, age 35, came into your office today. He has been a client of yours for a long time. He has neglected his insurance portfolio up until this point and wants to complete the personal risk management process. Together you determine that his insurance objective is to "insure, in the most economical way, only those risks that have the potential of causing catastrophic financial loss." You also identified all of the possible risk exposures. In evaluating these risks, which of the following is true? a. Loss severity is the expected number of losses that will occur within a given period of time. b. Death is always financially catastrophic. c. Most, if not all clients, need health insurance. d. Perils are the proximate or actual cause of a loss that upon occurrence always lead to financial hardship.
c. Most, if not all clients, need health insurance.
Ginny and Max own a rental home on the Gulf Coast. They insured their property with their local insurance company. The policy provides protection against losses caused by perils that are specifically listed as covered in the policy. What type of policy do they have? a. All-risk policy. b. Open-perils policy. c. Named-perils policy. d. Identified-perils policy.
c. Named-perils policy.
Dustin Towns is a well-known financial planner in your area. His clients rave about how great he is and after meeting him you understand why. While describing him to your friend Jim, Jim wanted to know what was so great about financial planners in general. You responded with the following statement "One of the most important qualities a professional financial planner brings to the client/planner relationship is: ________________." a. Subjectivity. b. Empathy. c. Objectivity. d. Sympathy.
c. Objectivity.
Tom is interested in purchasing a personal liability umbrella policy (PLUP). He has asked you to educate him on this type of policy. Which of the following is true? a. PLUPs are very expensive. b. Most people do not need a PLUP. c. PLUPs are usually sold in million dollars of coverage. d. Since Tom owns a home and a car with no other assets other than clothing, dishes, etc., he does not need a PLUP.
c. PLUPs are usually sold in million dollars of coverage.
Which of the following property ownership regimes has a right of survivorship feature? a. Sole Ownership / Fee Simple b. Tenancy in Common c. Tenancy by the Entirety d. Community Property
c. Tenancy by the Entirety
A financial planner is currently preparing a client's cash flow statement. Which of the following would the planner classify as a financing activity? a. The purchase of a new residence. b. A contribution to a retirement account. c. A cash inheritance. d. Paying a credit card debt.
d. Paying a credit card debt.
David, 33 years of age, and Kristina, 34 years of age, are married with no children. They anticipate having children within the next five years. David and Kristina both have a graduate degree and student loans. They both have good jobs and earn about $110,000 together. They have mortgage debt of $190,000 on their home that is valued at $210,000. They have one car that they share that is not yet paid for and they anticipate buying a second car in the next year. They have no credit card debt. Which of the following is a likely current goal of the couple? a. Education funding b. Gifting c. Charitable gifting d. Retirement funding
d. Retirement funding
Which of the following statements concerning income and expenses listed on the Income Statement is correct? a. Charitable contributions are always a discretionary expense. b. Reinvested dividends is an example of income. c. Entertainment expenses is an examples of a fixed expense. d. Social Security taxes withheld is an example of a fixed expense.
d. Social Security taxes withheld is an example of a fixed expense.
Utilizing the three-panel approach, which of the following would be evaluated in Panel 1 - Risk Management? a. Emergency fund b. Education fund c. Retirement fund d. Life insurance
d. Life insurance
Lisa Cooper recently came to your office for her second appointment after receiving your engagement letter. During the meeting you collect several documents from her including her prior year tax returns, estate planning documents, and investment statements and history. You also worked with her on identifying her goals and objectives. Which of the following is the next step in the financial planning process? a. Establish and define the client relationship. b. Analyze and evaluate the client's financial status. c. Implementing the financial plan recommendations. d. Developing and presenting the financial plan recommendations.
b. Analyze and evaluate the client's financial status.
Your client, Tom, asked you to prepare his financial statements. He believes that his wife is the root of all their financial problems because of her spending habits. His wife, on the other hand, believes that most of their money goes to pay routine expenses like, house, auto, etc. Which financial statement will help them resolve this disagreement? a. Balance Sheet b. Income Statement c. Statement of Net Worth d. Statement of Financial Position
b. Income Statement The income statement details the income and expenses of the household. The balance sheet identifies the assets the family owns, liabilities and the family's net worth. The statement of net worth explains the changes in net worth between two balance sheets by reporting financial transactions that are not reported on the other statements. The statement of financial position is another name for the balance sheet.
Jennifer had a very bad year. She wrecked her car in January when she ran a red light (because she could not see properly having left her contacts at home) and crashed into another car completely destroying both cars. The insurance company was very nice to her and she purchased a new car with the insurance proceeds. Jennifer decided that since she had insurance, it really did not matter if she took proper care of her new car because she could always get a new one. Jennifer got in the habit of leaving her new car unlocked and it was stolen. After Jennifer bought another car, she decided that she really liked the insurance adjuster and wanted to see him again, so one day she purposefully set her car on fire. In her carelessness, she also caught her hand on fire. Jennifer was depressed over her circumstances and decided she did not want to go back to work. She filed a falsified disability claim for the loss of use of her hand (even though she could still use her hand). Which of the following statements is true? a. Driving with poor eyesight is not a hazard. b. Leaving the car unlocked is a morale hazard. c. Burning the car on purpose is a morale hazard. d. Filing a false disability claim is a morale hazard.
b. Leaving the car unlocked is a morale hazard.
Julie is a doctor that specializes in performing heart surgery on babies. She has a long-term disability policy that covers her in the event that she can no longer perform this type of surgery due to disability. What type of long-term disability policy does she have? a. Hybrid occupation b. Own occupation c. Any occupation d. Specific occupation
b. Own occupation
Nathan and Even (two brothers) are joint property owners. Nathan owns 60% and Evan owns 40%. How is this property owned? a. Sole Ownership / Fee Simple b. Tenants in Common c. Joint Tenancy d. Tenancy by the Entirety
b. Tenants in Common
Which of the following items of information is least likely to be obtained from your client during the data gathering portion of the client meeting? a. General attitude towards spending. b. The income tax bracket of your client's adult children. c. Employer sponsored employee benefits. d. Repayment term of outstanding debt.
b. The income tax bracket of your client's adult children.
Paul and Lucy Martin are married and both are 65 years of age. Paul is retired from the military and receives a military pension as well as disability benefits from an injury he sustained during the Vietnam War. Lucy is a retired nurse. Lucy is fairly healthy, although she is borderline diabetic. Paul is diabetic and had a triple bypass several years ago. He also has extensive hearing loss in one ear that he sustained during his military service. Both have a family history of Alzheimer's disease. Their home is paid for and they just purchased a new car with financing. They have three self-sufficient adult children and two grandchildren. The Martins have a life insurance policy on each of their adult children they purchased when the children were young with a death benefit of $10,000. All three policies have a cash value of $3,000 each. They also have policies on each other with a death benefit of $100,000. The Martins live comfortably with their pensions but do not have a lavish lifestyle or high net worth. Which of the following is their most important need/goal? a. They should immediately begin a gifting plan giving $13,000 to each child each year. b. They should investigate long-term care insurance. c. They should purchase additional life insurance immediately. d. They should purchase a disability policy on Paul.
b. They should investigate long-term care insurance.
Roy Al Pain has been a client of yours for several years. During that time, Roy has been rude to both you and your staff on numerous occasions. He has used profanities in front of your staff and other clients, thrown things, and screamed at your staff. You have tired of working with Roy and want to terminate your relationship with him. Which of the following is true? a. You must continue the relationship since only clients can end the client/ planner relationship. b. You should consult your engagement letter to determine your rights to terminate the relationship. c. You should start to offer subpar services to Roy in hopes that he will tire of you and end your relationship. d. You should bad mouth Roy in the community and hope it gets back to him so he will decide not to work with you anymore.
b. You should consult your engagement letter to determine your rights to terminate the relationship.
A client, Marie, age 35, came into a financial planner's office today. She provides the planner with the following information for the upcoming year: Income - $100,000 Principal and Interest payments on home mortgage - $14,000 Homeowners insurance - $1,000 Property taxes - $5,000 Living expenses - $40,000 Credit Card Debt payments - $12,000 Savings - $5,000 Student Loan Payments - $5,000 Car Payment - $6,000 When considering the targeted benchmarks, which of the following statements is the planner most likely to make during the next meeting? a. Both the basic and broad housing ratio are within the normal range. b. Both the basic and broach housing ratio are outside the normal range. c. The basic housing ratio is within the normal range, but the broad housing ratio is not. d. The broad housing ratio is within the normal range, but the basic housing ratio is not.
c. The basic housing ratio is within the normal range, but the broad housing ratio is not.
Zach and Laura recently purchased a new home. They came to your office to ask several questions about their homeowners policy. Which of the following is true regarding homeowners insurance? a. Most policies cover all possible losses. b. Most policies cover all possessions within the home. c. Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy. d. Broad peril coverage means the insurance company covers "all" perils.
c. Zach and Laura should probably have an open perils and replacement value for all property covered under the homeowners policy.
Erin purchased a life insurance policy on her own life. Her husband Mike is the beneficiary of the policy. Which of the following is not a necessary legal element of the contract? a. Offer and acceptance b. Legal competency of all parties c. Consideration d. Listed beneficiary
d. Listed beneficiary
Roger and Julie are married. Roger is a police officer and earns $50,000 per year. He contributes 10% of his salary to his retirement plan. His employer also makes a 5% match contribution. Julie stays at home with their children and contributes $5000 to an IRA. What is their total savings rate? a. 10.0% b. 20.0% c. 20.5% d. 25.0%
d. 25.0% 5,000 + 2,500 + 5,000 / 50,000
Josh, age 30, is a single father of one daughter, Nicole, age 11. Josh works for an advertising agency with an annual income of $40,000. Due to his messy divorce and several student loans that drain his financial resources, Josh lives paycheck to paycheck. His doctor recently discovered that he has high cholesterol and Josh is worried that his health may fail. He wants to purchase a life insurance policy to protect Nicole in the event of his untimely death (his employer does not yet offer a group plan). Assuming he wants to buy as much coverage as possible for the cheapest price, which of the following policies should he buy? a. A whole life insurance policy b. A universal policy c. A single premium whole life policy d. A 20-year term insurance policy
d. A 20-year term insurance policy
Which of the following is most likely to be an insurable risk? a. Intentionally burning down your house b. War c. Gambling losses d. An automobile accident due to negligence.
d. An automobile accident due to negligence.
Craig's financial planner is preparing his balance sheet. Which of the following would be considered an "investment asset?" a. A certificate of deposit with a maturity of exactly 1 year. b. The unvested portion of a pension plan. c. A vacation home. d. An education fund.
d. An education fund.
If a risk has a high frequency of occurrence and a high severity, you should: a. Transfer the risk. b. Retain the risk. c. Reduce the risk. d. Avoid the risk.
d. Avoid the risk.
Utilizing investment assets to gross pay benchmarks, which of the following individuals is likely on target with their investment assets? a. Jimmy, age 55, earns $150,000 a year and has invested assets of $900,000. b. Sarah, age 35, earns $30,000 a year and has invest assets of $15,000. c. Terry, age 45, earns $60,000 a year and has invest assets of $150,000. d. Casey, age 25, earns $40,000 a year and has invest assets of $9,000.
d. Casey, age 25, earns $40,000 a year and has invest assets of $9,000.
Your client, Jed, engaged you to help him with his financial situation. During the course of your meetings you sold Jed a $1,000,000 life insurance policy. Which part of the financial planning process were you engaged in? a. Analyze and evaluate the client's financial status. b. Monitoring the plan. c. Developing and presenting the financial plan recommendations. d. Implementing the financial plan recommendations
d. Implementing the financial plan recommendations