Personal Finance Part 1
Because of inflation, the school supplies you bought for $20 last year now cost
$30 Chapter 1
The Accounting Equation states that
Assets = Liabilities + Equity Chapter 3
In January you made your final payment on your car loan and in July you got a small home equity loan to replace windows and add a deck. How would you classify these activities in your cash flow statement?
Financing Chapter 3
You report your individual income tax return on
Form 1040. Chapter 6
Ryan has a choice of paying cash or over time for a smartphone. What would be his opportunity cost of paying cash?
He would lose liquidity. He would lose income from savings. Chapter 2
You must pay income taxes on
IRA distributions. unemployment compensation. Social Security benefits. Chapter 6
Matt wants to see where his biggest expenses are and where he can best reduce expenses to increase his personal profit. Which kind of financial statement does he need?
Income statement Chapter 3
Which of the following assets do/does not reduce expenses but increase(s) income and store(s) wealth?
Investment Chapter 2
In which life stage(s) will you likely have high taxable income and many deductions, exemptions, or credits?
Middle adulthood Chapter 6
Erin needs additional memory and an external back-up drive for her computer but her resources are limited. Because there is a special price for the brand she wants, she decides to get the memory. What is her opportunity cost?
Not having the back-up drive Chapter 2
Which of the following individual situations often leads to a reduction of both income and wealth?
Retirement Chapter 1
If you had a budget surplus, which of the following choices would best increase that surplus?
Save and invest Chapter 2
Tariq's short-term goal is to purchase a car, but his current situation does not provide the means. Which of the following choices would most likely provide the greatest longer-term benefit with the least risk and the lowest cost?
Save for a car Chapter 1
Which of the following statements is true?
The liquidity of an asset affects its value. Chapter 4
A summary of income and expenses over a period of time is called
an income statement. Chapter 3
The PV of your future liquidity decreases
as r increases. Chapter 4
Common-size balance sheets shows each item as a percentage of
assets Chapter 3
Your can claim exemptions for dependents, including
children. elderly parents. disabled siblings Chapter 6
Banks that focus on operating cash flow management for businesses are the
commercial banks. Chapter 7
Assets create income through all the following ways EXCEPT
employment income Chapter 2
The value of assets is equal to the value of liabilities plus the value of
equity Chapter 3
The sum of each possible outcome's probability multiplied by its result is the
expected value of an event. Chapter 4
Individual factors that affect financial thinking include
family structure and health. career choice and age. Chapter 1
A loan structure that benefits lenders more than borrowers by minimizing interest rate risk is the
floating rate loan. Chapter 7
Making good financial decisions involves understanding
how the economy works. how financial decisions are made. how money flows through the economy. Chapter 2
Cash flows in the future are
illiquid Chapter 4
Income includes
interest and dividends wages or salary Chapter 2
Diversifying your savings in a series of instruments with different maturities is a strategy known as
laddering Chapter 7
Elements of family structure that affect financial planning include
marital status and dependents Chapter 1
The stocks in Wayne's investment portfolio lost value in the recession, but he also had CDs and a savings account. The effect of his investment diversification on his finances was to
reduce risk. Chapter 2
Taxable entities in the federal tax system include all of the following EXCEPT
tax-exempt entities. Chapter 6
Lenders determine their risk by assessing
the five C's. your credit score Chapter 7
In personal finance, assets are resources that can be used
to create income. to create liquidity. to satisfy or repay debts Chapter 3
When is the best time to get an education?
Before you sell your labor Chapter 2
Serena wants to see how her money from all sources came in and went out for all uses during each month of the past year. Which kind of financial statement does she need?
Cash flow statement Chapter 3
Of the following saving instruments, which is/are most likely to give you the highest price for your liquidity or the highest compensation for your opportunity cost and risk?
Certificates of Deposit Money market mutual funds Chapter 7
Cam wants to know how much larger his debts are than his assets and if he earns enough to afford the interest. What should he look at?
Debt to asset ratio Interest coverage ratio Chapter 3
Morgan's common-size balance sheet shows assets including a car, a savings account, and stocks representing about 50% of his assets' total value. How can he reduce his exposure to the risk of his stocks losing value?
Diversity his investments. Chapter 3
Taxes withheld from your wages or paid in advance include
FICA and Medicare. Chapter 6
The information you write on an application for consumer credit is used to determine your
FICO or credit score. Chapter 7
Sam wants to know if he can afford the debt he is carrying and, if so, how much leeway he has for assuming more debt. What should he look at?
Financial ratios Chapter 3
Ryan has a choice of paying cash or over time for a smartphone. What would be his opportunity cost of paying over time?
He would ultimately pay more. Chapter 2
Which life stage typically is best characterized by the following financial circumstances: decrease in expenses and spending needs, more leisure time, less reliance on earnings from employment and more on income from savings and investment, low risk tolerance?
Late adulthood Chapter 1
Which life stage typically is best characterized by the following financial circumstances: career building, family building, increased earning, increased spending, asset accumulation, desire to protect dependents and assets, decrease in willingness to assume risk?
Middle adulthood Chapter 1
Chance wants to know how big his income is for supporting his assets and relative to his net worth. What should he look at?
Net worth in relation to net income Total assets in relation to net income Chapter 3
Using your common-size income statement, you rank your expenses by size and discover that a surprisingly large percentage of your income is going to recreation. How can you use this information?
Re-allocate income. Make different lifestyle choices. Reduce recreation expense. Chapter 3
Which of the following individual situations typically leads to increased income needs, reduced risk tolerance, and greater need for future income protection?
Responsibility for others Chapter 1
Interest and dividend income is reported on
Schedule B. Chapter 6
Business income is reported on
Schedule C. Chapter 6
Rental and royalty income is reported on
Schedule E. Chapter 6
Megan's balance sheet shows that on February 7, 2010 she had assets totaling $27,600 and debts totaling $32,500. Which of the following statements best describes her situation?
She had negative net worth. Chapter 3
All the following terms describe the cyclical nature of market economies EXCEPT
Supply and demand Chapter 1
Which life stage typically is best characterized by the following financial circumstances: no dependents, few assets, little wealth, small income needs, high risk tolerance, focus on career development?
Young adulthood Chapter 1
In which life stage(s) will you likely have low taxable income and fewer deductions or exemptions?
Young adulthood Retirement Chapter 6
When your expenses are greater than your income you have
a budget deficit. Chapter 2
If an asset is worth more when you re-sell it than when you bought it, then you have
a capital gain Chapter 2
A comprehensive budget may include any of the following components EXCEPT
a cash flow statement. Chapter 5
To see what percentage of your total income is used for each expense you would create
a common-size income statement. Chapter 3
Cash or an asset that can be easily and quickly converted to cash is called
a liquid asset Chapter 2
A kind of annuity that consists of cash flows of equal amounts occurring at regular intervals and that continues indefinitely is
a perpetuity. Chapter 4
A period of declining productivity lasting less than half a year is called
a recession. Chapter 1
The PV or your future liquidity decreases
as t increases. Chapter 4
Storing wealth, creating income, and reducing future expenses are all uses of
assets. Chapter 2
A balance sheet is a list of
assets. debts or liabilities. equity or net worth. Chapter 3
Electronic options for withdrawals or payments include
automatic payments. debit and ATM cards Chapter 7
Seeing the effect of each financial transaction or event on your current situation is the purpose of
balancing your books Chapter 3
To avoid unwelcome adjustments, you should
be conservative in your expectations. Chapter 5
Robin uses her checkbook register to record and balance each cash flow, in and out, as it occurs. This activity is called
bookkeeping. cash accounting. Chapter 3
You are thinking of getting a $250,000 30-year fixed-rate loan at 6.5% interest, which would cost you a monthly cash outflow of $1,577. If you needed to reduce your monthly payment on this annuity, you would
borrow less and/or find a lower rate Chapter 4
With a line of credit you can
borrow money as needed, up to a limit. pay down each loan as desired. pay interest only on the outstanding balance Chapter 5
Understanding your current financial situation requires the ability to
calculate returns on investment. follow basic accounting procedures. create financial statements Chapter 3
A budget for long-term goals involving non-recurring items is called a(n)
capital budget. Chapter 5
The most common uses of debt by consumers are
car loans and home mortgages. Chapter 7
Financial advisors may assist through all the following services EXCEPT
career planning Chapter 1
Time affects liquidity through
cash flows. opportunity costs. uncertainty and risk. Chapter 4
Financial decisions to address needs of a dependent spouse, kids, or parents may include all the following except
changing to self-employment Chapter 1
A sales tax taxes your
consumption financed by income. Chapter 6
Factors to consider when deciding to borrow capital include
costs in relation to the asset's value. the risk of costs exceeding benefits. the interest rate, and time to repay Chapter 2
Information you need to protect from identify theft includes your
credit card and bank account numbers. driver's license and passport numbers. Social Security number Chapter 7
Personal financial planning software produces all the following kinds of reports EXCEPT
credit reports. Chapter 3
The budget process begins with a thorough understanding of your
current financial condition. financial statements. desires and choices. Chapter 5
Kinds of credit include all the following EXCEPT
debit cards. Chapter 7
The cost of credit stems primarily from
default risk. Chapter 7
The budget process begins with
defining goals and gathering data. Chapter 5
Time affects value by
discounting value. Chapter 4
Taxable individual income includes
distributions from trusts. stock dividends. interest from banks. Chapter 6
Separate filing statuses for reporting individual income tax include all the following EXCEPT
divorced. Chapter 6
A budget surplus most likely would enable you to do all the following EXCEPT
eliminate debt Chapter 2
When faced with uncertainty of an alternative that involves an independent event it is often helpful to be able to calculate its
expected value. Chapter 4
Micro factors to consider when developing your operating budget include changes in
family structure. health and age. Chapter 5
Shannon's monthly expenses exceed her monthly income. She has no way to increase her income just now, so her best choice to reduce her budget deficit is to
find ways to cut spending Chapter 2
If they find a discrepancy in your tax return, the IRS may
follow up by mail or personal interview. conduct a full audit. request verification. Chapter 6
After you pay taxes you should keep all your employment tax records
for at least four years. Chapter 6
The U.S. government offers tax deductions for all of the following items EXCEPT
gains from the sale of assets. Chapter 6
The appropriate time period for the budget process is based on
getting manageable and meaningful data. Chapter 5
Dylan earns $24,500 a year as an office worker. He pays $1,000 a month for rent, $300 a month toward his car, and his other expenses come to around $1,200 a month. Dylan
has a budget deficit. should reduce expenses Chapter 2
In financial planning the best strategy is to
have liquidity sooner rather than later. Chapter 4
Sources of income may be diversified by
having more than one employer Chapter 2
Your financial planning should reflect the realities of your career choice because your choice of career affects your
health and safety risks. salary and benefits. career duration. Chapter 1
The purpose of credit ratings is to estimate
how dependent you are on credit. whether you can afford to take on more credit. whether you pay your debts. Chapter 7
The timing of your budget process depends on
how much financial activity you have. how much financial discipline you need. how much financial data you generate. Chapter 5
Rachel trained to be an EMT but is entering the workforce at a time when EMTs are plentiful and not in great demand. In this case, she is
in a buyer's market. likely to find fewer, lower-paying jobs Chapter 2
Financial planning software exists for which of the following purposes
income and expense budgeting. mortgage repayment. managing retirement savings. Chapter 3
Paying for a home mortgage and children's education leads to greater
income needs Chapter 1
The taxes most relevant for personal financial planning are
income taxes. Chapter 6
As the risks of waiting for liquidity increase, the present value, and therefore the future value, of an annuity
increases Chapter 4
A better investment asset is one that
increases in value. creates a capital gain. stores wealth Chapter 2
Individual factors may affect all the following financial situations EXCEPT
inflation Chapter 1
The Consumer Price Index is a measure of
inflation Chapter 1
If you get into trouble with debt you should first
inform lenders and get debt counseling. Chapter 7
The cost of debt is
interest. Chapter 2
nvestments in assets may be diversified by
investing in a variety of assets. Chapter 2
An effect of deflation is that your money
is worth more and buys more Chapter 1
The value of a currency is based on
its usefulness in trade Chapter 1
Your time horizon for financial planning is
life long Chapter 1
Systemic or "macro" factors that affect financial thinking include all the following EXCEPT
life stages. Chapter 1
Alex realizes from his balance sheet that he could be facing personal bankruptcy within the year. He can prevent this from happening by
liquidating assets to pay creditors. achieving positive net worth. refinancing debt on different terms. Chapter 3
Examples of recurring expenditures are
living expenses. Chapter 5
Characteristics of financial advisors to look for include
manner of compensation. professional training Chapter 1
Financial management is significantly influenced by
microeconomic factors. macroeconomic factors. personal factors. Chapter 7
Tax advantages were created to encourage certain financial goals, including
mortgage interest deductions. defined contribution plans. education and health care savings accounts. Chapter 6
Income that is not taxed by the U.S. government and does not have to be reported as income includes all of the following EXCEPT
most distributions from pensions. Chapter 6
Taxes may be imposed on all of the following sources of wealth EXCEPT
most gifts. Chapter 6
To calculate your cash flow to income ratio (how much payments for investing and financing take from income), you would divide your net cash flow by your
net income. Chapter 3
Examples of annuities include all the following EXCEPT
one-time cash flows. Chapter 4
A budget for short-term goals involving recurring items is called a(n)
operating budget. Chapter 5
Buying capital means that you
own a proportion of an asset's gains or losses. have equity. Chapter 2
The value of your choices is affected by
personal and economic factors. the relationships of time and risk. Chapter 5
You can project recurring incomes and expenses using
personal financial history. new information and microeconomic factors. macroeconomic factors. Chapter 5
On a cash flow statement, each cash flow is shown as a percentage of total
positive cash flow. Chapter 3
The formula PV x (1+r) t = FV expresses the relationship between
present and future value. Chapter 4
When deciding on whether to receive cash flows over time or in a lump sum, you should consider
present value vs. future value. the rates at which time affects value Chapter 4
Personal finance is about all of the following processes EXCEPT
preventing exposure to risks. Chapter 2
You can project the impact of each alternative financial choice on your future finances by using
pro forma financial statements. Chapter 4
Future incomes and expenses can be projected for quantity and price on the basis of
probability. volatility. predictability. Chapter 5
If you pay proportionally more taxes due to the more income, you have then you are paying a
progressive tax. Chapter 6
The relationship between your financial statements and your budget is that together they allow you to
project the effects of your financial choices. Chapter 5
The purpose of pro forma financial statements is to show
projected future value. consequences of choices. scenarios for financial planning Chapter 4
Creating a budget involves
projecting realistic behavior. questioning your assumptions. reviewing your financial records Chapter 5
All of the following are examples of consumption taxes EXCEPT
property taxes. Chapter 6
Periods of contraction in the economy often lead to
reduced returns on investment. Chapter 1
Taxation that discriminates against the less affluent by decreasing the tax rate as the amount to be taxed increases is called
regressive Chapter 6
If you pay proportionally more taxes due to the less income you have, then you are paying a
regressive tax. Chapter 6
Credit cards have all the following benefits EXCEPT
reliance on cash. Chapter 7
The ability to delay payment for different items from different vendors, up to an amount limit, during a period of time is called
revolving credit. Chapter 7
Obtaining liquidity for your wealth creates
risk. opportunity costs. transaction costs Chapter 4
The cash budget's greatest value is in clarifying
risks and choices in the timing of cash flows. Chapter 5
Recurring incomes and expenses
satisfy lifestyle goals. Chapter 5
Calculating the future value of a series of cash flows is useful when
saving for college, a wedding, or retirement. planning for specific cash requirements in the future. deciding whether to save, reduce debt, or invest. Chapter 4
In addition to gross domestic product and rates of employment and unemployment, key measures of the health of an economy include all the following EXCEPT
savings and loans. Chapter 1
You should have at least one full year's worth of data on incomes and expenditures to see
seasonal variations. periodic items. monthly averages. Chapter 5
Tax deductions for non-discretionary expenditures include all of the following EXCEPT
self-employment taxes. Chapter 6
The cost of equity is
sharing the benefits of investment. Chapter 2
Financial planing depends on understanding the relationship between goals and
sources of income overtime Chapter 1
Your total income can be adjusted for all the following items, which the U.S. government feels should not be taxed, EXCEPT
state and local fax refunds. Chapter 6
An example of a non-discretionary expense shown on an income statement is
taxes. Chapter 3
Sources of tax information include
the IRS. employers, banks, or brokerages. professional tax preparers or software. Chapter 6
Buying stocks or corporate or government bonds is a way to invest in
the capital market Chapter 2
In financial planning, the numbers expressed in an income statement, balance sheet, and cash flow statement are assessments of
the current situation. Chapter 1
The present value of your wealth decreases proportionately to
the distance in time to its liquidity. the costs and risks of delayed liquidity Chapter 4
The study of risk and prediction of outcomes is based on
the dynamics of probability. the study of behavioral finance. the uncertainty of independent events Chapter 4
To calculate the present value of an annuity you need to know all the following EXCEPT
the future value of the cash flows. Chapter 4
The higher the lender's risk, then
the higher your cost of debt. Chapter 7
The present value of a series of cash flows is equal to the sum of
the present value of each cash flow. Chapter 4
If the demand for labor is greater than the supply, then
the price of labor is higher Chapter 2
Recurring incomes and expenditures must be evaluated in terms of
the reliability of the source. the frequency of the recurrence. the amount of the cash flow. Chapter 5
Common-size cash flows show the uses of cash as percentages of
the sources of cash. Chapter 3
The relationship between the passage of time and the value of assets is called
the time value of money. Chapter 4
The financial decision making process is complicated by all of the following factors EXCEPT
the use of information in planning Chapter 1
After identifying choices, the next steps in the financial planning process involve all the following calculations EXCEPT
the value of goals. Chapter 1
Bankruptcy occurs when
there is negative net worth. debts are greater than assets. Chapter 3
In financial planning, effective goals are
timely. specific and measurable. realistic and attainable. Chapter 1
The best uses of debt include all the following EXCEPT
to cover a budget deficit. Chapter 2
Comparing financial statements shows how cash flows were used
to increase assets. to decrease liabilities. to create positive cash flow. Chapter 3
Ways to eliminate a budget deficit are:
to increase income. to reduce expenses. to borrow. Chapter 2
The best way(s) to accumulate assets and increase your wealth is
to invest budget surplus. to have income greater than expenses. to protect your income. Chapter 2
To calculate your cash flow to assets ratio (how much cash flow supports assets), you would divide the value of your net cash flow by the value of your
total assets Chapter 3
On the balance sheet, each asset, liability, and net worth is shown as a percentage of
total assets. Chapter 3
To calculate your debt to assets ratio (how much asset value there is to satisfy your debt), you would divide your total debt by the value of your
total assets. Chapter 3
All of the following financial ratios should be greater or bigger EXCEPT
total debt. Chapter 3
On an income statement, each income and expense is shown as a percentage of
total income. Chapter 3
To calculate your net income margin to determine how much of your income goes to expenses, you would divide your net income by your
total income. Chapter 3
The probability of any one outcome for an event is always stated as a percentage of the
total outcomes possible. Chapter 4
Budgets can be prepared conservatively by
underestimating earnings. Chapter 5
Macro factors to consider when developing your operating budget include changes in
unemployment rates. price levels. Chapter 5
The time value of money is an important concept in
valuing a series of future cash flows. Chapter 4
Examples of recurring incomes are
wages or salary. interest or dividends Chapter 5
If your financial advisor is paid by commission rather than fee-for-service, then you should expect that the advisor will
want to sell you specific financial products. Chapter 1
Taxes may be imposed by all the following government jurisdictions EXCEPT
wards and precincts. Chapter 6
Your career choice will have the greatest impact on your
wealth accumulation. income Chapter 1
The U.S. government levies taxes on income from all of the following sources EXCEPT
welfare benefits. Chapter 6
The usefulness of a currency is based on
what it can buy. Chapter 1
To relate PV to FV you need to know
what the PV or FV is. when the FV will be. the discount rate. Chapter 4
To calculate the relationships between time, risk, opportunity cost, and value, you need to know all of the following variables EXCEPT
where the future cash flows will go. Chapter 4
Examples of non-recurring expenditures are
window replacements. Chapter 5
If you had a budget deficit, the best way to reduce it among the following choices would be to
work more Chapter 2
A good credit rating would be based on all the following criteria EXCEPT
you depend on credit for regular expenses. Chapter 7
Borrowing capital has all of the following consequences EXCEPT
you have equity. Chapter 2
Your credit score is determined primarily on the basis of
your credit history. Chapter 7
The existence of a budget variance indicates that
your estimate was inaccurate. factors changed unexpectedly. your budget needs readjusting. Chapter 5
Sources of information about your recurring incomes and expenditures include
your income statement. your cash flow statement. Chapter 5
Your savings strategy will be determined by your ability to predict
your need for liquidity. interest rates. the time value of money. Chapter 7
You tax rate is 15% and you have $350 of deductible expenses. You expect your income will increase in the next tax year but also that you will still be in the same tax bracket while your deductible expenses will double. What would be your tax savings in deductibles next year?
$105 Chapter 6
If you are in the 25% or higher tax brackets, your tax rate on long-term capital gains (on assets held more than one year) is
15%. Chapter 6
Margot has four uncertain choices and their weighted probabilities of happening with the expected result are 20%, 45%, 15%, and
20%. Chapter 4
