Deck 3: Financial Statement and Budgets: Where Are You Now and Where Are You Going

Question 1

Which of the following relationships is correct?

A)Liabilities = Net worth - Assets
B)Liabilities = Assets
C)Liabilities = Net worth + Assets
D)Net worth = Assets - Liabilities

Answer 1

Net worth = Assets - Liabilities

Question 2

Dave Scott bought a used car in early 2007 for $12,000.He borrowed $11,000,which he is repaying over four years.During 2007,he made payments of $3,600,of which $800 was interest and $2,800 was repayment of principal.Dave believes the car depreciated about $4,000 in 2007.Given the above data we can say that by the end of 2005 the car had

A)increased Dave's net worth by $8,200.
B)decreased Dave's net worth by $4,800.
C)increased Dave's assets by $12,000,increased his liabilities by $11,000,and increased his net worth by $1,000.
D)decreased Dave's net worth by $200.

Answer 2

decreased Dave's net worth by $200.

Question 3

Which of the following items would appear on a personal balance sheet?

A)A loan made on a life insurance policy
B)Interest paid on an installment loan
C)Interest received on a savings account
D)Premiums paid on a health insurance policy

Answer 3

A loan made on a life insurance policy

Question 4

For most individuals,which item below is an example of a lifestyle asset?

A)100 shares of IBM stock
B)$2,000 in a savings account
C)$10,000 vested interest in an employer's retirement plan
D)A new car

Question 5

Two kinds of noncurrent liabilities are

A)deferred liabilities and rescheduled obligations.
B)bills payable and credit card balances due.
C)co-signor agreements and bankruptcy judgments.
D)noncurrent portions of loans with repayment schedules and loans without repayment schedules.

Question 6

In relation to the balance sheet,an income statement shows

A)net worth,not the period's savings or dissavings.
B)the period's savings or dissavings,not net worth.
C)activities at a point in time,not over a period of time.
D)financial position,not financial performance.

Question 7

Current liabilities are often defined as those

A)payable immediately.
B)payable within one year.
C)payable over the same maturity as the asset they financed.
D)that can be liquidated without decreasing your existing net worth.

Question 8

The best description of an asset is

A)something you own that has market value.
B)something you either own or control that provides monetary or psychic income.
C)anything of personal value to you.
D)something you own that has market value and is clear of any debt obligation.

Question 9

Funds borrowed on a life insurance policy are shown on the balance sheet as

A)a current liability.
B)a noncurrent liability.
C)an offset to the value of the stock.
D)an offset to net worth.

Question 10

At the end of 2005,Phil had a net worth of $10,000.During 2008,he plans to save $2,000 and he also expects the market value of his assets to increase by 5%.If Phil's total liabilities were $4,000 at December 31,2007,his December 31,2008 net worth will be

A)$12,000.
B)$12,500.
C)$12,700.
D)$12,800.

Question 11

A liquid asset is most appropriately described as one that is

A)cash in a checking account.
B)cash or any other asset that is easily converted to cash with no loss in market value.
C)cash or any other asset that is marketable.
D)cash and all other assets except those specifically designated as retirement assets.

Question 12

Which of the following items would not appear on a personal balance sheet?

A)Jewelry
B)Credit card balances
C)Rent expense
D)A loan to a friend

Question 13

Kathy charged her groceries on her credit card.The cost of the groceries is now a

A)current liability.
B)noncurrent liability.
C)noncurrent asset.
D)current asset.

Question 14

An asset that influences the quality of your life is referred to in the text as a

A)lifestyle asset.
B)liquid asset.
C)current asset.
D)lifelong asset.

Question 15

Your personal balance sheet provides

A)an estimate of your net worth at a point in time.
B)an illustration of how your wealth has changed over time.
C)a summary estimate of your expenses and income over the previous year.
D)a pro forma budget for the coming year.

Question 16

Three years ago,Michelle bought a custom-made bookcase to fit in the corner of her apartment.She paid $1,000 for it.To replace it today would cost $1,500;however,if she had to sell it,she believes she could get only $700.The appropriate balance sheet amount for the bookcase is

A)$1,000.
B)$1,500.
C)$ 700.
D)$1,200.

Question 17

Which of the following relationships is correct?

A)Assets + Net worth = Liabilities
B)Assets + Liabilities = Net Worth
C)Assets - Net Worth = Liabilities
D)Assets - Net Worth + Liabilities = zero

Question 18

A personal income statement shows

A)a detailed breakdown of cash income and expenses over a past period of time.
B)a comparison of income and expenses at a point in time.
C)your contribution to savings for the year by following strict accounting rules for determining net income.
D)all revenue,expense,asset,liability,and net worth items.

Question 19

The most appropriate definition of a balance sheet is that it is a statement that shows

A)a balance between one's goals and resources available to achieve them.
B)a realistic balance between income and expenses for an upcoming period.
C)your wealth (net worth)as of a specific date.
D)how to balance your financial books of account.

Question 20

To be considered an investment asset,an item

A)must be purchased for the specific purpose of providing additional income or increasing net worth.
B)must be a stock,a bond,or a savings account.
C)must be intangible.
D)must be owned free and unencumbered by a loan.

Question 21

A positive contribution to savings can

A)increase both assets and net worth.
B)increase both assets and liabilities.
C)increase net worth only.
D)increase assets only or liabilities only.

Question 22

A simple yardstick to measure your annual income performance is to compare the annual inflation rate with your

A)percentage increase in nominal income.
B)percentage increase in real income.
C)percentage increase in nominal expenses.
D)percentage increase in real expenses.

Question 23

Jan showed the following financial items in 2007 and 2008:

In relation to 2007's savings,Jan's savings in 2008

A)decreased by $800.
B)decreased by $200.
C)increased by $200.
D)increased by $800.

Question 24

Rob's income was $20,000 in 2005 and $22,000 in 2006.If inflation was 6% in 2006,then we can say that Rob's 2006 income

A)simply matched the inflation rate.
B)fell behind the inflation rate.
C)exceeded the inflation rate by 4%.
D)lagged the inflation rate by 2%.

Question 25

In relation to the balance sheet or income statement,the budget

A)requires greater accuracy.
B)requires greater concern for financial goals.
C)is less concerned with planning.
D)is less important.

Question 26

People suffering from sticker shock probably have

A)overestimated their real income.
B)underestimated their nominal income.
C)overestimated inflation.
D)underestimated inflation.

Question 27

If your take-home pay is $30,000 annually and you have $15,000 in liquid assets and $5,000 in current liabilities,you have about

A)six months' of liquid reserves,which is good.
B)two month's of liquid reserves,which is poor.
C)four month's of liquid reserves,which is fair.
D)six years of liquid reserves,which is excessive.

Question 28

Dissavings can

A)decrease assets and net worth.
B)decrease both assets and liabilities.
C)decrease net worth only.
D)decrease assets only or liabilities only.

Question 29

If the rate of increase in the dollar value of your net worth equals the rate of inflation,then your

A)real net worth is unchanged.
B)real income is unchanged.
C)nominal net worth is unchanged.
D)nominal income is unchanged.

Question 30

The current average savings rate for all U.S.families is generally in the range of:

A)10 to 20%.
B)5 to 10%.
C)0 to 5%.
D)0 to - 5%.

Question 31

Which of the following statements might be considered poor advice in budgeting?

A)Set realistic budget goals.
B)Stick to simple procedures.
C)Use the budget primarily as a record-keeping device.
D)Use the budget to direct and control expenses.

Question 32

Stacey has a debt service coverage ratio of 1.15.This tells us that

A)Stacey's debt service charges are 1.15% of her take-home pay.
B)Stacey has virtually no debt to service.
C)Stacey has poor debt-carrying capacity and much of her future income will be required to service past debt.
D)Stacey's debt reserves are only 1.15 times greater than her actual debts.

Question 33

If your liquidity ratio is 1.50,you have

A)$1.50 in liquid assets for $1.00 of take-home pay.
B)$1.50 in liquid assets for $1.00 of current liabilities.
C)$1.50 in liquid assets for $1.00 of total liabilities.
D)$1.50 in liquid assets for $1.00 of total assets.

Question 34

Among other things,a well-planned budget

A)forces you to choose among competing activities.
B)plans for savings of at least 20% of your after-tax income.
C)must include many categories of income and expense items.
D)assures a positive savings each month.

Question 35

Your income less your expenses over the previous period represents

A)your contribution to savings
B)your net worth.
C)the reduction in your net worth.
D)your total savings.

Question 36

Which item below contains all inflexible expenses?

A)Rent,dining out,payroll taxes
B)Hobbies,clothing,vacations
C)Life insurance,health insurance,utilities
D)Auto loan payments,mortgage payments,auto insurance

Question 37

Jan showed the following financial items at the ends of 2007 and 2085:

Jan's net worth changed in 2008 by

A)+ $100.
B)- $700.
C)+ $400.
D)+ $800.

Question 38

Which of the following is an example of an inflexible expense?

A)Mortgage payments
B)Entertainment
C)Home maintenance
D)Newspapers and magazines

Question 39

Juanita has the following three ratios: (1)debt service coverage = 2.5, (2)debt ratio = 0.5,and (3)liquidity ratio = 0.8.We can say that Juanita has

A)poor solvency and poor liquidity.
B)strong solvency and strong liquidity.
C)strong liquidity but poor solvency.
D)strong solvency but poor liquidity.

Question 40

John Davis has a debt ratio of 0.25,which tells us that John

A)is insolvent since the ratio is less than 1.0.
B)could have $10,000 in total assets and $7,500 in net worth.
C)has 25% of his income allocated to reducing debt.
D)might have $2,500 in liquid assets and $10,000 in current debts.

Question 41

In extending an expense item for the current budget year,an often-used and useful approach is to

A)use last year's figure.
B)use the average of the last three years.
C)use last year's figure plus a usual 10% "fudge factor."
D)adjust last year's figure upwards by this year's expected inflation.

Question 42

The primary purpose of the monthly review and control is

A)to indicate future revised spending amounts,assuming some prior variances.
B)to revise action plans.
C)to identify family members causing unfavorable variances.
D)make sure the previous month's budget is balanced.

Question 43

The following two items are from Marcia White's "Dining Out" expense category:
(1)January monthly variance = $25 (favorable);
(2)February cumulative variance = -$10 (unfavorable).
If Marcia budgeted $85 a month for this activity,we know that she

A)spent $60 in January and $95 in February.
B)spent $60 in January and $120 in February.
C)can bring the activity back within budget by spending $85 in March.
D)has not budgeted properly.

Question 44

An asset is anything you own that has market value.

Question 45

For purposes of annual budgeting,it is better to

A)express goals very broadly to allow for flexibility.
B)ignore goals altogether and focus instead on savings.
C)express income goals concretely and expense goals broadly;this usually assures adequate savings.
D)express all goals concretely,which then reduces all goals to yearly consumption and savings targets.

Question 46

The master budget worksheet shows

A)forecasted income and expenses for the budget year.
B)month-to-month budget variances.
C)a reconciliation of this year's budget to last year's balance sheet.
D)all balance sheet and income statement accounts that relate to the annual budget.

Question 47

If some expense items are related to your income,and your income increases above budgeted amounts,you can expect

A)favorable variances in both income and expense accounts.
B)budgeted savings to remain about the same.
C)favorable income variances and unfavorable variances in related expenses.
D)savings will decrease.

Question 48

The main function of a balance sheet is to show your net worth at a point in time.

Question 49

A favorable income variance indicates a monthly income

A)equal to the budgeted monthly income.
B)greater than budgeted monthly expenses.
C)greater than budgeted monthly income.
D)greater than accumulated income variances.

Question 50

A liquid asset is any asset that can be sold quickly,even if such a sale results in a loss.

Question 51

Adding together all 12-month cumulative income and expense variances should equal

A)zero.
B)actual savings (or dissavings).
C)planned savings (or dissavings).
D)the difference between planned saving and actual saving.

Question 52

A savings account is an example of a liquid asset.

Question 53

Which item is not true with respect to simplifying the recording of income and expenses?

A)Use cash to pay bills whenever possible.
B)Code income and expense items on your check stubs and bank deposits.
C)Use bank-provided bookkeeping services,if they are available and reasonably priced.
D)Use a personal computer,if you own one.

Question 54

If a balance sheet is prepared correctly,assets plus liabilities equals net worth plus savings.

Question 55

If your assets increase from one year to the next,so must your net worth by an equal amount.

Question 56

Asset values on the balance sheet should reflect their acquisition costs.

Question 57

Which of the following statements is not true concerning the monthly income and expense plan?

A)Each month's expenses are planned not to exceed the month's income.
B)The year's expenses and income are detailed by each month.
C)Some monthly allocations are made by simply dividing the annual estimate by 12.
D)It may indicate the need for effective cash management.

Question 58

In preparing a balance sheet,you should list only those assets that you own outright;that is,free of debt.

Question 59

From a budgeting view,which of the following statements is not true concerning variances?

A)A favorable expense variance means the budgeted amount was more than actual.
B)Cumulative variance = current month's variance + variances of previous months.
C)Ideally,cumulative variances for the year will equal zero.
D)Ideally,cumulative variances for the year should have a positive value.

Question 60

The cumulative variable is equal to

A)favorable variances less unfavorable variances over the previous months.
B)favorable variances plus unfavorable variances over the previous months.
C)this months planned expenses less actual expenses.
D)this months actual expenses less planned expenses.

Question 61

A noncurrent liability is a debt obligation extending beyond one year.

Question 62

Funds invested in retirement plans are shown as liquid assets.

Question 63

Financial progress is measured more appropriately by an increase in net worth rather than by an increase in total assets.

Question 64

A loan associated with a margin account is classified as a current liability.

Question 65

A positive contribution to savings must lead to an increase in assets,a decrease in liabilities,or a combination of each.

Question 66

A loan on a life insurance policy is shown as a noncurrent liability even though the debt has no due date.

Question 67

For balance sheet purposes,the best definition of a liability is anything that impedes your financial progress.

Question 68

Liquid assets are less risky than investment assets.

Question 69

An automobile is usually an example of a lifestyle asset.

Question 70

Rent and life insurance expenses are examples of flexible expenses.

Question 71

Current liabilities are defined as past-due debt obligations.

Question 72

Cash flow changes in net worth can be positive or negative.

Question 73

Overdue bills are noncurrent liabilities.

Question 74

The sum of current and noncurrent liabilities is net worth.

Question 75

Flexible expenses are best understood as those expenses over which you have little or no control.

Question 76

The "bottom line" to a personal income statement is the contribution to savings figure.

Question 77

By definition,a lifestyle asset must depreciate over time.

Question 78

The primary functions of an investment asset are to increase your net worth and/or provide additional income.

Question 79

Common stocks are good examples of liquid assets.

Question 80

Market value changes in net worth arise from current period savings or dissavings.