Deck 2: Developing Your Financial Statements and Plans

Question 1

An individual's auto loan payments are listed as an expense on the income and expense statement.

Answer 1

True

Question 2

If Jenny obtains a loan to purchase a car in June, the loan amount will be included as income for the month of June.

Answer 2

False

Question 3

An individual can maintain his or her personal financial statements using spreadsheet software.

Answer 3

True

Question 4

Financial plans provide direction to annual budgets.

Question 5

It is best to prepare your financial statements at least once a year, ideally when drawing up your budget.

Question 6

A cash budget uses short-term financial goals to help you reach long-term financial goals.

Question 7

Amit lists his gross salary in the income portion of his income and expense statement, and he includes the amount of his income taxes and Social Security taxes withheld from his paycheck in the expenses portion.

Question 8

An individual is said to have a balanced budget when his or her total income for the year equals or exceeds his or her total expenses.

Question 9

An income and expense statement provides a measure of financial performance over time.

Question 10

It is recommended that you maintain a ledger to summarize all of your financial transactions.

Question 11

Net income should be used when preparing an income and expense statement.

Question 12

A budget is a financial report that forecasts an individual's current income as a percentage of his or her past earnings.

Question 13

The best way to balance your annual budget is to increase borrowing to cover shortages.

Question 14

A cash budget has value only if you use it and keep careful records of actual income and expenses.

Question 15

Knowing how to prepare and interpret personal financial statements is a cornerstone of personal financial planning.

Question 16

The preparation of an income and expense statement is the first step in the personal financial planning process.

Question 17

Financial planning is necessary only if an individual earns a lot of money.

Question 18

The balance sheet shows an individual's financial condition as of the time the statement is prepared.

Question 19

Estimating expenses using actual expenses from previous years and tracking current expenses make the task of preparing a cash budget easier.

Question 20

The cash budget preparation process has four stages: forecasting income, forecasting expenses, categorizing expenses, and making adjustments.

Question 21

Which of the following is listed as an asset on an individual's balance sheet?

A) Bank credit card balances
B) Education loans
C) Outstanding medical bills
D) Checking accounts
E) Leased automobiles

Question 22

A budget helps in:

A) setting financial goals.
B) calculating discounted cash flows.
C) giving feedback on how close you are to reaching your long-term financial goals.
D) monitoring and controlling spending.
E) determining the value of assets.

Question 23

When Phil lists his house on his balance sheet, he should record its:

A) actual purchase price.
B) depreciated value.
C) insured value.
D) deferred price.
E) fair market value.

Question 24

Nominal interest rates are not adjusted for inflation.

Question 25

Which of the following statements regarding budgets is true?

A) Budgets are meant for poor people only.
B) Budgets need software to be effective.
C) Budgets are forward looking.
D) Budgets do not need to be revised.
E) Budgets provide long-term financial forecasts.

Question 26

Which of the following statements regarding a budget is true?

A) It shows the computation of the interest on a loan.
B) It is a schedule of personal investments.
C) It is a list of prepaid expenses.
D) It is a detailed financial report that looks forward.
E) It identifies your assets and liabilities.

Question 27

A detailed financial report used to monitor and control expenses is called a(n):

A) balance sheet.
B) profit and loss statement.
C) budget.
D) income and expense statement.
E) cash inflow.

Question 28

A balance sheet describes your:

A) financial position at a given point in time.
B) financial performance over time.
C) financial performance at a given point in time.
D) financial goals over time.
E) financial plans over time.

Question 29

A balance sheet provides a statement of one's financial:

A) position.
B) performance.
C) goals.
D) ratios.
E) history.

Question 30

A _____  is an example of a liquid asset.

A) fixed deposit of 3 years
B) savings account
C) tax
D) retirement account
E) car

Question 31

A(n) _____  is an example of a current liability.

A) auto loan
B) credit card balance
C) mortgage
D) education loan
E) furniture loan

Question 32

The income and expense statement measures your financial:

A) obligations that have been paid.
B) performance over time.
C) current position.
D) liquid assets.
E) long-term objectives.

Question 33

Investment assets are acquired to :

A) be used in our everyday lives.
B) increase productivity.
C) provide a service.
D) earn a return.
E) be easily converted to cash.

Question 34

Which of the following statements regarding budgets is true?

A) Budgets are detailed forward-looking financial reports based on expected income and expenses.
B) Budgets describe a person's financial position at a given point in time.
C) Budgets measure a person's financial performance at a given point in time.
D) Budgets describe a person's financial goals over time.
E) Budgets are historical documents that tell an individual how he or she has performed in the past.

Question 35

The best way to handle inflation in long-term financial planning decisions is first to consider the history of inflation.

Question 36

In a budget, "fun money" is for family members to spend as they like.

Question 37

A _____  is an example of a tangible asset.

A) house
B) patent
C) copyright
D) trademark
E) mortgage

Question 38

Future value calculations to estimate the funds needed to meet a goal take compounding into account.

Question 39

The three parts of an individual's balance sheet are his or her:

A) income, liabilities, and net worth.
B) assets, expenditures, and net worth.
C) assets, liabilities, and expenses.
D) assets, liabilities, and net worth.
E) income, liabilities, and assets.

Question 40

Which of the following statements regarding an individual's income and expense statement is true?

A) An income and expense statement describes your financial position at a given point in time.
B) An income and expense statement looks forward in time to control spending.
C) An income and expense statement identifies your financial goals.
D) An income and expense statement measures your financial performance over time.
E) An income and expense statement can be used to predict inflation and interest rates.

Question 41

When your assets exceed your liabilities, you:

A) are losing equity.
B) have a negative net worth.
C) are solvent.
D) are bankrupt.
E) have more real assets than investments.

Question 42

_____ will be listed as a liability on your balance sheet.

A) A money market deposit account
B) A checking account
C) Equipment
D) The cash value of a life insurance policy
E) An education loan

Question 43

Which of the following statements regarding liabilities is true?

A) Liabilities are generally classified according to maturity.
B) Most loans fall into the category of short-term liabilities.
C) Future interest payments are accounted for separately as long-term liabilities on the balance sheet.
D) All liabilities should be recorded on the balance sheet at their current fair market value.
E) Whether or not a liability must be repaid in the future depends on its source.

Question 44

_____ is an example of personal property.

A) Jewelry
B) A mutual fund
C) A corporate bond
D) A charge account
E) A certificate of deposit

Question 45

When your liabilities exceed your assets, you:

A) are bankrupt.
B) have growing equity.
C) have a positive net worth.
D) are insolvent.
E) have less real assets than investments.

Question 46

An income and expense statement includes:

A) income, liabilities, and net worth.
B) income, expenses, and cash surplus (or deficit).
C) expenses, net worth, and cash surplus (or deficit).
D) net worth, surplus, and profit (or loss).
E) savings, surplus, and profit (or loss).

Question 47

If your _____, your net worth on the balance sheet will increase from one period to the next.

A) liabilities increase and assets remain constant
B) liabilities increase and assets decrease
C) assets increase and liabilities remain constant
D) income and liabilities decrease
E) liabilities and expenses increase

Question 48

Which of the following portions of a mortgage loan is recorded as a liability on the balance sheet?

A) Interest only
B) Sum of the interest paid and the outstanding balance
C) Sum of the interest due and the outstanding balance
D) Outstanding principal portion only
E) Principal portion and interest paid

Question 49

Sam and his wife, Ann, purchased a home in Lubbock, Texas, in 1980 for $100,000. Their original home mortgage payment was $90,000. The house has a current market value of $175,000 and a replacement value of $200,000. They still owe $55,000 of their home mortgage payment. On their current balance sheet, their home will be reflected as:

A) a $200,000 asset for the replacement value and a $55,000 liability for the outstanding mortgage.
B) a $200,000 asset for the replacement value and a $90,000 liability for the original mortgage.
C) a $175,000 asset for the market value and a $55,000 liability for the outstanding mortgage.
D) a $175,000 asset for the market value and a $90,000 liability for the original mortgage.
E) a $100,000 asset for the purchase price and a $55,000 liability for the outstanding mortgage.

Question 50

I should record _____ on my income and expense statement for the period of January 1 to June 30.

A) an $800 refrigerator I bought on credit on May 30
B) an outstanding education loan account
C) jewelry I purchased with an arrangement to pay later
D) my checking account balance
E) the groceries I bought and paid for in June

Question 51

Sonny and Cher have a net worth of $35,000 and total assets of $200,000. If they have credit card purchases of $1,200 and unpaid bills of $1,000, what will their long-term liabilities be?

A) $115,000
B) $140,000
C) $142,200
D) $162,800
E) $165,000

Question 52

The total amount of salary you earn before taxes are deducted is your _____ salary .

A) gross
B) after-tax
C) take-home
D) net
E) liquid

Question 53

Your car has a market value of $4,000, while the balance of the loan against it is now $2,500. Your ownership interest in the car is:

A) $2,500.
B) $4,000.
C) $6,500.
D) $1,500.
E) $5,500.

Question 54

Which of the following statements regarding an individual's net worth is true?

A) It is the sum of an individual's current assets and his or her current liabilities.
B) It is the sum of an individual's take-home pay and his or her payroll taxes.
C) It is the difference between an individual's current assets and his or her current liabilities.
D) It is the difference between an individual's monthly income and his or her expenses.
E) It is the difference between an individual's total assets and his or her total liabilities.

Question 55

You record _____ on an income and expense statement.

A) the value of your stock portfolio
B) your installment loan balance
C) your checking account balance
D) your cash on hand
E) your insurance premiums

Question 56

Your _____ is an example of a liquid asset.

A) home
B) car
C) checking account
D) charge account
E) life insurance cash value

Question 57

Loans should be recorded as a liability on the balance sheet at their _____ outstanding balance.

A) original
B) year-end
C) average
D) current
E) beginning

Question 58

Which of the following is an example of real property?

A) Jewelry
B) A computer
C) An automobile
D) A garage
E) Office furniture

Question 59

You are solvent if your:

A) total liabilities exceed your total assets.
B) total assets exceed your total liabilities.
C) total assets exceed your equity.
D) total liabilities exceed your equity.
E) current liabilities exceed your current assets.

Question 60

You bought a $500 stereo on an installment plan and made two payments of $75 each during the year. On your income and expense statement for the year, you will show an expense of:

A) $150.
B) $575.
C) $650.
D) $500.
E) $75.

Question 61

A cash budget helps you:

A) monitor and control your finances.
B) analyze your financial position.
C) calculate your solvency ratio.
D) measure your net worth.
E) identify your long-term debt.

Question 62

Jacques's total monthly loan payments amount to $1,020, while his gross income is $3,000 per month. What is his debt service ratio?

A) 34%
B) 43%
C) 50%
D) 75%
E) 82%

Question 63

_____  are considered to be variable expenses.

A) Interest payments
B) Medical expenses
C) Rent payments
D) Insurance premiums
E) Cable TV fees

Question 64

When estimating income for the income and expense statement, you should:

A) use gross income.
B) include expected pay increases.
C) adjust expenses for inflation.
D) use net income less capitalized interest.
E) include the value of any assets purchased.

Question 65

A cash surplus on an income and expense statement prepared on a cash basis indicates that:

A) the net worth is equal to zero.
B) investments are less than the cash balance.
C) the payments on debts are not met.
D) total expenses are less than total income .
E) income and expenses are equal.

Question 66

Which of the following is one of the three stages in preparing a cash budget?

A) Calculating financial ratios
B) Forecasting expenses
C) Calculating depreciation expenses
D) Finalizing the balance sheet
E) Preparing the bank reconciliation report

Question 67

What can you do if your budget shows an annual budget deficit?

A) Liquidate investments to meet the total budget shortfall.
B) Increase low-priority expenses on the budget.
C) Invest more in real estate/personal estate.
D) Discourage additional borrowing.
E) Shift expenses from the surplus months to the deficit months.

Question 68

If your total assets equal $87,000 and your total liabilities equal $10,000, your solvency ratio is:

A) 11.5%.
B) 13.0%.
C) 77.0%.
D) 87.0%.
E) 88.5%.

Question 69

The liquidity ratio is designed to show the percentage of _____  you can cover with your current liquid assets.

A) current debts
B) current expenses
C) long-term debts
D) planned savings
E) planned purchases

Question 70

If your liquid assets equal $15,000 and your current debts equal $50,000, your liquidity ratio is:

A) 30%.
B) 70%.
C) 143%.
D) 233%.
E) 333%.

Question 71

Assume that your total income for the current year is $35,000. Your total expenses, including taxes of $5,000, are $30,000. Your savings ratio is:

A) 7.5%.
B) 10.0%.
C) 12.5%.
D) 13.3%.
E) 16.7%.

Question 72

If your statement of income and expense prepared on a cash basis shows a deficit, you have:

A) increased your debts.
B) liquidated your investments.
C) increased your savings.
D) taken a cash loan on your insurance.
E) sold some securities.

Question 73

A savings ratio calculated from an income and expense statement represents the:

A) percentage of gross income saved.
B) ability to cover immediate debt when there is an interruption in income.
C) percentage of after-tax income saved.
D) percentage of tax-deferred income earned annually.
E) percentage of asset value salvaged.

Question 74

There is a need for budget adjustments when:

A) income is stable.
B) account deficits and surpluses balance out.
C) account deficits are more than surpluses.
D) a new calendar year begins.
E) short-term financial goals are achieved.

Question 75

The best approach to solve the problem of an annual budget deficit is to:

A) liquidate more assets than required to meet the total budget shortfall for the year.
B) borrow funds on credit cards.
C) reduce flexible expenses for nonessential items.
D) reduce fixed expenses.
E) reduce high-priority expenses on the budget.

Question 76

In which of the following ways is an income and expense statement and a cash budget alike?

A) They are prepared on a cash basis.
B) They compare projected income to projected expenses.
C) They show an individual's net worth.
D) They describe an individual's financial position at a given point in time.
E) They are used as the basis for computing solvency and liquidity ratios.

Question 77

Total assets on your balance sheet are $6,000 and liabilities are $2,000. Your solvency ratio will be:

A) 30.2%.
B) 33.3%.
C) 67.7%.
D) 85.0%.
E) 75.0%.

Question 78

If your annual budget shows a deficit, you can  _____  to balance your budget.

A) increase your savings
B) increase your income
C) increase your expenses
D) increase your investments
E) purchase real property

Question 79

Which of the following ratios indicates your ability to pay current debts with existing assets that can be converted to cash quickly?

A) Solvency
B) Liquidity
C) Cash
D) Savings
E) Debt service

Question 80

Mike and Teresa have a monthly gross income of $5,000. They pay $1,000 per month toward taxes and $2,000 per month toward various loans. What is their debt service ratio?

A) 20%
B) 30%
C) 40%
D) 50%
E) 60%