Which of the following financial statements provides a
snapshot of the client's net worth at any given point in time,
usually at the end of a calendar
... [Show More] year?
1 Personal tax return
2 Cash flow statement
3 Net worth statement
4 Statement of financial position - ...ANSWER...3-4
A statement of financial position, also known as a personal
balance sheet or net worth statement, provides a snapshot of
the client's net worth at any given point in time, most often at
the end of a calendar year.
Which of the following statements regarding a financial
planner's analysis of a client's cash flow statement is
CORRECT?
1 The analysis of the client's cash flow statement can help the
planner determine whether the client is living within his
financial means.
2 The analysis of the client's cash flow statement helps
determine the client's net worth, or total cash surplus, by
tracking cash inflows and outflows over a period of time.
3 Typically, the financial planner will encourage the client to
reduce the variable expenses reported on the cash flow
statement - ...ANSWER...1, 3
The analysis of the client's cash flow statement helps
determine the client's savings level, or total cash surplus, by
tracking cash inflows and outflows over a period of time. Net
worth is determined in a statement of financial position.
You have gathered the following information from Edgar's
financial statements:
Net income $75,000
Gross income $110,000
Total assets $190,000
Total debt $45,000
Consumer debt $20,000
Based on this information, which of the following statements
is CORRECT?
1 Edgar's total debt ratio exceeds the generally recommended
maximum.
2 Edgar's consumer debt ratio exceeds the generally
recommended maximum. - ...ANSWER...all
It is generally recommended that total debts do not exceed
36% of gross income. Edgar's total debt ratio is 40.9%, greater
than the 36% maximum ($45,000 / $110,000 = 40.9%). The
consumer debt ratio is the ratio of consumer debt payments to
net income. Edgar's consumer debt ratio is 26.67%, which
exceeds the generally recommended maximum of 20%
($20,000 / $75,000 = 26.67%)
Blake and Sarah have a monthly mortgage payments of $850
(principal, interest, taxes, and insurance [PITI]) on a mortgage
balance of $95,000 on their home. They have an auto loan
balance of $5,000, with monthly payments of $250.
Additionally, they have a credit card balance of $2,000, on
which they pay $225 each month. Blake and Sarah's net
income for the past year was $35,000. Their gross income was
$48,000.
Are Blake and Sarah using excessive amounts of debt? -
...ANSWER...No, because monthly house payments (PITI)
are less than 28% of gross income and total monthly debt
payments are only 33% of gross income.
Blake and Sarah are not using excessive amounts of debt.
Both ratios should be calculated using gross income.
Which of the following are considered fixed cash outflows?
1 Clothing expenses
2 Mortgage payments
3 Insurance premiums
4 Auto loan payments - ...ANSWER...2,3,4
Clothing expenses are a variable outflow because they
typically do not occur on a regular basis and the amount tends
to vary. The other choices represent fixed outflows because
they tend to occur regularly and the amount is more
predictable.
*** Peter, age 35, has requested your expertise in developing
a college funding plan for his five-year-old daughter, Brooke.
He has presented you with the following information.
Current annual salary—$115,000
Monthly mortgage payment—$1,700
Credit card debt—$3,000 (16.5% fixed)
Checking account balance—$1,345
Long-term group disability insurance—60% of salary to age
65, 60-day elimination period
Life insurance—1x salary (group), $400,000 20-year term
(individual)
After completing a budget with Peter, you have determined
that he has $350 per month in surplus cash flow. He tells you
he would like to use this amount to fund a college plan for
Brooke. Based on the information provided, what should Peter
do first? - ...ANSWER...Establish an emergency fund
At this point, Peter should use his surplus cash flow to
establish an emergency fund. He does not have access to
immediate cash, and, in the event of disability, he does not
have enough set aside to cover his elimination period. Paying
off his credit card debt, purchasing additional life insurance,
and establishing a college plan for Brooke should be
considered after establishing the emergency fund.
Mickey has decided he needs to increase the balance of his
emergency fund. Which of the following are ways Mickey can
save for this purpose?
1 Cancel his audiobook subscription.
2 Choose a more economical cell phone plan.
3 Use an overdraft feature on his debit cards.
4 Decrease the deductible on his automobile insurance policy.
- ...ANSWER...1-2
Using an overdraft feature on debit cards may entice Mickey
to spend money he does not have available in his account.
Decreasing insurance deductibles increases premiums, which
is not a savings strategy.
Aaron, a financial planner, has advised Macy that she needs to
increase her savings. What might you recommend as a good
savings strategy?
1 Limit the number of lattes she purchases.
2 Use an overdraft feature on debit cards.
3 Increase her deductible on her car insurance policy.
4 Limit her credit card purchases to those she can pay off in
full in one year. - ...ANSWER...1,3
Macy can use the money she saves by limiting the number of
lattes she purchases to increase her savings. Using an
overdraft feature on debit cards may tempt her to spend
money she does not have available in her account. Increasing
insurance deductibles decreases premiums, which is a good
savings strategy. If credit cards are used, they should be paid
off in full at the end of each month.
Over the years, Quinn has made timely payments on four of
his credit card accounts, all which have balances near the
available credit limits. He did pay off a fifth credit card
account, which he had for 20 years, and immediately closed it.
Which of the following statements regarding Quinn's credit
score is CORRECT? [Show Less]