Deck 2: Using Financial Statements and Budgets

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Financial plans provide direction to annual budgets.

Question 5

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

Question 6

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 expenditures for the year.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

Budgeting and record keeping are the same.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

_____ 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 22

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 23

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 24

A balance sheet describes your:

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

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 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 a specific period of time.
E)Budgets are historical documents that tell an individual how he or she has performed in the past.

Question 27

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 28

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 29

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 30

Your _____ is an example of a liquid asset.

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

Question 31

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 32

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

Question 33

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 34

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 35

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

Question 36

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 37

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. In 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 38

_____ 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 39

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 a period of time.
E)An income and expense statement can be used to predict inflation and interest rates.

Question 40

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 41

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 42

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 43

The Wilsons' short-term goals might include:

A)buying back-to-school clothes in August.
B)buying a house.
C)sending the kids to college.
D)planning to retire at the age of 60.
E)going on a world tour.

Question 44

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 45

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 46

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 47

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

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

Question 48

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

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

Question 49

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 50

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%

Question 51

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 charitable payments

Question 52

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 53

An income 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 54

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 55

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 56

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 57

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)the total expense is less than the total income.
E)income and expense are equal.

Question 58

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 59

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 60

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 61

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 62

When your assets exceed your liabilities, you:

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

Question 63

Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take for the account to double in value? (Round answer to one decimal place.)

A)8.8
B)9.7
C)10.8
D)11.4
E)14.2

Question 64

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 65

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 66

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

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

Question 67

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

A)You can liquidate investments to meet the total budget shortfall.
B)You can increase low-priority expenses on the budget.
C)You can invest more in real estate\personal estate.
D)You can discourage additional borrowing.
E)You can shift expenses from the surplus months to the deficit months.

Question 68

Your investment advisor wants you to purchase an annuity that will pay you $25,000 per year for 10 years. You require a 7% return. The present value annuity factor at 7% for 10 years is 7.0236. What is the most you should pay for this investment?

A)$49,179
B)$175,590
C)$201,000
D)$225,682
E)$250,000

Question 69

Phil has $2,000, and he needs it to grow to $4,000 in 8 years. Assuming he does not add any more money to this fund, what rate of interest would he need to earn? (Round the rate of interest to the nearest whole number.)

A)6%
B)7%
C)8%
D)9%
E)10%

Question 70

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

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

Question 71

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 72

A ______  is an example of a tangible asset. ​

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

Question 73

Michael and Sandy purchased a home for $100,000 5 years ago. If its value appreciated at 6% annually, what is it worth today? (Round the answer to the nearest dollar.)

A)$100,000
B)$106,000
C)$130,000
D)$133,823
E)$135,603

Question 74

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 75

Elena purchased a stamp collection for $5,000 30 years ago. If its value appreciated at 8% annually, what is it worth today? (Round the answer to the nearest dollar.)

A)$17,000
B)$36,400
C)$50,313
D)$123,023
E)$150,000

Question 76

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

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

Question 77

Investment assets are required 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 78

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 79

The first step in financial planning is to:

A)define one's financial goals.
B)set up a budget.
C)calculate one's liquidity ratio.
D)prepare a trend analysis.
E)list expenses.

Question 80

Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it take for the account to double in value? (Round the number of years to the nearest whole number.)

A)8
B)9
C)10
D)11
E)12