Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

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 4

Which of the following statements regarding budgets is true?

Accepted Answer

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

The real rate of return is also referred to as the real:

Accepted Answer

A) liability rate. 
B) short-term rate. 
C) estimated rate. 
D) inflation rate. 
E) interest rate.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The Wilsons' short-term goals might include:

Accepted Answer

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 9

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

Accepted Answer

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

Question 10

Rosa and Jose have liquid assets of $5,000 and other assets of $50,000. Their total liabilities equal $26,000. What is their net worth? (Show all work.)

Accepted Answer

The answer of Rosa and Jose have liquid assets of...

Question 11

When your assets exceed your liabilities, you:

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

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

Question 16

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

Accepted Answer

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 17

The Hamptons want to have $1,750,000 for their retirement in 30 years. How much should they save annually if they expect to earn 8% on their investments?

Accepted Answer

The answer of The Hamptons want to have $1,750,000 for...

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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:

Accepted Answer

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 20

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

Accepted Answer

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.

Exam 2: Using Financial Statements and Budgets

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

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

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

Which of the following statements regarding budgets is true?

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

The real rate of return is also referred to as the real:

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

The Wilsons' short-term goals might include:

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

Rosa and Jose have liquid assets of $5,000 and other assets of $50,000. Their total liabilities equal $26,000. What is their net worth? (Show all work.)

When your assets exceed your liabilities, you:

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

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

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

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?

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

The Hamptons want to have $1,750,000 for their retirement in 30 years. How much should they save annually if they expect to earn 8% on their investments?

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

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