Chapter 3

Question 1

Define money management.

Answer 1

the day-to-day financial activities needed to manage personal economic resources, while working toward long-term financial security

Question 2

What are the three components of money management?

Answer 2

storing and maintaining financial documents; creating personal finance statements; creating and implementing a plan for spending/saving

Question 3

How long should you keep personal and employment records?

Answer 3

1 year

Question 4

How long should you keep money management records?

Answer 4

3 years

Question 5

How long should you keep tax records?

Answer 5

7 years

Question 6

How long should you keep financial services records?

Answer 6

1 year

Question 7

How long should you keep consumer purchase, auto/credit records?

Answer 7

1 year

Question 8

How long should you keep housing records?

Answer 8

forever

Question 9

How long should you keep insurance records?

Answer 9

as long as policy is in force

Question 10

How long should you keep investment records?

Answer 10

as long as you own it

Question 11

How long should you keep estate planning/retirement records?

Answer 11

forever

Question 12

How long should birth records/wills/Social Security information be kept?

Answer 12

forever

Question 13

What are the 4 purposes of personal financial statements?

Answer 13

Report your current financial position in relation to the value of the items you own and the amounts you owe; Measure your progress toward your financial goals; Maintain information on your financial activities; Provide data you can use when preparing tax forms or applying for credit

Question 14

What are two other names for the balance sheet?

Answer 14

net worth statement; statement of financial planning

Question 15

What are liquid assets? (2)

Answer 15

cash; near-cash

Question 16

What are the two items listed in the “listing items of value” section?

Answer 16

assets; liabilities

Question 17

What is the time frame for current liabilities?

Answer 17

<= 1 year

Question 18

What is the time frame for current liabilities?

Answer 18

> 1 year

Question 19

What are two equations relating net worth?

Answer 19

net worth = assets - liabilities; assets = net worth + liabilities

Question 20

What is insolvency?

Answer 20

inability to pay debts when they are due

Question 21

Define net worth.

Answer 21

indication of the financial position at any given date

Question 22

What is the formula for debt ratio?

Answer 22

liabilities / net worth

Question 23

Relationship between your debts and net worth

Answer 23

indicates financial situation

Question 24

What is better, a higher or lower debt ratio?

Answer 24

lower

Question 25

What is the formula for current ratio?

Answer 25

current assets / current liabilities

Question 26

The current ratio indicates

Answer 26

Indicates how well you will be able to pay upcoming debts

Question 27

What is better, a higher or lower current ratio?

Answer 27

higher

Question 28

What is the formula for liquidity ratio?

Answer 28

current assets / monthly expenses

Question 29

Define liquidity ratio.

Answer 29

Indicates the number of months a person will be able to pay expenses if an emergency situation arises. Again, a higher number is desired especially if uncertainty exists regarding continual employment.

Question 30

What is the formula for solvency ratio?

Answer 30

total assets / total liabilities

Question 31

Define solvency ratio.

Answer 31

Shows the relationship between the value of assets and what is owed. A higher number is desired.

Question 32

What is the formula for debt payment ratio?

Answer 32

monthly credit payments / monthly take-home pay

Question 33

Define debt payment ratio.

Answer 33

Expresses portion of monthly earnings going for credit payments. A lower ratio is desired.

Question 34

What is the formula for savings ratio?

Answer 34

amount saved / gross income

Question 35

Define savings ratio.

Answer 35

Presents the portion of annual earnings that has been saved.

Question 36

What is the formula for investment assets ratio?

Answer 36

investment assets / net worth

Question 37

Define investment assets ratio.

Answer 37

Indicates portion of net worth that contributes to long-term financial goals.

Question 38

Define cash flow.

Answer 38

actual inflow and outflow for a given time period

Question 39

What is the equation for cash surplus/deficit?

Answer 39

total cash received during the time period (minus) cash outflows during the time period

Question 40

What is another name for the cash flow statement?

Answer 40

income and expenditure statement

Question 41

What are the three steps in preparing a balance sheet?

Answer 41

listing items of value; determining amounts owed; computing net worth

Question 42

What are the three steps in preparing a cash flow statement?

Answer 42

record income; record cash outflows; determine net cash flows

Question 43

What is a budget?

Answer 43

spending plan that estimates income and expenses

Question 44

What are the four characteristics of a successful budget?

Answer 44

well-planned; realistic; flexible; clearly communicated