Module 3 Financial Statements, Cash Flow Management, Financing Strategies, and Financial Institutions

Question 1

Which of the following statements concerning a client’s level of savings is CORRECT?

A budget should consider the client’s financial goals and serve as a control document for future cash flows, including cash available for savings.
If future spending exceeds budget projections, the cash actually saved will be more than anticipated.
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II

Answer 1

The answer is I only. Statement I is correct. A budget should consider the client’s financial goals and serve as a control document for future cash flows, including cash available for savings. Statement II is incorrect. If future spending exceeds budget projections, the cash actually saved will be less than anticipated.

LO 3.2.3

Question 2

The simple formula to determine the net cash flow (surplus or deficit) of a client is

A)
fixed outflows – variable outflows.
B)
assets – liabilities.
C)
inflows – outflows.
D)
inflows + outflows.

Answer 2

The answer is inflows ‒ outflows. The net cash flow (surplus or deficit) of a client can be determined by subtracting outflows from inflows.

LO 3.1.2

Question 3

Which of these types of information are important to gather from a client prior to developing financial planning recommendations?

Their desired age of retirement
Current asset mix within 401(k) or 403(b) plan
Potential inheritance from parents
Number of children client and spouse intend to have
A)
I and IV
B)
I, III, and IV
C)
I, II, III, and IV
D)
II and III

Answer 3

The answer is I, II, III, and IV. The age of retirement is required for determining investment and life insurance needs. The current asset mix is necessary to know when developing an investment strategy based on other information provided by the client. A potential inheritance should not generally be counted on for financial planning, but it can be a warning that estate tax problems may crop up in the future. The number of children a couple may have gives an indication as to what may be needed for education expenses and how children will affect family income, and creates the need for other forms of planning such as trusts and guardianship issues.

LO 3.2.1

Question 4

Hannah has the following assets, some of which are deposited at National Bank.

Assets Ownership Balance
Savings account (National Bank) Hannah $250,000
Traditional IRA (National Bank is custodian) Hannah $275,000
Checking account (National Bank) Joint with sister $10,000
Certificate of deposit (National Bank) Hannah $50,000
Savings account (National Bank) Joint with son $50,000
Money Market mutual fund (National Bank Advisors) Hannah $80,000
What amount of Hannah’s assets is currently insured by the Federal Deposit Insurance Corporation (FDIC)?

A)
$585,000
B)
$640,000
C)
$530,000
D)
$560,000

Answer 4

The answer is $530,000. The amount currently insured by the FDIC for Hannah is $530,000. FDIC insurance coverage is $250,000 for the account owned solely by Hannah and the CD (the values total $300,000; however, the maximum FDIC coverage for assets with the same ownership is $250,000). Hannah’s FDIC insurance covers 50% of the joint checking account ($5,000), 50% of the joint savings account ($25,000), and the IRA up to the $250,000 limit for IRAs. The money market mutual fund is not a money market deposit account and, therefore, is not covered. ($250,000 + $5,000 + $25,000 + $250,000 = $530,000)

LO 3.4.1

Question 5

Which of the following guidelines are used to determine whether a client has excessive debt?

Payments on housing should be no greater than 28% of gross income.
Total monthly payment on all debts should be no greater than 36% of gross monthly income.
Total monthly payment on all debts should be no greater than 28% of gross monthly income.
Consumer debt payments should be no greater than 30% of net income.
A)
I, II, and III
B)
I, II, III, and IV
C)
I and II
D)
III only

Answer 5

The answer is I and II. Consumer debt payments should be no greater than 20% of net income.

LO 3.1.3

Question 6

A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except

A)
the client’s liquidity position.
B)
the size of the client’s net cash flow.
C)
the diversification of the client’s assets.
D)
the client’s use of debt.

Answer 6

The answer is the size of the client’s net cash flow. A balance sheet (also called a statement of financial position or net worth statement) reports assets and liabilities. Cash flow information is reported on a cash flow statement.

LO 3.1.1

Question 7

Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has no mortgage on his home. Which of the following statements is true about Robert’s cash flow statement?

A)
The value of the home would be an income source since there is no mortgage.
B)
The value of the home would be an asset.
C)
The taxes on his salary would be a liability.
D)
The taxes on his salary would be an expense.

Answer 7

The answer is the taxes on his salary would be an expense. Cash flow statements show income and debt payments (i.e., inflows and outflows). Assets and liabilities are shown on a statement of financial position or net worth statement. The home’s value by itself would be recorded as an asset on a statement of financial position, rather than as an income source on a cash flow statement. Again, income rather than income sources are shown on cash flow statements.

LO 3.1.2

Question 8

Trenton, age 59, is unmarried and retired. He has the following assets on deposit at Riverview Bank, an

FDIC-insured financial institution:

Account Ownership Balance
Checking account Trenton $70,000
Savings account Joint with daughter, Bailey $80,000
Certificate of deposit (CD) Trenton $225,000
Rollover traditional IRA Trenton $150,000
What amount is insured by the FDIC?

A)
$525,000
B)
$325,000
C)
$480,000
D)
$250,000

Answer 8

The answer is $480,000. The FDIC insures separate legal categories of accounts of a legal institution. As a result, the individual accounts owned by Trenton (CD and checking account) are aggregated and are insured up to a total of $250,000. The joint account is insured for $80,000. The individual retirement account (IRA) will be insured up to $250,000. Total amount insured is $480,000 ($250,000 max on CD and checking account + $80,000 joint savings account because titled differently + $150,000 rollover traditional IRA).

LO 3.4.1

Question 9

As a rule, the housing cost ratio should NOT exceed what percentage of gross monthly income?

A)
22%
B)
28%
C)
36%
D)
20%

Answer 9

The answer is 28%. As a rule, the housing cost ratio should not exceed 28% of gross monthly income.

LO 3.1.3

Question 10

A generally accepted rule in personal financial planning is that the consumer debt ratio should NOT exceed

A)
36%.
B)
28%.
C)
33%.
D)
20%.

Answer 10

The answer is 20%. This ratio, which is monthly consumer debt divided by monthly net income, refers to debt other than mortgage indebtedness and should not exceed 20%.

LO 3.1.3

Question 11

William is in the market for a new automobile. He is weighing the choice between leasing and buying. Which of the following are reasons he should consider leasing rather than buying?

Drives fewer than 15,000 miles per year
Uses the car mostly for business purposes
Keeps a car for five years or longer
A)
II only
B)
II and III
C)
I, II, and III
D)
I and II

Answer 11

The answer is I and II. William should consider leasing an automobile if he drives fewer than 15,000 miles per year, uses the car for business, likes to have a new car every two to four years, does not like to borrow money for automobile purchases, and wants a lower monthly car payment.

LO 3.3.4

Question 12

Margaret is in the market for a new automobile. An automobile dealer has suggested that she lease a vehicle. The proposed lease terms include making 36 monthly payments of $325 and returning the vehicle to the dealer at the end of the lease period. Margaret may owe the lease company additional money if the car’s actual value is less than the projected value. What type of lease agreement is the dealer proposing to Margaret?

A)
Finance/open-end lease
B)
Operating lease
C)
Closed-end lease
D)
Fixed-cost lease

Answer 12

The answer is finance/open-end lease. Finance and open-end leases are the same. Closed-end and fixed-cost leases are also the same, except for unusual use or damage, there are no additional costs. Operating leases don’t exist.

LO 3.3.4

Question 13

What is the key to successfully using the snowball technique to eliminate debt?

A)
Develop a plan that the client can commit to executing.
B)
Start with the debt that has the highest account balance.
C)
Begin with the debt that has the highest interest rate.
D)
Begin with the debt that has the highest payment.

Answer 13

The answer is develop a plan that the client can commit to executing. Whether a client starts with the lowest account balance or highest interest rate, the key to the effectiveness of using the snowball technique is developing a plan that the client can commit to and execute. The goal is eliminating debt, and the client needs to agree to the process to make that happen. Beginning a debt reduction plan with the debt that has the highest payment is not a typical debt reduction technique.

LO 3.3.2

Question 14

The ratio of a client’s monthly consumer debt payments to monthly net income should NOT exceed

A)
20%.
B)
25%.
C)
15%.
D)
30%.

Answer 14

The answer is 20%. Consumer debt refers to debt other than mortgage indebtedness and most often includes debt incurred to service automobile and credit card purchases. A generally accepted rule in personal financial planning is that this ratio should not exceed 20%.

LO 3.1.3

Question 15

Which of the following assets is appropriate to include in an emergency fund for a family with $500 per month in discretionary income?

A)
A certificate of deposit with a 2-year maturity
B)
An S&P 500 Index mutual fund
C)
Cash advance limit on consumer lines of credit
D)
A money market deposit account

Answer 15

The answer is a money market deposit account. The only liquid and time-appropriate asset listed is a money market deposit account. An S&P 500 Index mutual fund should not be used for emergency fund purposes because its value may decline and any sale of shares may result in a taxable event.

LO 3.2.2

Question 16

Which of the following are good savings strategies?

Use an overdraft feature on debit cards
Choose an economical cell phone plan
Increase deductibles on automobile insurance policies
Limit credit card purchases to those that can be paid off in full in six month
A)
II and III
B)
III and IV
C)
I, II, III
D)
II and IV

Answer 16

The answer is II and III. Using an overdraft feature on debit cards may entice individuals to spend money they do not have available in their accounts. Increasing insurance deductibles decreases premiums, which is a good savings strategy. Another good plan is to choose an economical cell phone plan (and limiting texting and calls). If credit cards are used, they should be paid off in full at the end of each month.

LO 3.2.3

Question 17

Which of the following items are normally included as variable expenses in a budget?

Auto loan repayment
Home mortgage
College education savings fund deposits
Charitable contributions
A)
III and IV
B)
I and II
C)
I, II, and IV
D)
I, III, and IV

Answer 17

The answer is III and IV. Debt repayment and housing costs are generally shown as fixed expenses. While they may vary somewhat each month, they are regular and recurring. Education savings funds and contributions to charitable organizations are normally viewed as discretionary or variable.

LO 3.3.1

Question 18

On a statement of cash flows, the following items would be classified under which category?

Food expenses
Clothing expenses
Utilities expenses
Travel and entertainment expenses
A)
Discretionary expenses
B)
Fixed outflows
C)
Nondiscretionary expenses
D)
Variable outflows

Answer 18

All of these items are variable outflows. Variable outflows are considered as such because there is some variation in occurrence and amount.

LO 3.1.2

Question 19

Justin has the following accounts on deposit in the same bank.

Account Ownership Balance
Savings account Justin $300,000
Checking account Justin $25,000
Savings account Justin with spouse $400,000
Savings account Justin with son $100,000
How much Federal Deposit Insurance Corporation (FDIC) insurance coverage does Justin currently have for his accounts?

A)
$500,000
B)
$625,000
C)
$825,000
D)
$600,000

Answer 19

The answer is $500,000. Each category of ownership (e.g., individual, joint, or retirement account) in the same institution is subject to a separate limit of $250,000. Justin has $250,000 of coverage on his individual accounts and $250,000 of coverage ($200,000 with his spouse and $50,000 with his son) on his joint accounts, for a total of $500,000 of coverage.

LO 3.4.1

Question 20

Frank and Sarah are not sure whether to purchase a new home or lease. Which one of the following would best support a decision to lease (rent) a personal residence in the near future?

A)
Frank and Sarah are native to the area and expect to stay in the area for at least for the next 10 years.
B)
Frank and Sarah were just married and plan to start a family within four years.
C)
Frank and Sarah want to spend time and money making their residence look better on the interior and exterior of the home.
D)
Frank and Sarah believe real estate in the area will appreciate faster than the inflation rate.

Answer 20

The answer is Frank and Sarah were just married and plan to start a family within four years. The expectation of staying in one location for 10 years is reasonable justification for buying a home. With an impending marriage and family plans in the future, the individual’s housing needs may change substantially. Anyone who wants to spend the time and money to improve the appearance of his or her home should own the home; otherwise the improvement efforts will simply benefit the landlord. It would be best to own a home if you think prices will appreciate faster than the inflation rate to participate in the price appreciation and avoid rent increases.

LO 3.3.4

Question 21

Which one of the following is a CORRECT statement regarding an issue applicable to the buy-versus-lease decision?

I. Individuals should lease autos if they intend to keep them for many years.

II. An automobile should be leased if it is the owner’s intention to use it in business.

A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II

Answer 21

The answer is II only. Individuals should buy, not lease, autos if they intend to keep them for many years.

LO 3.3.4

Question 22

Which of the following items are normally included in a cash flow statement?

Dividend income
Money market account balance
Mortgage note balance
Vested pension benefits
A)
II and III
B)
II, III, and IV
C)
I and IV
D)
I only

Answer 22

The answer is I only. The remaining items are asset values, correctly shown on a statement of financial position or balance sheet. Income items (e.g., dividend income) are on the cash flow statement.

Question 23

Which one of the following client goals is stated appropriately?

A)
$14,000 in current dollars, per year, for each child’s education
B)
An adequate emergency fund
C)
A comfortable retirement
D)
Enough life insurance to keep the family in its “own world”

Answer 23

The answer is $14,000 in current dollars, per year, for each child’s education. A specified dollar amount to be accumulated for education is a goal that can be attained. The other goals/targets are ambiguous and require more specificity to be of any use.

LO 3.2.1

Question 24

What asset listed below should typically not be used to establish an emergency fund?

A)
Short-term CDs
B)
Cash in a basement safe
C)
U.S. government bonds
D)
Money market account

Answer 24

The answer is U.S. government bonds. Bonds are not as liquid as other assets and they can go down in value if interest rates rise, so they are not typically a good source of emergency funds. Cash is a good source for emergency funds. Putting the cash in a basement safe (or any other non-interest-earning account) is probably not the best choice. However, the point is to identify that cash, or cash equivalents, are usually the best choice for emergency funds.

LO 3.2.2

Question 25

Which of the following are considered financial weaknesses? Low risk tolerance level Insufficient insurance coverage Inarticulate financial goals Weak cash flow management skills A) I, II, III, and IV B) II, III, and IV C) III and IV D) I only

Answer 25

The answer is II, III, and IV. A client's low risk tolerance level is not considered a financial weakness. However, planners need to consider a client's risk tolerance level when making investment recommendations. LO 3.1.4

Question 26

A financial institution that allocates earnings from loan interest and investments to its members in the form of dividends is A) a trust company. B) a bank. C) a credit union. D) an investment bank.

Answer 26

The answer is a credit union. This statement describes a credit union. Credit union members may also elect a board of directors. LO 3.4.2

Question 27

The estimated value of a real estate asset in a financial statement prepared by a CFP® certificant should be based upon A) the basis of the asset, after taking into account all straight line and accelerated depreciation. B) the current replacement value of the asset. C) the value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell. D) the client’s estimate of current value.

Answer 27

The answer is the value that a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell. On a financial statement, in the absence of special circumstances, assets are normally valued at fair market value. Fair market value can be defined as what a well-informed buyer is willing to accept from a well-informed seller where neither is compelled to buy or sell. LO 3.1.1

Question 28

What purpose do footnotes serve on personal financial statements? Used to describe details of assets and liabilities listed on the client's financial statement List values or circumstances not disclosed in the body of the client's financial statements Total the cash balance on the client's financial statements Total the investment balance on the client's financial statements A) II, III, and IV B) I and III C) II and III D) I and II

Answer 28

The answer is I and II. Footnotes should be used to describe details of both assets and liabilities on a client's financial statements. They may also be used to describe values and circumstances not disclosed in the body of the financial statements. Cash and Investments are two categories found in financial statements. LO 3.1.1

Question 29

Jennifer has the following debts and would like to start a process to pay them off, starting with the debt with the lowest balance. She currently has $70 in excess monthly cash flow to start this process. Using the snowball technique, what would she be able to pay on Credit Card 4 once the smaller loans have been paid off? Debt Balance Min Payment CC1 225 25 CC2 575 35 CC3 1000 50 CC4 3200 120 Auto Loan 12000 300 A) $230 B) $300 C) $120 D) $180

Answer 29

The answer is $300. Jennifer would have the $70 she can start with, plus $110 once Credit Cards 1, 2, and 3 are paid off, plus the $120 she has been paying all along on Credit Card 4 for a total of $300. LO 3.3.2 Basically, over time you'd crunch down the smallest debt first (snowball gets bigger over time) and you'd pay off CC1. Debt one was using the original $70 per month excess cash flow PLUS the $25 per month you were already paying. Now that you've paid off that one, you can put the 70 + 25 towards CC2. Pay that off and you can put 70+25+35 towards CC3. Then you'll have 70+25+35+50 towards CC4, in addition to the 120 you're already putting toward it in minimum payments. 70+25+35+50+120 = 300

Question 30

The Martins have decided to set up an appointment with Michael, a CFP® professional and an experienced financial planner, to get their finances in order. Up to this point, the Martins had been making their financial decisions as the need arose without a comprehensive strategy. In addition, they believe that their life insurance coverage is inadequate and they need to update their will due to the birth of their second child, Zachary. Lately, they have been spending indiscriminately with very little set aside for savings and investment. What should be the first step that Michael should take in working with the Martins? A) The Martins should review their wills with the attorney recommended by their financial planner. B) The Martins should start an investment plan with their broker. C) Michael should assist the Martins in preparing a budget. D) The Martins should consult with their life insurance agent about purchasing additional policies.

Answer 30

The answer is Michael should assist the Martins in preparing a budget. Developing a budget is one of the most important ways to help clients in the savings process. The budget can reveal problem spending areas and help clients adjust their cash flow. LO 3.2.1

Question 31

Gerome, a CFP® practitioner, provides a SWOT analysis to all of his financial planning clients. The major advantage of providing this analysis to his clients is that they obtain a broad overview of their personal A) risk tolerance. B) financial strengths and weaknesses. C) vulnerability to longevity risk. D) credit rating and score.

Answer 31

The answer is financial strengths and weaknesses. A SWOT analysis would examine a client's financial strengths and weaknesses, along with any significant opportunities or threats. LO 3.1.4

Question 32

Andrew and Angela are buying a house valued at $374,900. They have been saving for some time and are planning to put 20% down toward the house. They are looking at two mortgages: one for 30 years with an interest rate of 4.74%, and one for 20 years with a rate of 3.27%. They are interested in lower payments, but also shorter terms. What is the difference in the interest that will be paid between these two mortgages in the first year? A) $14,116 B) $4,470 C) $6,168 D) $9,646

Answer 32

The answer is $4,470. Set the calculator for 12 payments per year [12, DOWNSHIFT, p/yr (the PMT key)]. Be sure the calculator is in End Mode. A 20% down payment of $74,980 means that Angela and Andrew financed the balance of $299,920 and this is used as the PV in both calculations. Because we must first calculate the regular monthly payment of the 30 year offer it reads as follows, N = 360 (or 30 years x 12 months per year). The interest or I/YR = 4.74 and all that needs to be done is to calculate the payment or PMT = $1,562.72. With the payment for the 30-year mortgage at $1,562.72 per month, next press 1, followed by 12 [DOWNSHIFT] [AMORT]. Then press the [=] key and the calculator will show principal paid in the first year of $4,636.26; interest paid is $14,116.35; and the remaining balance is $295,283.74. Calculate the payments for the 20-year mortgage. The 20-year mortgage payment is calculated using $299,920 as PV; 240 = N; and 3.27 = I/YR; then press PMT and $1,704.72 is the monthly payment. Once this is calculated, the amortization schedule should be calculated. Press 1, followed by 12 [DOWNSHIFT] [AMORT], and then press the [=] key and the calculator will show on the 20-year mortgage the principal paid in the first year is $10,803.72; interest paid is $9,646.42; and the remaining principal balance is $289,116.74. A quick subtraction tells us that the total difference in interest paid between the two in the first year $14,116.35 - $9,646.42 = $4,470 . LO 3.3.5

Question 33

Given the following data for Daphne Jones: Checking account $1,000 Jewelry $5,000 Mutual funds $60,000 Vested 401(k) $55,000 Mortgage balance $95,000 Auto loan balance $20,000 Money market account $10,000 Personal assets $50,000 Sailboat $7,000 Credit card balance $5,000 Stock portfolio $10,000 90-day CD $2,000 Automobile $35,000 Personal residence $150,000 What is the total value of her investment assets? A) $125,000 B) $157,000 C) $152,000 D) $150,000

Answer 33

The answer is $125,000. Daphne's investment assets include the following: Mutual funds $60,000 Stock portfolio $10,000 Vested 401(k) $55,000 $125,000 LO 3.1.1

Question 34

Which assets typically are not used to establish an emergency fund? A) Corporate bonds B) Certificates of deposit with a three-month maturity C) Money market accounts D) Passbook savings accounts

Answer 34

The answer is corporate bonds. Corporate bonds are not as liquid as pure money market instruments, and their values are not fixed (unless held to maturity); therefore, they would not normally be used for an emergency fund. Savings accounts, money market deposit accounts, and short maturity CDs are all used as emergency funds. LO 3.2.2

Question 35

Bette and Bob are purchasing a new home and are evaluating financing alternatives. They have heard that using a graduated equity mortgage may be disadvantageous. You can tell them that A) negative amortization may occur. B) payment amounts are predictable C) the home must be sold to repay the mortgage. D) the principal amount must be paid in a lump sum.

Answer 35

The answer is negative amortization may occur. The payment amounts may change and are unpredictable. Principal is repaid in each payment over the mortgage term, not in a lump sum. Selling the home is unnecessary to repay the mortgage. LO 3.3.5

Question 36

Which of the following statements regarding a personal statement of financial position are CORRECT? Assets − liabilities = net worth. Current liabilities are due within two years. Long-term liabilities are due in more than two years. Personal use assets include cars and furniture. A) I and IV B) II, III, and IV C) II and III D) I, II, III, and IV

Answer 36

The answer is I and IV. Current liabilities are due in less than one year, while long-term liabilities are due in one year or more. LO 3.1.1

Question 37

Noah grew up in the period following the Depression and is very conservative with his finances. He has individual accounts at three separate federally chartered banks with balances of $265,000, $300,000, and $200,000. What is the total amount insured by the Federal Deposit Insurance Corporation (FDIC)? A) $250,000 B) $765,000 C) $500,000 D) $700,000

Answer 37

The answer is $700,000. Each individual account in a federally chartered bank is insured against loss up to $250,000. Therefore, his two accounts with balances in excess of $250,000 will only be insured up to $250,000 each for a total of $500,000. The third account will be insured for the entire $200,000. The total insured amount is $700,000 ($250,000 + $250,000 + $200,000). LO 3.4.1

Question 38

Which of the following statements regarding savings and loan associations (S&Ls) is CORRECT? S&Ls are also known as thrift institutions. One purpose of S&Ls is to provide home loans. Checking and savings accounts are offered by S&Ls. Federally chartered S&Ls are regulated by the FDIC. A) I only B) I, II, III, and IV C) II and III D) I and II

Answer 38

The answer is I and II. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. The main purposes of an S&L are to accept savings and provide home loans. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency. LO 3.4.2

Question 39

Which of the following can be monitored and evaluated through the use of a budget? Income Net worth Expenses Spending patterns A) I, II, and III B) II and IV C) I, III, and IV D) I and III

Answer 39

The answer is I, III, and IV. A budget can help clients assess their income, expenses, and spending patterns. The statement of financial position is used to determine a client's net worth. LO 3.2.1

Question 40

One way to free up cash flow is for the client to A) acquire a home equity line of credit. B) obtain an cash-back credit card. C) use a home equity loan for home improvements rather than savings. D) consolidate or eliminate consumer debt.

Answer 40

The answer is consolidate or eliminate consumer debt. Acquiring more debt will not improve a client's cash flow unless the new debt restructures old debt into a lower monthly payment. Using a home equity line of credit or a home equity loan merely adds an additional liability against an asset and incurs an additional outflow when payments are due. Additional credit cards reduce cash flow when used, as they create an additional monthly payment. Consolidating or eliminating consumer debt frees up cash flow. LO 3.3.1

Question 41

Troy and Kacie realize they are in need of an emergency fund. Troy is a marketing executive for a local advertising firm, and Kacie is an office manager for a national distribution company. They come to you, their financial planner, and ask how much money they should have in this fund. Which of the following is the best response? A) An amount equal to 3 months of expenses B) An amount equal to 6 months of expenses C) An amount equal to 12 months of expenses D) An amount equal to 1 month of expenses

Answer 41

The answer is an amount equal to 3 months of expenses. Three months' worth of expenses should be set aside if the clients are married and both are employed outside the home. A client who is a single wage earner or one who is married with a spouse not employed outside the home should have an amount equal to 6 months of expenses in an emergency fund. LO 3.2.2

Question 42

All of the following are debt management ratios except A) consumer debt ratio. B) housing cost ratio. C) P/E ratio. D) total debt ratio.

Answer 42

The answer is P/E ratio. The consumer debt ratio is the ratio of monthly consumer debt payments to monthly net income. The housing cost ratio measures the relationship of housing costs to gross income. The total debt ratio, which includes monthly housing costs and consumer debt payments, should not exceed 36% of gross monthly income. The P/E ratio is used in stock analysis and is not used for debt management. LO 3.1.3

Question 43

All of the following are ways to improve one's credit score except A) pay down credit card balances and keep them low. B) close paid-off accounts on which there is a solid payment record. C) leave good, older debt on your report. D) always make payments on time.

Answer 43

The answer is close paid-off accounts on which there is a solid payment record. A mistake people often make is trying to eliminate debt off their credit report once it's paid off. Older debt that has a solid payment history is good for your credit rating. Of course, making payments on time and keeping balances low are good ways to improve a credit score also. LO 3.3.3

Question 44

Which of the following is considered a strength in a client's financial plan? Well-defined financial goals Promising employment status Inadequate emergency fund Lack of estate planning documents A) II only B) I, III, and IV C) III and IV D) I and II

Answer 44

The answer is I and II. Statements I and II are financial strengths. Other examples of strengths are appropriate investments given a client's risk tolerance, appropriate savings, and an adequate emergency fund. An inadequate emergency fund and lack of estate planning documents are considered weaknesses. LO 3.1.4

Question 45

You have gathered the following information from Gerry's financial statements: Gross income $110,000 Net income $80,000 Total assets $195,000 Total debt $30,000 Consumer debt $18,000 Based on this information, which of the following statements is CORRECT? Gerry's total debt ratio exceeds the generally recommended maximum. Gerry's consumer debt ratio exceeds the generally recommended maximum. A) Neither I nor II B) Both I and II C) II only D) I only

Answer 45

The answer is II only. Financial planners generally recommend that total debts do not exceed 36% of gross income. Gerry's total debt ratio is 27%, less than the 36% maximum ($30,000/$110,000 = 27.3%). The consumer debt ratio is the ratio of consumer debt payments to net income. Gerry's consumer debt ratio is 22.5%, which exceeds the generally recommended maximum of 20% ($18,000/$80,000 = 22.5%). LO 3.1.3

Question 46

Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT? The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means. Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement. 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. A) I, II, and III B) II only C) I and III D) I only

Answer 46

The answer is I, II, and III. All of these statements are correct. LO 3.1.2

Question 47

Which of the following cash outflows is the best example of a variable outflow? A) Clothing expenses B) Mortgage payments C) Insurance premiums D) Auto loan payments

Answer 47

The answer is clothing expenses. Variable cash outflows are those for which there is some variation in occurrence and amount. 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. LO 3.1.2

Question 48

Which of these guidelines are used to determine whether a client has excessive debt? Payments on housing should be no greater than 28% of gross monthly income. Total monthly payment on all debts should be no greater than 36% of gross monthly income. Total monthly payment on all debts should be no greater than 28% of gross monthly income. Consumer debt payments should be no greater than 30% of net monthly income. A) I and II B) I and IV C) I and III D) II only

Answer 48

The answer is I and II. Total debt payments should be less than or equal to 36% of gross monthly income. Consumer debt payments should be no greater than 20% of net monthly income. LO 3.1.3

Question 49

The function of an investment bank may include all of the following except A) distributing large blocks of stock to the public and to institutions. B) advising corporations regarding the best ways to raise long-term capital. C) raising capital for issuers by distributing new securities. D) purchasing securities from the public and reselling them to the issuers.

Answer 49

The answer is purchasing securities from the public and reselling them to the issuers. Investment banks may buy securities from issuers and resell them to the public. LO 3.4.2

Question 50

Which of the following will raise a FICO score? A) A payment history reflecting consistent on-time payments B) Opening several new accounts in a short period of time C) Keeping account balances near the available credit limit D) Immediately closing long-standing accounts once they are paid off

Answer 50

The answer is a payment history reflecting consistent on-time payments. The easiest way to raise a credit score is to make payments on time, every time, for a long time. All the other answer choices will lower a credit score. LO 3.3.1

Question 51

Mark and Shelly are working with you, their financial planner, to develop a budget. You advise them to list all their discretionary and nondiscretionary expenses. Which of the following would be considered a nondiscretionary cash outflow for planning purposes? Travel and entertainment Mortgage payments Utilities Taxes A) I, III, and IV B) II, III, and IV C) II and III D) IV only

Answer 51

The answer is II, III, and IV. Mortgage payments, utilities, and taxes are considered nondiscretionary expenses. Travel and entertainment, along with gifts, premium cable TV channels, and club dues are considered discretionary expenses. LO 3.2.1

Question 52

Which one of the following generally is used to determine the amount of emergency funds required? A) Number of sources of income B) Net income C) Types of assets held (regardless of income-producing capabilities) D) Gross income

Answer 52

The answer is number of sources of income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed. If income comes from several different sources, the amount of emergency funds required is lower than if all income is from one person's earnings. Possession of substantial income-producing assets could affect the amount of emergency funds a client requires. However, this is generally not the situation. Income from the assets would have a direct effect on the recommended level of emergency funds, but the assets themselves would not. The emergency fund amount is a function of expenses, not income. The number of a client's sources of income is a factor in determining the amount of emergency funds needed. LO 3.2.2

Question 53

Which of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT? The NCUSIF insures member accounts of all federal credit unions. The fund is administered by the National Credit Union Administration (NCUA). The NCUSIF is backed by the full faith and credit of the U.S. government. Up to $500,000 of a member's account balances are insured by the NCUSIF. A) I, II, and III B) I, III, and IV C) II and III D) I and II

Answer 53

The answer is I, II, and III. The NCUSIF insures member accounts of all federal and most state-chartered credit unions up to $250,000. LO 3.4.2

Question 54

Which of the following are reasons for analyzing a client's cash flow? To determine the client's ability to save and invest. To reveal problem areas in the client's spending patterns that will show the inability to save. A) Both I and II B) I only C) Neither I nor II D) II only

Answer 54

The answer is both I and II. A statement of cash flows will show a client's general ability to save. Spending issues will expose a client's inability to save. LO 3.2.3

Question 55

A financial institution that allocates earnings from loan interest and investments to its members in the form of dividends is A) a thrift institution. B) a credit union. C) a bank. D) a savings and loan association.

Answer 55

The answer is a credit union. This statement describes a credit union. A savings and loan association and a thrift institution are two names for the same institution. LO 3.4.2

Question 56

Savings and loan associations (S&Ls) A) are regulated by the Office of Comptroller of the Currency, if federally chartered. B) are also known as trust companies. C) are permitted to provide demand deposits. D) provide small business loans as a primary line of business.

Answer 56

The answer is are regulated by the Office of Comptroller of the Currency, if federally chartered. S&Ls are also known as thrift institutions, not trust companies. S&Ls are not permitted to provide demand deposits, such as checking accounts. However, they can offer interest-bearing NOW accounts, which are similar to demand deposit accounts. As a result of the Dodd-Frank Act, federal and many state-chartered S&Ls once regulated by the Office of Thrift Supervision are now regulated by the Office of the Comptroller of the Currency. The main purposes of S&Ls are to accept savings and provide home loans. LO 3.4.2

Question 57

Which of the following statements regarding FICO scores is correct? A) Length of credit history represents 30% of the credit score. B) Payment history accounts for 20% of the credit score. C) Opening several new accounts in a short time period can increase a credit score. D) A mix of credit accounts will likely increase a credit score.

Answer 57

It is generally better to have a mix of credit cards, retail accounts, installment loancs, and mortgages. Note, however, that too many accounts negatively affect credit scores. Payment history accounts for 35% of the credit score. Opening several new accounts in a short time period will decrease a credit score. Fifteen percent of a credit score is represented by the length of credit history. LO 3.3.1

Question 58

Your clients have several long-term goals that will require a fairly significant amount of capital. What is the most effective recommendation you can make to help your clients work toward their long-term goals? A) Recommend that they reduce their variable expenses across all categories. B) Recommend that they increase their insurance deductibles to save on insurance premiums. C) Recommend that they implement an ongoing saving and investing plan. D) Recommend that they work on paying off any debts they may have as soon as practical.

Answer 58

The answer is recommend that they implement an ongoing saving and investing plan. Saving and investing is what ultimately builds a client's net worth which provides them with flexibility and the financial ability to meet their goals. Saving and investing should be an important focus when developing a cash flow statement. LO 3.2.3

Question 59

Which of the following areas is the most important to focus on with clients when developing a cash flow statement that will ultimately enable them to meet their long-term goals and objectives? A) Fixed expenses B) Insurance costs C) Savings and investments D) Variable expenses

Answer 59

The answer is savings and investments. Although controlling expenses is important when developing the cash flow statement, the most important area to focus on that will ultimately give clients more flexibility and the ability to achieve their goals and objectives is making sure that they are committed to saving and investing over time. LO 3.2.3

Question 60

In preparing a statement of financial position for a client, generally a financial planner should use which type of value in valuing the assets? A) Original cost value B) Depreciated value C) Replacement value D) Current fair market value

Answer 60

The answer is current fair market value. Replacement value would be useful in determining insurance coverage but not in valuing assets for financial statement purposes. Original cost is used in business financial statements, and it is the amount on which depreciation is calculated. Depreciated value is used in business financial statements to show how much of the original cost of a capital asset remains to be depreciated. A personal statement of financial position employs current fair market value to value the assets included. In rare cases, other values may have to be used if fair market value is not available. LO 3.1.1

Question 61

Five years ago, your clients began a savings investment program to provide funds for their daughter's education. The initial plan was to invest $100 at the beginning of each month in mutual funds, with a goal of having over $36,500 at the end of 14 years when she turned 18. The fund currently has a value of $6,950. How is the plan working? A) The plan is right on schedule. Their estimate for the rate of return was accurate to date. B) The plan is ahead of schedule. They underestimated the return they have received to date. C) The plan is behind schedule. The fund is not growing at the rate they expected. D) There is not enough information to make any determination.

Answer 61

The answer is the plan is behind schedule. The fund is not growing at the rate they expected. Investing $100 at the beginning of each month for 14 years and ending up with approximately $36,500 requires a 9.94% rate of return. Five years of $100 per month reaching $6,950 would be accomplished with a return of 5.67%. At this rate, they will not reach their goal without increasing the monthly contribution or changing to funds with better returns. LO 3.2.3

Question 62

Prior to making recommendations to a client, it is necessary for the financial planning practitioner to assess the client's financial situation and determine the likelihood of reaching the stated objectives by continuing present activities. The practitioner will utilize client-specified, mutually agreed upon, and/or other reasonable assumptions. Both personal and economic assumptions must be considered in this step of the process. These assumptions include all of the following except A) the tax rates. B) life expectancy. C) the inflation rate. D) the unemployment rate.

Answer 62

The answer is the unemployment rate. Tax rates, inflation rate, and client life expectancy are all relevant information and are necessary assumptions to further the planning process. The rate of unemployment is not. LO 3.2.1

Question 63

Who of the following is most likely to implement a reverse mortgage? A) An individual who expects to relocate soon B) An individual who wishes to refinance the mortgage C) A first-time homeowner D) A 65-year-old homeowner with substantial home equity

Answer 63

The answer is a 65-year-old homeowner with substantial home equity. In a reverse mortgage, the lender makes monthly payments to the homeowner based on the fair market value of the home. Therefore, a 65-year-old homeowner with substantial home equity stands to reap the most benefit. LO 3.3.5

Question 64

National banks are subject to regulation by which of the following independent federal agencies? Federal Reserve Board Securities and Exchange Commission (SEC) Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of the Currency (OCC) A) II, III, and IV B) I, III, and IV C) I, II, III, and IV D) I and III

Answer 64

The answer is I, III, and IV. Although it is true the SEC is an independent federal agency, it regulates the securities markets, not national banks. LO 3.4.1

Question 65

A client's total debt ratio should NOT exceed what percentage of gross income? A) 18% B) 36% C) 28% D) 24%

Answer 65

The answer is 36%. Financial planners generally recommend that total debts should not exceed 36% of gross income. LO 3.1.3

Question 66

Rock Enterprises is an intermediary that facilitates transactions involving sales of investments or real estate. Rock Enterprises is A) a trust company. B) a thrift institution. C) a brokerage company. D) a mutual fund.

Answer 66

The answer is a brokerage company. This describes a brokerage company. A trust company specializes in managing estates and serving as trustee for various types of trusts. A mutual fund company pools money from shareholders and invests these funds in various types of securities, including stocks, bonds, and money market instruments according to the fund's prospectus. The main purpose of a thrift institution, also known as a savings and loan association (S&L), is to accept savings and provide home loans. LO 3.4.2

Question 67

All of the following types of accounts are covered by Federal Deposit Insurance Corporation (FDIC) insurance except A) checking accounts. B) savings accounts. C) money market mutual funds. D) certificates of deposit.

Answer 67

The answer is money market mutual funds. Money market deposit accounts, not money market mutual funds, are covered by FDIC insurance. LO 3.4.1

Question 68

Cash/Cash Equivalents Checkings: 1923 Savings: 4265 Invested Assets CD 3005 Mut Fund 5690 Use Assets 109k Autos 15k Pers Prop 16k Liabilities CC Balance 2080 In addition to the assets and liabilities listed in the financial statement above, Mary and John also have the following: Growth and income mutual fund: purchase price, $6,000; current market value, $11,000 Life insurance policy on John's life: face value, $200,000; cash value, $22,000 (not available as emergency funds) Six corporate bonds: par value for each, $1,000; current market value of all bonds, $6,212 Home mortgage: current balance, $67,000; original loan amount, $83,000 What is Mary and John's net worth on their completed statement of financial position? A) $125,015 B) $194,095 C) $109,015 D) $192,015

Answer 68

The answer is $125,015. Total assets are $194,095, which is made up of the total cash/cash equivalents ($28,188), total invested assets ($25,907), and total use assets ($140,000). Total liabilities are $69,080. Therefore, assets minus liabilities equals $125,015. LO 3.1.1

Question 69

John and Kelly recently moved to the East Coast. John is in the Navy and wishes to live off base for his next tour of duty, which is expected to last no more than four years. John and Kelly want to purchase a home; however, they expect to move after his tour of duty. Which of the following mortgages is best for John and Kelly if they want to keep their monthly mortgage payments to a minimum? A) An adjustable-rate mortgage with an interest rate cap B) A 30-year fixed-rate mortgage C) A 15-year fixed-rate mortgage D) A reverse mortgage

Answer 69

The answer is an adjustable-rate mortgage with an interest rate cap. Given John and Kelly's relatively short time in the residence, an adjustable-rate mortgage (ARM) is their best option. A reverse mortgage is a special type of home loan where the payment stream is reversed (that is, the lender pays the homeowner a stream of income secured by the considerable amount of equity in the home). LO 3.3.5

Question 70

Martin and Pamela Ash have a combined gross income of $76,000. After taxes, their income is $62,300. Currently their housing payments (PITI) total $1,510 monthly. Their car loans and credit card payments total $1,150. They have no other debt. Which of the following is a CORRECT statement? A) No determination can be made from the information given. B) Their housing costs are too high relative to the standard rules of thumb. C) Their consumer debt is within the acceptable range. D) Their total debt is too high relative to the standard rules of thumb.

Answer 70

The answer is their total debt is too high relative to the standard rules of thumb. With these totals, the Ashes' total debt is too high in that it exceeds 36% of gross income. Housing costs are less than 28% of gross income, but consumer debt is in excess of 20% of net income, leading to an excessive debt burden. LO 3.1.3

Question 71

What are some of the potential costs of owning a home? Monthly mortgage payments Annual property taxes Monthly homeowners insurance premiums Random maintenance expenses A) I, II, and III B) I, II, III, and IV C) II and III D) II, III, and IV

Answer 71

The answer is I, II, III, and IV. Other potential costs include monthly utility expenses and the opportunity cost on the funds used for the down payment. LO 3.3.4

Question 72

Mike and Molly would like to refinance their current 7.5% 30-year $150,000 fixed-rate mortgage into a new 5.75% $150,000 30-year mortgage. How much is their new monthly payment and how much per month will they save with this payment? A) New payment = $1048.82, savings = $173.46 B) New payment = $875.36, savings = $173.46 C) New payment = $875.82, savings = $341.70 D) New payment = $1048.82, savings = $196.80

Answer 72

The answer is new payment = $875.36, savings = $173.46. END Mode Old payment: PV = 150,000 n = 360 (30 × 12) i = .625 (7.5 ÷ 12) PMT = −1,048.82 New payment: PV = 150,000 n = 360 (30 × 12) i = .4792 (5.75 ÷ 12) PMT = −875.36 Savings = $1,048.82 − $875.36 = $173.46 LO 3.3.2

Question 73

In the first few minutes of your initial meeting with your new clients, Dennis and Kate Miller, you learned they have a combined income of $62,000 and very little in savings or investments. They expect to start a family within two years. In your summary of the first meeting you will tell them what they can expect from you in this initial year of financial planning. Which of the following are likely to be on your list? Development of a budget Asset allocation plan Establish education funding program Analyze estate planning needs A) II and III B) I, II, and IV C) I and II D) I only

Answer 73

The answer is I only. At this phase, the clients in question will benefit only from budgeting assistance. They must establish and fund an emergency fund before beginning any kind of investment program, education funding program, or estate planning. They may need basic legal documents such as medical powers of attorney, but complex estate issues do not exist. With no assets, the last three items are still well in the future for the Millers. It is a waste of their time and money to attempt to go beyond the basics of an emergency fund and adequate insurance at this time. LO 3.1.4

Question 74

Which of the following statements regarding credit unions are CORRECT? Credit unions make loans and accept deposits. Credit union deposits are insured by the FDIC. Earnings from investments are allocated to members in the form of credit union stock. A board of directors, elected by members, is responsible for providing leadership and setting credit union guidelines. A) II and IV B) I and IV C) I, III, and IV D) II, III, and IV

Answer 74

The answer is I and IV. Deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF) up to $250,000 per qualifying account. Earnings from investments are allocated to members in the form of dividends. LO 3.4.2

Question 75

The process of gathering data concerning the client's cash flow situation, presenting the data in an organized format and identifying strengths, weaknesses, and important patterns is cash flow analysis. revenue and expense analysis. net worth planning. capital consolidation. A) I and III B) I, II, III, and IV C) I and II D) II and IV

Answer 75

The answer is I and II. Cash flow analysis, or revenue and expense analysis, reveals inefficient, ineffective, or unusual utilization of resources. This analysis also highlights alternative courses of action, is intended to motivate the client, and makes family members aware of the need to conserve resources. LO 3.1.4

Question 76

Which of the following types of accounts are covered by Federal Deposit Insurance Corporation (FDIC) insurance? Securities Certificates of deposit Money market mutual funds Money market deposit accounts A) II, III, and IV B) I, II, and III C) II and IV D) III and IV

Answer 76

The answer is II and IV. Certificates of deposit are afforded FDIC protection. Securities are not. Money market deposit accounts, not money market mutual funds, are covered by FDIC insurance. LO 3.4.1

Question 77

Which mortgage is generally available for lower-income households whose owners would be unlikely to secure a conventional home loan? A) Federal Housing Administration (FHA) mortgage B) Veterans Affairs (VA) mortgage C) Reverse mortgage D) Interest-only mortgage

Answer 77

The answer is Federal Housing Administration (FHA) mortgage. With this mortgage, the federal government guarantees loans through various FHA programs. These mortgages are for buyers who would not likely be able to secure a conventional home loan (15- or 30-year fixed-rate mortgage or ARM) because they fail to meet the qualifications. LO 3.3.5

Question 78

Account Owner Account Type Balance Archie CD 225k Archie and Son Joint Savings 70k Archie Rlvr Trad IRA 150k Archie Checking 80k What amount is insured by the FDIC? A) $325,000 B) $525,000 C) $250,000 D) $470,000

Answer 78

The answer is $470,000. The FDIC insures separate legal categories of accounts of a legal institution. As a result, the individual retirement account (IRA) will be insured up to $250,000. The individual accounts owned by Archie are aggregated and are insured up to a total of $250,000. The joint account is insured for $70,000. Total amount insured is $470,000 ($150,000 + $250,000 + $70,000). LO 3.4.1

Question 79

Before any of the transactions below, June had a net worth of $100,000. Took out a home equity loan of $12,000 to pay for a trip abroad Paid off her auto loan of $4,000 using funds from her money market deposit account Purchased her deceased aunt's romance novels for $2,000 with personal savings account funds, even though the books were of no economic value What is June's net worth after these transactions? A) $88,000 B) $84,000 C) $86,000 D) $90,000

Answer 79

The answer is $86,000. June's $12,000 home equity loan for travel increases her liabilities and does not affect her assets. Payment of her credit card balance will reduce debt by $4,000. However, the use of her money market deposit account to pay off the debt will reduce assets by $4,000. The net effect of this transaction on her net worth is zero. Purchasing her aunt's books for $2,000 with funds from her personal savings account decreases her assets by $2,000. Therefore, after the transactions, her net worth decreases to $86,000 ($100,000 – $12,000 – $2,000). LO 3.1.1

Question 80

While reviewing the finances of the Stewarts, Ms. Brown, a CFP® certificant, is calculating a variety of financial ratios. The Stewarts have provided the following information: Principal and interest $1,200 per month Property insurance $600 per year Property taxes $2,400 per year Gross income $5,000 per month Based on the information provided, calculate the Stewarts' housing cost ratio. A) 3.45 B) 0.84 C) 0.29 D) 0.50

Answer 80

The answer is 0.29. The formula for the housing cost ratio is as follows: housing cost ratio = all monthly nondiscretionary housing costs ÷ monthly gross income ≤ 28%. All monthly nondiscretionary housing costs include the following: principal, interest, taxes, and insurance. To compute the Stewarts' housing cost ratio, the property insurance and property taxes provided need to be adjusted to monthly expenses ($600 ÷ 12 = $50; $2,400 ÷ 12 = $200). Therefore, the Stewarts' ratio equals 0.29, or 29% ($1,450 ÷ $5,000) and this would be very close to the acceptable range. LO 3.1.3

Question 81

Which one of the following arguments provides the best support for a decision to buy a car rather than lease one? A) The average annual distance driven will be less than 10,000 miles. B) The client does not want to regularly make monthly payments. C) The client needs the lowest monthly payment for a specific car. D) The client does not have 20% or more for a down payment.

Answer 81

The answer is the client does not want to regularly make monthly payments. If an individual leases a vehicle, there will be a monthly payment as long as he or she is leasing. If an individual purchases a car, there is an end to the payments. A lease may be the better option in the other scenarios. LO 3.3.4

Question 82

An analysis of a client's cash flow is important because it impacts a client's A) ability to do any planning. B) personal balance sheet. C) ability to reach established goals. D) statement of financial position.

Answer 82

The answer is ability to reach established goals. Being able to analyze how cash flow impacts the client's ability to reach established goals is a significant part of the financial planning process. LO 3.2.3

Question 83

Which components of the FICO credit score calculation have the greatest impact on the total score? Credit mix Payment history Amounts owed Length of credit history A) II and V B) III and IV C) II and III D) I and II

Answer 83

The answer is II and III. Payment history and amounts owed have the greatest impact on total score of the FICO credit score calculation. LO 3.3.3

Question 84

Your client, Andy, is in need of assistance in preparing his statement of financial position and statement of cash flows. He earns $150,000 annually and pays $1,000 monthly in alimony to his ex-wife, Debbie. Andy owns a condo valued at $230,000, which currently has an outstanding mortgage balance of $100,000. He pays annual property taxes of $3,000, and the condo insurance costs $180 per month. All of the following statements are CORRECT except A) Andy’s salary would be considered a cash inflow on his statement of cash flows. B) the alimony Andy pays would be a cash inflow on Debbie’s statement of cash flows. C) taxes paid on his property would be a liability on his statement of financial position. D) the condo insurance payments would be a fixed outflow on Andy’s statement of cash flows.

Answer 84

The answer is taxes paid on his property would be a liability on his statement of financial position. The property taxes Andy pays would be considered a fixed outflow on his statement of cash flows. Such tax payments would not be an entry on a statement of financial position. LO 3.1.2

Question 85

Before any of the transactions below, Sid had a net worth of $200,000. Took out a $24,000 loan to pay for a European vacation Paid off his student loan of $8,000 using funds from his money market deposit account Purchased an antique car valued at $18,000 for $15,000 with checking account funds What is Sid's net worth after these transactions? A) $186,000 B) $173,000 C) $179,000 D) $169,000

Answer 85

The answer is $179,000. Sid's $24,000 loan for travel increases his liabilities and does not affect his assets. Payment of his student loan will reduce debt by $8,000. However, the use of his money market deposit account to pay off the debt will reduce his assets by $8,000. The net effect of this transaction on his net worth is zero. Purchasing the antique car for $15,000 with funds from his checking account decreases assets by $15,000; however, assets are increased by $18,000 (the value of the car) for a net asset increase of $3,000. Therefore, after the transactions, his net worth decreases to $179,000 ($200,000 – $24,000 + $3,000). LO 3.1.1

Question 86

Which of these are reasons a client should consider purchasing a home rather than renting one? Mortgage interest is generally income tax deductible Adequate liquid assets are available for a down payment Client plans to live in the home five years or longer A) I and III B) I, II, and III C) I only D) II and III

Answer 86

The answer is I, II, and III. The deductibility of mortgage interest when a client itemizes deductions is a definite tax advantage in purchasing a home as opposed to renting one. If clients intend to live in their residences for several years (more than five) and have enough money for a down payment (without depleting the emergency fund), they should consider purchasing a home. LO 3.3.4

Question 87

Which of the following statements regarding a client's credit score is CORRECT? Using a high percentage of available credit will positively affect a credit score. Considering a client's credit history only, the longer the history, the higher credit score. A) I only B) II only C) Both I and II D) Neither I nor II

Answer 87

The answer is II only. When considering a client's credit history and no other FICO categories, in general, the longer the credit history, the higher the credit score. Using a high percentage of available credit will negatively affect a client's credit score. LO 3.3.1

Question 88

Which of the following financial statements provides a snapshot of a client's net worth at any given point in time, usually at the end of a calendar year? Statement of cash flows Statement of financial position Personal tax return Net worth statement A) I and IV B) II and IV C) II only D) II and III

Answer 88

The answer is II and IV. The statement of financial position, also known as a personal balance sheet or net worth statement, provides a snapshot of the client's net worth (wealth) at any given point in time. LO 3.1.1

Question 89

What is the appropriate date to identify the statement of financial position of a calendar-year client for the year 2022? A) For the period from January 1 to December 31, 2022 B) On December 31, 2022 C) For the period beginning January 1, 2022 D) On January 1, 2023

Answer 89

The answer is on December 31, 2022. The statement of financial position (personal balance sheet) is presented as of a specific date in time (i.e., a snapshot). The answer choice "For the period beginning January 1, 2022" could be correct, but the question specified the date was for a calendar-year client. LO 3.1.1

Question 90

What assets should typically NOT be used to establish an emergency fund? A) U.S. government bonds B) Cash in a basement safe C) Checking accounts D) A money market deposit account

Answer 90

The answer is U.S. government bonds. Bonds are not as liquid as other assets and are therefore not typically a good source of emergency funds. Money market deposit accounts are a good source for emergency funds. To the extent that they exceed the regular expenses of the client, checking account balances can be a good source for emergency funds. LO 3.2.2

Question 91

Which of the following statements regarding a client's credit score is CORRECT? Too many credit inquiries may lower a credit score, but likely not by much. Opening several new accounts in a short amount of time reflects a good use of credit and therefore can increase a credit score. A) II only B) Neither I nor II C) Both I and II D) I only

Answer 91

The answer is I only. Opening several new accounts over a short period can lower, not increase, a client's credit score. Too many credit inquiries may lower a client's credit score but will likely not have a great impact. LO 3.3.1

Question 92

Which of these is characteristic of the snowball technique of debt reduction? The debt with the lowest balance is eliminated first. Clients are encouraged by paying off the first debt quickly. A) Neither I nor II B) Both I and II C) I only D) II only

Answer 92

The answer is both I and II. The snowball technique of debt reduction involves eliminating the debt with the lowest balance first. Clients are often encouraged by paying off the first debt quickly, which motivates them to continue the process. LO 3.3.2

Question 93

Joe and Mary believe in stress management. Several times each year, they take a short vacation to relax and recharge as part of their overall approach to maintaining good health. Their regularly planned vacations are an example of what type of expense? A) Fixed discretionary expense B) Variable discretionary expense C) Fixed nondiscretionary expense D) Variable nondiscretionary expense

Answer 93

The answer is variable discretionary expense. Although Joe and Mary believe the vacations to be important for good health, the vacations are considered a variable discretionary expense. LO 3.1.2

Question 94

Which of the following statements regarding liabilities on the statement of financial position is CORRECT? They are categorized as fixed or variable. Any outstanding mortgage balance is reported as its original amount. A) II only B) Both I and II C) Neither I nor II D) I only

Answer 94

The answer is neither I nor II. Liabilities are categorized as current (short-term) liabilities or long-term on the statement of financial position. The current outstanding mortgage balance as of the date of the statement of financial position, not the original mortgage amount, is reported on this statement. LO 3.1.1

Question 95

Which of these types of accounts are covered by Federal Deposit Insurance Corporation (FDIC) insurance? Securities Certificates of deposit Money market mutual funds Money market deposit accounts A) II, III, and IV B) II and IV C) III and IV D) I, II, and III

Answer 95

The answer is II and IV. Certificates of deposit are afforded FDIC protection; securities are not. Money market deposit accounts, not money market mutual funds, are covered by FDIC insurance. LO 3.4.1

Question 96

Which components of the FICO credit score calculation have the greatest impact on the total score? New credit Length of credit history Amounts owed Payment history A) I and III B) II and IV C) I and IV D) III and IV

Answer 96

The answer is III and IV. Payment history (35% of credit score) and amounts owed (30% of credit score) have the greatest impacts on the total FICO score. LO 3.3.1

Question 97

Allyson would like to pay off her debt, reducing the debt with the highest interest rate first. Compared to the snowball approach of debt reduction, which of the following statements are CORRECT? Compared to the snowball approach, it is relatively more difficult to pay off the first debt with a high balance quickly. This approach increases the total amount of interest paid during the debt reduction process. A) Both I and II B) II only C) I only D) Neither I nor II

Answer 97

The answer is I only. With Allyson's approach, it often takes longer to pay off the first debt when the highest interest rate has a considerable balance. Less interest paid during the debt reduction process is an advantage of paying off debt in order of interest rate. LO 3.3.2

Question 98

All of the following items should be included on an individual's statement of financial position except A) fair market value of a home. B) mortgage balance. C) mortgage payment. D) mutual fund balance.

Answer 98

The answer is mortgage payment. The mortgage payment, which is considered a fixed outflow, is included on the statement of cash flows, not the statement of financial position. The mortgage balance should be shown as a liability on the statement of financial position. The fair market value of a home and the balance of a mutual fund should be listed as assets on the statement of financial position. LO 3.1.1

Question 99

Which of the following actions would most likely decrease an individual's credit score? A) Make just the minimum payment on time each month B) Take advantage of several offers for new credit cards C) Pay off a balance on a credit card that the individual has had for 10 years D) Have several different types of credit accounts, such as a car loan, a mortgage, and credit cards

Answer 99

The answer is take advantage of several offers for new credit cards. Taking advantage of several offers for new credit cards would decrease an individual's credit score. LO 3.3.3

Question 101

Question #18 of 30 Question ID: 1481346 Doug has the following amounts on deposit at the same bank. Account Ownership Balance Savings account Doug $200,000 Traditional IRA Doug $300,000 Certificate of Deposit Joint with spouse $400,000 How much Federal Deposit Insurance Corporation (FDIC) insurance coverage does Doug have for his accounts at the bank? A) $650,000 B) $450,000 C) $900,000 D) $700,000

Answer 101

The answer is $650,000. Each category of ownership (e.g., individual, joint, or retirement account) in the same institution is subject to a separate limit of $250,000. Doug has $200,000 of coverage on his individual savings account, $250,000 of coverage on the traditional IRA, and $200,000 of coverage on the joint account, for a total of $650,000. LO 3.4.1

Question 102

Alex has a personal emergency requiring him to immediately access $50,000. He expects this need will last for several months. Which of the following assets shown on his statement of financial position is the best choice to pay for his emergency? A) A life insurance cash surrender value in the amount of $55,000 B) A money market mutual fund worth $35,000 C) A credit union account totaling $60,000 D) Aggressive stocks currently trading at a market value of $65,000

Answer 102

The answer is a credit union account totaling $60,000. Although both the credit union account and the money market mutual fund reflect liquid assets, the best asset to use is the credit union account because it sufficiently covers Alex's needs. LO 3.2.2

Question 103

Which of the following items should NOT be included in an individual's statement of cash flows? Home value Mortgage balance Mortgage payment Mutual fund balance A) I, II, and IV B) III only C) I and IV D) I and II

Answer 103

The answer is I, II, and IV. The mortgage balance should be shown as a liability on the statement of financial position. The value of a home and the balance of a mutual fund should be listed as assets on the statement of financial position. Only the mortgage payment, which is considered a fixed outflow, is included in the statement of cash flows. LO 3.1.2

Question 104

What is the key to successfully using the snowball technique to eliminate debt? A) Developing a plan that the client can commit to executing B) Start with the debt that has the highest account balance C) Begin with the debt that has the highest interest rate D) Begin with the debt that has the highest payment

Answer 104

The answer is developing a plan that the client can commit to executing. The key to the effectiveness of using the snowball technique is developing a plan that the client can commit to and execute. The goal is eliminating debt, and the client needs to agree to the process to make that happen. Beginning a debt reduction plan with the debt that has the highest payment is not a typical debt reduction technique. LO 3.3.2

Question 105

Some rule-of-thumb ratios are helpful in understanding how a client's debt will be assessed by lenders, which can determine interest rates. Which of these is NOT correct regarding ratio descriptions and the related benchmark? A) The minimum required payments should be used in the calculation. B) Consumer debt is all nonmortgage debt. It should be no more than 20% of monthly net income. C) Total monthly payment on all debts should be no more than 36% of gross monthly income. D) Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 28% of the prospective borrower's net income.

Answer 105

Monthly housing costs include principal, interest, taxes, fees, and insurance, and should be no more than 36% of the prospective borrower's net income. Keeping all debt payments under 36% is important in order to qualify for reasonable rates on credit. Helping clients understand what will make future debt more costly can give them motivation to stay within the guidelines. Monthly housing costs should be no more than 28% of the prospective borrower's gross, not net, income. LO 3.1.3

Question 106

Which of these statements regarding credit unions are CORRECT? Loans are typically offered at reduced interest rates. Earnings from loan interest and investments are paid to members in the form of shares. Deposits in a credit union are insured up to $100,000 per qualifying account by the National Credit Union Share Insurance Fund (NCUSIF). Each credit union member may use a vote to elect the board of directors. A) I and IV B) III and IV C) II and IV D) I, II, and III

Answer 106

The answer is I and IV. Statement II is not correct because earnings from loan interest and investments are paid to members in the form of dividends, not shares. Statement III is not correct because deposits in a credit union are insured up to $250,000 per qualifying account by the NCUSIF. LO 3.4.2

Question 107

Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily subjective. A planner may rely on financial ratios to assist in making this determination. A) Neither I nor II B) Both I and II C) II only D) I only

Answer 107

The answer is both I and II. During this subjective process, a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses. LO 3.1.4

Question 107

Which of the following has the least impact on a client's total FICO score? A) Credit mix B) Amounts owed C) Length of credit history D) Payment history

Answer 107

The answer is credit mix. These categories affect credit scores in the following percentages: credit mix, 10%; length of credit history, 15%; amounts owed, 30%; and payment history, 35% LO 3.3.1

Question 108

Brandon and Jessica are in their mid-30s. Both are employed and they have no children. They enjoy international travel and own luxury automobiles. To afford their lifestyle, the couple has accumulated significant debt. In addition to their large car loans, Brandon and Jessica have balances on multiple credit cards and a substantial private loan used to pay for a Mediterranean cruise. Within the next few months, they intend to purchase a home. Both Brandon and Jessica are aware of their need to plan for retirement, but their current debt makes it difficult for them to consistently save money. After meeting with the couple and analyzing their financial statements, you recommend they adopt a savings plan. Assuming they accept your recommendation, which of the following steps would help Brandon and Jessica maximize their savings potential? Begin paying off their debts, giving priority to the debt with the highest interest rate Monitor their spending to ensure they are not using debt to finance a lifestyle they cannot afford A) II only B) I only C) Both I and II D) Neither I nor II

Answer 108

The answer is both I and II. Both of these steps should be implemented as part of the Brandon and Jessica's savings plan. LO 3.2.3

Question 109

When preparing a cash flow statement for a client, what is the CORRECT way to indicate the period covered? A) For the period January 1, 20XX to December 31, 20XX B) As of December 31, 20XX C) For the period January to December 20XX D) From January 20XX to December 20XX

Answer 109

The answer is for the period January 1, 20XX to December 31, 20XX. Usually the cash flow statement is prepared for the calendar year period, specifying the dates. LO 3.1.2

Question 110

Jake and Ashley are working with their financial planner to develop a budget. The financial planner told them to list all their fixed cash outflows and variable cash outflows on a questionnaire. Which of the following would be considered a fixed cash outflow for planning purposes? A) Food B) Mortgage payments C) Travel and entertainment D) Utilities

Answer 110

The answer is mortgage payments. Only mortgage payments are considered a fixed cash outflow. Other examples of fixed cash outflows are car payments, insurance premiums, and property taxes. LO 3.2.1

Question 111

Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT? This process is primarily objective. A planner may rely on financial ratios to assist in making this determination. A) Both I and II B) I only C) Neither I nor II D) II only

Answer 111

The answer is II only. Although a planner may rely on financial ratios to assist in identifying financial strengths and weaknesses, this analysis is generally subjective. LO 3.1.4

Question 112

Which of these are tax implications of owning a personal residence? The points paid are tax deductible for the buyer Mortgage interest is generally tax deductible for the buyer Capital gains may be nontaxable within specific limits Homeowners may depreciate their personal residence A) I, II, and III B) II and III C) I and III D) I, II, and IV

Answer 112

The answer is I, II, and III. Although I, II, and III are tax implications of home ownership, exceptions and restrictions apply to these benefits. A taxpayer of any age can exclude $250,000 of gain ($500,000 for joint filers) from the sale of a home owned and used by the taxpayer as a principal residence for at least two of the five years immediately preceding the sale. Generally, an individual cannot claim depreciation on a personal residence. LO 3.3.4