Book 1 module 3

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

• Food expenses

• Clothing expenses

• Utilities expenses

• Travel and entertainment expenses

Variable Outflows

In a _________, 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.

reverse mortgage

Consumer debt payments should be no greater than_____ of net income.

20%

The estimated value of a real estate asset in a financial statement prepared by a CFP® certificant should be based upon

a. the current replacement value of the asset.

b. the basis of the asset, after taking into account all straight line and accelerated depreciation.

c. the client’s estimate of current value

d. 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

A client's total debt ratio should NOT exceed what percentage of gross income?

36%

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 _________ 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.

snowball

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

28

. Current liabilities are due in less than ___ year, while long-term liabilities are due in ____ year or more.

one

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?

500,000

The answer is an _____________ with an interest rate cap. Given John and Kelly's relatively short time in the residence,_ is their best option. ________ 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).

adjustable-rate mortgage

Which of the following statements regarding the National Credit Union Share Insurance Fund (NCUSIF) are CORRECT?

1. The NCUSIF insures member accounts of all federal credit unions.

2. The fund is administered by the National Credit Union Administration (NCUA).

3. The NCUSIF is backed by the full faith and credit of the U.S. government.

4. Up to $500,000 of a member's account balances are insured by the NCUSIF.

In preparing a statement of financial position for a client, generally a financial planner should use which type of value in valuing the assets?

1,2 3

In preparing a statement of financial position for a client, generally a financial planner should use which type of value in valuing the assets?

Current fair market value

___________ are those for which there is some variation in occurrence and amount.

Variable cash outflows

Which of the following statements regarding credit unions are CORRECT?

1. Credit unions make loans and accept deposits.

2. Credit union deposits are insured by the FDIC.

3. Earnings from investments are allocated to members in the form of credit union stock.

4. A board of directors, elected by members, is responsible for providing leadership and setting credit union guidelines.

1,4

The answer is number of sources of _______. The number of a client's sources of ________ is a factor in determining the amount of emergency funds needed. If ______ comes from several different sources, the amount of emergency funds required is lower than if all income is from one person's earnings.

income

Which components of the FICO credit score calculation have the greatest impact on total scores?

Payment History, amount owed

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?

179,000

Which of these are reasons a client should consider purchasing a home rather than renting one?

1. Mortgage interest may be income tax deductible for taxpayers who itemize deductions and meet IRS requirements.

2. Adequate liquid assets are available for a down payment

3. Client plans to live in the home five years or longer

1,2,3

Which of the following statements regarding a client's credit score is CORRECT?

1. Using a high percentage of available credit will positively affect a credit score.

2. Considering a client's credit history only, the longer the history, the higher credit score.

2

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?

1. Statement of cash flows

2. Statement of financial position

3. Personal tax return

4. Net worth statement

1 and 2

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?

1. Statement of cash flows

2. Statement of financial position

3. Personal tax return

4. Net worth statement

2,4

Which of the following statements regarding a client's credit score is CORRECT?

1. Too many credit inquiries may lower a credit score, but likely not by much.

1

Which of these is characteristic of the snowball technique of debt reduction?

1. The debt with the lowest balance is eliminated first.

2. Clients are encouraged by paying off the first debt quickly.

1 and 2

Several times each year, Joe and Mary 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?

variable discretionary expense

Which of these statements regarding liabilities on the statement of financial position is CORRECT?

1. They are categorized as fixed or variable.

2. Any outstanding mortgage balance is reported as its original amount.

Neither one or two

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?

1. Compared to the snowball approach, it is relatively more difficult to pay off the first debt with a high balance quickly.

2. This approach increases the total amount of interest paid during the debt reduction process.

1

The mortgage payment, which is considered a fixed outflow, is included on the statement of cash flows, not the statement of ___________.

financial position

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 equally	$400,000

How much Federal Deposit Insurance Corporation (FDIC) insurance coverage does Doug have for his accounts at the bank?

650,000

Alex has a personal emergency requiring him to immediately access $50,000. He expects this need will last for several months. Regarding liquidity, which of these assets shown on his statement of financial position is the best choice to pay for his emergency? A __________ credit union totaling $60,000.

Credit Union

Monthly housing costs should be no more than _____ of the prospective borrower's gross, not net, income.

28%

Which of these statements regarding credit unions are CORRECT?

1. Loans are typically offered at reduced interest rates.

2. Earnings from loan interest and investments are paid to members in the form of shares.

3. Deposits in a credit union are insured up to $100,000 per qualifying account by the National Credit Union Share Insurance Fund (NCUSIF).

4. Each credit union member may use a vote to elect the board of directors.

1 and 4

Which of the following has the least impact on a client's total FICO score?

credit mix

A financial planner reviews a client's financial situation and identifies several areas that may affect the client's ability to meet long-term goals. Which of these statements regarding financial strengths and weaknesses are CORRECT?

1. Maintaining an adequate emergency fund is considered a financial strength.

2. Excessive consumer debt may be considered a financial weakness.

3. Determining financial strengths and weaknesses is based solely on objective financial ratios.

4. Failing to maintain sufficient insurance coverage may be considered a financial weakness.

1,2, 4

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?

1. Begin paying off their debts, giving priority to the debt with the highest interest rate

2. Monitor their spending to ensure they are not using debt to finance a lifestyle they cannot afford

1 and 2

When preparing a cash flow statement for a client, what is the CORRECT way to indicate the period coveredA)

A. For the period January to December 20XX

B. For the period January 1, 20xx to December 31, 20XX

C. From January 20XX to December 20XX

D. As of December 31, 20XX

B

Which of the following statements regarding the identification of financial strengths and weaknesses is CORRECT?

1. This process is primarily objective.

2. A planner may rely on financial ratios to assist in making this determination.

2

Which of these are tax implications of owning a personal residence?

1. The points paid may be tax deductible subject to IRS requirements and limitations

2. Mortgage interest is generally tax deductible for the buyer

3. Capital gains may be nontaxable within specific limits

4. Homeowners may depreciate their personal residence

1,2, and 3