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FINN 1003 (CHAPTER 2)

1. Money management refers to day-to-day financial activities necessary to manage personal economic
resources.
TRUE
2. Money management refers to annual financial activities necessary to manage personal economic
resources.
FALSE
Money management refers to day-to-day financial activities.
3. The focus of an organized system of financial records is to reduce credit card usage.
FALSE
The focus of an organized system is to handle daily business activities.
4. A budget is a record of how a person or family has spent their money.
FALSE
A budget is a spending plan, looking to the future.
5. Programs are available to help low-income older or disabled people who have difficulty budgeting.
TRUE
Based on the “Did You Know” section.
6. In an organized system, credit card records belong in a safe deposit box.
FALSE
See Exhibit 2-1
7. In an organized system, birth and marriage certificates belong in a safe deposit box.
TRUE
See Exhibit 2-1
8. In an organized system, a will belongs in a home file.
TRUE
See Exhibit 2-1
9. Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box.
FALSE
These should be kept in a home file.
10. In an organized system, an annual stock investment statement belongs in a safe deposit box.
TRUE
11. Records related to tax returns should be saved for ten years.
FALSE
These should be saved for seven years.
12. Wills and Social Security data should be kept for up to ten years.
FALSE
These should be kept permanently.
13. The two primary personal financial statements include the personal balance sheet and a credit card
payoff statement.
FALSE
The statements include the personal balance sheet and the cash flow statement.
14. The current financial position of an individual or family is a common starting point for financial planning.
TRUE
15. Net worth is the amount owed to others.
FALSE
Liabilities are amounts owed to others.
16. Current liabilities are the debts you must pay within a short time.
TRUE
17. Most people liquidate their assets to calculate their net worth.
FALSE
Very few people, if any, liquidate all assets.
18. A cash flow statement uses the equation: assets – liabilities = net worth.
FALSE
The equation is for a personal balance sheet.
19. A cash flow statement uses the equation: cash inflows – cash outflows = cash surplus (deficit)
TRUE
20. When completing a cash flow statement, deductions are subtracted from salary to determine take home pay.
TRUE
21. When completing a cash flow statement, take home pay less deductions equals salary.
FALSE
22. Financial advisers suggest that an emergency fund should cover one to two months of living expenses.
FALSE
An emergency fund should cover three to six months of living expenses.
23. When creating a budget, it is important to save the amount you have left at the end of the month.
FALSE
It is important to “pay yourself first.”
24. One method to spend more money is to use a direct deposit system from payroll.
FALSE
Direct deposit is one method to make saving easier.
25. One method to save more money is to write a check each payday and deposit it in a savings account not readily available for regular spending.
TRUE
Direct deposit is one method to make saving easier.
26. Money management refers to
B. Day-to-day financial activities.
27. Which of the following is NOT a component of money management?
E. All of the above are components of money management
28. A home file should be used for storing
B. Financial records for current needs.
29. Which of the following financial documents would most likely be stored in a safe deposit box?

A. W-2 forms
B. personal financial statements C. warranties
D. marriage certificates
E. checking account statements

D. marriage certificates
30. Which of the following is most correct?

A. A warranty belongs in a safe deposit box
B. A birth certificate should be kept in a personal computer system
C. Tax records belong in a home file
D. Past budgets belong in a safe deposit box
E. Adoption papers belong in a home file

C. Tax records belong in a home file

Home file: Warranty, tax records
Safe deposit box: Birth certificate, adoption papers Personal computer system: Past budgets

31. Which of the following is most correct?

A. Rare coins and stamps belong in a safe deposit box
B. A birth certificate should be kept in a personal computer system C. W-2s for tax records belong in a safe deposit box
D. Past budgets belong in a safe deposit box
E. Adoption papers belong in a home file

A. Rare coins and stamps belong in a safe deposit box

Home file: W-2s for tax records
Safe deposit box: Rare coins, birth certificate, adoption papers Personal computer system: Past budgets

32. A broker statement is an example of a(n) ____________ record.
A. investment
33. The number of personal financial records a household has to organize may seem overwhelming. How long should you keep copies of your tax returns?
D. Seven years
34. The number of personal financial records a household has to organize may seem overwhelming. How long should you keep documents relating to the purchase of real estate?
E. Indefinitely
35. How long should you keep documents relating to investments?
B. As long as you own them
36. How long should you keep your most current will?
E. Permanently
37. The main purposes of personal financial statements are to:

A. Report your current financial position
B. Measure your progress toward financial goals
C. Maintain information about your financial activities
D. Provide data for preparing tax forms or applying for credit E. These are all correct

E. These are all correct
38. Which of the following are considered to be the primary personal financial statements?
B. Balance sheet and cash flow statement
39. A personal balance sheet presents
D. Items owned and amounts owed.
40. The current financial position of an individual or family is best presented with the use of a(n)
C. Balance sheet.
41. Another name for a statement of financial position is a
A. Balance sheet.
42. The statement that includes liquid assets, real estate, personal possessions, and investment assets is known as a
A. Personal balance sheet.
43. Items with value are referred to as
E. Assets.
44.Which of the following is NOT a liquid asset?

A. Cash withdrawn from an ATM
B. Cash value of life insurance
C. Checking account balance
D. Coins in a jar at home
E. Retirement investments

E. Retirement investments
45. When creating a personal balance sheet, which of the following is a real estate asset?
B. Vacation property
46. When creating a personal balance sheet, which of the following is considered to be a personal possession asset?
A. A five-year-old television set
47. When creating a personal balance sheet, which of the following is an investment asset?
D. Retirement account
48. When creating a personal balance sheet, which of the following is a current liability?

A. Checking account
B. Net worth
C. Auto loan
D. Money your sister owes you in two years
E. Charge account

E. Charge account
49. The amount you would have if everything of value would be sold and all debts would be paid in full.
B. Net worth.
50. The equation to calculate net worth is:
D. Assets – liabilities = net worth
51. The inability to pay debts when they are due is called:
B. Insolvency
52. Which of the following situations describes a person who could be insolvent?

A. Assets $56,000; annual expenses $60,000
B. Assets $78,000; net worth $22,000
C. Liabilities $45,000; net worth $6,000
D. Assets $40,000; liabilities $45,000
E. Annual cash inflows $45,000; liabilities $50,000

D. Assets $40,000; liabilities $45,000
53. All of the following are ways that households can increase their net worth except:

A. Increase their savings
B. Reduce spending
C. Increase value of investments
D. Reduce amounts owed
E. Increase their debt ratio

E. Increase their debt ratio
54. Which of the following will increase the net worth of a household?

A. Decrease saving by $50 per month
B. Increase the amount borrowed for major purchases
C. Decrease spending by $5 per day
D. Invest in possessions whose values do not increase
E. Keep an extra $100 in a checking account instead of a savings account

C. Decrease spending by $5 per day
55. Which of the following is a cash inflow?

A. Mail rent check
B. Buy groceries
C. Make a loan payment
D. Receive a paycheck
E. Pay medical expenses

D. Receive a paycheck
56. Which of the following appears on a cash flow statement?

A. Assets
B. Payments for variable expenses
C. Net worth
D. Liabilities
E. Investment
transfers

B. Payments for variable expenses

The other choices would appear on a balance sheet.

57. Which of the following appears on a cash flow statement?

A. Home value
B. Loan payment
C. Net worth
D. Balance of mortgage
E. Transfer from one mutual fund to another

B. Loan payment

The other choices would appear on the personal balance sheet.

58. Financial experts recommend a monthly savings ratio of at least ____ of gross income.
B. 5-10%
59. Financial experts recommend a debt/payments ratio of less than ____ of take-home pay.
C. 20%
60. A current ratio of 2 means:
E. $2 of liquid assets are available for every $1 in current liabilities
61. A debt ratio of 0.5 indicates:
B. For every dollar of net worth, debt equals $0.50
62. Which of the following ratios shows the relationship between debt and net worth?

A. Debt ratio
B. Current ratio
C. Household ratio
D. Debt payments ratio E. Savings ratio

A. Debt ratio
63. Which of the following ratios indicates that liquid assets are available to pay liabilities for a household?

A. Debt ratio
B. Current ratio
C. Liquidity ratio
D. Debt payments ratio
E. Savings ratio

B. Current ratio
64. Which of the following ratios indicates the number of months in which living expenses can be paid if an emergency arises?

A. Debt ratio
B. Current ratio
C. Liquidity ratio
D. Debt payments ratio
E. Savings ratio

C. Liquidity ratio
65. Which of the following ratios indicates the amount of a person’s earnings that goes for payments for credit cards, auto loans, and other debt (except mortgage)?

A. Debt ratio
B. Current ratio
C. Liquidity ratio
D. Debt payments ratio
E. Savings ratio

D. Debt payments ratio
66. Which of the following ratios shows the relationship between gross income and money not spent?

A. Debt ratio
B. Current ratio
C. Liquidity ratio
D. Debt payments ratio
E. Savings ratio

E. Savings ratio
67. All of the following are sources of income except

A. Interest
B. Commission
C. Dividends
D. Salary
E. Social security taxes

E. Social security taxes
68. Which of the following is a deduction to determine take-home pay?

A. Interest
B. Commissions
C. Dividends
D. Salary
E. Social security taxes

E. Social security taxes
69. Disposable income equals
B. Take-home pay
70. Discretionary income equals
D. Money left over after paying for housing, food, and other necessities
71. The money left over after paying for housing, food, and other necessities is called
B. Discretionary income
72. Another name for take-home pay is
C. Disposable income
73. An example of a variable expense is
E. Electric bill
74. All of the following are fixed expenses except

A. Mortgage payment
B. Installment loan payment
C. Monthly bus pass
D. Allocation for life insurance
E. Electric bill

E. Electric bill
75. An example of a fixed expense is
D. Mortgage
76. Which of the following is NOT a main purpose of a budget?

A. Help to live within your income
B. Spend your money without care
C. Reach financial goals
D. Prepare for financial emergencies
E. Develop wise financial management habits

B. Spend your money without care

A correct goal for B is to spend your money wisely.

77. When creating a budget, which of the following statements is true?
D. Numbers in the budget are estimates.

A – estimate your income for the given time period; B – variable earnings make it more difficult to budget income; C – common financial problems can be minimized through budgeting; E – it is better to only include money that you are sure you’ll receive.

78. When creating a budget, it is important to:
E. Set aside savings before other expenses are budgeted.
79. The difference between the amount budgeted and the actual amount received or spent is called the
A. Variance
80. A budget deficit would result when a person’s or family’s
D. Actual expenses are greater than planned expenses.
81. After the budget is created, it is important to
C. Track spending and identify variances
82. Which of the following categories would be most difficult to cut from a household budget?

A. Vacations
B. Lawn services
C. Cable
D. Charitable donations
E. Auto insurance

E. Auto insurance

Many admit that auto insurance is a necessary expense, the others are discretionary.

83. A budget that involves envelopes, folders or containers to hold money or slips of paper is called a
B. Physical budget
84. A budget that can be kept on notebook paper or budgeting paper is called a
C. Written budget
85. The document that would be most useful to track spending patterns for the past few months is
B. Cash flow statement
86. The document that would be most useful to track planned spending patterns for the next month is
C. Budget
87. The document that would be most useful to track current value of investment accounts is
A. Balance sheet
88. A family with $45,000 in assets and $22,000 of liabilities would have a net worth of
B. $23,000

Assets – liabilities = $45,000 – 22,000 = $23,000

89. Patrick Guitman has a net worth of $156,000 and liabilities of $167,000. What are his total assets?
E. $323,000

Net worth + liabilities = $156,000 + 167,000 = $323,000

90. Given the following information, calculate the net worth:

Assets = $5000
Cash inflows = $4500
Cash outflows = $2000
Liabilities = $1000

E. $4000

Assets – liabilities = $5000 – 1000 = $4000

91. Given the following information, calculate the debt ratio percentage:

Liabilities $24,000
Liquid assets $4,400
Monthly credit payments $300 Monthly savings $260
Net worth $72,000
Current liabilities $1,100 Take-home pay $1,800
Gross income $3,000
Monthly expenses $1,540

A. 33.3

liabilities/net worth – 24,000/72,000 = 33.3%

92. Given the following information, calculate the current ratio:

Liabilities $24,000
Liquid assets $4,400
Monthly credit payments $300 Monthly savings $260
Net worth $72,000
Current liabilities $1,100 Take-home pay $1,800
Gross income $3,000
Monthly expenses $1,540

B. 4

liquid assets/current liabilities – 4400/1100 = 4

93. Given the following information, calculate the liquidity ratio:

Liabilities $24,000
Liquid assets $4,400
Monthly credit payments $300 Monthly savings $260
Net worth $72,000
Current liabilities $1,100 Take-home pay $1,800
Gross income $3,000
Monthly expenses $1,540

C. 2.86

liquid assets/monthly expenses – 4400/1540 = 2.86

94. Given the following information, calculate the debt payments ratio:

Liabilities $24,000
Liquid assets $4,400
Monthly credit payments $300 Monthly savings $260
Net worth $72,000
Current liabilities $1,100 Take-home pay $1,800
Gross income $3,000
Monthly expenses $1,540

D. 16.67 percent

monthly credit payments/take-home pay = $300/$1,800 = .1667 = 16.67%

95. Given the following information, calculate the savings ratio:

Liabilities $24,000
Liquid assets $4,400
Monthly credit payments $300 Monthly savings $260
Net worth $72,000
Current liabilities $1,100 Take-home pay $1,800
Gross income $3,000
Monthly expenses $1,540

E. 8.67 percent

monthly savings/gross income = $260/$3000 = .0867 = 8.67%

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