Personal Financial Planning 2nd

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Test Bank Questions, Chapter 5

1. Which of the following tells you how you are doing today and sets the stage for any
steps that need be taken to alter future activities?

a. Balance sheet.
b. Cash flow statement.
c. Projected cash flow statement.
d. Income statement.
e. None of the above.

Answer: b.

2. What is a balance sheet?

a. A statement of financial position at a given point in time.

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 b. A statement of assets that are expected to be or can be converted into cash in the
next year.
c. A statement of publicly traded investments.
d. A statement of the future income stream of its wage earners.
e. None of the above.

Answer: a

3. Which assets are not usually placed on balance sheets?

a. Human-related assets.
b. Marketable investments.
c. Human assets.
d. All of the above.
e. Both a and c.

Answer: e

4. Pension plans that pay out yearly income upon retirement are an example of:

a. Human-related assets.
b. Marketable investments.
c. Human assets.
d. Current assets.
e. None of the above.

Answer: a

5. Which of the following are placed on the right-hand side of the balance sheet?

a. Credit card debts.

b. Taxes outstanding.
c. Mortgage debt.
d. All of the above.
e. None of the above.

Answer: d

6. What is household equity?

a. The household’s net worth.

b. The household’s assets minus its liabilities.
c. The household’s liabilities minus its assets.
d. Both a and b above.
 e. None of the above.

Answer: d

7. A client owns a boat worth $45,000, savings of $500,000, and owes $65,000. What is
the client’s net worth?

a. $45,000
b. $545,000
c. $480,000
d. $65,000
e. None of the above.

Answer: c

8. Which of the following are not placed on the left-hand side of the balance sheet?

a. Bonds and bond funds.

b. IRAs.
c. Furniture and fixtures.
d. Household equity.
e. All of the above are placed on the left-had side of the balance sheet.

Answer: d

9. Financial assets that can be turned into cash are best defined as:

a. Real Estate.
b. Current assets
c. Marketable assets.
d. Household assets.
e. Other assets.

Answer: c

10. Which of the following is not a characteristic of the cash flow statement?

a. It may be the single best measurement of the household’s financial performance.

b. It represents how much cash has been generated over a period of time.
c. It includes all household operations that require financial resources.
d. The cash flow statement is fairly difficult to understand and measure.
e. All of the above are characteristics of the cash flow statement.

Answer: d
11. Which of the following best defines a functional cash flow statement?

a. A detailed cash flow statement that separates cash flows by type of household
activity.
b. A detailed cash flow statement that separates cash flows by household member.
c. A detailed cash flow statement that separates cash flows by discretionary and
nondiscretionary expenses.
d. A summary of the household’s actual cash flow statement, used to simplify
analysis.
e. None of the above.

Answer: a

12. What are operating activities?

a. The cash left over after our operating, capital expenditure, and debt activities.
b. Outlays on household related matters that provide benefit beyond the current year.
c. The day-to-day financial functions of the household.
d. Additions or subtractions from debt.
e. None of the above.

Answer: c

13. What are capital expenditures?

a. Additions or subtractions from debt.

b. Outlays on household related matters that provide benefit beyond the current year.
c. The day-to-day financial functions of the household.
d. Cash flows that come from changes in debt.
e. None of the above.

Answer: b

14. What are financing activities?

a. The cash left over after our operating, capital expenditure, and debt activities.
b. Outlays on household related matters that provide benefit beyond the current year.
c. The day-to-day financial functions of the household.
d. Cash flows that come from changes in debt.
e. None of the above.

Answer: d
15. What are savings?

a. Additions or subtractions from debt.

b. Outlays on household related matters that provide benefit beyond the current year.
c. The day-to-day financial functions of the household.
d. Cash flows that come from changes in debt.
e. None of the above.

Answer: e

16. What is a traditional cash flow statement?

a. A cash flow statement that groups all inflows and outflows together.
b. A cash flow statement that distinguishes between flows based on operating, capital
expenditures, and debt repayment.
c. A cash flow statement that lumps together paydown of debt and interest payments.
d. All of the above.
e. Both a and c above.

Answer: e

17. Which of the following is not a way though which one can avoid underestimating
expenses?

a. Through using software programs detailing records of expenditures.

b. Through avoiding hard copies of records of checks paid and actual bank and
investment account cash deposits and withdrawals.
c. Through recording after tax income plus other cash inflows and subtracting the
amounts deposited into savings accounts.
d. All of the above are ways through which one can avoid underestimating expenses.
e. None of the above is a way through which one can avoid underestimating
expenses.

Answer: b

18. The treating of repayment of debt as an expense in the cash flow statement is an
example of:

a. The blurring or elimination of the distinctions between assets and liabilities,

income and expenses, and cash inflows and outflows.
b. The underestimation of expenses.
c. The overestimation of expenses.
d. None of the above.
e. Both a and b above.
 Answer: e

19. Which of the following is not applicable to a traditional household statement of cash
flows?

a. Resembles business cash flow statement.

b. Calculates net cash flows properly.
c. Handles revenues properly.
d. It is simpler than a functional household statement of cash flows.
e. All of the above are applicable to a traditional household statement of cash flows.

Answer: a

20. Which of the following is not applicable to a functional household statement of cash
flows?

a. Resembles business cash flow statement.

b. Calculates net cash flows properly.
c. Handles revenues properly.
d. It is simpler than a traditional household statement of cash flows.
e. All of the above are applicable to a traditional household statement of cash flows.

Answer: d

21. Why are retirement assets listed separately on the balance sheet?

a. Retirement assets often cannot be turned into cash immediately without penalty.
b. Normal withdrawals from pensions are taxable.
c. Normal withdrawals from pensions are nontaxable.
d. Retirement assets have low cash value relative to their face amount.
e. Both a and b above.

Answer: e

22. Why is it useful for a footnote to the balance sheet to give the cost of investment assets
individually?

a. To avoid double taxation when taxes are filed.

b. To permit estimation of the effect of taxation on the gain upon ultimate sale.
c. As investment assets often cannot be turned into cash immediately without
penalty.
d. All of the above.
e. None of the above.
 Answer: b

23. What are pro forma statements?

a. Functional cash statements that were converted from traditional cash flow
statements.
b. Statements that do not include projections.
c. Statements that include projections.
d. Traditional cash statements that were converted from functional cash flow
statements.
e. None of the above.

Answer: c

24. Which of the following is not a reason why we include projections in a statement?

a. To better anticipate needs.

b. To forecast resources to meet those needs.
c. To adjust our plans according to our forecasts.
d. All of the above are reasons why we include projections in a statement.
e. None of the above is a reason why we include projections in a statement.

Answer: d

25. What is the common rate?

a. The rate of annual increase that many household expenses share.

b. The inverse of the assumed future inflation rate.
c. Investment projections based on an assumed return.
d. All of the above.
e. None of the above.

Answer: a

26. For which of the following operating activities is the rate of inflation not commonly
used for projections?

a. Food.
b. Clothing.
c. Alimony.
d. Hobbies.
e. Charitable contributions.
 Answer: c

27. Which of the following statements is not accurate?

a. Household results are provided on a cash flow statement while business results are
provided on an income statement.
b. Business accounting under GAAP attempts to report income and expenses,
whether or not in cash, for a fair presentation.
c. For household reporting of results, only cash matters.
d. All of the above statements are accurate.
e. None of the above statements are accurate.

Answer: d

28. What is depreciation?

a. The projected reduction in asset value due to wear and tear or obsolescence.
b. A non-tax deductible expense that depreciates household assets.
c. The projected increase in asset value due to capital gains.
d. A non-tax deductible expense that depreciates household income.
e. None of the above.

Answer: a

29. How is the performance for period recorded according to GAAP business?

a. As a “fair” presentation of results for the period.

b. As a capitalized as asset on balance sheet, not as an expense on income
statement.
c. As a proper matching of revenues and costs for the period in an income
statement.
d. All of the above.
e. None of the above.

Answer: c

30. How is depreciation recorded according to GAAP business?

a. As a “fair” presentation of results for the period.

b. As a capitalized as asset on balance sheet, not as an expense on income statement.
c. As an expense on income statement based on original cost, and deducted from
asset on balance sheet.
d. All of the above.
e. None of the above.
Answer: c

Essay questions:

31. Dorothy had $750 in cash, $34,300 dollars in stock, $5,500 dollars in bonds, and owned
a car worth $3,000. She had $1,500 in credit card payments and an education loan of
$24,000 with payments not due to begin for three years and a mortgage loan of
$200,000 with $7,000 due this year. She owned a home worth $350,000, furniture and
fixtures of $1,500, appliances with a value of $1,000, and jewelry of $1,000. She
expects to pay her mortgage and other obligations from current year’s earnings. Please
create her household balance sheet.

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash $750 Credit Card Payment $1,500
Total Current Current Portion
Assets $750 Mortgage Loan $7,000
Total Current
Liabilities $8,500
Marketable Investments
Bonds and Bond
Funds $5,500 Long-Term Liabilities
Stocks and Stock
Funds $34,300 Mortgage Loan $193,000
Total Mark.
Investments $39,800 Education Loan $24,000
Total Long-Term
Liabilities $217,000
Real Estate
Home $350,000
Total Real Estate $350,000 Total Liabilities $225,500

Household Assets
Autos $3,000
Furnitures and
Fixtures $1,500
Appliances $1,000
Total Household
Assets $5,500
EQUITY
Other Assets
 Jewelry $1,000 Household Equity $171,550
Total Other
Assets $1,000 Total Equity $171,550

Total Liabilities and

Total Assets $397,050 Equity $397,050

32. How are each of the following items recorded according to GAAP business?

• Balance Sheet
• Performance for Period
• Revenues
• Expenses Paid
• Profits
• Capital Expenditures
• Depreciation
• Asset Value on Balance Sheet

Answer:

• Balance Sheet: Based on original cost.

• Performance for Period: A proper matching of revenues and costs for the period in an
income statement.
• Revenues: Recorded when fairly represents a transaction.
• Expenses Paid: Recorded as necessary for proper matching with revenues.
• Profits: A “fair” presentation of results for the period.
• Capital Expenditures: Capitalized as asset on balance sheet, not as an expense on
income statement.
• Depreciation: Recorded as an expense on income statement based on original cost, and
deducted from asset on balance sheet.
• Asset Value on Balance Sheet: Recorded at original cost less depreciation.