Factors That Affect Cash Flows
1) Cash inflows tend to be higher
for younger individuals and lower for individuals in their 50s.
2) Individuals who switch from a
low-demand industry to a high-demand industry usually earn higher incomes.
3) During the final stage in the
life cycle, retirement, people experience higher incomes from their demanding
careers.
4) Some people with large incomes
spend their entire paychecks within a few days, while others with small incomes
may be big savers.
5) Which cash inflow will probably
be discontinued after retirement?
A) Dividend and interest received
from investments
B) Pension payments
C) Salary
D) Social Security benefits
6) Which of the following usually
affects cash inflows the most?
A) The education and income of your
parents
B) Your job skills
C) Your personal consumption
behavior
D) The size of your family
7) Cash inflows tend to be the
highest in which of the following?
A) College
B) Retirement
C) 20 years into a career
D) First job out of college
8) All of the following affect cash
outflowsexcept
A) the size of the family.
B) your age.
C) your education level.
D) your personal consumption
behavior.
9) If both a husband and wife are
employed, their consumption behavior will
A) increase.
B) decrease.
C) stay the same.
D) None of the above; the
employment of spouses is unrelated to consumption behavior.
10) Cash flow can be increased by
all of the followingexcept
A) increasing credit card
purchases.
B) working overtime.
C) selling stock.
D) getting a second job.
2.3 Creating a Budget
1) A personal cash flow statement
is usually the starting point for an individual’s or family’s budget.
2) One advantage of budgeting
several months in advance is that you will be warned of potential deficiencies
and can determine how to cover them.
3) The most common error people
make is to underestimate cash inflows and overestimate cash outflows.
4) Detecting future cash flow
overages and deficiencies in cash inflows and outflows improves with practice
in the budgeting process.
5) One of the problems in making a
monthly budget is that some expenses fluctuate quite a bit from month to month.
6) A three-month budget is easier
to prepare, anticipates large and unusual expenditures, and gives a better
picture than a twelve-month budget.
7) Getting financial help from
family and friends is easy and should be one of your first options in case of
emergencies.
8) Careful budgeting and controlled
spending lead to self-reliance and a feeling of financial freedom.
9) Many individuals tend to
________ their cash inflows and ________ their outflows.
A) underestimate; overestimate
B) overestimate; underestimate
C) minimize; maximize
D) not know; accurately know
10) A cash flow statement that is
based on forecasted cash flows for a future time period is called a(n)
A) cash outflow.
B) net cash flow.
C) income statement.
D) budget.
11) A budget willnotdo which of the following?
A) Help determine if cash outflows
will be sufficient to cover cash inflows
B) Anticipate cash shortages
C) Determine the excess you have to
invest
D) Determine the additional
payments you can make to reduce personal debt
12) If you do not budget for
unexpected expenses in a given month, you will likely experience a(n)
A) cash shortage.
B) cash surplus.
C) increase in assets.
D) decrease in liabilities.
13) In budgeting, it is useful to
compare ________ with the budgeted amounts to determine the accuracy or error
of the budget and adjust it as necessary.
A) actual inflows
B) actual outflows
C) both actual inflows and outflows
D) current assets
14) If spending exceeds the amount
of your income over a period of time, yourbestoption is probably to
A) reduce your spending.
B) sell some of your assets.
C) increase your work hours.
D) get a second job.
15) Which of the following isnotan appropriate approach to solving the
problem of an annual budget deficit?
A) Liquidate enough savings or
investments to make up the deficit
B) Increase short-term, flexible
expenditure items
C) Renegotiate terms for long-term
expense items
D) Increase income by getting an
additional part-time job
16) Allison expects her monthly
cash inflow after taxes to be $3000. She also has the following monthly
expenses: Rent, $750; student loan payment, $200; utilities, $150; food, $300;
recreation, $600; car expenses, $200; clothing, $150. What is Allison’s net cash flow for
the current month?
A) $2,350
B) $650
C) ($650)
D) $3000
17) Allison anticipates an
additional car expense two months from now of $400 for new tires that she has
not previously budgeted for. What action should Allison take?
A) Nothing; wait another month to
consider the expense since she doesn’t need the tires for another two months.
B) Plan to use her credit card to
purchase the tires. Then she won’t have to use her excess cash.
C) Revise her car expenses over the
next two months to allow for the additional cost of the new tires.
D) Ask her parents for the money
for the new tires.
18) A(n) ________ is a forecast of
your future cash inflows and outflows.
19) Budgeting is a starting point
for developing your financial plan. A good understanding of cash inflows and
outflows, or what you make and spend is essential. Describe one way to increase
your cash inflows and one way to decrease your personal outflows.
2.4 Personal Balance Sheet
1) Stocks are considered liquid
assets since they are easy to sell without a loss in value.
2) Long-term liabilities are debts
that will be paid at least three years into the future.
3) A high debt ratio indicates an
excessive amount of debt and should be reduced over time to avoid any debt
repayment problems.
4) Which of the following isnotan asset you might find on a personal
balance sheet?
A) Liquid assets
B) Inventory
C) Household assets
D) Personal investments
5) Which one of the following is a
liquid asset?
A) Cash in a savings account
B) A swimming pool
C) Real estate
D) Stock held in an IRA
6) Liquid assets refers to
A) the earnings on savings.
B) the ease of converting a
financial resource into cash without a loss in value.
C) the amount of insurance coverage
a person has.
D) a person’s inability to pay his
or her debt.
7) Which of the following would
increase your liquid assets?
A) Buying a new car
B) Making regular deposits to a
savings account at your bank
C) Buying rental property
D) Putting more of your salary in a
401(k)
8) Which of the following isnota liquid asset?
A) Cash in your pocket
B) Money in a savings account
C) Corporate stock you own outright
D) Money in your checking account
9) Which of the following isnotconsidered an asset for a family?
A) Cash in a checking account
B) A mortgaged home
C) A leased car
D) Furniture
10) Property such as a person’s
home, car, and furniture is called
A) liquid assets.
B) household assets.
C) major property assets.
D) investment assets.
11) The value of an asset you would
receive if you sold the asset today is called
A) market
value.
B) book value.
C) sales value.
D) cost.
12) Investment assets are all of
the followingexcept
A) stocks.
B) automobiles.
C) bonds.
D) rental property.
13) When a person owns corporate
stocks, government or corporate bonds, or mutual funds, these are called
A) liquid assets.
B) household assets.
C) investment assets.
D) retirement assets.
14) An investment in which shares
are sold to individuals and then proceeds are invested in stocks or bonds is
called a
A) current liability.
B) mutual fund.
C) stocks.
D) bonds.
15) Which of the following isnota true statement about mutual funds?
A) They are managed by professional
managers.
B) Proceeds are only invested in
stocks.
C) Minimum investment is required.
D) The value of shares is reported
inThe Wall Street Journal.
16) Corporations issue stocks for
all of the following reasonsexcept
A) to purchase new machinery.
B) to borrow money from
shareholders.
C) to fund a plant expansion.
D) to loan money to shareholders.
17) Which of the following
statements about stocks isnottrue?
A) Stocks represent partial
ownership of a firm.
B) Corporations issue stocks to
obtain money for special projects.
C) Investments in stocks are
considered liquid assets.
D) The market value of stocks
changes daily.
18) Balance sheet assets should be
valued at
A) original purchase price.
B) replacement value.
C) insured value.
D) fair market value.
19) Bills that are to be paid off
within a year are called
A) short-term liabilities.
B) one-year liabilities.
C) current liabilities.
D) insignificant bills.
20) Liabilities can be calculated
by
A) adding assets plus net worth.
B) subtracting net worth from
assets.
C) adding assets plus income.
D) subtracting expenses from
assets.
21) Liabilities include all of the
followingexcept
A) this year’s monthly car payments
on a three-year loan.
B) the total mortgage on a home.
C) the amount due on a credit card.
D) the pay-off on a student loan.
22) Student loans, car loans, and
housing loans are good examples of
A) long-term liabilities.
B) current liabilities.
C) short-term debts.
D) personal obligations.
23) The difference between assets
and liabilities is called
A) surplus.
B) deficit.
C) net income.
D) net worth.
24) Another term for your wealth
calculated by deducting money that you owe from the value of the things you own
is
A) gross income.
B) net income.
C) net property.
D) net worth.
25) A personal balance sheet
presents
A) amounts budgeted for spending.
B) income and expenses for a period
of time.
C) earnings on savings and investments.
D) items owned and amounts owed.
26) A personal balance sheet
summarizes
A) income and expenses.
B) cash inflows and outflows.
C) assets, net worth, and income.
D) assets, liabilities, and net
worth.
27) In the balance sheet, a(n)
________ in assets ________ net worth.
A) increase; increases
B) decrease; increases
C) Both A and D are correct.
D) decrease; decreases
28) Jennifer has assets of $100,000
and $10,000 of debt. She could
A) borrow more money, since her
debt ratio is low.
B) apply for a bank loan, but
expect to be turned down.
C) borrow approximately $200,000 at
below market rates.
D) not borrow more money until she
paid off her current debt.
29) The current financial position
of an individual or family is best presented with the use of a
A) budget.
B) cash flow statement.
C) balance sheet.
D) bank statement.
30) Your current liquidity ratio is
2.0. If you take money out of your savings account to pay off a credit card
your liquidity ratio will
A) increase.
B) decrease.
C) stay the same.
D) More data is needed to determine
what affect this action will have.
31) If you sell stock from your
portfolio to pay off your car loan, your debt ratio of 0.5 will
A) increase.
B) decrease.
C) stay the same.
D) More data is needed to determine
what affect this action will have.
32) Margaret has $5,000 in her
checking account, a home with a market value of $175,000, and stocks valued at
$10,000. Margaret also has a credit card debt of $15,000. Margaret’s liquidity
ratio is
A) 1.00.
B) 12.00.
C) 12.67.
D) .33.
33) Nancy has $40,000 of annual
disposable income and saves $8,000 a year. Her savings rate is
A) 5%.
B) 12%.
C) 17%.
D) 20%.
34) If you save the same dollar
amount from each paycheck during your career as your income increases, your
savings rate will
A) increase.
B) decrease.
C) stay the same.
D) More data is needed to determine
what affect this action will have.
35) Bill’s annual savings rate is
9%. If Bill wants to increase his savings rate by 2% and he currently saves
$6,750, how much additional savings will Bill need to contribute to achieve his
savings goal of 11%?
A) $8,250
B) $135
C) $1,500
D) more data needed to determine
the answer
36) If Jo Ann had $4,000 in liquid
assets and $1,000 in current liabilities, she would have a liquidity ratio of
A) 0.25.
B) 4.0.
C) 1,000.
D) 4,000.
37) A low liquidity ratio means
A) that you have very few debts.
B) that liquid assets are
increasing faster than current debt.
C) that you probably will have
trouble paying your current bills.
D) that you have many liquid
assets.
38) Paying cash for an Alaskan
cruise would
A) increase assets.
B) decrease assets.
C) increase net worth.
D) decrease liabilities.
39) Paying off a credit card with
cash will have which of the following effects on net worth?
A) Increase
B) Decrease
C) No effect
D) Insufficient data
40) Which of the following willnotincrease your liquidity ratio?
A) Purchasing a stereo on credit
B) Paying off a credit card
C) Selling stock for a gain
D) More data needed
41) If your current debt to asset
ratio is 50%, which of the following will increase it?
A) Taking out a home equity loan
B) Buying a car with cash
C) Paying off a student loan
D) Buying stock with cash
42) If Kim’s current debt ratio is
45%, this means that ________ of Kim’s assets are purchased on credit.
A) 55%
B) 45%
C) 50%
D) not enough data to determine the
answer
43) Jerry has assets of $200,000, a
net worth of $150,000, and an annual income of $100,000. What are Jerry’s
liabilities?
A) $100,000
B) $250,000
C) $50,000
D) $450,000
44) If you have current assets of
$20,000 and current liabilities of $10,000, then you
A) have a current liquidity ratio
of 2.
B) are in poor shape with a
liquidity ratio of 0.5.
C) may have trouble paying your
bills depending on their due dates.
D) are over-extended by $10,000.
45) A family with $45,000 in assets
and $22,000 in liabilities would have a net worth of
A) $45,000.
B) $23,000.
C) $22,000.
D) $67,000.
46) David’s liquidity ratio is 3.0.
He has $1,000 in current liabilities. Therefore, he has ________ worth of
liquid assets.
A) $3,000
B) $333
C) $4,000
D) $700
47) The cash in your wallet, your
checking account balance, and your savings account comprise your ________
assets.
48) If your monthly disposable
income equals $1,500 and you currently save $500/month, your savings rate is
________.
55) List three components of your
personal balance sheet and two components of your income statement.
56) Determine if the following are
liquid assets or household assets by placing an L or H beside the following.
________ Car
________ Home
________ Checking account
________ Furniture
________ Cash
________ Savings account
57) Judy has cash inflows of $3,000
for the month of June. Her expenses or cash outflows were $4,000. What is her
net cash flow? List two options for Judy to meet her financial obligations in
June. What is the effect (increase or decrease) of these options on her assets
and liabilities?
2.5 How Budgeting Fits Within Your
Financial Plan
1) Your net worth can change even
if your net cash flows are zero.
2) Which of the following actions
willnotincrease your net worth?
A) Country club dues paid monthly
B) Contributions to a mutual fund
paid monthly
C) Car payments paid monthly
D) Home mortgage payments paid
monthly
3) A person’s net worth would
increase as a result of
A) reducing amounts owed to others.
B) reducing earnings.
C) decreasing the value of assets.
D) increasing spending on current
living expenses.
4) The net worth of an individual
or family can be increased by
A) increasing spending.
B) increasing liabilities.
C) decreasing assets.
D) increasing income.
5) The best measure of a person’s
or family’s wealth is
A) the amount of salary earned
annually.
B) net worth.
C) the total dollar value of
investment assets.
D) the market value of real estate
including the personal home.
6) If your cash outflows are $600
and your cash inflows are $1,000, you can increase your net worth by
A) $1,000.
B) $600.
C) $1,600.
D) $400.
7) If your net cash inflows exceed
your net cash outflows, you can increase your net worth by investing the
difference in more ________.