Chapter 2 Money Management Skills – Flashcards
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1. (p. 45) Money management refers to day-to-day financial activities necessary to manage personal economic resources. True or False?
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TRUE
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2. (p. 45) Money management refers to annual financial activities necessary to manage personal economic resources. True or False?
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FALSE Money management refers to day-to-day financial activities.
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3. (p. 47) The focus of an organized system of financial records is to reduce credit card usage. True or False?
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FALSE The focus of an organized system is to handle daily business activities.
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4. (p. 46) A budget is a record of how a person or family has spent their money. True or False?
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FALSE A budget is a spending plan, looking to the future.
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5. (p. 46) Programs are available to help low-income older or disabled people who have difficulty budgeting. True or False?
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TRUE Based on the "Did You Know" section.
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6. (p. 47) In an organized system, credit card records belong in a safe deposit box. True or False?
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FALSE See Exhibit 2-1
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7. (p. 47) In an organized system, birth and marriage certificates belong in a safe deposit box. True or False?
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TRUE See Exhibit 2-1
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8. (p. 47) In an organized system, a will belongs in a home file. True or False?
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TRUE See Exhibit 2-1
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9. (p. 48) Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box. True or False?
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FALSE These should be kept in a home file.
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10. (p. 47) In an organized system, an annual stock investment statement belongs in a safe deposit box. True or False?
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TRUE
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11. (p. 47) Records related to tax returns should be saved for ten years. True or False?
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FALSE These should be saved for seven years.
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12. (p. 47) Wills and Social Security data should be kept for up to ten years. True or False?
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FALSE These should be kept permanently.
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13. (p. 49) The two primary personal financial statements include the personal balance sheet and a credit card payoff statement. True or False?
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FALSE The statements include the personal balance sheet and the cash flow statement.
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14. (pg. 49) The current financial position of an individual or family is a common starting point for financial planning. True or False?
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TRUE
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15. (p. 49) Net worth is the amount owed to others. True or False?
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FALSE Liabilities are amounts owed to others.
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16. (p. 51) Current liabilities are the debts you must pay within a short time. True or False?
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TRUE
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17. (p. 51) Most people liquidate their assets to calculate their net worth. True or False?
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FALSE Very few people, if any, liquidate all assets.
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18. (p. 51) A cash flow statement uses the equation: assets - liabilities = net worth. True or False?
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FALSE The equation is for a personal balance sheet.
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19. (p. 53) A cash flow statement uses the equation: cash inflows - cash outflows = cash surplus (deficit) True or False?
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TRUE
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20. (p. 53) When completing a cash flow statement, deductions are subtracted from salary to determine take home pay. True or False?
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TRUE
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21. (p. 53) When completing a cash flow statement, take home pay less deductions equals salary. True or False?
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FALSE
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22. (p. 56) Financial advisers suggest that an emergency fund should cover one to two months of living expenses. True or False?
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FALSE An emergency fund should cover three to six months of living expenses.
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23. (p. 56) When creating a budget, it is important to save the amount you have left at the end of the month. True or False?
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FALSE It is important to "pay yourself first."
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24. (p. 63) One method to spend more money is to use a direct deposit system from payroll. True or False?
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FALSE Direct deposit is one method to make saving easier.
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25. (p. 63) 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 or False?
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TRUE Direct deposit is one method to make saving easier.
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26. (p. 45) Money management refers to A. Preparing personal financial statements. B. Day-to-day financial activities. C. Trade-offs that occur with financial decisions. D. Storing financial records for easy access. E. Spending money on current living expenses.
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B. Day-to-day financial activities.
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27. (p. 46) Which of the following is NOT a component of money management? A. Creating personal financial records to document business transactions and legal matters B. Creating personal financial statements to measure and assess financial position and progress C. Creating a budget D. None of the above are components of money management E. All of the above are components of money management
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E. All of the above are components of money management
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28. (p. 47) A home file should be used for storing A. All financial documents and records. B. Financial records for current needs. C. Documents that require maximum security. D. Obsolete financial documents. E. Records that are difficult to replace.
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B. Financial records for current needs.
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29. (p. 47) 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
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D. marriage certificates
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30. (p. 47) 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
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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
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31. (p. 47) 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
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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
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32. (p. 47) A broker statement is an example of a(n) ____________ record. A. investment B. insurance C. estate planning D. tax E. consumer purchase
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A. investment
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33. (p. 47) The number of personal financial records a household has to organize may seem overwhelming. How long should you keep copies of your tax returns? A. Until you receive your refund B. Until the end of the current year C. Three years D. Seven years E. Permanently
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D. Seven years
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34. (p. 47) 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? A. Until the mortgage is paid off B. Until you move out of the house C. Three years D. Seven years E. Indefinitely
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E. Indefinitely
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35. (p. 47) How long should you keep documents relating to investments? A. No need to since the broker probably has a copy B. As long as you own them C. Seven years D. Ten years E. Permanently
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B. As long as you own them
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36. (p. 47) How long should you keep your most current will? A. No need to keep it since your lawyer probably has a photocopy B. One year C. Three years D. Seven years E. Permanently
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E. Permanently
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37. (p. 49) 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
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E. These are all correct
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38. (p. 49) Which of the following are considered to be the primary personal financial statements? A. Budget and credit card statements B. Balance sheet and cash flow statement C. Checkbook and budget D. Tax returns E. Bank statement and savings passbook
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B. Balance sheet and cash flow statement
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39. (p. 49) 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. E. Family financial goals.
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D. Items owned and amounts owed.
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40. (p. 49) The current financial position of an individual or family is best presented with the use of a(n) A. Budget. B. Cash flow statement. C. Balance sheet. D. Bank statement. E. Time value of money report.
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C. Balance sheet.
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41. (p. 49) Another name for a statement of financial position is a A. Balance sheet. B. Bank statement. C. Budget. D. Cash flow statement. E. Time value of money report.
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A. Balance sheet
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42. (p. 49) The statement that includes liquid assets, real estate, personal possessions, and investment assets is known as a A. Personal balance sheet. B. Bank statement. C. Budget. D. Cash flow statement. E. Time value of money report.
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A. Personal balance sheet.
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43. (p. 51) Items with value are referred to as A. Liabilities. B. Variable expenses. C. Net worth. D. Income. E. Assets.
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E. Assets.
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44. (p. 50-51) 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
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E. Retirement investments
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45. (p. 50-51) When creating a personal balance sheet, which of the following is a real estate asset? A. Cash value of life insurance B. Vacation property C. Possessions in your home D. Investments for a dream home E. Mutual funds
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B. Vacation property
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46. (p. 49-51) 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 B. A home C. Cash withdrawn from an ATM D. Retirement investments E. Vacation property
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A. A five-year-old television set
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47. (p. 49-51) When creating a personal balance sheet, which of the following is an investment asset? A. Cash value of life insurance B. Checking account C. Possessions in your home D. Retirement account E. Vacation property
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D. Retirement account
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48. (p. 49-51) 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
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E. Charge account
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49. (p. 49) The amount you would have if everything of value would be sold and all debts would be paid in full. A. Net assets. B. Net worth. C. Total liabilities. D. Total income. E. Budgeted expenses.
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B. Net worth.
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50. (p. 49) The equation to calculate net worth is: A. Assets -cash outflows = net worth B. Cash inflows - liabilities = net worth C. Cash inflows - cash outflows = net worth D. Assets - liabilities = net worth E. Cash inflows + liabilities = net worth
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D. Assets - liabilities = net worth
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51. (p. 51) The inability to pay debts when they are due is called: A. Liabilities B. Insolvency C. Net worth D. Cash flow E. Liquid assets
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B. Insolvency
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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
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D. Assets $40,000; liabilities $45,000
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53. (p. 52) 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
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E. Increase their debt ratio
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54. (p. 52) 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
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C. Decrease spending by $5 per day
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55. (p. 50 - 52) 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
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D. Receive a paycheck
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56. (p. 53) 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
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B. Payments for variable expenses The other choices would appear on a balance sheet.
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57. (p. 53) 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
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B. Loan payment The other choices would appear on the personal balance sheet.
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58. (p. 52) Financial experts recommend a monthly savings ratio of at least ____ of gross income. A. 0% B. 5 - 10% C. 20% D. 25 - 35% E. 50% - B. 5 - 10%;
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B. 5 - 10%
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59. (p. 52) Financial experts recommend a debt/payments ratio of less than ____ of take-home pay. A. 0% B. 5 - 10% C. 20% D. 25 - 35% E. 50% - C. 20%;
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C. 20%
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60. (p. 52) A current ratio of 2 means: A. 2% from each paycheck is available for savings B. The minimum payment for a credit card is 2% of the balance C. 2 months of living expenses are available in case of emergency D. Net worth equals 2 times the amount of debt E. $2 of liquid assets are available for every $1 in current liabilities
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E. $2 of liquid assets are available for every $1 in current liabilities
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61. (p. 52) A debt ratio of 0.5 indicates: A. The balance on the mortgage = 50% of the value of the home B. For every dollar of net worth, debt equals $0.50 C. For every dollar of debt, net worth equals $0.50 D. For every dollar of take-home pay, monthly credit payments equal $0.50 E. For every dollar of assets, monthly credit payments equal $0.50
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B. For every dollar of net worth, debt equals $0.50
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62. (p. 52) 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
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A. Debt ratio
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63. (p. 52) 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
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B. Current ratio
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64. (p. 52) 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
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C. Liquidity ratio
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65. (p. 52) 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
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D. Debt payments ratio
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66. (p. 52) 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
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E. Savings ratio
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67. (p. 52-53) All of the following are sources of income except A. Interest B. Commission C. Dividends D. Salary E. Social security taxes
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E. Social security taxes
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68. (p. 53) Which of the following is a deduction to determine take-home pay? A. Interest B. Commissions C. Dividends D. Salary E. Social security taxes
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E. Social security taxes
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69. (p. 53) Disposable income equals A. Gross income B. Take-home pay C. Amount being saved each month D. Money left over after paying for housing, food, and other necessities E. Social security taxes
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B. Take-home pay
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70. (p. 53) Discretionary income equals A. Gross income B. Take-home pay C. Amount being saved each month D. Money left over after paying for housing, food, and other necessities E. Social security taxes
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D. Money left over after paying for housing, food, and other necessities
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71. (p. 53) The money left over after paying for housing, food, and other necessities is called A. Monthly savings B. Discretionary income C. Disposable income D. Gross income E. Take-home pay
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B. Discretionary income
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72. (p. 53) Another name for take-home pay is A. Monthly savings B. Discretionary income C. Disposable income D. Gross income E. Deductions
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C. Disposable income
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73. (p. 54) An example of a variable expense is A. Mortgage payment B. Install loan payment C. Monthly bus pass D. Allocation for life insurance E. Electric bill
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E. Electric bill
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74. (p. 53) 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
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E. Electric bill
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75. (p. 53) An example of a fixed expense is A. Medical expenses B. Gifts C. Utilities D. Mortgage E. Recreation
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D. Mortgage
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76. (p. 55) 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
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B. Spend your money without care A correct goal for B is to spend your money wisely.
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77. (p. 55-56) When creating a budget, which of the following statements is true? A. Plan on your income being the same as last year. B. It is easier to create a budget if your earnings vary. C. Common financial problems can be maximized through budgeting. D. Numbers in the budget are estimates. E. It is better to overestimate your income for next year.
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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.
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78. (p. 56) When creating a budget, it is important to: A. Save the amount you have left at the end of the month. B. Set aside savings after your variable expenses are paid. C. Save an amount no more than three percent of your annual income in emergency fund. D. Spend the amount of money you have budgeted in each category. E. Set aside savings before other expenses are budgeted.
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E. Set aside savings before other expenses are budgeted.
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79. (p. 59) The difference between the amount budgeted and the actual amount received or spent is called the A. Variance B. Cash outflow C. Income D. Cash inflow E. Variable expense
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A. Variance
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80. (p. 59) A budget deficit would result when a person's or family's A. Actual expenses are less than planned expenses. B. Assets exceed liabilities. C. Actual expenses equal planned expenses. D. Actual expenses are greater than planned expenses. E. Net worth decreases.
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D. Actual expenses are greater than planned expenses.
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81. (p. 59) After the budget is created, it is important to A. File the budget in a safe deposit box B. Compare it to the previous budget C. Track spending and identify variances D. Only pay attention to expenses that are more than 10 percent of your salary E. None of the above are true since budgets are just estimates
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C. Track spending and identify variances
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82. (p. 59) 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
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E. Auto insurance Many admit that auto insurance is a necessary expense, the others are discretionary.
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83. (p. 60) A budget that involves envelopes, folders or containers to hold money or slips of paper is called a A. Mental budget B. Physical budget C. Written budget D. Computerized budget E. Allocated budget
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B. Physical budget
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84. (p. 60) A budget that can be kept on notebook paper or budgeting paper is called a A. Mental budget B. Physical budget C. Written budget D. Computerized budget E. Allocated budget
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C. Written budget
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85. (p. 61-63) The document that would be most useful to track spending patterns for the past few months is A. Balance sheet B. Cash flow statement C. Budget D. All of the above E. None of the above
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B. Cash flow statement See Concept Check 2-4
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86. (p. 61) The document that would be most useful to track planned spending patterns for the next month is A. Balance sheet B. Cash flow statement C. Budget D. All of the above E. None of the above
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C. Budget See Concept Check 2-4
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87. (p. 61) The document that would be most useful to track current value of investment accounts is A. Balance sheet B. Cash flow statement C. Budget D. All of the above E. None of the above
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A. Balance sheet See Concept Check 2-4
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88. (p. 51) A family with $45,000 in assets and $22,000 of liabilities would have a net worth of A. $22,000 B. $23,000 C. $41,000 D. $45,000 E. $67,000
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B. $23,000 Assets - liabilities = $45,000 - 22,000 = $23,000
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89. (p. 51) Patrick Guitman has a net worth of $156,000 and liabilities of $167,000. What are his total assets? A. $11,000 B. $156,000 C. $161,500 D. $167,000 E. $323,000
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E. $323,000 Net worth + liabilities = $156,000 + 167,000 = $323,000
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90. (p. 51) Given the following information, calculate the net worth: Assets = $5000 Cash inflows = $4500 Cash outflows = $2000 Liabilities = $1000 A. $500 B. $1000 C. $2500 D. $3000 E. $4000
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E. $4000 Assets - liabilities = $5000 - 1000 = $4000
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91. (p. 52) 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 B. 4 C. 2.86 D. 16.67 E. 8.67
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A. 33.3 liabilities/net worth - 24,000/72,000 = 33.3%
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92. (p. 52) 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 A. 33.3 B. 4 C. 2.86 D. 16.67 E. 8.67
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B. 4 liquid assets/current liabilities - 4400/1100 = 4
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93. (p. 52) 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 A. 33.3 B. 4 C. 2.86 D. 16.67 E. 8.67
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C. 2.86 liquid assets/monthly expenses - 4400/1540 = 2.86
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94. (p. 52) 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 A. 33.3 percent B. 4 percent C. 2.86 percent D. 16.67 percent E. 8.67 percent
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D. 16.67 percent monthly credit payments/take-home pay = $300/$1,800 = .1667 = 16.67%
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95. (p. 52) 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 A. 33.3 percent B. 4 percent C. 2.86 percent D. 16.67 percent E. 8.67 percent
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E. 8.67 percent monthly savings/gross income = $260/$3000 = .0867 = 8.67%
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96. (p. 57) Rebecca Gladlyn budgeted $345 for a new wardrobe in June. She actually spent $378. What is her budget variance? A. $378 deficit B. $33 deficit C. $723 deficit D. $33 surplus E. $345 surplus
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B. $33 deficit $345 budgeted less $378 spent = $33 deficit. Note: Similar to self-test problem #2.
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97. (p. 57) Rebecca Gladlyn budgeted $1050 for housing and utilities in July. She actually spent $962. What is her budget variance? A. $962 deficit B. $88 deficit C. $44 deficit D. $88 surplus E. $962 surplus
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D. $88 surplus $1050 budgeted less $962 spent = $88 surplus. Note: Similar to self-test problem #2.
