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FINN 3003 Test 1 practice questions Ch 1-4
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Terms in this set (115)
Net cash flows are the difference between cash inflows and cash outflows and can be either positive or negative.
True
The primary goal of financial planning is to
maximize wealth.
The personal cash flow statement measures
cash inflows and outflows.
The cash flow statement reports a person's or family's
current income and payments.
Cash outflows are also called
expenses.
Which of the following usually affects cash inflows the most?
job skills
All of the following affect cash outflows except
education
The most common error people make is to underestimate cash inflows and overestimate cash outflows.
false
A three-month budget is easier to prepare, anticipates large and unusual expenditures, and gives a better picture than a twelve-month budget.
false
Many individuals tend to ________ their cash inflows and ________ their outflows.
overestimate; underestimate
A cash flow statement that is based on forecasted cash flows for a future time period is called a(n)
budget.
A high debt ratio indicates an excessive amount of debt and should be reduced over time to avoid any debt repayment problems.
true
Liquid assets refers to
the ease of converting a financial resource into cash without a loss in value.
An investment in which shares are sold to individuals and then proceeds are invested in stocks or bonds is called a
mutual fund
Bills that are to be paid off within a year are called
current liabilities.
The difference between assets and liabilities is called
net worth
Another term for your wealth calculated by deducting money that you owe from the value of the things you own is
net worth
A personal balance sheet presents
items owned and amounts owed.
A personal balance sheet summarizes
assets, liabilities, and net worth.
In the balance sheet, a(n) ________ in assets ________ net worth
increase; increases
vice versa
Jennifer has assets of $100,000 and $10,000 of debt. She could
borrow more money, since her debt ratio is low.
The current financial position of an individual or family is best presented with the use of a
balance sheet
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
increase
If you sell stock from your portfolio to pay off your car loan, your debt ratio of 0.5 will
decrease
Nancy has $40,000 of annual disposable income and saves $8,000 a year. Her savings rate is
20%
If you save the same dollar amount from each paycheck during your career as your income increases, your savings rate will
decrease
A low liquidity ratio means
that you probably will have trouble paying your current bills.
Paying off a credit card with cash will have which of the following effects on net worth?
no effect
If your current debt to asset ratio is 50%, which of the following will increase it?
paying off a student loan
If you have current assets of $20,000 and current liabilities of $10,000, then you
have a current liquidity ratio of 2.
The time period over which you save money has very little impact on its growth.
false
The time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific savings goal.
true
Time value of money calculations, such as present and future value amounts, can be used for many day-to-day decisions
true
Time value of money is only applied to single dollar amounts.
false
Your utility bill, which varies each month, is an example of an annuity.
false
It is better to spend your money today than wait a year because you will be able to buy more with it today than in one year.
true
An annuity is a stream of equal payments that are received or paid at equal intervals in time.
true
An annuity is a stream of equal payments that are received or paid at random periods of time.
false
Time value of money computations relate to future value of lump sum cash flows only.
false
There are two sets of present and future value tables: one set for lump sums and one set for annuities.
true
Money received today is worth more than the same amount of money received in the future. This is true because
money received today can grow at a compounded rate.
The time value of money refers to
the difference in values of money as to when it is received.
The time value of money implies that a dollar received today is worth ________ a dollar received tomorrow.
more than
The concept of time value of money is based on
interest earned.
An ordinary annuity can be defined as
a series of equal payments at the end of each period.
Which of the following it not an annuity?
Monthly utility bills
The concept of time value of money is important to financial decision making because
it emphasizes earning a return of interest on the money you invested.
B) it recognizes that $1 today has more value than $1 received a year from now.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of these.
When money earns interest on interest, it is said to be compounding.
true
When money accumulates interest, it is said to be discounting.
false
Compounding is the process of obtaining present values; discounting is the process of obtaining future values.
false
The process of obtaining ________ values is referred to as compounding.
future
The accumulation of interest over time is called
compounding
To determine how much you must save each year to have enough for your daughter's college education, you would use the present value of $1 tables.
false
Which of the following decisions would involve the use of the future value of $1?
Your brother buys your car and offers to pay you $500 now or $1,500 in two years
Byron is investigating a mutual fund that claims that $1,000 today will be worth $5,000 in five years. What is he solving for?
interest rate
The process of obtaining present values is known as discounting.
true
The process of obtaining present values is known as compounding.
false
The process of obtaining ________ values is referred to as discounting.
present
Susie wants to know how much she needs to save today to have $5,000 in five years. Which of the following tables should she use?
Present value $1
Sandy wants to know how much she needs to save today to have $5,000 in five years at a 7% interest rate. Which of the following tables should she use?
Present value $1
Which of the following decisions would involve the use of the present value of $1?
Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college in 4 years
Future and present values are dependent upon all of the following except
annual income
An annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period.
true
If the payment in an ordinary annuity changes over time, you cannot determine the future value of the payment stream.
false
Which of the following decisions would involve the use of the future value of a $1 ordinary annuity table?
You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
Jerry wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10% interest rate. Which of the following tables should he use?
Future value ordinary annuity
Don wants to know how much he needs to save every year to amass $15,000 in five years at a 5% interest rate. What is he calculating using his financial calculator?
Payment
The future value of an annuity assumes that the payments are received
at the end of the year and the last payment does not compound.
To determine how much money you would need to save to withdraw $10,000 a year for five years, you would use the present value of an annuity tables.
true
The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.
true
To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use the
Future Value of an annuity.
B) Present Value of an annuity.
C) both Future and Present Value of an annuity.
To determine how much you would need to save each year to reach a specific goal, you would use
Future Value of an annuity.
Yogi Berra Jr. has agreed to play for the New York Mets for $4 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?
Present value of an annuity
The time value of money can be applied to all of the following except
investment valuation.
Only the income that remains after deductions and exemptions are subtracted from adjusted gross income is taxable.
true
All interest and dividends received by an individual taxpayer are taxable
false
Which of the following is not a tax filing status option?
divorced
Different tax rates are associated with each filing status such as single, married filing jointly, and head of household.
true
A dollar's worth of tax credits is more valuable than a dollar's worth of deductions.
true
A long-term capital gain results from profit on the sale of capital assets that were held 12 months or more.
true
To qualify for "head of household" you must
A) be single.
B) have at least one dependent in your household.
Your gross wages are subject to FICA (Federal Insurance Contributions Act) taxes that fund the Social Security system and Medicare.
true
An earned income credit is a special credit that reduces the amount of taxes owed by taxpayers who earn high incomes.
false
Employee contributions to qualified Individual Retirement Accounts (IRAs) and interest paid on student loans are adjusted from gross income to calculate a taxpayer's adjusted gross income.
true
There is no Social Security tax on income beyond a certain level.
true
In 2001, the tax laws were changed to allow substantial tax benefits for parents who wish to set aside money for their children's future college expenses.
true
Gross income includes all of the following except
employer's current contribution to 401(k).
Jerry is divorced and has two children that live with him. What filing status should Jerry claim on his tax return?
Head of household
The government usually adjusts the exemptions and standard deductions amounts annually to account for inflation.
true
Which of the following is the correct method for starting with gross income and computing taxable income?
Subtract adjustments, deductions, and exemptions
The standard deduction (assuming you are not over 65 or blind) is largest for
married filing jointly.
The tax method that uses the principle of taxing those more who earn more is called ________ taxation.
progressive
The filing status that yields the largest standard deduction per taxpayer is
head of household.
Which of the following items is not impacted by the taxpayer's income level?
Personal exemptions
Which of the following is not a legitimate itemized deduction?
Interest paid on credit cards
Which of the following is not subject to immediate taxation?
Contributions to your employer-sponsored retirement account
An expense that could be included in the itemized deductions of a taxpayer is
real estate property taxes.
Income earned from the sale of an asset for more than you paid for it is classified as a(n)
capital gain.
Which of the following taxes is only paid on the first $110,100 of your salary?
Social Security Tax
Purchasing which of the following items on credit will help reduce your tax bill?
Home
Which item below cannot be taken as an itemized deduction?
Child and dependent care expenses
Which of the following statements is not true regarding FICA taxes paid?
All FICA taxes apply to your total income
You should claim itemized deductions if
itemized deductions exceed the standard deduction.
If you own stock that has increased in price, it would be best to sell it after you have owned it for at least
12 months and one day.
The Tax Relief Act of 2001
provided educational incentives to most taxpayers.
When you own a house as a primary residence
interest and taxes may increase your allowable deductions to the point where it is beneficial to itemize them
Determining taxes requires you to address all of the following topics except
daily living expenses.
Gross income and adjusted gross income can be the same if you do not have any special adjustments. Which of the following is not one of these special adjustments?
Capital gains are deducted and capital losses are added
A allowable amount which taxpayers can claim for themselves and dependents is called a(n)
exemption
Which tax form is generally used by taxpayers whose filing status is married, has no dependents, and whose taxable income if less than $100,000?
1040
For qualified individuals, a contribution to a traditional IRA (Individual Retirement Account) is a(n)
adjustment to gross income.
Jerry is divorced and has two children that live with him. In addition he baby-sits three other children in the evenings and has a cat and two dogs. How many exemptions can he claim on his tax return?
three
Reductions of gross income for such items as individual retirement accounts (IRAs), moving expenses, and student loan interest payments will result in
adjusted gross income.
When taxable income exceeds certain levels, the itemized deductions and exemptions
are reduced.
Legal methods of reducing your taxes include all of the following except
overstating cash contributions to Salvation Army Christmas kettles
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