2. Money Management Refers to Annual Financial Activities Necessary to Manage Personal

Student:

1. Money management refers to day-to-day financial activities necessary to manage personal economic resources while working toward long-term financial security. True False 2. Money management refers to annual financial activities necessary to manage personal economic resources. True False 3. The focus of an organized system of financial records is to reduce credit card usage. True False 4. A budget is a record of how a person or family has spent their money. True False 5. Programs are available to help low-income older or disabled people who have difficulty budgeting. True False 6. In an organized system, credit card records belong in a safe deposit box. True False 7. In an organized system, birth and marriage certificates belong in a safe deposit box. True False 8. In an organized system, a will belongs in a home file. True False 9. Financial records that may need to be referred to on a regular basis should be kept in a safe deposit box. True False 10. In an organized system, account summaries showing the performance results of investments belong in a computer or online. True False 11. Records related to tax returns should be saved for 10 years. True False 12. Wills and Social Security data should be kept for up to 10 years. True False 13. The two primary personal financial statements include the personal balance sheet and a credit card payoff statement. True False 14. The current financial position of an individual or family is a common starting point for financial planning. True False 15. Net worth is the amount owed to others. True False 16. Current liabilities are the debts you must pay within a short time, usually less than a year. True False 17. Most people liquidate their assets to calculate their net worth. True False 18. A cash flow statement uses this equation: Assets - Liabilities = Net worth. True False 19. A cash flow statement uses this equation: Total cash received during the time period - Cash outflows during the time period = Cash surplus (deficit). True False 20. When completing a cash flow statement, deductions are subtracted from salary to determine take-home pay. True False 21. When completing a cash flow statement, take-home pay less deductions equals salary. True False 22. Financial advisers suggest that an emergency fund should cover one to two months of living expenses. True False 23. When creating a budget, it is important to save the amount you have left at the end of the month. True False 24. One method to spend more money is to use a direct deposit system from payroll. True False 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 False 26. 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. 27. Which of the following is NOT a component of money management? A. Storing 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 these are components of money management. E Storing personal financial records, creating personal financial statements, and creating a budget are all . components of money management. 28. 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. 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 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. A plan for effective budgeting belongs in your safe deposit box. E. Adoption papers belong in a home file. 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. A plan for effective budgeting belongs in your safe deposit box. E. Adoption papers belong in a home file. 32. A broker statement is an example of a(n) record. A. investment B. insurance C. estate planning D. tax E. consumer purchase 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? A. Until you receive your refund B. Until the end of the current year C. Three years D. Seven years E. Permanently 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? A. Until the mortgage is paid off B. Until you move out of the house C. Three years D. Seven years E. Indefinitely 35. 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. 36. 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. 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. 38. Which of the following are considered to be the primary personal financial statements? A. Budget and credit card statements B. Personal balance sheet and cash flow statement C. Checkbook and budget D. Tax returns E. Bank statement and savings passbook 39. 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. 40. 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. E. Time value of money report. 41. 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. 42. 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. 43. Items with monetary value are referred to as A. Liabilities. B. Variable expenses. C. Net worth. D. Income. E. Assets. 44. Which of the following is NOT a liquid asset? A. Savings/money market accounts B. Cash value of life insurance C. Checking account balance D. Coins in a jar at home E. Retirement investments 45. 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 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 B. A home C. Cash in a checking account D. Retirement investments E. Vacation property 47. 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 48. When creating a personal balance sheet, which of the following is a current liability? A. Checking account B. Net worth C. Student loan D. Money your sister owes you in two years E. Charge account balance 49.The amount you would have if everything of value would be sold and all debts would be paid in full is called your A. Net assets. B. Net worth. C. Total liabilities. D. Total income. E. Budgeted expenses. 50. 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. 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. 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 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. 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 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 56. Which of the following appears on a cash flow statement? A. Assets B. Payments for variable expenses C. Net worth D. Liabilities E. Investments 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. Cash value of life insurance 58. 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% 59. 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% 60. 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. 61. 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. 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 63. Which of the following ratios indicates that liquid assets are available to pay current liabilities for a household? A. Debt ratio B. Current ratio C. Liquidity ratio D. Debt payments ratio E. Savings 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 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 66. Which of the following ratios shows the relationship between gross income and money saved? A. Debt ratio B. Current ratio C. Liquidity ratio D. Debt payments 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 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 69. Disposable income equals A. Gross income. B. Take-home pay. C. The amount being saved each month. D. Money left over after paying for housing, food, and other necessities. E. Social Security taxes. 70. Discretionary income equals A. Gross income. B. Take-home pay. C. The amount being saved each month. D. Money left over after paying for housing, food, and other necessities. E. Social Security taxes. 71. 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. 72. Another name for take-home pay is A. Monthly savings. B. Discretionary income. C. Disposable income. D. Gross income. E. Deductions. 73. An example of a variable expense is a(n) A. Mortgage payment. B. Installment loan payment. C. Monthly bus pass. D. Allocation for life insurance. E. Electric bill. 74. All of the following are fixed expenses except a(n) A. Mortgage payment. B. Installment loan payment. C. Monthly bus pass. D. Allocation for life insurance. E. Electric bill. 75. An example of a fixed expense is A. Medical expenses. B. Gifts. C. Utilities. D. A mortgage. E. Recreation. 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 77. When creating a budget, which of the following statements is true? A. Include in income the bonuses and gifts you expect to receive. 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. 78. 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 3% of your annual income in an emergency fund. D. Spend the amount of money you have budgeted in each category. E. "Pay yourself first" by setting 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. B. Cash outflow. C. Income. D. Cash inflow. E. Variable expense. 80. 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. 81. 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. Pay attention only to expenses that are more than 10 percent of your salary. E. None of these are true since budgets are just estimates. 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 83. A budget system 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. 84. A budget system 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. 85. The document that would be most useful to track spending patterns for the past few months is the A. Balance sheet. B. Cash flow statement. C. Budget. D. All of these. E. None of these. 86. The document that would be most useful to track planned spending patterns for the next month is the A. Balance sheet. B. Cash flow statement. C. Budget. D. All of these. E. None of these. 87. The document that would be most useful to track the current value of investment accounts is the A. Balance sheet. B. Cash flow statement. C. Budget. D. All of these. E. None of these. 88. A family with $50,000 in assets and $30,000 of liabilities would have a net worth of A. $10,000. B. $20,000. C. $30,000. D. $50,000. E. $80,000. 89. Patrick Guitman has a net worth of $165,000 and liabilities of $176,000. What are his total assets? A. $11,000 B. $-165,000 C. $176,000 D. $187,000 E. $341,000 90. Given the following information, calculate the net worth: Assets = $7,000 Cash inflows = $6,500 Cash outflows = $4,000 Liabilities = $3,000 A. $500 B. $1,000 C. $2,500 D. $3,000 E. $4,000 91. Given the following information, calculate the debt ratio percentage: Liabilities = $24,500 Liquid assets = $4,900 Monthly credit payments = $800 Monthly savings = $760 Net worth = $72,500 Current liabilities = $1,600 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $-2,040 A. -33.79 B. -3.06 C. 2.40 D. 34.78 E. -21.71 92. Given the following information, calculate the current ratio: Liabilities = $-24,500 Liquid assets = $-4,900 Monthly credit payments = $-800 Monthly savings = $-760 Net worth = $-72,500 Current liabilities = $-1,600 Take-home pay = $-2,300 Gross income = $-3,500 Monthly expenses = $-2,040 A. -33.79 B. -3.06 C. -2.40 D. -34.78 E. -21.71 93. Given the following information, calculate the liquidity ratio: Liabilities = $-24,500 Liquid assets = $-4,900 Monthly credit payments = $-800 Monthly savings = $-760 Net worth = $-72,500 Current liabilities = $-1,600 Take-home pay = $-2,300 Gross income = $-3,500 Monthly expenses = $-2,040 A. -33.79 B. 3.06. C. 2.40 D. -34.78 E. -21.71 94.Given the following information, calculate the debt payments ratio: Liabilities = $24,500 Liquid assets = $4,900 Monthly credit payments = $800 Monthly savings = $760 Net worth = $72,500 Current liabilities = $1,600 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,040 A. 33.79% B. 3.06% C. 2.40% D. 34.78% E. 21.71% 95. Given the following information, calculate the savings ratio: Liabilities = $24,500 Liquid assets = $4,900 Monthly credit payments = $800 Monthly savings = $760 Net worth = $72,500 Current liabilities = $1,600 Take-home pay = $2,300 Gross income = $3,500 Monthly expenses = $2,040 A. 33.79% B. 3.06% C. 2.40% D. 34.78% E. 21.71% 96. Rebecca Gladlyn budgeted $375 for a new wardrobe in June. She actually spent $408. What is her budget variance? A. $408 deficit B. $33 deficit C. $783 deficit D. $33 surplus E. $375 surplus 97. Rebecca Gladlyn budgeted $1,250 for housing and utilities in July. She actually spent $1,162. What is her budget variance? A. $1,162 deficit B. $88 deficit C. $44 deficit D. $88 surplus E. $1,162 surplus 98. What is a personal balance sheet?

99. Given the following information, calculate net worth: 100.Given the following information, calculate total assets:

101.Given the following information, calculate total liabilities:

102.Given the following information, calculate net worth: 103.Given the following information from June 30, 2012, create a personal balance sheet for Jacob and Jennifer Johnson in good form:

104.On a personal balance sheet, assets can be identified as belonging to one of four categories. List each category and provide one example of each.

105.What is an example of an asset? At what value is it listed on the personal balance sheet?

106.Identify what a cash flow statement is and discuss what it is used for. 107.Given the following information from June 30, 2012, calculate cash inflows, cash outflows, and cash surplus or deficit for Tim Carter:

108.Why can a spending diary be helpful?

109.Discuss how a budget is created and used.

110.How can personal financial statements and a budget allow you to achieve your financial goals?

111.What are two methods that can make saving easier? 33. (p. 47) D

34. (p. 47) E 1. (p. 45) TRUE 35. (p. 47) B 2. (p. 45) FALSE 36. (p. 47) E 3. (p. 47) FALSE

4. (p. 46) FALSE

5. (p. 46) TRUE

6. (p. 47) FALSE

7. (p. 47) TRUE

8. (p. 47) TRUE

9. (p. 48) FALSE

10. (p. 47) TRUE

11. (p. 47) FALSE

12. (p. 47) FALSE

13. (p. 49) FALSE

14. (p. 49) TRUE

15. (p. 49) FALSE

16. (p. 51) TRUE

17. (p. 51) FALSE

18. (p. 51) FALSE

19. (p. 53) TRUE

20. (p. 53) TRUE

21. (p. 53) FALSE

22. (p. 56) FALSE

23. (p. 56) FALSE

24. (p. 63) FALSE

25. (p. 63) TRUE

26. (p. 45) B

27. (p. 46) E

28. (p. 47) B

29. (p. 47) D

30. (p. 47) C

31. (p. 47) A

32. (p. 47) A 2 Key 37. (p. 49) E

38. (p. 49) B

39. (p. 49) D

40. (p. 49) C

41. (p. 49) A

42. (p. 49) A

43. (p. 51) E

44. (p. 50-51) E

45. (p. 50-51) B

46. (p. 49-51) A

47. (p. 49-51) D

48. (p. 49-51) E

49. (p. 49) B

50. (p. 49) D

51. (p. 51) B

52. (p. 51) D

53. (p. 52) E

54. (p. 52) C

55. (p. 50-52) D

56. (p. 53) B

57. (p. 53) B

58. (p. 52) B

59. (p. 52) C

60. (p. 52) E

61. (p. 52) B

62. (p. 52) A

63. (p. 52) B

64. (p. 52) C

65. (p. 52) D

66. (p. 52) E

67. (p. 52-53) E

68. (p. 53) E

69. (p. 53) B

70. (p. 53) D

71. (p. 53) B

72. (p. 53) C

73. (p. 54) E

74. (p. 53) E 75. (p. 53) D

76. (p. 55) B

77. (p. 55-56) D

78. (p. 56) E

79. (p. 59) A

80. (p. 59) D

81. (p. 59) C

82. (p. 59) E

83. (p. 60) B

84. (p. 60) C

85. (p. 61-63) B

86. (p. 61) C

87. (p. 61) A

88. (p. 51) B

89. (p. 51) E

90. (p. 51) E

91. (p. 52) A

92. (p. 52) B

93. (p. 52) C

94. (p. 52) D

95. (p. 52) E

96. (p. 57) B

97. (p. 57) D

98. (p. 49) A personal balance sheet identifies the assets (items of value) and the liabilities (amounts owed) and calculates the net worth for an individual or a household. It provides information about a household's current financial position and uses market (current) values.

Feedback: Assets - Liabilities = Net worth; ($10,000 + 138,000 + 7,000 + 74,000) - (500 + 97,000) = 229,000 - 97,500 = $131,500. 99. (p. 49) $131,500

$12,000 + 1,100 + 2,000 + 5,500 + 175,000 + 500 = $196,100. Feedback: Total assets = Automobile + Cash + Cash value of life insurance + Mutual funds + Home + Market value of TV = 100. (p. 51) $196,100

Feedback: Total liabilities = Auto loan + Credit card balance + Mortgage = $10,000 + 1,250 + 150,000 = $161,250. 101. (p. 51) $161,250 ($12,000 + 1,100 + 2,000 + 5,500 + 175,000 + 500) - (10,000 + 1,250 + 150,000) = 196,100 - 161,250 = $34,850. (Automobile + Cash + Cash value of life insurance + Mutual fund + Home + Market value of TV) less (Auto loan + Credit card balance + Mortgage). Feedback: Assets - Liabilities = Net worth. 102. (p. 51) $34,850

103. (p. 49-51) 104. (p. 49-51)

105. (p. 50-51) Assets are listed at current, or market, value. Examples are listed below.

106. (p. 52-55) A cash flow statement is a summary of cash receipts and payments for a given period, such as a month or a year. It shows the calculation of a cash surplus or deficit (cash inflows less cash outflows). Since it provides data on income and spending patterns, it is helpful when preparing a budget. A cash flow statement provides the foundation for preparing and implementing a spending, saving, and investment plan.

Cash surplus = Cash inflows less cash outflows = $3,875 - 2,095 = $1,780. Cash outflows = Rent + Parking + Food and dining out + Clothing + Insurance + Cell phone = $1,000 + 250 + 395 +150 + 200 + 100 = $2,095. (Note: The book example shows deductions being reduced from gross salary to determine net salary in calculating cash inflows.) 107. (p. 52-55) Cash inflows = Salary - Deductions + Interest earned = $5,500 - 1,700 + 75 = $3,875

108. (p. 58) A spending diary is used to track how money is being spent. It is useful for creating a budget.

109. (p. 55-59) A budget, or spending plan, begins with setting financial goals. Next, estimates are made for income, emergency fund and savings, fixed expenses, and variable expenses. After the spending plan is established, income and expenses are tracked and budget variances are calculated. Finally, spending and savings patterns are reviewed. This last step is used to determine any revisions to goals or the budget. 110. (p. 60) The personal balance sheet reports the current financial position, where you are now. The cash flow statement tells what has been received and spent over the past month. The budget plans spending and saving to achieve financial goals.

111. (p. 63) Three methods are identified in Chapter 2. These are (1) writing a check each payday and depositing it in a savings account not readily available for regular spending, (2) using a direct deposit system to have an amount automatically deducted from your salary and deposited into savings, and (3) saving coins or spending less on certain items. 2 Summary Category # of Blooms: Analyze Questions3 Blooms: Apply 22 Blooms: Remember 35 Blooms: Understand 51 Difficulty: 1 Easy 37 Difficulty: 2 Medium 45 Difficulty: 3 Hard 29 Kapoor - Chapter 02 111 Learning Objective: 02-01 Identify the main components of wise money management. 23 Learning Objective: 02-02 Create a personal balance sheet and cash flow statement. 67 Learning Objective: 02-03 Develop and implement a personal budget. 15 Learning Objective: 02-04 Connect money management activities with saving for personal financial goals. 7 Topic: A Plan for Effective Budgeting 15 Topic: A Successful Money Management Plan 23 Topic: Money Management and Achieving Financial Goals 7 Topic: Personal Financial Statements 66 1

Student:

1. Personal financial planning is the process of managing your money to achieve personal economic satisfaction. True False 2. A financial plan is an informal report that analyzes past financial decisions. True False 3. A financial plan is another name for a budget. True False 4. Financial Plans are only created by financial planners. True False 5. The life situation of a household has little influence on personal financial planning decisions. True False 6. The financial activities for a young single will probably be the same as those for an older couple with no dependent children at home. True False 7. Inflation is most harmful to people with incomes expected to increase. True False 8. Inflation reduces the buying power of money. True False 9. When prices are increasing at a rate of 6 percent, the cost of products would double in about 12 years. True False 10. Borrowing by consumers and businesses usually results in lower interest rates. True False 11. Developing a budget is part of the "spending" component of financial planning activities. True False 12. Retirement planning includes thinking about your housing situation, recreational activities, and possible volunteer or part-time work. True False 13. Short-term goals are usually achieved within the next year or so. True False 14. Intermediate goals are usually achieved within the next year or so. True False 15. Purchasing a car is an example of a consumable-product goal. True False 16. Purchasing a car is an example of a durable-product goal. True False 17. Opportunity costs refer to money already spent. True False 18. Opportunity costs refer to time, money, and other resources that are given up when a choice is made. True False 19. Interest earned is calculated by multiplying the principal times the opportunity cost. True False 20. Risks associated with most financial decisions are easy to measure. True False 21. A formalized report that summarizes your current financial situation, analyzes your financial needs, and recommends a direction for your financial activities is a(n) A. Insurance prospectus. B. Financial plan. C. Budget. D. Investment forecast. E. Statement. 22. The major function of a financial plan is to A. Reduce taxes. B. Increase savings. C. Achieve financial goals. D. Improve your credit rating. E. Obtain adequate insurance protection. 23. An advantage of personal financial planning is: A. The use of low-interest savings B. Increased impulse spending C. Increased control of financial affairs D. More credit card debt E. Less monitoring of investments 24. The stages that an individual goes through based on stages in the family and financial needs is called the A. Financial planning process B. Budgeting procedure C. Personal economic cycle D. Adult life cycle E. Tax planning process 25. Sally Smith's friends have told her that they think she should consider a visit to a personal financial planner. Why do you think her friends made the suggestion? A. Sally usually saves 10 percent of her paycheck for long-term goals. B. Sally has no credit card debt. C. Sally tracks her investments and makes changes to her allocations once per year. D. Sally plans to quit her job and volunteer for local organizations. E. Sally has used a budget for years. 26. John Jones was laid off from his job two months ago. He just received an offer for a position that pays 2/3 the salary of his old job. Why should he set up a financial plan? A. To increase the effectiveness of obtaining, using, and protecting his financial resources. B. To decrease control of his financial affairs regarding debt. C. To accept the loss of freedom from financial worries due to his new position. D. To learn how to manage with less savings. E. To find out why he was laid off. 27. The consumer price index reflects: A. The prices of products and services in the United States B. The prices of products and services around the world C. The average change in prices of products and services of urban consumers D. The change in prices of products and services around the world E. None of the above 28. The actual cost of living increase for a household will be: AGreater than the inflation rate as reported by the CPI since the index excludes the product or service . with the highest inflation rate for the past 12 months B Lower than the inflation rate as reported by the CPI since the index excludes the product or service with . the lowest inflation rate for the past 12 months C Equal to the inflation rate as reported by the CPI since it includes all products and services whether or . not the prices have changed in the past 12 months D. Either greater than or less than the inflation rate as reported by the CPI depending on the household's cost of necessities purchased E. Zero since the CPI does not measure consumer price changes 29. The Rule of 72 is: A. A tool to determine the number of years until retirement for an employee B. Used to estimate how long it takes for prices to double using a given annual inflation rate C. The legal code for requiring companies to provide a match on retirement savings D. Used to calculate interest rates for savings E. The number of steps required to complete a financial plan 30. Who is most likely to benefit by inflation? A. Retired people B. Lenders C. Borrowers D. Low-income consumers E. Government 31. Lower consumer saving and investing is likely to be accompanied by A. Lower union wages B. Lower interest rates C. Lower production costs D. Higher interest rates E. Higher exports 32. An investor should expect to receive a risk premium for A. Expanded exports B. Lower consumer prices C. Higher uncertainty about getting his/her money back D. Reduced availability of investments E. Expected lower inflation 33. Which of the following would increase the interest rate for a loan? A. Poor credit rating B. Higher down payment C. Constant interest rates D. Lower consumer prices E. Short time to maturity 34. Patrick Guitman recently graduated from college with $20,000 in student loans and $5,000 in credit card debt. He usually makes minimum payments on his debt and he has been late with three payments in the last year. He wants to buy a new car but was told that his interest rate on a loan would be very high. What is the most likely reason this might be so? A. General interest rates are very low B. His credit rating is poor because of his late payments C. He already has a student loan outstanding D. Recent graduates are not allowed to have more than $25,000 in debt outstanding E. Interest rates must be tied to the CPI 35. Attempts to increase income are part of the component of financial planning. A. Obtaining B. Planning C. Saving D. Borrowing E. Spending 36. The ‘borrowing' activity in a financial plan relates to A. Acquiring adequate insurance coverage B. Investing for long-term growth C. Setting up a budget D. Obtaining financial resources from employment, investments or ownership E. Maintaining control of credit-buying habits 37. The problem of bankruptcy is associated with poor decisions in the component of financial planning. A. Sharing B. Savings C. Obtaining D. Borrowing E. Protecting 38. A question associated with the saving component of financial planning is: A. Do you have an adequate emergency fund? B. Is your will current? C. Is your investment program appropriate to your income and tax situation? D. Do you have a realistic budget for your current financial situation? E. Are your transportation expenses minimized through careful planning? 39. Which of the following short-term goals is stated most clearly? A. Buy a car for less than $17,000 within 6 months B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account C. Purchase a house with a mortgage no greater than $150,000 within 5 years D. Set up an emergency fund E. Invest $50 per month for the next 18 years for my nephew's college fund 40. Which of the following long-term goals is stated most clearly? A. Buy a car for less than $17,000 within 6 months B. Retire in 10 years at age 65 C. Purchase a house with a mortgage no greater than $150,000 within 3 years D. Set up an emergency fund E. Invest $50 per month for the next 18 years for my nephew's college fund 41. Which of the following intermediate goals is stated most clearly? A. Buy a car for less than $17,000 within 6 months B. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account C. Purchase a house with a mortgage no greater than $150,000 within 3 years D. Set up an emergency fund E. Invest $50 per month for the next 18 years for my nephew's college fund 42. Which of the following goals would be the easiest to implement and measure? A. Invest $2,000 a year for retirement. B. Reduce our debt payments. C. Save funds for an annual vacation. D. Save $100 a month to create a $4,000 emergency fund. E. Spend less each month. 43. The goal of investing $50 per month for the next 18 years for your nephew's college fund is a(n) goal. A. Short-term B. Intermediate C. Long-term D. Intangible E. Durable 44. Many Americans have money problems because of A. Poor planning and weak money management habits B. Too many clearly defined goals C. Proper use of credit D. Not enough advertising to make effective decisions E. Controlled spending 45. Fran Gardner has a goal of "saving $25 per month for a TV". Fran's goal lacks A. Measurable terms B. A realistic perspective C. An action-orientation D. A specific objective E. A time frame 46. Which of the following is correct? A. A car purchase is a consumable-product goal B. Entertainment is a durable-product goal C. Appliances and sporting equipment are intangible-purchase goals D. Leisure and education are durable-product goals E. Food and clothing are consumable-product goals 47. goals relate to infrequently purchased, expensive items. A. Short-term B. Intangible-purchase C. Durable-product D. Consumable-products E. Intermediate 48. To develop a financial plan, one should A. Set several general goals for the short-term B. Only set long-term goals after short-term goals have been accomplished C. Focus on intermediate goals first D. Identify specific, realistic goals that are measurable along with a time frame and an action plan E. Not worry about whether or not the goals can be achieved based on one's income and life situation 49. The goal of purchasing a long-term care insurance policy would be most appropriate for A. A young couple without children. B. A single mother with a preschool daughter. C. A recent college graduate. D. A single adult nearing retirement age. E. An extremely wealthy executive. 50. Opportunity cost refers to A. Money needed for major consumer purchases. B. The trade-off of a decision. C. The amount paid for taxes when a purchase is made. D. Current interest rates. E. Evaluating different alternatives for financial decisions. 51. Rob Redbird is interested in attending a concert next weekend. Unfortunately, he is scheduled to work. If he finds a substitute for his shift so he can attend the concert, what kind of cost is he incurring? A. Fixed B. Opportunity C. Unexpected D. Unavoidable E. Tangible 52. Which of the following is an example of opportunity cost? A. Renting an apartment near school B. Saving money instead of taking a vacation C. Organizing income tax records D. Purchasing automobile insurance E. Using a personal computer for financial planning 53. An example of a personal opportunity cost would be A. Interest lost by using savings to make a purchase. B. Higher earnings on savings that must be kept on deposit a minimum of six months. C. Lost wages due to continuing as a full-time student. D. Time comparing several brands of personal computers. E. Having to pay a tax penalty due to not having enough withheld from your monthly salary. 54. The time value of money refers to A. Personal opportunity costs such as time lost on an activity. B. Financial decisions that require borrowing funds from a financial institution. C. Changes in interest rates due to changes in the supply and demand for money in our economy. D. Increases in an amount of money as a result of interest earned. E. Changing demographic trends in our society. 55. If I can invest a dollar today and earn interest on it, then it should be worth in the future. A. Less B. The same as C. More D. Either less or the same as E. Either the same as or more 56. To calculate the time value of money, we need to consider all of the following except the A. amount of the savings. B. Annual interest rate. C. Length of time the money is invested. D. Type of investment. E. Principal. 57. Future value computations are also referred to as A. Discounting. B. Add-on interest. C. Compounding. D. Simple interest. E. An annuity. 58. Present value computations are also referred to as A. Discounting. B. Add-on interest. C. Compounding. D. Simple interest. E. An annuity. 59. Jake Jones wants to deposit $100 per month into an account earning 5 percent for the next 4 years, so he can purchase a used car at that time. What type of computation would he use to determine the amount he will have for his purchase? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity 60. Wanda Green wants to take out a 4 year loan to purchase a car. What type of computation would she use to calculate her monthly payments? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity 61. Tim Calibe received a $500 gift from his grandparents. He wants to invest this money for the down payment of a house that he plans to purchase in 3 years. What type of computation should he use? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity 62. Rebecca Gladyn plans to attend graduate school in 5 years. She thinks that she will need a total of $32,000 to pay for school, and she wants to save money each month to reach her goal. What type of computation should she use? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity 63. Paul Jacoby wants to deposit money today for a vacation that he plans to take to Asia after he graduates from Graduate School. Which formula should he use to determine the amount of money he will have available for his vacation? A. Present value of a single amount B. Future value of a single amount C. Simple interest D. Present value of an annuity E. Future value of an annuity 64. The first step of the financial planning process is to A. Develop financial goals. B. Implement the financial plan. C. Analyze your current financial situation. D. Evaluate and revise your actions. E. Create a financial plan of action. 65. Financial decisions related to income include all of the following except A. Spending B. Saving C. Sharing D. Taking E. All of these are financial decisions 66. Place the following steps for a personal financial plan in the proper order: 1. Review and revise your plan 2. Identify alternative courses of action 3. Create and implement your financial action plan 4. Determine your current financial situation 5. Evaluate your alternatives 6. Develop your financial goals A. 6, 1, 2, 5, 3, 4 B. 4, 2, 6, 5, 3, 1 C. 3, 6, 4, 2, 5, 1 D. 4, 6, 2, 5, 3, 1 E. 6, 2, 5, 4, 1, 3 67. The uncertainty associated with decision making is referred to as A. Opportunity cost. B. Selection of alternatives. C. Financial goals. D. Personal values. E. Risk. 68. The changing cost of money is referred to as risk. A. interest-rate B. inflation C. income D. liquidity E. personal 69. The rising of prices that causes changes in buying power is referred to as risk. A. interest-rate B. inflation C. income D. liquidity E. personal 70. The loss of a job is referred to as risk. A. interest-rate B. inflation C. income D. liquidity E. personal 71. The tangible and intangible factors that create a less than desirable situation is referred to as risk. A. interest-rate B. inflation C. income D. liquidity E. personal 72. The potential for difficulty to convert an investment to cash is referred to as risk. A. interest-rate B. inflation C. income D. personal E. liquidity 73. Changes in income, values, and family situation make it necessary to A. Evaluate and revise your actions. B. Implement the financial plan. C. Develop financial goals. D. Analyze your current personal and financial situation. E. Create a financial plan of action. 74. The step in the personal financial planning process that follows "Create and implement your financial action plan" is A. Review and revise your financial plan B. Identify alternative courses of action C. Determine your current financial situation D. Evaluate your alternatives E. Develop your financial goals 75. Using the services of financial institutions or specialists (such as insurance agents or investment brokers) will be most evident in your effort to A. Develop financial goals. B. Evaluate and revise your actions. C. Analyze your current financial situation. D. Implement your financial plan. E. Create a financial plan of action. 76. If inflation is expected to be 9 percent, how long will it take for prices to double? A. 6 years B. 7 years C. 8 years D. 12 years E. 18 years 77. If a $10,000 investment increases to $10,080 in one year, what is its rate of return? A. .8 percent B. 1.08 percent C. 8 percent D. 80 percent E. 108 percent 78. If a $10,000 investment earns a 4 % annual return, what should its value be after one year? A. $4,000 B. $4,100 C. $10,000 D. $10,040 E. $10,400 79. If a $10,000 investment earns a 7% annual return, what should its value be after 5 years? A. $10,035 B. $14,070 C. $14,700 D. $14,030 E. $14,300 80. If Patty Shoemaker estimates that her $100 weekly grocery bill will increase at an annual inflation rate of 4%, what should her weekly grocery bill be in 3 years? A. $30.00 B. $40.00 C. $112.50 D. $112.60 E. $121.60 81. Annual earnings on a $500 Certificate of Deposit earning 4.50% would be A. $20.00 B. $22.50 C. $25.00 D. $500.00 E. $545.00 82. Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10% per year on his investments, how much does he need to deposit each year to reach his goal? Round your answer to the nearest dollar. A. $17,460 B. $18,000 C. $5,727 D. $25,000 E. None of the above 83. Who can benefit from financial planning? How?

84. What are the main activities of personal financial planning?

85. How do the main activities of personal financial planning fit together? 86. Provide an example of a clear financial goal. Identify if it is a short-term, intermediate, or long-term goal.

87. What are the guidelines one can use to set effective financial goals?

88. Why might a goal regarding use of leisure time be important to include in a financial plan?

89. What types of risks are commonly associated with personal financial decisions? How can these risks be evaluated and minimized to reduce personal and financial difficulties?

90. Hope Appleton is trying to decide whether to keep her money in a savings account or in a mutual fund. What would you tell her to help her analyze her decision? 33. (p. 7) A

34. (p. 7) B 1. (p. 3) TRUE 35. (p. 7) A 2. (p. 4) FALSE 36. (p. 7-8) E 3. (p. 4) FALSE

4. (p. 4) FALSE

5. (p. 5) FALSE

6. (p. 5) FALSE

7. (p. 6) FALSE

8. (p. 6) TRUE

9. (p. 6) TRUE

10. (p. 7) FALSE

11. (p. 7) FALSE

12. (p. 8) TRUE

13. (p. 9) TRUE

14. (p. 9) FALSE

15. (p. 9) FALSE

16. (p. 10) TRUE

17. (p. 12) FALSE

18. (p. 12) TRUE

19. (p. 12) FALSE

20. (p. 19) FALSE

21. (p. 4) B

22. (p. 4, 9) C

23. (p. 4) C

24. (p. 4) D

25. (p. 5) D

26. (p. 5) A

27. (p. 6) C

28. (p. 6) D

29. (p. 6) B

30. (p. 6) C

31. (p. 6-7) D

32. (p. 7) C 1 Key 37. (p. 8) D

38. (p. 8) A

39. (p. 9-11) A

40. (p. 9-11) E

41. (p. 9-11) C

42. (p. 10-11) D

43. (p. 9) C

44. (p. 9) A

45. (p. 10-11) E

46. (p. 9-10) E

47. (p. 10) C

48. (p. 11) D

49. (p. 5) D

50. (p. 12) B

51. (p. 12) B

52. (p. 12) B

53. (p. 12) D

54. (p. 12) D

55. (p. 12) C

56. (p. 12) D

57. (p. 12-14) C

58. (p. 12-13) A

59. (p. 14) E

60. (p. 14) D

61. (p. 13) B

62. (p. 13) E

63. (p. 13) B

64. (p. 16-17) C

65. (p. 16) D

66. (p. 17) D

67. (p. 19) E

68. (p. 19) A

69. (p. 19) B

70. (p. 19) C

71. (p. 19) E

72. (p. 19) E

73. (p. 21) A

74. (p. 20) A 75. (p. 20) D

76. (p. 6) C

77. (p. 12) A

78. (p. 12) E

79. (p. 13) D

80. (p. 13) C

81. (p. 12) B

82. (p. 40) A

83. (p. 4) Answers can vary but should consider life situation or lifestyles including factors such as age, income, household size, and personal beliefs. The way that financial planning can benefit individuals or households should reflect the ability to meet goals and to be flexible as life changes.

84. (p. 7-8) The main components of personal financial planning are obtaining, planning, saving, borrowing, spending, managing risk, and investing, as well as retirement and estate planning.

85. (p. 7-8) The main components of personal financial planning (obtaining, planning, saving, borrowing, spending, managing risk, investing, and retirement and estate planning) fit together, because one component can impact another. For instance, if one's main goal is to save for retirement, then the money available for spending will be limited.

Short-term goals should be achieved within the next year or so while intermediate goals have a time frame of 2 to 5 years, and long-term goals will take more than 5 years to accomplish. 86. (p. 9-11) Answers will vary by student. Each goal should take a SMART approach: state a specific objective, measurable with a specific amount, action-oriented, realistic for your income and life situation, and based on a time frame.

87. (p. 10-11) Each goal should take a SMART approach: state a specific objective, measurable with a specific amount, action-oriented, realistic for your income and life situation, and based on a time frame.

88. (p. 11) Leisure goals, such as developing a hobby, have financial and time implications. For instance, a leisure goal of becoming a pilot may affect the components of planning, saving, borrowing, spending, and managing risk.

89. (p. 19) Common risks are inflation risk, interest rate risk, income risk, personal risk, and liquidity risk. Risks can be evaluated and minimized by obtaining information based on your experience and the experiences of others and using financial planning information sources such as the internet, financial institutions (banks, credit unions, or investment companies), media sources (newspapers, magazines, television, or radio), and financial specialists (financial planners, insurance agents, credit counselors, lawyers, or tax preparers) to compare alternatives before making a decision, and obtaining insurance.

90. (p. 15-20) Students answers will vary. Suggested responses might mention gathering information based on your experience and the experiences of others and using financial planning information sources such as the internet, financial institutions (banks, credit unions, or investment companies), media sources (newspapers, magazines, television, or radio), and financial specialists (financial planners, insurance agents, credit counselors, lawyers, or tax preparers) to compare alternatives. Also, mention analyzing risks and assessing personal goals. 1 Summary Category # of Blooms: Analyze Questions8 Blooms: Apply 14 Blooms: Remember 27 Blooms: Understand 41 Difficulty: 1 Easy 24 Difficulty: 2 Medium 43 Difficulty: 3 Hard 23 Kapoor - Chapter 01 90 Learning Objective: 01-01 Identify social and economic influences on personal financial goals and decisions. 34 Learning Objective: 01-02 Develop personal financial goals. 18 Learning Objective: 01-03 Calculate time value of money situations associated with personal financial decisions. 23 Learning Objective: 01-04 Implement a plan for making personal financial and career decisions. 15 Topic: A Plan for Personal Financial Planning 15 Topic: Developing and Achieving Financial Goals 18 Topic: Making Financial Decisions 34 Topic: Opportunity costs and the Time Value of Money 23