Personal Finance 12th Edition by E. Thomas Garman – Test Bank

 

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ample Test

Chapter_3_Financial_Statements_Tools_and_Budgets     1. Financial planning focuses primarily on spending wisely.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s:Understanding OTHER:   Analytic NOTES:   financial planning also includes the management of risk and plans for capital accumulation 3.1

 

2. Financial planning begins by acquiring a good job that provides a person with enough extra income to manage.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s:Understanding OTHER:   Analytic NOTES:   financial planning begins by examining values and setting financial goals. 3.1

 

3. Financial planning is the process of developing and implementing short-term plans to achieve financial objectives.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   financial planning is long-term. 3.1

 

4. Financial planning is a single, customized plan regarding a person’s financial affairs.   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   financial planning involves a series of plans. 3.1

 

5. Financial planning is only for the rich.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   people of all income and wealth levels benefit from doing financial planning. 3.1

 

6. Values have little impact on financial goals.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   personal values are the starting point for setting financial goals. 3.1

 

7. It is not necessary that your values be consistent with your financial and lifestyle goals.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   financial and lifestyle goals should be consistent with your values.

 

8. Values are fundamental beliefs regarding what consumer goods are worth.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   values are your beliefs about what is important, desirable and worthwhile. 3.1

 

9. The concept of “pay myself first,” saving and investing before you pay other expenses, is a characteristic of successful financial managers.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

10. Financial planning begins by examining one’s values.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

11. Your goal in financial planning is to manage your income and wealth in such a way that your goals are met in a suitable manner.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

12. Paying off debts is an example of a financial goal even though it does not involve a direct purchase.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

13. Effective financial goals should be stated explicitly in terms of purpose, dollar amounts, and projected date for achievement.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

14. Among the intermediate-term goals for capital accumulation is having a fund for emergencies.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Identify your financial values, goals and strategies KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.1

 

15. Reducing the number of bank and credit accounts that each partner brings into the marriage can save money on account fees.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

16. A balance sheet describes an individual’s financial progress over a period of time, generally a year.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 a balance sheet shows an individual’s financial status on a specified date.

 

17. A cash-flow statement summarizes transactions that have taken place over a specific period of time.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

18. Monetary assets include cash and near-cash items that can be readily converted to cash.   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   3.2

 

19. Tangible assets are assets whose primary purpose is to provide maintenance of a lifestyle.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

20. In general, tangible assets do not depreciate in value over time.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 most tangible assets do depreciate over time.

 

21. Successful financial planning requires identifying the one best investment asset for an individual, then putting all of an individual’s surplus into that asset.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   successful financial planning involves using several investment assets. 3.2

 

22. Both individual retirement accounts (IRAs) and non-residential real estate property are investment assets.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   3.2

 

23. The balance sheet serves as an assessment of assets and liabilities at fair market value as of a specified date.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

24. For most people, the only way to increase net worth is to spend less than their income; people must save and invest.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

25. A balance sheet shows flows of income in and expenses out of your finances for a given period of time.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 the balance sheet shows the value of your assets and liabilities as of a specific date.

 

26. Short-term liabilities are obligations to be paid off within one year.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

27. The liability section of a balance sheet would include money owed to a doctor or a lawyer but would not include money owed to a friend.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 all monies owed are included

 

28. A person who has a negative net worth is technically insolvent.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

29. A cash-flow statement for a previous year would show whether you were able to live within your income.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

30. A cash-flow statement shows flows of income in and expenses out of your finances for a given period of time.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

31. A cash-flow statement shows the value of your assets and liabilities as of a specific date.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 the cash-flow statement shows flows of income in and expenses out of your finances for a given period of time.

 

32. Keeping track of all income and expenses is very important to achieving your financial objectives.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

33. Savings set aside can be categorized as both fixed and variable expenses.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

34. It is usually easy to reduce a fixed expense.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   fixed expenses are difficult to reduce. 3.2

 

35. The surplus section on an individual’s cash-flow statement is similar to net profit for a business.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

36. Most people keep track of their finances on a cash basis rather than on an accrual basis.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

37. A surplus demonstrates that you are managing your financial resources successfully and do not have to use savings or borrow to make financial ends meet.   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

38. Financial ratios are numerical calculations that make assessments of financial conditions more complex.   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 financial ratios simplify the process of assessing your financial condition.

 

39. Many experts recommend that people should have assets equal to one year’s expenses in emergency cash reserves.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   financial experts tend to recommend a three-month emergency fund although some recommend up to six months. 3.2

 

40. The liquidity ratio reveals how many months it would take to convert all assets into cash.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   this ratio relates only to monetary assets and how long they would last should income stop. 3.2

 

41. You can use the liquidity ratio to determine the number of months that you could continue to meet your expenses using only your monetary assets should all income cease.   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

42. A family with two income earners will always need a greater amount of cash reserves than a family with one earner.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   the need for cash reserves relates to the amount of income and not whether it comes from one or multiple sources. 3.2

 

43. By analyzing financial statements, a person can assess his or her financial condition and progress.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress NATIONAL STANDARDS:   United States – FN_3 – Reporting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

44. Households dependent on the income from a self-employed person may need a larger emergency cash reserve than others.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

45. The asset-to-debt ratio compares total assets with total liabilities and is a broad measure of a household’s financial liquidity.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   3.2

 

46. A person is insolvent when he or she doesn’t have enough current income to pay all of his or her current bills.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2 insolvent refers to not having enough assets to cover your liabilities—a negative net worth.

 

47. A low asset-to-debt ratio is a positive indicator of financial well-being.   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   a high asset-to-debt ratio is desirable. 3.2

 

48. The debt-to-income ratio provides a view of total debt burden of an individual or family by comparing the dollars spent on gross annual debt repayments with gross annual income.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

49. A debt-to-income ratio of 0.36 or less is considered manageable for most families.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.2

 

50. A debt-to-income ratio of 0.36 or less indicates that disposable income is adequate to make debt repayments.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   a ratio of 0.36 or less indicates that gross income is adequate to make debt repayments. 3.2

 

51. The debt payments-to-disposable-income ratio is gross income divided by monthly nonmortgage debt repayments.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   the ratio is monthly nonmortgage debt payments divided by monthly disposable income. 3.2

 

52. The investment assets-to-total assets ratio compares the value of your investment assets with your total assets.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Use balance sheets and cash-flow statements to measure your financial health and progress KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   3.2

 

53. ​Keeping good records is a prerequisite for effective financial planning.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Collect and organize the financial records necessary for managing your personal finances KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.3

 

54. Original deeds and mortgage papers should be stored in one’s home file.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Collect and organize the financial records necessary for managing your personal finances KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   such records are best kept in a safe-deposit box. 3.3

 

55. Safe-deposit boxes take two keys to open, and the financial institution where the box is located keeps one of these keys.   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Collect and organize the financial records necessary for managing your personal finances KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.3

 

56. Specific financial goals drive the creation of budgets.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.4

 

57. The major purpose of budgeting is to reach your financial goals.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.4

 

58. The major purpose of budgeting is to make sure bills get paid.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   the major purpose of budgeting is to reach financial goals. 3.4

 

59. Budgeting is narrower in scope than overall financial planning as it is primarily concerned with projecting future income and expenditures over a period of time.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Moderate REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.4

 

60. Disposable personal income is the amount of take-home pay remaining after all deductions are withheld for taxes, insurance, and union dues.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Remembering OTHER:   Analytic NOTES:   3.4

 

61. Budgeting gives one control over his or her finances.​   a. True   b. False   ANSWER:   True POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   3.4

 

62. Once budget estimates are determined; one should not make any changes in the budget for at least one year.​   a. True   b. False   ANSWER:   False POINTS:   1 DIFFICULTY:   Easy REFERENCES:   Achieve your financial goals through budgeting KEYWORDS:   Bloom’s: Understanding OTHER:   Analytic NOTES:   budget estimates should be revised as needed to reflect reality. 3.4