Chapter 2—Using Financial Statements and Budgets
1. A personal balance sheet shows your financial condition as of the time the statement is prepared.
a. True
b. False
2. A balance sheet is like a photograph of your financial condition, while an income and expense statement is like a
motion picture.
a. True
b. False
3. The income and expense statement looks forward in time, while a budget is backward looking.
a. True
b. False
4. The income and expense statement provides a measure of financial performance over a period of time.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
5. Personal financial statements help you identify potential financial problems.
a. True
b. False
6. Approximately 50 percent of Americans prepare a detailed household budget.
a. True
b. False
7. A budget is a detailed statement of what income and expenses occurred over a past period.
a. True
b. False
8. A budget is a detailed financial forecast.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
9. Investments are mostly intangible financial assets acquired to achieve long-term personal financial goals.
a. True
b. False
10. The value of assets purchased on credit should be included on the asset side of your personal balance sheet.
a. True
b. False
11. Jewelry, furniture, and computers are examples of personal property.
a. True
b. False
12. A house and land are examples of real property.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
13. Most types of personal property depreciate shortly after being put into use.
a. True
b. False
14. Investment assets include items such as boats or automobiles.
a. True
b. False
15. A home and land should be recorded on the personal balance sheet at their original cost.
a. True
b. False
16. All assets, regardless of category, should be recorded on your personal balance sheet at their current fair market value.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
17. Money I loaned to a friend is a liability on my balance sheet.
a. True
b. False
18. A charge made on your credit card becomes a liability as soon as the charge is incurred.
a. True
b. False
19. Your auto loan payments would be listed as an expense on the income and expense statement.
a. True
b. False
20. Only the current month’s payment on your mortgage loans would be listed on the personal balance sheet as a liability.
a. True
Chapter 2—Using Financial Statements and Budgets
b. False
21. Your net worth and your equity in owned assets are the same basic concept.
a. True
b. False
22. The balance sheet equation is assets plus liabilities equals net worth.
a. True
b. False
23. A budget is an orderly estimate of income and expenditures.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
24. Mary and Tom purchased their home for $150,000, and it is now worth $175,000. Its asset value is $150,000.
a. True
b. False
25. The equity in your home is the difference between the loan balance and the purchase price.
a. True
b. False
26. The income and expense statement is a summary of actual income earned and expenses made over a specific point of
time.
a. True
b. False
27. Interest you earned on your savings account would be an entry on your personal balance sheet.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
28. If you obtain a loan to purchase a car in June, this loan amount would be included as income for June.
a. True
b. False
29. If you listed your gross salary in the income portion of the budget, the expenditures section must include income taxes
and social security taxes.
a. True
b. False
30. If you use net salary as income on your budget, the expenditures section must include income taxes and social security
taxes.
a. True
b. False
31. An income and expense statement deficit would increase net worth.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
32. When the income and expense statement indicates a cash surplus, this may be used to increase net worth by increasing
assets or decreasing liabilities.
a. True
b. False
33. A cash deficit decreases net worth.
a. True
b. False
34. The personal balance sheet and income and expense statement should be prepared at least annually.
a. True
b. False
35. The savings ratio is useful in the evaluation of the personal balance sheet.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
36. Total liquid assets is the numerator in the savings ratio formula.
a. True
b. False
37. A family could have a positive savings ratio at the same time that its debt service ratio is increasing.
a. True
b. False
38. The liquidity ratio is an indicator of a family’s ability to pay current debts if there is an interruption in income.
a. True
b. False
39. The savings ratio indicates the percentage of after-tax income that is saved.
a. True
Chapter 2—Using Financial Statements and Budgets
b. False
40. The level of the debt service ratio would indicate your ability to meet loan payments out of current income.
a. True
b. False
41. You have a balanced budget when total income for the year equals or exceeds total expenditures for the year.
a. True
b. False
42. You may be under-budgeting for food if you continually have monthly deficits in the food category.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
43. The best way to balance your budget is to increase borrowing.
a. True
b. False
44. A solvency ratio shows how much “cushion” you have as a protection against insolvency.
a. True
b. False
45. Budgeting and record keeping are really the same activity.
a. True
b. False
46. The best place to keep a budget is in a safe deposit box.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
47. Total net worth is the numerator for the solvency ratio.
a. True
b. False
48. When preparing a cash budget, estimating expenses using actual expenses from previous years and by tracking current
expenses makes the task easier.
a. True
b. False
49. A cash budget has value only if you use it, review it regularly, and keep careful records of income and expenses.
a. True
b. False
50. The savings ratio is calculated by dividing the cash surplus by before-tax income.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
51. Using the future value calculations to estimate the funds needed to meet a goal takes compounding into account.
a. True
b. False
52. Using time value of money is important when planning for long-term goals.
a. True
b. False
53. So long as you can earn interest on your investments, in a strict financial sense, you should always prefer to receive
equal amounts of money sooner rather than later.
a. True
b. False
54. Net income (after taxes) should be used when developing an income and expense statement.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
55. In a budget, “fun money” is a budget category used for family members to spend as they like without having to
account for how it is spent.
a. True
b. False
56. Net worth typically peaks between the ages of 65–74 and then diminishes throughout remaining retirement years.
a. True
b. False
57. Only four categories of spending account for almost 90% of all consumer expenditures.
a. True
b. False
58. Net worth typically increases over the life cycle of an individual or family, peaking at about age 55.
a. True
b. False
Chapter 2—Using Financial Statements and Budgets
59. The personal balance sheet describes a family’s wealth
a. at a certain point in tine.
b. as an annual summary.
c. as a time period less than one year.
d. at a future time.
e. none of these
60. The three parts of your personal balance sheet are
a. income, liabilities, balance.
b. assets, expenditures, balance.
c. assets, liabilities, balance.
d. assets, liabilities, net worth.
e. income, liabilities, net worth.
61. A(n) ____ would not be listed as an asset on your balance sheet.
a. mortgaged home
b. savings account
c. owned automobile
d. checking account
e. leased automobile
Chapter 2—Using Financial Statements and Budgets
62. When Phil lists his house on his personal balance sheet, he should record the
a. actual purchase price.
b. replacement value.
c. insured value.
d. sale price.
e. fair market value.
63. Your ____ is an example of a liquid asset.
a. home
b. car
c. checking account
d. charge account
e. life insurance cash value
64. Kathy purchased new furniture for $10,000. She put $1,000 down and financed $9,000. She will pay $350 per month
until the loan is paid off. Which of the following is true?
a. The furniture should be recorded as an asset of $10,000 on Kathy’s personal balance sheet.
b. The $9,000 is entered as a liability on Kathy’s personal balance sheet.
c. The furniture should be recorded as a $1,000 expenditure on Kathy’s personal balance sheet.
d. The $350 payments are expenses on Kathy’s income and expense statement.
e. All are correct except c.
Chapter 2—Using Financial Statements and Budgets
65. Sam and his wife Ann purchased a home in Lubbock, Texas, in 1980 for $100,000. Their original home mortgage was
for $90,000. The house has a current market value of $175,000 and a replacement value of $200,000. They still owe
$55,000 on their home mortgage. Sam and Sally are now constructing their balance sheet. How should their home be
reflected on their current personal balance sheet?
a. $200,000 asset and $55,000 liability
b. $200,000 asset and $90,000 liability
c. $175,000 asset and $55,000 liability
d. $175,000 asset and $90,000 liability
e. $100,000 asset and $55,000 liability
66. ____ is an example of personal property.
a. Jewelry
b. Recreational equipment
c. Corporate bond
d. Charge account balance
e. Both a and b
67. A budget is a
a. purchase plan.
b. line of credit.
c. financial statement.
d. detailed financial forecast.
e. set of personal financial objectives.
Chapter 2—Using Financial Statements and Budgets
68. The main purpose of a budget is to
a. develop goals.
b. develop a financial plan.
c. give feedback to the plan.
d. monitor and control financial outcomes.
e. revise goals.
69. Budgets are
a. restrictive.
b. complicated.
c. forward looking.
d. permanent.
e. retrospective.
70. ____ would not be listed as a liability on your personal balance sheet.
a. Taxes owed
b. Loan balances
c. Bank credit card charges
d. Savings accounts
e. Rent due
Chapter 2—Using Financial Statements and Budgets
71. ____ would not be a long-term financial goal.
a. Purchasing a new car
b. Providing adequate life insurance
c. Reducing income taxes
d. Paying your phone bill
e. Planning for retirement
72. Net worth is measured by
a. bank card balances.
b. house mortgage balances.
c. amount owed on an automobile loan.
d. assets minus liabilities.
e. insurance premium.
73. Personal balance sheet liabilities should be recorded at their
a. original outstanding balance.
b. year-end outstanding balance.
c. average outstanding balance.
d. current outstanding balance.
e. none of these.