Chapter 2—Using Financial Statements and Budgets
74. On the personal balance sheet, a mortgage loan is recorded as the
a. interest only.
b. sum of interest paid and the outstanding balance.
c. sum of interest due and the outstanding balance.
d. principal portion only.
e. none of the above.
75. Another term sometimes used instead of net worth is
a. assets.
b. net debts.
c. long-term liabilities
d. equity.
e. liquid assets.
76. The personal balance sheet equation is
a. Total Assets / Total Liabilities = Net Worth.
b. Total Assets × Total Liabilities = Net Worth.
c. Total Assets − Total Liabilities = Net Worth.
d. Total Assets + Total Liabilities = Net Worth.
e. Total Liabilities − Total Assets = Net Worth.
77. Mandy and Jeff have a net worth of $25,000 and total assets of $140,000. If their revolving credit and unpaid bills
total $2,200, what are their total liabilities?
a. $115,000
Chapter 2—Using Financial Statements and Budgets
b. $140,000
c. $142,200
d. $165,000
e. $167,200
78. Sonny and Cher have a net worth of $35,000 and total assets of $200,000. If their revolving credit and unpaid bills
total $2,200, what are their long-term liabilities?
a. $115,000
b. $140,000
c. $142,200
d. $162,800
e. $165,000
79. You are solvent if your
a. total liabilities exceed total assets.
b. total assets exceed total liabilities.
c. total assets exceed net worth.
d. total liabilities exceed net worth.
e. none of these.
80. The income and expense statement examines your financial
a. level.
b. performance.
c. position.
Chapter 2—Using Financial Statements and Budgets
d. assets.
e. objectives.
81. The income and expense statement is specific to
a. one point in time.
b. a specific period of time.
c. last year.
d. next year.
e. none of these.
82. The income and expense statement includes
a. income, liabilities, and net worth.
b. income, expenses, and cash surplus or deficit.
c. expenses, net worth, and cash surplus or deficit.
d. net worth, cash surplus or deficit, and income or expenses.
e. savings, cash surplus or deficit, and income or expenses.
83. On an income and expense statement covering January 1 to June 30, ____ would not be included as income.
a. wages and salaries received in that six months
b. interest received on June 30
c. auto sold with payment received May 15
d. inheritance granted in April, to be paid in September
e. income tax refund received April 14
Chapter 2—Using Financial Statements and Budgets
84. The time period covered by an income and expense statement is usually
a. a week or a month.
b. a month or a quarter.
c. a month or a year.
d. one to two years.
e. one to five years.
85. You would not include ____ on an income and expense statement.
a. the value of your stock portfolio
b. taxes withheld
c. utilities paid
d. mortgage payments
e. charitable payments
86. You should not record ____ on an income and expense statement covering January 1 to June 30.
a. an $800 refrigerator bought on credit June 2 for which payment is not due until July
b. a paid March telephone bill
c. health insurance premiums deducted from monthly pay checks
d. checking account service charges
e. groceries bought and paid for in June
Chapter 2—Using Financial Statements and Budgets
87. ____ would be an example of a fixed expense.
a. Food
b. Vacation
c. Utilities
d. Taxes
e. None of these
88. _____ is an example of a variable expense.
a. Mortgage payment
b. Food
c. Car payment
d. Monthly insurance premium
e. Professional dues
89. A cash budget should help you to
a. achieve your short-term financial goals.
b. implement disciplined spending.
c. eliminate needless spending.
d. allocate funds to savings and investments.
e. do all of these.
Chapter 2—Using Financial Statements and Budgets
90. All of the following are stages in preparing a cash budget except
a. forecasting income.
b. forecasting expenses.
c. calculating the future value of the cash surplus.
d. finalizing the cash budget.
91. When a cash surplus exists on your income and expense statement, you can use it to
a. acquire assets.
b. pay off existing debts.
c. increase your savings.
d. increase your investments.
e. do any of the above.
92. Russ buys his wife a valuable painting for $20,000. He purchases it using $15,000 from his savings and a $5,000 loan.
How does this transaction affect Russ’s personal balance sheet?
a. His assets increase.
b. His liabilities increase.
c. His net worth stays the same.
d. a and b
e. a, b and c
Chapter 2—Using Financial Statements and Budgets
93. If your income and expense statement shows a cash deficit, you may have
a. increased your debts.
b. increased your assets.
c. added to savings.
d. bought additional insurance.
e. paid off some of your debts.
94. If your ____, your net worth on the personal balance sheet would have increased from one period to the next.
a. liabilities increased and assets remained constant
b. liabilities increased and assets decreased
c. assets increased and liabilities remained constant
d. income increased
e. none of these
95. The Wilson family’s short-term goals might include
a. setting up an emergency fund of three months’ income
b. buying a house
c. sending the kids to college
d. planning to retire at age 60
e. all of these
96. If your total liquid assets equal $50,000 and your total current debts equal $15,000, your liquidity ratio is
a. 30%.
b. 70%.
c. 143%.
d. 233%.
e. 333%.
97. If your total assets equal $87,000 and your total liabilities equal $10,000, your solvency ratio is
a. 11.5%.
b. 13.0%.
c. 77.0%.
d. 87.0%.
e. 88.5%.
98. Using personal balance sheet information, the ____ ratio indicates your ability to meet current debt payments.
a. solvency
b. liquidity
c. cash
d. savings
e. debt service
99. Kim’s net worth is $85,000 and her total assets are $100,000. What is Kim’s solvency ratio?
a. 15%
b. 25%
Chapter 2—Using Financial Statements and Budgets
c. 65%
d. 85%
e. 100%
100. The savings ratio expresses
a. the percentage of gross income saved.
b. the ability to cover immediate debt when there is an interruption in income.
c. the relative amount of cash surplus achieved during a given period.
d. the percentage of tax-deferred income earned annually.
e. none of the above.
101. Your total cash income is $40,000. You pay $5,000 in taxes and $30,000 in other expenses. Your savings ratio is
a. 7.5%.
b. 10.0%.
c. 12.5%.
d. 13.3%.
e. 14.3%.
102. Your total cash income is $80,000. You pay $8,000 in taxes and $60,000 in other expenses. Your savings ratio is
a. 10.0%.
b. 14.3%.
c. 15.0%.
d. 16.7%.
e. 17.5%.
Chapter 2—Using Financial Statements and Budgets
103. Mindy and Lou had total liquid assets of $10,000 and total current debts of $30,000. What is their liquidity ratio?
a. 25%
b. 33%
c. 67%
d. 150%
e. 300%
104. Jacque’s total monthly loan payments are $1,020 while her gross income is $3,000 per month. What is her debt
service ratio?
a. 34%
b. 43%
c. 50%
d. 75%
e. 82%
105. In order to minimize the difficulty associated with meeting monthly loan payments, the debt service ratio should be
a. above 50%.
b. below 50%.
c. at 35%.
d. below 35%.
e. above 20%.
Chapter 2—Using Financial Statements and Budgets
106. Mike and Teresa Garza have a monthly gross income of $5,000, but they pay $1,000 per month in taxes. They also
pay $2,000 per month in various loan payments. What is their debt service ratio?
a. 20%
b. 30%
c. 40%
d. 50%
e. 60%
107. When estimating income for the income and expense statement, you should
a. use gross income.
b. include expected pay increases.
c. adjust for inflation.
d. use net income.
e. do none of these.
108. The expenditure categories for your budget should be determined by
a. the BLS Urban Family Budget categories.
b. purchased budget book headings.
c. those used in previous years.
d. current and expected future spending.
e. itemized tax deductions.
Chapter 2—Using Financial Statements and Budgets
109. The need for budget adjustments is indicated when
a. income is stable.
b. account deficits and surpluses balance out.
c. account deficits are more than surpluses.
d. a new calendar year begins.
e. short-term financial goals are achieved.
110. The best approach to solving the problem of an annual budget deficit is generally to
a. liquidate enough savings to make up the deficit.
b. sell stock to make up the deficit.
c. reduce flexible expenses.
d. reduce fixed expenses.
e. get a part-time job.
111. What can you do if your budget shows an annual budget deficit?
a. Liquidate enough savings and investments to meet the total budget shortfall for the year.
b. Borrow enough to meet the total budget shortfall for the year.
c. Cut low-priority expenses from the budget.
d. Increase income.
e. All of the above.
Chapter 2—Using Financial Statements and Budgets
112. To determine how effectively the budget is working, you can compare it to
a. the personal balance sheet.
b. the income and expense statement.
c. the record of actual income and expenses.
d. the year-end financial statements.
e. your financial goals.
113. Your investment advisor wants you to purchase an annuity that will pay you $25,000 per year for 10 years. If you
require a 7% return, what is the most you should pay for this investment?
a. $49,179
b. $175,590
c. $201,000
d. $225,682
e. $250,000
114. Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately how many years will it
take for the account to double in value?
a. 8
b. 9
c. 10
d. 11
e. 12
Chapter 2—Using Financial Statements and Budgets
115. Jamil invested $9,500 in an account he expects will earn 5% annually. Approximately how many years will it take
for the account to double in value?
a. 8.8
b. 9.7
c. 10.8
d. 11.4
e. 14.4
116. Phil has $2,000 and he needs it to grow to $4,000 in 8 years. Assuming he adds no more money to this fund, what
rate of return would he need to earn?
a. 6%
b. 7%
c. 8%
d. 9%
e. 10%
117. Michael and Sandy purchased a home for $100,000 five years ago. If it appreciated 6% annually, what is it worth
today?
a. $100,000
b. $106,000
c. $130,000
d. $133,823
e. $135,603