Altfest_2e_Test_Bank_Chapter_06.docx

Test Bank Questions, Chapter 6 1. Which of the following best describes cash flow planning? a. The scheduling of current and future cash needs to achieve household goals. b. The recognition that cash flows can only be generated through strategic planning. c. A fin...

Test Bank Questions, Chapter 6 1. Which of the following best describes cash flow planning? a. The scheduling of current and future cash needs to achieve household goals. b. The recognition that cash flows can only be generated through strategic planning. c. A financial planning scheduling strategy that links financial reviews to cash flows. d. All of the above describe cash flow planning. e. None of the above describes cash flow planning. 2. Which of the following is not a goal of cash flow planning? f. Reducing tax liability. g. Planning for retirement. h. Paying off credit card debt. i. Eliminating risk. j. All of the above are goals of cash flow planning. 3. Establishing how people differ in the way they spend their money is: k. Of crucial importance to financial planners. l. Generally not of concern to advisors. m. The first step of the financial planning process. n. The second step of the financial planning process. o. The third step of the financial planning process. 4. What is the pure life cycle motive? p. To take advantage of investment opportunities that can make achievement of our financial goals easier. q. To provide monies for the down payment or full purchase of longer-lived assets such as durable goods or educational expenditures. r. To provide monies to even out differences in earnings over time. s. To provide a fund to cover future uncertainties such as fluctuating income, sickness, inflationary effects on expenditures, etc. t. To sacrifice today so that your future lifestyle can improve. 5. What is the precautionary motive? u. To take advantage of investment opportunities that can make achievement of our financial goals easier. v. To provide monies for the down payment or full purchase of longer-lived assets such as durable goods or educational expenditures. w. To provide monies to even out differences in earnings over time. x. To provide a fund to cover future uncertainties such as fluctuating income, sickness, inflationary effects on expenditures, etc. y. To sacrifice today so that your future lifestyle can improve. 6. The ability to accumulate investments with no intention of converting them into purchases in the future is the: z. Bequest motive. a. Independence motive. b. Precautionary motive. c. The investment motive. d. None of the above. 7. What is the underappreciated advantage associated with steady savings? e. It allows dollar cost averaging into investments. f. It provides for nonhousehold members. g. It has significant tax advantages. h. Steady savings allows even those without significant cash flow to save. i. None of the above. 8. Which of the following is not a way for people that find themselves with no money left at the end of the pay period to save? j. Treat savings as another expense. k. Have cash automatically wired to a separate savings or investment account when the payroll check is deposited. l. Develop a budget. m. Use dollar cost averaging. n. All of the above are ways to save. 9. What is the bucket approach? o. A strategy whereby savings take place one fixed calendar date every several months. The large amount placed into savings at this time is the "bucket." p. A strategy where separate savings accounts are created for each need. Each account is a separate "bucket." q. The mistake some people make whereby they only save when large cash flows are received, similar to dipping a bucket into a river. r. Both a and b above. s. None of the above. 10. Which of the following is advisable when other savings strategies fail? t. Place money in accounts that have penalties for early withdrawals such as pension accounts, tax deferred annuities, or life insurance policies. u. Contract for a house and undertake large monthly mortgage payments. v. Sell one's home and replace with a smaller home, to free up cash flow for savings. w. Both a and b. x. Both a and c. 11. Using cash as much as possible is as method through which one can: y. Reduce temptation. z. Minimize discomfort. a. Eliminate options to spend. b. All of the above. c. None of the above. 12. Success in saving can occur by minimizing discomfort through: d. Staying away from stores that result in greater spending than needed. e. Saving a fraction of the extra money obtained from raises before the new money enters the spending stream. f. Carrying credit cards only for planned expenditures and for vacations. g. Dollar cost averaging. h. None of the above. 13. Which of the following is a reason why people do not save? i. They may be unable to visualize the long-term future. j. They may be unable to estimate future revenues or current savings needs correctly. k. They may prefer greater spending today rather than in the future. l. All of the above. m. Only a and c. 14. Informal budgeting involves: n. Less detailed ways of planning. o. Listing expenses but not sources of revenues. p. Listing expenses but not sources of revenues. q. Creating a detailed household budget that is not shown to the client. r. None of the above. 15. What is a household budget? s. An informal budget that lists expenses but not sources of revenues. t. A formal budget that reflects all categories of household expenditures. u. An informal budget that the household uses to manage cash flows. v. A budget that is used to purchase a home. w. None of the above. 16. What is purchasing power? x. The inverse of one plus the inflation rate. y. The risk of having your money decline in what it can buy over time due to inflation. z. The amount of goods and services a fixed sum of money will buy. a. The added responsibility and opportunities of the leader of a household. b. None of the above. 17. Which of the following is not a consideration when choosing the size of the emergency fund? c. The degree of risk. d. The availability of borrowing alternatives. e. Projections of future free cash flow to be generated. f. The amount of debt outstanding. g. All of the above are considerations when choosing the size of the emergency fund. 18. Debt and marketable securities are examples of: h. Liquidity substitutes. i. Equity substitutes. j. Emergency funds. k. Purchasing power risk. l. None of the above. 19. The capacity to find a seller or buyer of an asset at its current value is: m. Liquidity. n. Liquidity substitute. o. Marketability. p. Emergency substitute. q. None of the above. 20. The ability to turn an asset into cash quickly at a reasonable transaction cost and without loss of principal is: r. Liquidity. s. Liquidity substitute. t. Marketability. u. Emergency substitute. v. None of the above. 21. What is the objective of the household budget? w. To assure that the household generates enough cash to meet household operating needs. x. To provide resources for emergency funds if current assets are insufficient. y. To keep track of growth in efficient spending. z. Both a and b above. a. None of the above. 22. Which of the following is not a recommended solution if the comparison of projected cash flows with goals identifies a shortfall? b. Find additional income. c. Utilize the emergency fund. d. Cut back costs. e. Change goals. f. All of the above are recommended solutions. 23. Which of the following is not a step in the household budgeting process? g. Compare budgeted with actual figures. h. Review results for reasonableness and finalize budget. i. Compare projected cash outflows with goals and adjust. j. Compute net cash flow. k. All of the above are steps in the household budgeting process. 24. What is the current ratio? l. Current liabilities/current assets. m. Current assets/current liabilities. n. Liquid assets/total monthly household expenses. o. Total monthly household expenses/liquid assets. p. None of the above. 25. The ratio of liquid assets to total monthly household expenses is the: q. Discretionary cost percentage. r. Current ratio. s. Operating ratio. t. Nondiscretionary cost percentage. u. None of the above. 26. The ratio of discretionary expenses plus discretionary capital expenditures to cash flows before discretionary expenses is the: v. Discretionary cost percentage. w. Total operating percentage. x. Discretionary payout percentage. y. Nondiscretionary cost percentage. z. None of the above. 27. What is the gross savings percentage? a. (new cash flow + total income + change in debt)/targeted savings. b. (new cash flow + targeted savings + change in debt)/total income. c. (total income + targeted savings + change in debt)/new cash flow. d. (new cash flow + targeted savings + total income)/change in debt. e. None of the above. 28. If net cash flow is \$500, targeted savings are \$400, total income is \$2,000, and change in debt is \$40, what is the gross savings percentage? f. 47% g. 57% h. 20.5% i. 12.5% j. None of the above. 29. If total discretionary costs are \$500, total income is \$2,000, and discretionary capital expenditures are \$500, what is the discretionary cost percentage? k. 50% l. 25% m. 20% n. 250% o. None of the above. 30. If discretionary expenses are \$500, cash flow before discretionary expenses are \$2,000, and discretionary capital expenditures are \$500, what is the discretionary payout percentage? p. 50% q. 25% r. 20% s. 250% t. None of the above. Answer: a Essay questions: 31. Please list and describe eight different reasons for savings. Answer: 1. The Pure Life Cycle Motive: To provide monies to even out differences in earnings over time. 2. The Investment Motive: To take advantage of investment opportunities that can make achievement of our financial goals easier. 3. Downpayment Motive: To provide monies for the down payment or full purchase of longer-lived assets such as durable goods or educational expenditures. 4. Precautionary Motive: To provide a fund to cover future uncertainties such as fluctuating income, sickness, inflationary effects on expenditures, etc. 5. Improvement Motive: To sacrifice today so that your future lifestyle can improve. 6. Independence Motive: To fund sufficient money to be able to be financially independent after working to a certain age. 7. Bequest Motive: To accommodate funds to provide for nonhousehold members whether they are children, friends, relatives, or charities. 8. Hoarding Motive: The ability to accumulate investments with no intention of converting them into purchases in the future. 32. If you had the following variables, which of the financial ratios presented in the chapter would you be able to calculate? 1. Current assets 2. Liquid assets 3. Total monthly household expenses 4. Total income 5. Discretionary capital expenditure 6. Cash flow before discretionary expenses 7. Targeted savings 8. Change in debt Answer: The only ratios that you would be able to calculate are: - Current ratio: current assets/current liabilities. - Emergency fund ratio: liquid assets/total monthly household expenses. Insufficient variables are provided to calculate any of the other ratios.