Personal Finance Test 1

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Freddy Wong works full-time as an assistant manager at a retail clothing store and his wife (Cathy)
works part-time for an accountant. At night and on weekends they operate a marketing business out
of their home. They began this business two years ago to start saving for their daughter's college
education and to get out of debt. Something has happened. Their web page ad and reputation for
service have boosted sales beyond their wildest dreams. They can't keep up with the orders and now
must make a decision about expansion. Before the Wongs take this step, they must get their finances
in order. They have been neglected because of the lack of time. It's Saturday night and they are
pondering their dilemma.The primary consideration for Freddy at this time is _____.

     A) quitting his full-time job

     B) getting out of debt

     C) asking his wife to quit her part-time job

     D) finding the cheapest accountant

     E) cash flow


Items of value that you own are called _____.

     A) debts.

     B) assets.

     C) liabilities.

     D) expenses.

     E) none of the above


Suppose that Cheryl's only assets are an automobile worth $10,000 and a checking account with a
$5,000 balance. Her only liabilities are a student loan balance of $2,000 and a balance of $8,000 on
her car loan. What is her net worth?
     A) $8,000

     B) $5,000

     C) $2,000

     D) none of the above


A plan for controlling cash inflows and cash outflows is called a(n) ________.

     A) balance sheet

     B) income statement

     C) cash budget

     D) statement of changes in financial position

     E) none of the above


Which of the following is not one of the basic entries on Form 1040?

     A) income

     B) exemptions

     C) filing status

     D) adjusted gross income

     E) place and address of employment


Income that comes from wages or a business is called ________.
     A) investment income

     B) portfolio income

     C) active income

     D) passive income

     E) none of the above


Step 3 of the personal financial planning process is to "Develop a Plan of Action." Which of the
following is not one of the "common concerns" that should guide all financial plans?

     A) long-term profitability

     B) liquidity

     C) minimization of taxes

     D) protection

     E) flexibility


Chapter 1 discusses fifteen principles that form the foundation of personal finance. The principle that
considers that stockbrokers may actually be acting in their own interest is the ________ principle.

     A) time dimension of investing

     B) agency problem - beware the sales pitch

     C) time value of money

     D) all risk is not equal

     E) none of the above

You have been saving for five years toward the purchase of a new mountain bike. You placed $600 in
a bank account and have earned 12%. How much do you now have on deposit?

      A) $1,057.41

      B) $78.70

      C) $293.71

      D) $138.70


Elvis could have minimized his financial problems by:

      A) hiring a competent financial advisor.

      B) keeping more money in the bank.

      C) tax sheltering his income

      D) letting Priscilla act as his business manager.

      E) increasing contributions to his retirement plan.


Which of the following principles would apply most appropriately to a 20-year-old college student?

      A) the best protection is knowledge

      B) nothing happens without a plan - even (or especially) a simple plan

      C) the time value of money - a dollar today is worth more than a dollar in the future

      D) all of the above

      E) none of the above

What should you do with your goals on a frequent basis throughout your lifetime?

      A) Put them in writing.

      B) Modify them.

      C) Prioritize them.

      D) Let an advisor help.

      E) all of the above


What is (are) the primary activity(ies) during stage two of the financial life cycle?

      A) Help supplement your children's budgets.

      B) Get out of debt.

      C) Solidify retirement.

      D) Fine tune your financial plans.

      E) both C and D above


Which of the following is the safest alternative for a not-for-profit foundation's excess funds?

      A) savings accounts

      B) asset management accounts

      C) certificates of deposit

      D) U.S. Treasury Bills

      E) money market deposit accounts

Of those listed below, which is not an IRS tax form?

      A) 1040AZ

      B) 1040

      C) 1040EZ

      D) 1040A

      E) All are common forms.


________ is found by dividing total debt or liabilities by total assets.

      A) Debt ratio

      B) Current ratio

      C) Net worth

      D) Positive balance

      E) Debt affordability


Which of the following statements describe(s) the typical savings accounts you may encounter?

      A) The bank could require a grace period before allowing you to withdraw.

      B) They are easy to open and maintain.

      C) A fixed return on your deposit is guaranteed.

      D) It is less liquid than a checking account.

      E) All of the above are descriptive.

Suppose that you are a 35-year-old man with inadequate insurance - it simply will not take care of
your family's needs. You have not made any investments toward retirement and do not give your
financial future much thought because you believe, "tomorrow will take care of itself." What would be
your most serious shortcoming?

      A) deciding not to take a class in personal finance

      B) failure to find a more competent tax preparer

      C) failure to involve your wife in decision making

      D) neglecting principle #8 - nothing happens without a plan

      E) not shopping around for the best buy in insurance


Arnold Diaz learned something very valuable as a teenager from his dad. He was told to invest $1,000
at 12% interest at age 20 and leave it alone until age 65. Arnold's dad knew that one strategy that
wealthy people use is to exercise self-discipline to never touch this long-term plan. Arnold is very
happy he applied his dad's advice. From age 62 to age 68, Arnold's investment will grow by more than

      A) $16,000.

      B) $32,000.

      C) $64,000.

      D) $128,000.


John Madrid put $1,000 into a mutual fund yielding 18%. When will it double in value?

      A) two years

      B) three years

      C) four years

      D) five years
      E) six years


Which of the following could one accomplish with personal financial planning as outlined in the text?

      A) manage the unplanned

      B) cover your assets

      C) minimize payments to Uncle Sam

      D) realistically save for retirement

      E) all of the above


The value of an investment at some future point in time is also known as _____.

      A) the time value of money.

      B) calculated value

      C) present value.

      D) future value.

      E) compounded annuity


When you leave your $7.00 interest payment in your savings account, you are _____.

      A) establishing a savings habit.

      B) creating wealth.
      C) reinvesting.

      D) losing money - invest it elsewhere.

      E) none of the above


Which of the following is not one of the major types of assets?

      A) monetary

      B) mortgage

      C) investments

      D) personal property

      E) retirement plans


By the time Adrian Sandusky, a divorced mother of two, reached age 37 she had withdrawn almost all
of the money she had accumulated in investments. The retirement plan at work had just begun two
years ago when she became eligible. Having an inadequate income and a former husband who doesn't
support the children have caused a severe strain on Adrian's finances. It's only natural she
supplements her income in some way. Life is full of difficult choices. Had she worked a part-time job
instead of withdrawing from the investments, babysitters would have been necessary. Would she have
been money ahead? What is the greatest loss Adrian has suffered?

      A) the effects of compound interest and reinvesting

      B) penalties caused by withdrawals

      C) the lack of child support

      D) diversification of investments

      E) none of the above