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Financial Literacy Exam 1 Questions with Complete Solutions
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5 steps of the financial planning process - Answer-1) evaluate your financial health- budgeting, financial statements, ratios- help you see where you are 2) define goals- should be specific, need for liquidity, protection (insurance), minimize taxes when possible 3) develop specific plan- set up ...

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  • October 12, 2024
  • 5
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • financial literacy exam 1 questions with complete
  • 5 steps of the financial planning process answer

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  • Financial Literacy
  • Financial Literacy

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Financial Literacy Exam 1 Questions
with Complete Solutions
5 steps of the financial planning process - Answer-1) evaluate your financial health-
budgeting, financial statements, ratios- help you see where you are
2) define goals- should be specific, need for liquidity, protection (insurance), minimize
taxes when possible
3) develop specific plan- set up 3-6 month emergency fund
4) implement plan- budget, start saving, minimize taxes, should change with
time/circumstances
5) review periodically- monitor and adjust- can't let plan go on autopilot

10 principles of financial planning - Answer-1) the best protection is knowledge- don't
listen to everything on tv or online
2) have a plan
3) time value of money- compound interest, rule of 72
4) taxes matter- every dollar of tax savings is a dollar saved
5) stuff happens- importance of liquidity (access to cash)-unexpected expenses will
happen
6) spend smartly
7) protect your assets and income- insurance
8) risk and return- more return you want, more risk you have to take; diversification-
spread out investments

asset - Answer-something you own that has value and can be sold
ex- cash, checking account, savings account, accounts receivable, house, car, etc.

liability - Answer-something you owe
ex- credit card bill, accounts payable, mortgage

classifications of assets - Answer-monetary assets- cash, CD's, money market
investments- stocks
retirement plans- 401k, IRA
house- primary residence
car-
personal property- small stuff you own- tv, furniture

classifications of liabilities - Answer-current- bills due within 1 year
long term- mortgage, auto loans, student loans

balance sheet - Answer-financial statement that is a snapshot in time- shows assets
and liabilities and shows net worth

net worth - Answer-assets - liabilities

, shows how much you own compared to what you owe

income statement - Answer-revenues - expenses = net income
shows over a period of time

ratios - Answer-ratios allow you to compare balance sheet/income statement to targets

current ratio - Answer-monetary assets / current liabilities

monthly living expenses covered ratio - Answer-monetary assets / monthly living
expenses

debt ratio - Answer-total debt or liabilities / total assets

long term debt coverage ratio - Answer-take home pay / monthly long term debt
payments

savings ratio - Answer-(take home pay - expenses) / income available for living
expenditures

gross income vs take home pay - Answer-gross income is total income before taxes
take home pay= gross income - taxes - 401k contributions

discretionary expenses - Answer-expenses you have control over- can adjust them
anytime

non discretionary - Answer-expenses you don't have control over- can adjust about
once a year

Future value - Answer-FV= PV * (1+i)^n

Present value - Answer-PV = FV / (1+i)^n

annuity due - Answer-payment comes at beginning of period

ordinary annuity - Answer-payment comes at end of period

progressive tax system - Answer-taxed at every rate as you move up the tax bracket-
the more income you have, the higher % you pay in taxes

income - Answer-ordinary-wages, tips, lottery
capital earnings- from stocks- short term or long term
passive- rental property income if not in real estate business

tax bracket creep - Answer-brackets go up every year adjusted for inflation

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