Test 1

Chapter 1-3 Questions

1. Samantha is trying to decide between two investments. The first one will earn 5% simple
interest annually. The second investment will earn 5% compounded quarterly. Assuming
they have the same amount of risk, which is the better investment?
a. Neither is a good investment.
b. 5% compounded quarterly
c. Both will earn the same amount
d. 5% simple interest
2. If you deposit $500 per year in an account for six years at 9%, how much will you have in
the account? Round your answer to the nearest dollar.
a. $3,500
b. $3,762
c. $3,000
d. $3,270
3. What is the current value of a future amount based on a certain interest rate and a
certain time period? An example might be-how much do I need to save NOW at 6% in
order to have $20,000 in 10 years.
a. Present value
b. Annuity plan
c. Future value
4. Marie will be receiving $300 per year for the next six years. The interest on the account
is 5% compounded annually. What is the present value of this annuity? Answers are
rounded to whole dollars. Use the appropriate table from those beginning on page 41.
Round your answer to the nearest dollar. (Hint: Find future value first then use present
value formula.)
a. $2,041
b. $1,800
c. $1,523
d. $1,678
5. Which elements collectively create the national economy? (multiple answers)
a. Government
b. Consumer spending
c. Businesses
d. Labor force
e. Unemployment
6. Simon will be receiving $200 per year for the next five years. The interest on the account
is 6%, compounded annually. What is the present value of this annuity? Answers are
rounded to whole dollars. Use the appropriate table from those beginning in the
appendix at the back of the chapter. (Hint: Find future value first then use present value
formula.)
 a. $842
b. $1,000
c. $1,127
d. $994
7. A rise in the general level of prices is called _________.
8. _________ are the ideas and principles that a person considers correct, desirable, and
important. This is a one-word answer and taken directly from the text.
9. To calculate time value of money, the following items are needed: (multiple answers)
a. Reason for saving
b. Length of time
c. Net worth
d. Annual interest rate
e. Principal amount
10. What are three main elements that affect overall financial planning? (multiple answers)
a. Investment strategy
b. Ability to evaluate risk
c. Life situation
d. Personal values
e. Economic factors
11. What measures the increase in the amount of money in a savings account as a result of
interest earned?
a. Personal opportunity costs
b. Time value of money
c. Trade balance
d. Inflation rate
12. When people first begin planning for retirement, saving for a child’s college education,
and planning the purchase of a vacation home, these are usually:
a. Long-term goals
b. Intermediate goal
c. Short-term goals
13. Your financial goals are the basis for measuring the progress of which of the following?
a. Financial spending
b. Spending, saving, investment activities
c. Financial investment activities
d. Financial savings
14. The stages in the family situation and financial needs of an adult is called the:
a. Financial cycle
b. Family life cycle
c. Financial needs cycle
d. Adult life cycle
15. The purpose of the _________ _________ system is to act as the nation’s central bank.
This is a two-word answer straight from the text.
16. What are some of the methods that can be used to compute time value of money? The
five correct methods are found in the text. (Multiple answers)
a. Financial calculator
b. Banker’s book
c. Measuring tape and ruler
d. Time value of money tables
e. Mathematical formulas
17. The amount to which current savings will increase based on a certain interest rate and a
certain time period is called:
a. Discount interest
b. Present value
c. Deflation rate
d. Future value
18. An important personal opportunity cost involves ________. This is a one-word answer
straight from the text.
19. What are some factors that may cause people in their 50s to spend money differently
than people in their 20s? There is more than one correct answer. (multiple answers)
a. Income levels
b. Whether you are a registered voter
c. Age
d. Household size
20. The Fed influences the money supply by: (multiple answers)
a. Encouraging business growth
b. Maintaining an adequate money supply
c. Creating government policy
d. Creating jobs
21. The measure of the average change in the prices urban consumers pay for a fixed
“basket” of goods and services is called the Consumer Price _______.
22. Sound financial goals for a young family might include: (multiple answers)
a. Taking frequent vacations
b. Saving for college for the children
c. Having adequate life insurance for care of the children
d. Make minimum payments on credit cards when they could pay more
e. Buying fancy new clothes
f. Saving money for a sports car
23. Which of the following is not true?
a. Consumer price index measures changes in price of a “basket” of goods
b. CPI is a totally accurate measure of inflation in the U.S.
c. Inflation rates can be deceptive
d. Hidden inflation is when the cost of necessities rises at a higher rate than
nonessential items
24. “Hidden” inflation exists when the cost of _______ rise at a higher rate than ______
items.
 a. Nonessential; necessities
b. Necessities; nonessential
25. Samantha wants to buy a new watch that costs $100. She decides to wait a year. All
other factors being equal, if inflation is 4%, the watch will cost $_______ next year.
26. How is the money supply maintained by the Federal Reserve?
a. Through lending and interest rates
b. Through economic growth, expanding GDP, influencing interest rates, and time
value of money
c. Through lending, interest rates, and buying and selling of government bonds
d. Through purchasing and selling stock, calculating time value of money, and
increasing the money supply
27. Personal opportunity costs related to health are: (multiple answers)
a. Poor eating habits that result in illness
b. Spending money from a savings account to purchase something
c. Investing money in the stock market
d. Avoiding exercise that results in increased health care costs
e. Lack of sleep that results in illness
28. An increase in demand of goods and services will most likely cause an increase in:
a. Sales tax rates
b. Employment
c. School enrollment
d. Tax rates
29. Alex has an interest rate of 3.6% on his savings account. Using the rule of 72’s his money
will double in ______ years.
30. Key factors for most people in making financial decisions include: (multiple answers)
a. Time value of money
b. Financial opportunity costs
c. Exchange rates
d. Inflation costs
31. Interest rates represent the true cost of _______ (one-word). This is taken directly from
the text.
32. Common financial goals and activities include: (multiple answers)
a. Making a list of past vacation spots
b. Purchasing life insurance
c. Purchasing health insurance
d. Planning for retirement
33. Which of the following are personal factors that can impact financial decisions? (multiple
answers)
a. Technology improvements
b. Household size
c. Income
d. Age
e. Personal beliefs
34. Valuing your time rather than making money your top priority in meeting your needs,
achieving your goals and satisfying your personal values are examples of:
a. Personal opportunity costs
b. Time management challenges
c. Time obligations
d. Financial opportunity costs
35. How do personal values affect your financial plan?
a. Personal values define a person and also what that person things. Personal
values apply to a few financial decisions but not all.
b. The important part of a financial plan is the future value of your money. Personal
values do not determine the future value of your money.
c. A financial plan should not be determined by personal values. A financial plan
should be determined by earnings and growth rates.
d. Personal values define a person and also what that person thinks is important.
Your personal values also determine how you plan your finances.
36. An example of an intangible-purchase goal is:
a. A new car
b. A vacation
c. New clothes
d. A new house
37. When your investments are increasing, you may only be concerned with any amount of
growth. What is one way to ensure that you do not lose sight of your actual goal-taken
from the SMART approach?
a. Evaluate all of your personal alternatives before investing.
b. Review and revise your plan of action constantly.
c. Growth of any kind is acceptable.
d. State your goals in specific and measurable terms.
38. Examples of opportunity costs do NOT include: (multiple answers)
a. Forfeiting interest and taking money from savings and purchasing new appliances
to save energy
b. Having enough money to fund retirement and pay for current expenses
c. Being able to work and go to school at the same time
d. Accepting a low yield because you have chosen low-risk investments
39. What type of financial goal is the infrequent purchases of things, such as a car or kitchen
appliances?
a. Intangible-product goals
b. Frequent-product goals
c. Consumable-product goals
d. Durable-product goals
40. The ________ premium represent the “extra” amount that you can expect to receive for
investing in an instrument due to factors such as expected inflation and the uncertainty
of getting your money back. This is a one-word answer taken directly from the text.
41. What are the two main reasons Americans have financial problems? (multiple answers)
 a. Poor planning, weak management of money habits
b. Lack of clear financial goals provided for them
c. Advertising efforts and availability of goods lead to overspending
d. Employers do not pay enough to their employees
42. The Fed has indirect control over interest rates. The Fed attempts to make adequate
funds available for which of the following: (multiple answers)
a. Tax laws
b. Business expansion
c. Consumer spending
d. Government policy
43. Another name used for calculating present values is 2_____. Compounding is the other
term for future value.
a. Compounding
b. Marginalizing
c. Discounting
d. Capitalizing
44. Paul can invest his money in the stock market now; however, that would require a trade-
off or:
a. Personal opportunity costs only
b. Liquidity rationing
c. Opportunity costs
45. A cause of inflation is a decrease in supply of products when there is:
a. Increased spending-increased demand
b. Decreased demand
c. Volatile interest rates
d. Decreased wage and salary levels
46. The inflation rate on clothing is 8%, whereas the inflation rate on washing machines is
4%. What is the amount of the hidden inflation?
a. 32%
b. 8%
c. 4%
d. 12%
47. Paul invested $185. The interest earned is 4%, compounded annually. At the end of two
years, Paul will have about: Use the appropriate table from those beginning on page 41.
Round to the nearest dollar.
a. $185
b. $200
c. $208
d. $190
48. How does a rapidly increasing unemployment rate influence a person with a job?
a. The unemployment rate does not affect people with jobs, only those people
without jobs.
 b. The person may feel that they should take the opportunity to work less to
provide employment options for others.
c. The decisions that the person makes do not change because the person has
employment.
d. The decisions that the person makes will usually be lower risk and will focus on
ways to preserve savings and maintain financial security.
49. What do people begin to assess when global markets and economies begin to slow?
a. People begin to spend more and save less
b. People begin to worry less about their economic factors.
c. People begin to assess personal and economic factors.
d. People begin to work harder to keep their jobs.
50. Every financial decision has a trade-off, also known as a(n):
a. Opportunity cost
b. Planned option
c. Financial plan
d. Deciding factor
51. Which of the following activities would be best suited for single adults aged 50 or older?
(multiple answers)
a. Purchasing long-term care coverage
b. Establishing financial independence
c. Reviewing will and estate plans
d. Reviewing retirement facilities
52. Food and clothing are examples of:
a. Intangible products
b. Durable products
c. Luxury items
d. Short-term consumable goods
53. What are the four situational influences for financial decisions? (multiple answers)
a. Number and age of household members
b. Age
c. Savings goals
d. Opportunity costs
e. Employment situation
f. Marital status
54. Interest rates represent the true cost of _________. (one-word)
55. Which of the following is true regarding global influence of American consumption?
a. American consumption is a small part of the global economy.
b. American consumption is the only part of the global economy.
c. The global economy is solely driven by American consumption.
d. American consumers provide foreign companies with a market.
56. The rule of 72 is used to determine the time that it would take for your money to:
a. Double
b. Quadruple
 c. Half
d. Grow to $1 million
57. Which of the following is not an influence on personal financial planning, as shown on
the fourth step of the financial planning process?
a. Economic factors or conditions
b. Personal values
c. Life situation
d. Gold prices
58. A series of equal deposits or payments is called a(n):
a. Future value plan
b. Annuity
c. Financial plan
d. Present value plan
59. Individuals with poor credit ratings will typically pay:
a. Higher interest rates
b. The same rates as all others
c. Lower interest rates
d. An average of all borrowers
60. Sam has an investment of $200 that is expected to earn 10%. How much will the
investment be worth at the end of the first year if the investment earns simple interest?
a. $240
b. $200
c. $210
d. $220
61. Paul needs to have $200 in two years. The interest earned on the account is 4%,
compounded annually. How much does he need to invest today?
a. $200
b. $208
c. $216
d. $185
62. Which of the following activities would be best suited for single adults aged 18 to 35?
(multiple answers)
a. Purchasing disability insurance
b. Considering home purchase for tax benefit
c. Reviewing retirement facilities
d. Establishing financial independence
e. Reviewing will and estate plans
63. When determining goal-setting guidelines, what three things should you take into
account? (multiple answers)
a. Investing activities
b. Treasury stock
c. Municipal bonds
d. Saving
 e. Spending
64. Which of the following activities would be best suited for couples that have households
with multiple generations? (multiple answers)
a. Establishing financial independence
b. Purchasing insurance for dependents
c. Making elder care plans
d. Using dependent care services
e. Naming guardians of your siblings’ children in your will
65. When computing time value of money using any of the five techniques, you may get
slightly different answers due to:
a. Rounding
b. Changes in the amounts invested
c. Changes in the time frame
d. Changes in the interest rate
66. Which of the following activities would be best suited for young couples with children
under age 18? (multiple answers)
a. Naming guardians of children in your will
b. Carefully managing credit
c. Purchasing life insurance for care of dependents
d. Purchasing long-term care coverage
e. Reviewing retirement facilities
67. Consumer, business, government, and foreign borrowing increase the demand for
money, interest rates tend to:
a. Rise
b. Stay the same
c. Decline
68. Financial plans should include goals that are stated in specific, measurable terms. Which
of the following is the best answer?
a. Stating your goals in measurable terms allows you to constantly compare your
progress with others.
b. Defining your goals in specific measurable terms will never allow you to
understand your progress toward your goals.
c. Specifying your goals will help you know your goals, create a plan to achieve
them, & measure so you can see if you achieve them
d. Determining your goals ahead of time will keep you from making rash,
miscalculated decisions over time.
69. What is the Federal Reserve doing when it lends more money, buys government bonds,
and changes interest rates?
a. The Fed is trying to prevent a run on banks.
b. The Fed is decreasing the national money supply.
c. The Fed is decreasing the value of the dollar.
d. The Fed is maintaining or increasing the money supply.
70. The main cause of inflation is an increase in consumer spending (demand) without an
equal increase in:
a. Supply
b. Wage levels
c. Interest rates
d. Demand
71. Which of the following activities would be best suited for young couples with dual
income and no children? (multiple answers)
a. Making tax-deferred contributions for retirement
b. Developing investment plans
c. Naming guardians of your siblings’ children in your will
d. Coordinating insurance coverage
e. Reviewing estate plans just prior to retirement
72. When there is a decreased money supply, what typically increases? (multiple answers)
a. Interest rates
b. Unemployment
c. Corporate tax rates
d. Prices of products
73. Which of the following activities would be best suited for single parents with children
under age 18? (multiple answers)
a. Naming guardians of children in your will
b. Reviewing retirement facilities
c. Saving money for college
d. Arrange for long-term care insurance
e. Purchasing insurance for health, life, and disability insurance
74. Interest rates are affected by the following: (multiple answers)
a. Demand for goods and services
b. Time value of money
c. The cost of real estate only
d. Supply of goods and services
75. Spending money from your savings account would mean:
a. Increased interest
b. Lost interest
c. No change in earnings
76. Opportunity costs can be viewed in terms of: (multiple answers)
a. Planned costs
b. Financial costs
c. Challenge costs
d. Personal costs
77. Which of the following activities would be best suited for Older couples (50+) with no
dependent children at home? (multiple answers)
a. Planning for possible part-time work
b. Naming guardians of children in your will
 c. Establishing financial independence
d. Reviewing estate and financial plans
e. Changing household budgets for future
78. Decreased money supply will generally cause ________ interest rates.
a. Higher
b. Lower
79. When the level of exports of U.S.-made products is lower than imported goods, this will
typically cause the money supply to:
a. Increase
b. Reduce by one-half the amount of the imports
c. Decrease
d. Stay the same
80. Personal _______ have a direct influence on such decisions as spending now versus
saving for the future.
a. Values
b. Experiences
c. Knowledge
d. Feelings
81. Which of the following is the first step in the financial planning process?
a. Determine your current financial situation
b. Review and revise your plan
c. Identify alternative courses of action
d. Develop your financial goals
82. Spending less money and saving more for retirement is a good example of what goal
setting guideline?
a. Reviewing your financial plan more often
b. Setting a measurable goal
c. Creating financial goals to determine the financial action to be taken
d. Decreasing your retirement account to have more to spend each month
83. Which of the following statements is not true?
a. The steps of the financial planning process can provide an approach to career
planning.
b. Career choices require periodic evaluation of trade-offs related to various factors.
c. The average person changes jobs seven times in a lifetime.
d. Career choice decisions do not have risks and opportunity costs.
84. The demographic that is most affected by inflations is:
a. Person with a high net worth
b. Persons on commission salaries
c. Persons on fixed incomes
d. Persons earning hourly wages
85. Saving for four years for a down payment on a house affects how soon you are able to
purchase a home. This is an example of:
a. Achieving a long term goal in the four-year time frame
 b. An intermediate goal that affects a long-term goal
c. A series of short-term goals
d. A short-term goal
86. Bank and Trust has an interest rate of 5%. The current inflation rate is 8%. What does
this mean - in other words are they staying up with the inflation rate?
a. Bank and Trust is gaining 3% of buying power
b. Loans in the past are not effected by inflation
c. Bank and Trust should cancel all past loans
d. Bank and Trust is losing 3% of buying power
87. Inflation has more of a negative impact on (think of a lender making a mortgage at 3%
for 30 years):
a. Lenders
b. Borrowers
88. True or false: Managing risk is not a financial planning activity.
a. True
b. False
89. True or false: In time value of money calculations, the future value of an amount will
always be greater than the original amount. Do not factor in possible inflation in your
answer.
a. True
b. False
90. True or false: Goals should be set as high as possible regardless of reality because they
may be obtainable.
a. True
b. False
91. True or false: Inflation reduces the buying power of a dollar.
a. True
b. False
92. True or false: Short-term goals are usually achieved within the next year or so.
a. True
b. False
93. If a $10,000 investment earns interest of $500 in one year, what is its rate of return?
a. 5%
b. 10%
c. 50%
d. 75%
94. A formalized report that summarizes your current financial situation, analyzes your
financial needs, and recommends a direction for your financial activities is a(n):
a. Insurance prospectus
b. Budget
c. Financial Plan
d. Investment forecast
95. Which of the following goals would be the easiest to implement and measure?
 a. Invest $2,000 a year for retirement
b. Reduce our debt payments
c. Spend less each month
d. Save $100 a month to create a $4,000 emergency fund
96. Opportunity cost refers to
a. Money needed for major consumer purchases.
b. The trade-off of a decision
c. The amount paid for taxes when a purchase is made.
d. Current interest rates
97. The time value of money refers to
a. Personal opportunity costs such as time lost on an activity.
b. Financial decisions that require borrowing funds from a financial institution.
c. Changes in interest rates due to changes in the supply and demand for money in
d. our economy
e. Increases in an amount of money as a result of interest earned
98. If inflation is expected to be 8 percent, how long will it take for prices to double?
a. 6 years
b. 7 years
c. 9 years
d. 12 years
99. If a $10,000 investment earns a 7% annual return, what should its value be after 6 years?
a. $10,000
b. $10,700
c. $12,000
d. $15,007
100. The Rule of 72 is:
a. A tool to determine the number of years until retirement for an employee
b. Used to estimate how past price will double using a given annual inflation rate
c. The legal code for requiring companies to provide a match on retirement savings
d. Used to calculate interest rates for savings
e. The number of steps required to complete a financial plan
101. Which of the following would increase the interest rate for a loan?
a. Poor credit rating
b. Higher down payment
c. Expected lower inflation
d. Lower consumer prices
e. Short time to maturity
102. Which of the following short-term goals is stated most clearly using the SMART
approach?
a. Buy a car for less than $15,000 within 6 months
b. Retire in 10 years at age 65 with $2,000,000 in my 401(k) account
c. Purchase a house with a mortgage no greater than $150,000 within 5 years
d. Set up an emergency fund
e. Invest $50 per month for the next 12 years for my nephew's college fund
103. If I can invest a dollar today and earn interest on it, then it should be worth
_________ in the future.
a. Less
b. The same as
c. More
d. Either less or the same as
e. Either the same as or more
104. To calculate the time value of money, we need to consider all of the following
except the
a. Amount of the savings.
b. Annual interest rate.
c. Length of time the money is on deposit.
d. Type of investment.
e. Principal.
105. Steve Wilson wants to deposit $150 per month into an account earning 4 percent
for the next 3 years, so he can purchase a used car at that time. What type of
computation would he use to determine the amount he will have for his purchase?
a. Present value of a single amount
b. Future value of a single amount
c. Simple interest
d. Present value of an annuity
e. Future value of an annuity
106. Changes in the cost of money is referred to as ____________ risk.
a. interest-rate
b. inflation
c. income
d. personal
e. liquidity
107. The rising or falling of prices that causes changes in buying power is referred to
as ____________ risk.
a. interest-rate
b. inflation
c. income
d. personal
e. liquidity
108. The difficulty of converting savings and investments to cash is referred to as
____________ risk.
a. interest-rate
b. inflation
c. income
d. personal
e. liquidity
109. Randy Hill wants to retire in 20 years with $1,000,000. If he can earn 10% per
year on his investments, how much does he need to deposit each year to reach his goal?
Round your answer to the nearest dollar.
a. $17,460
b. $18,000
c. $5,727
d. $25,000
e. None of the above
110. If you want $1,000 three years from now and you earn 4 percent on your savings,
how much do you need to deposit?
a. $885
b. $889
c. $1,000
d. $1,030
e. $1,040
111. When prices are increasing at a rate of 4 percent, the cost of products would
double in about 18 years.
a. True
b. False
112. Most financial documents come from financial institutions, however the two
documents you create yourself (also known as personal financial statements) are the
personal ________ ________ and the _________ __________ statement.
113. A personal _________ sheet also called a net worth statement or statement of
financial position, reports what you own and what you owe.
114. True or false: Total assets minus only CURRENT liabilities equal net worth.
a. True
b. False
115. How is a cash surplus (or deficit) on a statement of cash flows calculated?
a. Cash inflows (receipts) less cash outflows (expenditures) during a given period of
time
b. Assets less liabilities during a given period of time
c. Assets plus cash inflows less liabilities and cash outflows during a given period of
time
d. Cash inflows (receipts) for the last period less cash outflows (expenditures)
during a current period of time
116. True or false: When cash outflows, or expenses, exceed cash inflows, or income,
there will be a cash surplus.
a. True
b. False
117. True or false: Discretionary income is the same as net pay.
a. True
b. False
118. Budgets allow you to live within your income while increasing your chances of
achieving your financial goals.
a. True
b. False
119. Which of the following are characteristics of good financial goals? (multiple
answers)
a. Specific and measurable
b. Have a definite time frame
c. Long-term in nature
d. Realistic to achieve
120. Which of the following statements is true?
a. An adequate emergency fund is usually 3-6 months of gross pay
b. An adequate emergency fund is 9-12 months of take home pay
c. An emergency fund should be invested in stocks
d. An adequate emergency fund is usually 3-6 months of living expenses
121. True or false: Budgeting income may be difficult for someone who works strictly
for commissions.
a. True
b. False
122. Which of the following could likely be intermediate-term goals for a single college
student with one year of college remaining? (multiple answers)
a. Complete graduate school in two years
b. Pay-off automobile loan (12 months remaining)
c. Pay-off student loans in five years or less
d. Buy a retirement home
e. Complete college
f. Take a vacation to Europe
123. Number the following steps of budgeting in the correct order.
___ - estimate expected income
___ - record spending amounts
___ - review spending and saving patterns
___ - budget estimated expenses
___ - set financial goals
___ - budget known expenses
___ - allocate an emergency fund and savings
124. True or false: The amounts you budget for various fixed expenses will depend on
your current needs and plans for the future.
a. True
 b. False
125. When you calculate a budget _________, you determine the difference between
the actual amount spent or received and the amount budgeted.
126. Which of the following is an example of a variable expense?
a. Car payment
b. House payment
c. Property taxes
d. Groceries
127. When evaluating your budget, you should review and perhaps revise your
financial goals and budget allocations and review your financial progress.
a. True
b. False
128. Budgeting should be well planned,
a. Realistic, flexible, and clearly communicated.
b. Quick, flexible, and clearly communicated.
c. Quick, very specific, and clearly communicated.
d. Realistic, flexible, and easy.
129. People should prepare a personal balance sheet on a periodic basis to evaluate
financial progress.
a. True
b. False
130. True or false: Most Americans do not have adequate amounts of money set aside
for emergencies.
a. True
b. False
131. Which of the following can help you establish an adequate savings account and
emergency fund? (multiple answers)
a. Have savings deducted and automatically deposited into a savings account from
each paycheck
b. Write a check each payday to deposit into a savings account
c. Save coins in a jar at the end of each day for deposit at a future time into a
savings account
d. Buy long-term bonds with deductions from every other paycheck
e. Save between 5% and 10% of each paycheck
f. Invest 5% to 10% of each paycheck into the stock market.
132. True or false: A savings plan is important factor if you want your money to grow.
a. True
b. False
133. If Mary has cash inflow for the year of $120,000 with cash outflows of $135,000,
her cash flow statement would show a:
a. $120,000 surplus
b. $135,000 deficit
c. $15,000 deficit
 d. $15,000 surplus
134. The steps to prepare a budget include setting financial goals, estimating expected
income, allocating for emergency funds and expenses, recording actual expenses,
calculating variances, and evaluating.
a. True
b. False
135. A successful budget should be: (multiple answers)
a. Flexible
b. Realistic
c. Clearly communicated
d. Well planned
e. Optimistic
136. Invoices, credit card statement, ________ policies and tax forms are the basis of
financial record keeping and personal economic choices.
137. Debts due within a short time, usually the next 12 months, would be classified as
_________ liabilities, while debts that will come due in a period beyond the next 12
months would be categorized as _________-term liabilities.
138. Which of the following provide an accurate explanation of net worth? (multiple
answers)
a. Assets less liabilities
b. Liabilities less asses
c. Assets sold in 12 months less liabilities owed within the next 12 months
d. The amount you would have if you sold the assets and paid off the liabilities
139. Cash flow is the ____________ of cash during a given period of time.
a. Inflow and investment
b. Outflow
c. Inflow and outflow
140. Karen James owes $10,000 in medical bills, $500 to the public utility, $15,000 on
a 4-year student loan, and $100,000 on a 15-year home mortgage. What is the total of
Karen’s current liabilities?
a. $10,500
b. $10,000
c. $25,500
d. $115,500
141. When preparing a personal balance sheet, which of the following statements is
NOT true?
a. List and total all amounts owed to others
b. Subtract liabilities from assets to determine net worth
c. List and total all items of value
d. Subtract assets from liabilities to determine net worth
142. Financial ratios are guidelines for:
a. Using both numerical and subjective measures
b. Measuring changes in your financial situation
 c. Measuring strictly cash inflows
d. Measuring only solvency
143. Which of the following are the basic major money management activities?
(multiple answers)
a. Creating and implementing a plan for savings
b. Storing and maintaining personal financial records
c. Preparing personal financial statements
d. Investing in speculative stocks
144. Expenses that do not vary from month to month are referred to as ________
expenses.
a. Fixed
b. Expected
c. Required
d. Variable
145. Which of the following assets are liquid assets? (multiple answers)
a. Money market account
b. Cash
c. Home equity
d. Retirement accounts
e. Jewelry
f. Cash value life insurance
g. Savings account
146. Joe borrowed $100,000 (a four-year loan at 10% interest) on January 2, 2009.
During the course of the year, he paid back $300,000 on that debt. What would his
December 31, 2009 balance sheet show for his debt? Interest is an expense, not part of
the loan balance.
a. Approximately $10,000 because that is the amount of interest owed
b. $100,000 because the balance sheet shows what was originally borrowed
c. Approximately $25,000 because that is what will be paid over the next 12
months
d. $70,000 because the balance sheet should report what is owed on the balance
sheet date
147. Cash flow statements shows a summary of the inflows or cash (_______) and
payments for a given period such as a month or year.
148. The length of time to hold onto records varies according to the type of record.
How long should records pertaining to property and investments be retained?
a. As long as you own the assets
b. They should be kept permanently
c. At least 7 years
149. Tommy White has the following financial items on his balance sheet: $10,000 of
liquid assets, $15,000 of personal property, $300,000 of real estate, $5,000 of current
liabilities, and $120,000 of home mortgages. What is his net worth?
a. $325,000
 b. $125,000
c. $200,000
d. $25,000
150. Take-home pay is:
a. Total of salary, wages, and commissions earned during a pay period
b. Earnings (salary, wages, and commissions) after deducting for taxes and other
items
c. The same as discretionary income
d. The same as total cash inflow
151. Personal financial statements provide information about your current financial
position and present a summary of your income and spending. Which of the following
statements does NOT describe a main purpose of personal financial statements?
a. Report your current financial position
b. Measure your progress toward financial goals
c. Provide data for preparing tax forms or applying for credit
d. All four answers describe the purpose of personal financial statements
e. Maintain information about your financial activities
152. If Joe and Mary Smith have money market accounts of $100,000, real estate
holdings of $300,000, loans of $25,000, and investments of $10,000, what would their
TOTAL ASSETS be?
a. $435,000
b. $400,000
c. $410,000
d. $100,000
153. Which of the following are common sources of income? (multiple answers)
a. Self-employment income
b. Gain on value of real estate holdings
c. Wages, salaries, and commissions
d. Amounts received from pensions
e. Social security income payments
f. Forgiveness of debts
g. Gifts and grants
h. Inheritance of jewelry
154. Current (short-term) liabilities include:
a. Credit card bills and home improvement loan
b. Medical bills and credit card balances
c. Student loans, the last three payments due on an automobile loan, and home
mortgage
d. Medical bills and the home mortgage
155. Flexible payments that change from month to month are called _______
expenses.
a. Fixed
b. Most
 c. Variable
d. Required
156. Where should difficult-to-replace documents be kept?
a. Home filing system
b. Personal computer system
c. Safe deposit box
157. After categorizing assets and calculating total assets, what do you do next when
preparing the balance sheet?
a. Total the liabilities and then calculate net worth
b. Calculate net worth and subtract it from liabilities
c. Classify liabilities, total the liabilities, and calculate net worth
158. Which of the following are not liquid assets?
a. Checking account
b. Real estate
c. Savings account
d. Cash
159. The length of time to hold onto records varies according to the type of record.
How long should birth certificates, will, and social security records be retained?
a. At least 7 years
b. As long as you own the assets
c. They should be kept permanently
160. True or false: Money management is the day-to-day financial activities necessary
to manage current personal economic resources while working toward long-term
financial security.
a. True
b. False
161. Money management involves financial activities necessary to manage current
personal economic resources, while working for the achievement of long-term financial
security.
a. True
b. False
162. All of the following will increase net worth, EXCEPT:
a. Saving more of your salary each pay day
b. Reducing your spending and directing the money toward saving and investing
c. Taking $1,000 cash from your liquid assets and paying down $1,000 of debt
163. True or false: Solvency is defined as having liquid assets.
a. True
b. False
164. An example of a liquid asset would be
a. a home
b. an automobile
c. a checking account
d. a retirement account
165. Which of the following financial documents would most likely be stored in a safe
deposit box?
a. W-2 forms
b. Personal financial statements
c. Warranties
d. Marriage certificates
166. A personal balance sheet presents
a. Amounts budgeted for spending.
b. Income and expenses for a period of time.
c. Earnings on savings and investments.
d. Items owned and amounts owed.
167. A budget deficit would result when a person’s or family’s
a. Actual expenses are less than planned expenses.
b. Assets exceed liabilities.
c. Actual expenses equal planned expenses.
d. Actual expenses are greater than planned expenses
168. The document that would be most useful to track spending patterns for the past
few months is the:
a. Balance sheet.
b. Cash flow statement.
c. Budget.
d. All of these.
169. Which of the following ratios indicates the number of months in which living
expenses can be paid if an emergency arises?
a. Debt ratio
b. Current ratio
c. Liquidity ratio
d. Debt payments ratio
170. An example of a fixed expense is
a. Medical expenses.
b. Gifts.
c. Utilities.
d. A mortgage payment.
171. True or false: Current liabilities are the debts you must pay within a short time,
usually less than a year.
a. True
b. False
172. Brokerage statements are an example of a(n) ____________ record.
a. investment
b. insurance
c. estate planning
d. tax
e. consumer purchase
173. How long should you keep your most current will?
a. No need to keep it since your lawyer probably has a photocopy.
b. One year.
c. Three years.
d. Seven years.
e. Permanently.
174. A personal balance sheet reports
a. Amounts budgeted for spending.
b. Income and expenses for a period of time.
c. Earnings on savings and investments.
d. Items owned and amounts owed.
e. Family financial goals.
175. When creating a personal balance sheet, which of the following is a current
liability?
a. Checking account
b. Mortgage
c. Educational loan
d. Auto loan
e. Medical bill
176. The amount you would have left if all assets were sold and all debts were paid in
full is called your:
a. Net assets.
b. Net worth.
c. Total liabilities.
d. Total income.
e. Budgeted expenses.
177. The equation to calculate net worth is
a. Assets - Cash outflows = Net worth.
b. Cash inflows - Liabilities = Net worth.
c. Cash inflows - Cash outflows = Net worth.
d. Assets - Liabilities = Net worth.
e. Cash inflows + Liabilities = Net worth.
178. The inability to pay debts when they are due because liabilities far exceed the
value of assets is called:
a. Liabilities.
b. Insolvency.
c. Net worth.
d. Cash flow.
e. Liquid assets.
179. Which of the following situations describes a person who could be insolvent?
a. Assets $56,000; annual expenses $60,000
b. Assets $78,000; net worth $22,000
c. Liabilities $45,000; net worth $6,000
d. Assets $40,000; liabilities $55,000
 e. Annual cash inflows $45,000; liabilities $50,000
180. Which of the following is a cash inflow?
a. Payment for rent
b. Purchase of groceries
c. Payment for loan
d. Income from employment
e. Payment for medical expenses
181. Which of the following appears as a cash outflow on a cash flow statement?
a. Liquid assets
b. Variable expenses
c. Net worth
d. Personal possessions
e. Real estate assets
182. A current ratio of 2 means:
a. 2% from each paycheck is available for savings.
b. The minimum payment for a credit card is 2% of the balance.
c. 2 months of living expenses are available in case of emergency.
d. Net worth equals 2 times the amount of debt.
e. $2 in liquid assets are available for every $1 of current liabilities.
183. Disposable income equals:
a. Gross income.
b. The amount a person or household has to spend.
c. Money left over after paying for housing, food, and other necessities.
d. Social Security taxes.
e. The amount being saved each month.
184. A family with $100,000 in assets and $60,000 of liabilities would have a net
worth of
a. $20,000.
b. $40,000.
c. $60,000.
d. $100,000.
e. $160,000.
185. Patrick Guitman has a net worth of $145,000 and liabilities of $155,000. What
are his total assets?
a. $10,000
b. $145,000
c. $155,000
d. $200,000
e. $300,000
186. Given the following information, calculate the net worth:
Assets = $8,000
Cash inflows = $6,000
Cash outflows = $4,500
Liabilities = $4,000
 a. $500
b. $1,500
c. $2,000
d. $3,500
e. $4,000
187. Rebecca Wilson budgeted $1,200 for housing and utilities in July. She actually
spent $1,160. What is her budget variance?
a. $1,160 deficit
b. $40 deficit
c. $60 deficit
d. $40 surplus
e. $1,160 surplus
188. Your primary _______ should be to pay your fair share of taxes while taking
advantage of appropriate tax benefits.
189. A tax imposed on the value of a person’s property upon that person’s death is
called a(n):
a. Estate tax
b. Sales tax
c. Income tax
d. Real estate property tax
190. True or false: The two main taxes on salary are income taxes and estate taxes.
a. True
b. False
191. True or false: Income tax is paid during the year through withholding from
paychecks and/or estimated payments.
a. True
b. False
192. True or false: Income tax is calculated on adjusted gross income less deductions
and exemptions.
a. True
b. False
193. Components of income include earned, investment, and _______ income.
194. True or false: Adjusted gross income is gross income reduced for such things as
IRA contributions and alimony payments.
a. True
b. False
195. Salary is an example of ______ income.
a. Passive
b. Unearned
c. Earned
d. Business
196. Which of the following are types of investment income? (multiple answers)
a. Salaries
 b. Rent from investments
c. Bonuses
d. Interest
e. Dividends
197. Which of the following statements is true?
a. Tax-exempt income is not subject to tax while tax-deferred income will be taxed
at a later date.
b. Tax-derived income is not subject to tax while tax-deferred income will be taxed
at a later date.
c. Tax-deferred income is not subject to tax while tax-exempt income will be taxed
at a later date.
d. Tax-exempt income is subject to tax while tax-derived income will be taxed at a
later date.
198. Which of the following is an adjustment to income rather than an itemized
deduction?
a. Charitable donations
b. Mortgage interest
c. Personal property taxes
d. IRA contributions
199. You calculate taxable income by reducing gross income by adjustments,
exemptions, and standard or ______ tax deductions.
200. True or false: A tax deduction reduces tax liability directly, dollar for dollar.
a. True
b. False
201. True or false: If you itemize your deductions, you can deduct contributions made
to charities and amounts paid for real estate taxes.
a. True
b. False
202. Which of the following taxes are deductible for the person/family paying them?
(multiple answers)
a. Real estate property taxes
b. Inheritance taxes
c. State income taxes
d. Estate taxes
203. Which of the following would have tax deductible interest?
a. Home mortgage
b. Personal loan
c. Car loan
d. Credit cards
204. Which of the following is not a deductible charitable donation?
a. Giving money to a homeless on the street
b. Donating used furniture and appliances to goodwill
c. Donating money to your church
 d. Donating money to your college alma mater’s endowment association
205. Only cash contributions to qualified charitable organizations are deductible.
a. True
b. False
206. Which of the following would be included in gross income?
a. Municipal bond interest
b. Salaries, wages, commissions, dividends, interest, and profits from business
c. Deductions and tax credits to be deducted from income
d. Life insurance proceeds
207. Which of the following expenses can be deducted as job-related expenses?
(multiple answers)
a. Union dues
b. Tickets to a baseball game
c. Reimbursed job travel
d. Unreimbursed job travel
e. Cost of required continuing education
208. A filing system stores records that help provide proof of payment of charitable
expenses, medical expenses, and other itemized deductions.
a. True
b. False
209. Generally, you should keep your tax records for at least three years after filing
your return. However, you may be held responsible for providing back documentation
a. Up to five years.
b. For up to 10 years.
c. Indefinitely.
d. For up to six years.
210. True or false: An exemption is a reduction in taxable income for you, your
spouse, and dependents while a standard or itemized deduction is allowed for specific
expenses and contributions you make.
a. True
b. False
211. Which of the following are part of the requirements of a dependent? (multiple
answers)
a. The dependent must be under 19 years old unless a full-time student.
b. You must provide 100% of the person’s support for the entire year.
c. The dependent must reside in your home (includes away at college) or be
specified relative and meet citizenship requirements.
d. The dependent must be under 24-year-old if a full-time student.
e. You provide more than 50% of the dependent’s support.
212. True or false: W-2, W-2P, and 1099 forms make up the proof of income
documents for a taxpayer.
a. True
b. False
213. The tax rate that is used to calculate the tax on the last (or next) dollar of taxable
income is
a. A relevant tax rate
b. And average tax rate
c. A marginal tax rate
d. An overall tax rate
214. John owed $10,000 in taxes on taxable income of $40,000. If John earns an
additional $1,000, he will pay an additional $280. Therefore:
a. His marginal tax rate will increase to 29%
b. He will be at the 30% average tax rate after he earns the additional $1,000
c. His average tax rate is 28%
d. His average tax rate is about 25%
215. If you are in the 28% tax bracket and owe $20,000 on $100,000 of taxable
income, your average tax rate and marginal tax rate would be, respectively:
a. 24% for average and 28% for marginal
b. 28% for both
c. Impossible to determine
d. 20% for average and 28% for marginal
216. The first step in calculating your total tax due begins by using your taxable
income with either tax tables or tax rate ________.
217. True or false: A tax credit is an amount subtracted directly from taxes owed.
a. True
b. False
218. Taxpayers pay income taxes through payroll _______ and through estimated tax
________.
219. Which of the following events might cause a taxpayer to make estimated tax
payments? (multiple answers)
a. Significant salary increases
b. Earnings from independent contracting
c. Royalties
d. Significant life insurance proceeds
e. Significant earnings from savings and investments
f. Lump-sum payments from pensions
220. You can file Form 4868 to obtain an _____ six-month extension on filing an
income tax return by filing the proper forms with the IRS before the April 15 filing
deadline.
a. Request
b. Be denied
c. Be required to take
d. Automatic
221. True or false: There are five filing statues for your tax return, and they are
affected by marital status and number of dependents.
a. True
 b. False
222. When husband and wife file a joint return, the income of a husband and wife is
a. The higher of the two
b. Added together
c. Averaged
d. The lower of the two
223. A person would file as head of household if:
a. She is married
b. She is unmarried with a dependent child
c. He is unmarried with no dependents
d. He is married, but separated from his spouse
224. Which of the following is NOT a true statement?
a. If you paid in more than your tax liability, you will receive a refund
b. Tax credits are subtracted before the tax is computed
c. Additional taxes would include the self-employment tax
d. Contributions to an IRA are an adjustment to income.
225. You must file form 1040 if you:
a. Use itemized deductions
b. File as head of household
c. Are married
d. Have $50,000 of income from wages
226. Which of the following do NOT offer for-profit tax services?
a. Enrolled agents
b. H&R Block
c. CPA
d. Universities
227. The simplest type of IRS audit is the ________ audit.
228. Tax avoidance means using ______ strategies to reduce taxes while tax _______
involves illegal means to lower tax liability.
229. Real estate taxes and __________ are tax deductible by the homeowner.
a. Mortgage payments
b. Mortgage interest
c. Home improvements
d. All fees
230. Municipal bonds pay _________ that is tax-exempt from federal income taxes.
231. True or false: Your income tax due on your return is found by subtracting tax
credits from your tax based on the tax tables and adding any other taxes due.
a. True
b. False
232. Which of the following is potentially not a tax-deferred investment in that
contributions to it do not reduce your taxable income for the current year?
a. Keogh Plan
b. Traditional Ira
c. 401-(k)
 d. Roth IRA
233. Which of the following is true?
a. Bill, age 58, can contribute up to $6,500 in an IRA as of 2014
b. As of 2014, the contribution limit for IRA’s is $5,000
c. Bob, age 55, can contribute up to $5,000 in an IRA as of 2014
d. Joan, age 48, can contribute up to $6,000 in an IRA as of 2014
234. The biggest difference between a(n) __________ IRA and a Roth IRA is that the
Roth IRA contribution is not tax deductible, but after five years, its earnings are tax free.
235. Which of the following accurately describes the contribution limits of a 401(k)
plan?
a. Up to $17,500 in 2014
b. Up to $30,000 in 2014
c. Up to $5,000 in 2014, the same as traditional IRA
d. Up to $10,000 in 2014, double the amount allowed by a traditional IRA
236. True or false: All medical expenses may be deducted from income as long as you
have the receipts.
a. True
b. False
237. True or false: Tax credits amount to the same savings as tax deductions.
a. True
b. False
238. Jerry is divorced and has two children that live with him. What filing status
should Jerry claim on his tax return?
a. Single
b. Head of household
c. Married filing separately
d. Married filing jointly
239. Which of the following is not a legitimate itemized deduction?
a. Mortgage interest expense
b. Real estate tax
c. Interest paid on personal credit cards
d. State income tax
240. You should claim itemized deductions if
a. Itemized deductions > the standard deduction
b. The standard deduction > itemized deductions
c. Itemized deductions > exemptions
d. Itemized deductions > tax credits
241. Erin has a tax credit of $100 and a marginal tax rate of 28 percent. Erin’s income
tax liability will be reduced by how much as a result of the credit?
a. $100
b. $128
c. $28
d. $280
242. A worker’s primary goal on paying tax should be to
a. Pay no income taxes
b. Pay the average tax rate for people working in his or her industry.
c. Pay his or her fair share of taxes while taking advantage of appropriate tax
benefits.
d. Pay no taxes of any type.
243. Gross income after certain reductions have been made is
a. Taxable income.
b. Earned income.
c. Adjusted gross income (AGI)
d. Tax-deferred income.
244. Who is ultimately responsible for supplying accurate and complete information
for completing a tax return?
a. Professional tax preparer
b. IRS enrolled agent
c. Taxpayer’s attorney
d. Taxpayer
245. Which of the following is NOT an action that can reduce your taxes?
a. Owning a home and paying mortgage payment.
b. Taking out a consumer loan.
c. Paying certain work expenses such as union dues.
d. Depositing money into a flexible spending account (FSA).
 Answers
1. b.
2. b.
3. a.
4. c.
5. a., c., d.
6. a.
7. Inflation
8. Values
9. b., d., e.
10. c., d., e.
11. b.
12. a.
13. b.
14. d.
15. Federal Reserve
16. a., d., e.
17. d.
18. time
19. a., c., d.
20. a., b., d.
21. Index
22. b., c.
23. b.
24. b.
25. $104
26. c.
27. a., d., e.
28. b.
29. 20
30. a., b., d.
31. money
32. b., c., d.
33. b., c., d., e.
34. a.
35. d.
36. b.
37. d.
38. b., c.
39. d.
40. risk
41. a., c.
42. b., c.
43. c.
44. c.
45. a.
46. c.
47. b.
48. d.
49. c.
50. a.
51. a., c., d.
52. d.
53. a., b., e., f.
54. money
55. d.
56. a.
57. d.
58. b.
59. a.
60. d.
61. d.
62. a., b., d.
63. a., d., e.
64. b., c., d.
65. a.
66. a., b., c.
67. a.
68. c.
69. d.
70. a.
71. a., b., d.
72. a., b.
73. a., c., e.
74. a., d.
75. b.
76. b., d.
77. a., d., e.
78. a.
79. c.
80. a.
81. a.
82. c.
83. d.
84. c.
85. b.
86. d.
87. a.
88. b.
89. a.
90. b.
91. a.
92. a.
93. a.
94. c.
95. d.
96. b.
97. d.
98. c.
99. d.
100. b.
101. a.
102. a.
103. c.
104. d.
105. e.
106. a.
107. b.
108. e.
109. a.
110. b.
111. a.
112. Balance sheet; cash flow
113. Balance
114. b.
115. a.
116. b.
117. b.
118. a.
119. a., b., d.
120. d.
121. a.
122. a., c., f.
123. 2, 6, 7, 5, 1, 4, 3 (numbered in order)
124. a.
125. variance
126. d.
127. a.
128. a.
129. a.
130. a.
131. a., b., c., e.
132. a.
133. c.
134. a.
135. a., b., c., d.
136. insurance
137. current; long
138. a., d.
139. c.
140. a.
141. d.
142. b.
143. a., b., c.
144. a.
145. a., b., f., g.
146. d.
147. receipts
148. a.
149. c.
150. b.
151. d.
152. c.
153. a., c., d., e., g.
154. b.
155. c.
156. c.
157. c.
158. b.
159. c.
160. a.
161. a.
162. c.
163. b.
164. c.
165. d.
166. d.
167. d.
168. b.
169. c.
170. d.
171. a.
172. a.
173. e.
174. d.
175. e.
176. b.
177. d.
178. b.
179. d.
180. d.
181. b.
182. e.
183. b.
184. b.
185. e.
186. e.
187. d.
188. Goal
189. a.
190. b.
191. a.
192. a.
193. Passive
194. a.
195. c.
196. b.; d.; e.
197. a.
198. d.
199. itemized
200. b.
201. a.
202. a.; c.
203. a.
204. a.
205. b.
206. b.
207. a.; d.; e.
208. a.
209. d.
210. a.
211. a.; c.; d.; e.
212. a.
213. c.
214. d.
215. d.
216. schedules
217. a.
218. withholding; payments
219. b.; c.; e.; f.
220. d.
221. a.
222. b.
223. b.
224. b.
225. a.
226. d.
227. correspondence
228. legal; evasion
229. b.
230. interest
231. a.
232. d.
233. a.
234. traditional
235. a.
236. b.
237. b.
238. b.
239. c.
240. a.
241. a.
242. c.
243. c.
244. d.
245. b.