Module 1: Ch.

1-3 Worked

1. Understanding the financial process

1. Becky graduated with a master’s degree in personal financial planning. After working for
2 years in a small financial planning firm, Becky earns $85,000 annually and saves
$5,000 a year after spending on her current needs. What is her average propensity to
consume?
a. 5 percent
b. 25 percent
c. 60 percent
d. 88 percent
e. 94 percent
ANSWER: E
RATIONALE: Becky’s Average Propensity to Consume = ($85,000 – $5,000) ÷ $85,000 =
94%. See 1-1: The Rewards of Sound Financial Planning.
Page 4&5 in book
Average propensity to consume is the percentage of each dollar of income, on
average, that is spent for current needs rather than savings.

2. Using financial statements and budgets

2. Sonny and Cher have a net worth of $35,000 and total assets of $200,000. If they have
credit card purchases of $1,200 and unpaid bills of $1,000, what will their long-term
liabilities be?
a. $115,000
b. $140,000
c. $142,200
d. $162,800
e. $165,000
ANSWER: D
RATIONALE: Sonny and Cher’s long-term liabilities are calculated by subtracting the net
worth of $35,000, the credit card purchases of $1,200 and the unpaid bills of
$1,000 from the total assets of $200,000, which is equal to $162,800. See 2-2:
The Balance Sheet: How Much Are You Worth Today?
Page 32 in book.
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 3. If your liquid assets equal $15,000 and your current debts equal $50,000, your liquidity
ratio is:
a. 30%.
b. 70%.
c. 143%.
d. 233%.
e. 333%.
ANSWER: A
RATIONALE: Liquidity Ratio = Total Liquid Assets ÷ Total Current Debts = $15,000 ÷
$50,000 = 30% See 2-4: Using Your Personal Financial Statements.
Page 40 in book – measures the ability to pay current debts.

4. Jacques’s total monthly loan payments amount to $1,020, while his gross income is
$3,000 per month. What is his debt service ratio?
a. 34%
b. 43%
c. 50%
d. 75%
e. 82%
ANSWER: A
RATIONALE: Jacques’s Debt Service Ratio = Total Monthly Loan Payments ÷ Monthly Gross
Income = $1,020 ÷ $3,000 = 34% See 2-4: Using Your Personal Financial
Statements.
Page 41 of book. Provides a measure of the ability to pay debts promptly.

5. Theresa invested $5,000 in an account she expects will earn 7% annually. Approximately
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 how many years will it take for the account to double in value? (Round the number of
years to the nearest whole number.)
a. 8
b. 9
c. 10
d. 11
e. 12
ANSWER: C
RATIONALE: In the financial calculator, input the value of PV as –5000, i as 7, and FV as
10000 to compute the value of N equal to 10.2. Rounding off to the nearest
whole number yields 10 years as the answer. See 2-6: The Time Value of
Money: Placing a Dollar Value on Financial Goals. Rule of 72. 72/7=10.2

6. Michael and Sandy purchased a home for $100,000 5 years ago. If its value appreciated
at 6% annually, what is it worth today? (Round the answer to the nearest dollar.)
a. $100,000
b. $106,000
c. $130,000
d. $133,823
e. $135,603
ANSWER: D
RATIONALE: In the financial calculator, input the value of PV as –100000, N as 5, and I as 6
to compute the value of FV equal to 133,823. Hence, the value of home will
grow to $133,823 in 5 years at a rate of interest of 6%. See 2-6: The Time Value
of Money: Placing a Dollar Value on Financial Goals.

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 7. You bought a $500 stereo on an installment plan and made two payments of $75 each
during the year. On your income and expense statement for the year, you will show an
expense of:
a. $150.
b. $575.
c. $650.
d. $500.
e. $75.
ANSWER: A
RATIONALE: Expenses represent the money used for outlays. In this case, the actual outlay
equals two payments of $75 each during the year. Therefore, you will show an
amount of $150 as an expense on your income and expense statement for the
year. See 2-3: The Income and Expense Statement: What We Earn and Where It
Goes.

Other concepts to understand for Quiz – Chapters 1 and 2

Financial planning helps us spend wisely and brings rewards that include greater flexibility to
handle such contingencies as illness, job loss, and even financial crises. See 1-1: The Rewards
of Sound Financial Planning.

The last step of financial planning involves redefining goals so that they better meet current
needs and revising financial strategies accordingly. See 1-2: The Personal Financial Planning
Process.

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Professional financial planners provide services on a fee and commission basis. Many financial
planners take a hybrid approach and charge fees and collect commissions on the products they
sell, offering lower fees if you make product transactions through them. See 1-3: From Goals to
Plans: A Lifetime of Planning.

The length of time for which money is invested is just as important as the rate of return an
individual earns on his or her investments. One can accumulate more wealth by investing for 40
rather than 30 years. See 1-3: From Goals to Plans: A Lifetime of Planning.

The amount of goods and services that each dollar buys at a given time will decrease with an
increase in inflation. Therefore, your purchasing power will decrease if your raise is less than
inflation. See 1-4: The Planning Environment.
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Real property refers to immovable property: land and anything fixed to it, such as a house. See
2-2: The Balance Sheet: How Much Are You Worth Today?

The income and expense statement has three major parts: income, expenses, and cash surplus
(or deficit). See 2-3: The Income and Expense Statement: What We Earn and Where It Goes.

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Chapter 3 Preparing your taxes

8. Peter’s tax computed per the tax rate schedule amounts to $2,000, and his tax credits
amount to $500. His total tax liability is:
a. $2,500.
b. $1,500.
c. $3,000.
d. $2,200.
e. $4,000.
ANSWER: B
RATIONALE: Tax Liability = Tax Computed per Tax Rate Schedule – Tax Credits = $2,000 –
$500 = $1,500. See 3-3: Calculating and Filing Your Taxes.

9. Based on the given information, what is Max’s portfolio income?

Interest from savings account $1,000
Capital gains realized 5,000
Salary 8,000
a. $13,000
b. $6,000
c. $8,000
d. $16,000
e. $18,000
B
ANSWER:
RATIONALE: Max’s Portfolio Income = Interest from Savings Account + Capital Gains
Realized = $1,000 + $5,000 = $6,000 See 3-2: It’s Taxable Income That Matters.
Page 62 in book.

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Other concepts to understand for Quiz – Chapter 3

In a progressive tax system, the more money an individual makes, the higher the marginal tax
rate. See 3-1: Understanding Federal Income Tax Principles.
Page 66 tax schedule.

A married couple can file their tax returns with the filing status of jointly or married filing
separately. If the filing status is married filing separately, each spouse files his or her own
return, reporting only his or her income, deductions, and exemptions. See 3-1: Understanding
Federal Income Tax Principles.

Your take-home pay is what you are left with after subtracting the amount withheld from your
gross earnings. See 3-1: Understanding Federal Income Tax Principles.

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The tax levied under the Federal Insurance Contributions Act (FICA), also known as Social
Security tax, is paid equally by employer and employee. All employed workers (except certain
federal employees) must pay a combined old-age, survivor’s, disability, and hospital insurance
tax under this act. See 3-1: Understanding Federal Income Tax Principles.
Page 60 in book.

Capital gains occur whenever a capital asset is sold for more than its original cost. See 3-2: It’s
Taxable Income That Matters
Page 62 in book.

Estimated tax payments are most commonly required of investors, consultants, lawyers and
business owners, and various other professionals who are likely to receive income that is not
subject to withholding. See 3-4: Other Filing Considerations.

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