Chapter 3 Money Management Strategy: Financial Statements and Budgeting

True/False Questions

1) Money management activities refers to long-term investment decisions.

2. When one money management decision is selected, something else must be given up.

3. Opportunity costs are only associated with money management decisions involving long-term financial security.  

4. Financial records that may need to be referred to on a regular basis should be kept in a safe-deposit box.

5. A budget is a record of how a person or family has spent their money.

6. Personal records include birth certificate, marriage license, and social security card.

7. Most income tax documents and records should be kept in a safe-deposit box.

8. A personal balance sheet reports your income and expenses.

9. A person's net worth is the difference between the value of the items owned and the amounts owed to others.

10. Furniture, jewelry, and an automobile are examples of liquid assets.

11. Current liabilities are amounts that must be paid within a short period of time, usually less than a year.

 12. Insolvency is a result of having more liabilities than assets.

13. A personal cash flow statement presents income and outflows of cash for a given time period, such as a month.

14. Take-home pay is a person's earnings after deductions for taxes and other items.

 15. Medical expenses, clothing, and telephone are examples of fixed expenses.

16. If expenses for a month are greater than income, an increase in net worth will result.

17. A person's lifestyle is a reflection of his or her values, goals, career, and family situation.

18. A personal cash flow statement can serve as the basis for the budget categories used by an individual or family.

19. Definite financial obligations are referred to as variable expenses

20. If budgeted spending is less than actual spending, this is referred to as a deficit.

21. Most Americans have an adequate savings for emergencies.

22. "Pay yourself first" is an attitude that can assure building savings for the future.

Multiple Choice Questions

23. Money management refers to
    1. preparing personal financial statements.
    2. day-to-day financial activities.
    3. trade-offs that occur with financial decisions.
    4. storing financial records for easy access.
    5. spending money on current living expenses.

24. opportunity cost refers to
    1. current spending habits.
    2. changing economic conditions that affect a person's cost of living.
    3. storage facilities to make financial documents easily available.
    4. trade-offs associated with financial decisions.
    5. avoiding the use of consumer cre

25. A home file should be used for
    1. storing all financial documents and records.
    2. financial records for current needs.
    3. documents that require maximum security.
    4. obsolete financial documents.
    5. records that are difficult to replace.

26. Which of the following financial documents would most likely be stored in a safe-deposit box?
    1. W-2 forms
    2. personal financial statements
    3. warranties
    4. savings certificates
    5. checking account statement

27. An example of a personal and employment document is a
    1. budget.
    2. passbook.
    3. Social Security card.
    4. property tax bill.
    5. leas

28. A broker statement is an example of a(n)                          record.
    1. investment
    2. insurance
    3. estate planning
    4. tax
    5. consumer purchase

29. Warranties are commonly associated with                          purchases.
    1. investment
    2. insurance
    3. credit
    4. financial service
    5. consumer

30. Which of the following are considered to be personal financial statements?
    1. Budget and credit card statements
    2. Balance sheet and cash flow statement
    3. Checkbook and budget
    4. Tax returns
    5. Bank statement and savings passbook

31. A personal balance sheet presents
    1. amounts budgeted for spending.
    2. income and expenses for a period of time.
    3. earnings on savings and investments.
    4. items owned and amounts owed.
    5. family financial goals.

32. The current financial position of an individual or family is best presented with the use of a(n)
    1. budget.
    2. cash flow statement.
    3. balance sheet.
    4. bank statement.
    5. time value of money report.

33. A family with $45,000 in assets and $22,000 of liabilities would have a net worth of A) $45,000.

B) $23,000.

C) $22,000.

D) $67,000.

E) $41,000.

34. Items with a monetary worth are referred to as
    1. liabilities.
    2. variable expenses.
    3. net worth.
    4. income.
    5. assets.

Answer: E

35. Items of value less amounts owed to others equals
    1. net assets.
    2. net worth.
    3. total liabilities.
    4. total income.
    5. budgeted expenses.

36. liquid assets refer to
    1. amounts that must be paid soon.
    2. items that are easily converted to cash.
    3. total income available to a family for spending.
    4. the value of investments.
    5. amounts on which taxes must be paid.
37. An individual retirement account is an example of a(n)                          asset.
    1. liquid
    2. common
    3. investment
    4. household
    5. budgeted

38. Liabilities are amounts representing
    1. debts.
    2. items of value.
    3. living expenses.
    4. taxable income.
    5. current assets.

39. Current liabilities differ from long-term liabilities based on
    1. the amount owed.
    2. the financial situation of the creditor.
    3. the interest rate charged.
    4. when the debt is due.
    5. current economic conditions.

40. Ben Chase needs to pay off some of his debts over the next few months. Which item on his balance sheet would help him decide what amounts are due in the near future?
    1. The budget variance
    2. Investment assets
    3. Long-term liabilities
    4. Current assets
    5. Current liabilities

41. Which of the following would be considered a long-term liability?
    1. A charge account payment
    2. A mortgage
    3. An installment loan
    4. An amount due for taxes
    5. The amount due on a credit card

42. A person's net worth is computed by
    1. adding assets and liabilities.
    2. deducting current living expenses from total assets.
    3. subtracting total liabilities from total assets.
    4. subtracting assets from current liabilities.
    5. adding liabilities and budgeted expenses.

43. Which of the following situations is a person who could be insolvent?
    1. Assets $56,000; annual expenses $60,000
    2. Assets $78,000; net worth $22,000
    3. Liabilities $45,000; net worth $6,000
    4. Assets $40,000; liabilities $45,000
    5. Annual cash inflows $45,000; liabilities $50,000
44. A person's net worth would increase as a result of
    1. reduced amounts owed to others.
    2. reduced earnings.
    3. increased spending for current living expenses.
    4. decreased value of personal possessions.
    5. decreased value of investments.

45. A cash flow statement reports a person's or a family's
    1. net worth.
    2. current income and payments.
    3. plan for spending.
    4. value of investments.
    5. balance of savings.

46. Which of the following presents a summary of income and outflows for a period of time?
    1. A balance sheet
    2. A bank statement
    3. An investment summaA cash flow statement
    4. An asset report

47. Total earnings of a person less deductions for taxes and other items is called
    1. budgeted income.
    2. gross pay.
    3. net worth.
    4. total revenue.
    5. take-home pay.

48. A common deduction from a person's paycheck is for
    1. interest.
    2. taxes.
    3. rent.
    4. unemployment.
    5. current liabilities.

49. Payments that do not vary from month to month are                         expenses.
    1. fixed
    2. current
    3. variable
    4. luxury
    5. budgeted
50. Ed Bostrom wants to reduce his fixed expenses. What action would be appropriate?
    1. Get a part-time job
    2. Eat more meals at home than in restaurants
    3. Find a place to live with a lower rent
    4. Save more money for the future
    5. Buy on credit for items than might cost more later

51. Which of the following payments would be considered a variable expense?
    1. Rent
    2. An installment loan payment
    3. A mortgage payment
    4. A monthly parking fee
    5. A telephone bill
52. A decrease in net worth would be the result of
    1. income greater than expenses for a month.
    2. expenses greater than income for a month.
    3. assets greater than expenses.
    4. increased earnings on the job.
    5. income and expenses equal for a month.

53. During the past month, Jennifer Ernet had income of $3,000 and a decrease in net worth of $200. This means Jennifer's payments for the month were

A) $3,200.

B) $3,000.

C) $2,800.

D) $200.

54. Improvements in a person's financial position are the result of
    1. increased liabilities.
    2. reductions in earnings.
    3. increased savings and investments.
    4. increased purchases on credit.
    5. lower amounts deposited in savings.

55. To determine a person's solvency, which financial document should be consulted?
    1. Cash flow statement
    2. Budget
    3. Debt consolidation statement
    4. Balance sheet
    5. Credit report
56. An example of a long-term goal for a young couple may be
    1. a new car.
    2. reduction of amounts owed on credit cards.
    3. increased savings.
    4. income for retirement.
    5. funds for a vacation.

57. A major expenditure for most families is
    1. insurance.
    2. contributions.
    3. clothing.
    4. utilities.
    5. transportation.

58. The payment items that should be budgeted first are
    1. variable expenses.
    2. investment funds.
    3. fixed expenses.
    4. unplanned living expenses

59. Changes in the cost of living are
    1. different in various geographic areas.
    2. the same for different locations.
    3. constant from month to month.
    4. the same for all goods and services.
    5. not a factor when preparing a budget.

60. The difference between the amount budgeted and the actual amount is called a
    1. financial plan.
    2. current liability.
    3. change in net worth.
    4. budget variance.
    5. variable living expense.

61. If a family planned to spend $370 for food during March but only spent $348, this difference would be referred to as a
    1. surplus.
    2. deficit.
    3. fixed living expense.
    4. budget reduction.
    5. contribution to net worth.

62. A budget deficit would result when a person's or family's
    1. actual expenses are less than planned expenses.
    2. actual expenses are greater than planned expenses.
    3. actual expenses equal planned expenses.
    4. assets exceed liabilities.
    5. net worth decreases.

63. The Crown family has a difficult time staying on a budget. In an effort to actually see what funds are available for various expenses, a                                                   budget would be most appropriate.
    1. written
    2. computerized
    3. physical
    4. deficit
    5. mental

64. When it comes to savings, most Americans
    1. have an adequate emergency fund.
    2. use several different savings techniques.
    3. find saving difficult.
    4. keep substantial amounts in a regular savings account.
    5. reduce the amount they save during their working life.

Essay Questions

65. What types of financial records and documents should be kept in a safe-deposit box?

66. What are the main components of a personal balance sheet and a cash flow statement? What is the main purpose of each of these personal financial statements?

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