(Test Bank) Personal Finance: Turning Money into Wealth

Keown, 4

Business

Test Bank

4th Edition

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Test Bank for Personal Finance: Turning Money into Wealth, The downloadable file consists of 640 pages, and the total size of the file is 1.51 MB. Purchase now only for highly discounted price.

Author(s): Keown

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1 Copyright © 2023 Pearson Education, Inc. Personal Finance: Turning Money Into Wealth, 9e (Keown) C h a p t e r 1 T h e F i n a n c i a l P l a n n i n g P r o c e s s 1 . 1 F a c i ng Financial Challenges 1) Once a sound financial plan is in place, there should be no need to ever change it. Answer: FALSE Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 2) One purpose of financial pla nning is to help you legally red uce the amount of taxes you have to pay on your earnings. A n s w e r : T R U E Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 3) When comparing two different i nvestment opportunities the in vestor should always choose the investment that minimizes th e total amount of taxes paid. Answer: FALSE Diff: 2 Topic: Minimization of Taxes AACSB: Analytical Thinking 4) Annual public school tuition a nd fees are three times more e xpensive than private school tuition and fees. Answer: FALSE Diff: 2 Topic: Financial Challenges AACSB: Analytical Thinking 5) Being financially secure invo lves balancing what you earn wi th A) your investments. B) what you spend. C) your retirement plans. D) your current level of debt. A n s w e r : B Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 2 Copyright © 2023 Pearson Education, Inc. 6) Financial planning might not help you earn more, but it can help you use the money you do earn to achieve your A) life's purpose. B) dreams. C) financial goals. D) desired lifestyle. A n s w e r : C Diff: 1 Topic: Financial Goals AACSB: Analytical Thinking 7) Which statement is true a bout managing personal finances? A) The ability to manage finan ces is a skill with which you are born. B) Personal finance courses are commonly offered in high school . C) Financial difficulties can be a major cause of marital probl ems. D) Personal financia l management is not a skill worth learning. A n s w e r : C Diff: 2 Topic: Finance Company AACSB: Analytical Thinking 8) In order for your financial p lan to be realistic and attaina ble it needs to be based upon your A) budget. B) income level. C) number of tax deductions, exe mption, exclusions, and credits . D) balance sheet. E) none of the above. A n s w e r : B Diff: 2 Topic: Financial Planning AACSB: Analytical Thinking 9) Personal financia l planning can help you to A) deal with unplanned health issues. B) minimize your tax payments to Uncle Sam. C) minimize your chances of personal bankruptcy. D) have enough money for a com fortable retirement. E) all of the above. A n s w e r : E Diff: 2 Topic: Financial Planning AACSB: Analytical Thinking 3 Copyright © 2023 Pearson Education, Inc. 10) What elements are found in a n effective financial plan? A) Flexibility to allow for changes in your situation B) Sufficient liquidity t o meet unexpected needs C) Insurance protection fro m catastrophic events D) Helps you legally reduce the amount of taxes you owe E) All of the above A n s w e r : E Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 11) This course/text will assist you in accomplishing six finan cial objectives. What are they? A n s w e r : 1. Manage the unplanned. 2. Accumulate wealth for special expenses. 3. Realistically save for retirement. 4. Cover your assets. 5. Invest intelligently. 6. Minimize your payments to Uncle Sam. Diff: 2 Topic: Financial Planning AACSB: Analytical Thinking 12) How will a financial plan help you save for retirement? Answer: A strong financial plan will help you forecast the cos ts of retirement and develop a plan that will allow you to live a comfortable life after you r etire. Diff: 2 Topic: Financial Planning AACSB: Reflective Thinking 1 . 2 T h e P e r s o n a l F i n a n c i a l P l a n n i ng Process 1) Today, most Americans over the age of 65 have adequate savin gs and income available to them during retirement. Answer: FALSE Diff: 1 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 2) The amount of current incom e that you earn today isn't relev ant to setting your long-term goals for the future. Answer: FALSE Diff: 1 Topic: Financial Planning AACSB: Reflective Thinking 4 Copyright © 2023 Pearson Education, Inc. 3) A financial plan is only c oncerned with your future earnings and expenses. An examination of your current financial sit uation is not so important. Answer: FALSE Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 4) While each person's financial plan is different, some common factors guide all sound financial plans: flexibility, liquidit y, protection, and minimization of taxes. A n s w e r : T R U E Diff: 2 Topic: The Financial Planning Process AACSB: Analytical Thinking 5) Financial planning is an ongoing pr ocess. As your financial situation and position in life change, the plan changes. A n s w e r : T R U E Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 6) Which of the following is one of the five basic steps in per sonal financial planning? A) Evaluate your personal health. B) Define your career goals. C) Develop a plan of action. D) Let an accountant review your plan. A n s w e r : C Diff: 2 Topic: The Financial Planning Process AACSB: Analytical Thinking 7) Which basic step to persona l financial planning should be co nsidered when examining your current financial situation? A) Step 1 B) Step 2 C) Step 3 D) Step 4 A n s w e r : A Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 5 Copyright © 2023 Pearson Education, Inc. 8) Which basic step to persona l financial planning should be co nsidered when establishing your personal financial goals? A) Step 1 B) Step 2 C) Step 3 D) Step 4 A n s w e r : B Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 9) The personal financial pl anning process consists of ________ steps. A) three B) five C) seven D) ten A n s w e r : B Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 10) While each person's financia l plan is diffe rent, some commo n factors guide all sound financial plans. Which of the following is one of the common fa ctors? A) Sustainability B) Illiquidity C) Protection D) Maximization of taxes A n s w e r : C Diff: 2 Topic: The Financial Planning Process AACSB: Analytical Thinking 11) Evaluating your financial health consists of A) preparing a persona l balance sheet. B) determining what you are worth. C) preparing a personal income statement. D) determining where your money c omes from and where it goes. E) all of the above. A n s w e r : E Diff: 1 Topic: The Financial Planning Process AACSB: Analytical Thinking 6 Copyright © 2023 Pearson Education, Inc. 12) You need to review your progres s and reevaluate and revise your plan (Step 5) because A) your financial needs change ove r the course of your life. B) your employment situa tion changes over time. C) your net worth changes over time. D) your family situation mi ght change over time. E) all of the above are good reasons to periodically review you r financial plan. A n s w e r : E Diff: 3 Topic: The Financial Planning Process AACSB: Analytical Thinking 13) Suppose that you just completed your first year of college with $12,000 in loans and plan to borrow the maximum each year from now until graduation. You hav e never accounted for the way you spend your money, do not have a budget, and want to ens ure that you will be able to repay your loans after college. Wh at is the most important thin g you can do right now? A) Talk to your parents about an allowance. B) Visit your career cou nselor at school. C) Ask a friend who took the Persona l Finance course for advice . D) Immediately begin to develop a personal financial plan. A n s w e r : D Diff: 3 Topic: Financial Planning AACSB: Reflective Thinking 14) Suppose you have just retired, ha ve accumulated many luxury goods over the years, still owe a mortgage on your home, still have unpaid travel expenses on y our credit cards, and have helped your adult children financially. Your spouse has recently passe d away, and you miss his/her contribution to the household incom e. Which step in the persona l financial planning process have you neglected? A) Develop your financial health. B) Define your financial goals. C) Develop a plan of action. D) Implement your plan. E) Review your progress, reeval uate, and revise your plan. A n s w e r : E Diff: 2 Topic: Financial Planning AACSB: Reflective Thinking 7 Copyright © 2023 Pearson Education, Inc. 15) While reviewing your current financial plan, you discover t hat you most likely won't achieve your long-term financial goals. What should you do now? A) Look at increasing your income. B) Look at cutting back on your expenses. C) Look at revising your goals. D) All of these would be realistic things to do. A n s w e r : D Diff: 3 Topic: The Financial Planning Process AACSB: Analytical Thinking 16) Step 3 of the personal finan cial planning process is "Devel op a Plan of Action." According to your text, which of the followi ng is not one of the "common con cerns" that should guide all financial plans? A) Flexibility B) Long-term profitability C) Liquidity D) Protection E) Minimization of taxes A n s w e r : B Diff: 2 Topic: The Financial Planning Process AACSB: Analytical Thinking 17) The term that considers havi ng money readily available when you need it is the concept of A) flexibility. B) liquidity. C) equity. D) solvency. E) none of the above. A n s w e r : B Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 8 Copyright © 2023 Pearson Education, Inc. 18) Describe the five steps in t he personal financial planning process. A n s w e r : Step 1: Evaluate your financi al health by examining your curren t financial situation. Look at your whole financial picture. K eep records and determine your n et worth. Step 2: Define your financial go als by describing what, when, a nd how much you want to do. Written goals will draw you to them. Step 3: Develop a plan of action to reach your goals. Don't jus t think about goals — decide how you will carry them out! Let flexi bility, liquidity, protection , and minimization of taxes guide your plan. Step 4: Implement your plan by car rying it out — just do it! St ick to your plan. Step 5: Review your progress, r eevaluate, and revise your plan periodically and as needed. Diff: 2 Topic: The Financial Planning Process AACSB: Analytical Thinking 19) Why do individuals need t o plan for their finances? Answer: Without financial planning individuals will suffer and be at a loss both in the present time and in the future. Too many pe ople reach retirement broke and in poor health. Their financial means are so limited t hey live out a mea ger existence and become a burden upon family and society. Life is meant t o be enjoyed and only by planning c an we do that. Because it is always easier to spend than sav e, financial planning is a must! Diff: 2 Topic: Financial Planning AACSB: Diverse and Multicu ltural Work Environments 20) Elaborate upon the four common concerns that should guide a ll financial plans. Answer: Your financial plan s hould be flexible enough to respo nd to changes in your life and unexpected events. Planning must allow some funds to be liquid to allow access to money when you need it quickly. Plan for pr otecting your assets and yourse lf with adequate insurance. Finally, your financial plan should take taxes into account to pay as little as legally possible. Diff: 3 Topic: The Financial Planning Process AACSB: Reflective Thinking 21) What elements are include d in a solid financial plan? Answer: A solid personal finan cial plan includes an informed a nd controlled budget, outlines your investment strategy, and ref lects your unique personal and financial goals. Diff: 2 Topic: The Financial Planning Process AACSB: Reflective Thinking 9 Copyright © 2023 Pearson Education, Inc. 22) Why do you need to have liquidity? Answer: Liquidity allows you t o access your money with ease, w hen you need it. Life happens; at any moment, you could develop an illness, lose a job, or wre ck your car. When unforeseen circumstances occur, you need to have access to enough money to make it through. Diff: 2 Topic: Liquidity AACSB: Reflective Thinking 23) Which step has you to prepare a personal balance sheet? A) Step 1 B) Step 2 C) Step 3 D) Step 4 A n s w e r : A Diff: 1 Topic: Principle 2: Noth ing happens without a plan AACSB: Reflective Thinking 24) Which step has you to prepare a personal income statement? A) Step 1 B) Step 2 C) Step 3 D) Step 4 A n s w e r : A Diff: 1 Topic: Financial Planning AACSB: Reflective Thinking 25) Which step has you to ident ify what you are saving and what you need to save? A) Step 1 B) Step 2 C) Step 3 D) Step 4 A n s w e r : B Diff: 1 Topic: Financial Planning AACSB: Reflective Thinking 1 . 3 E s t a b l i s h i ng Your Financial Goals 1) Proper financial planning can help you use your current inco me to achieve your long-term financial goals. A n s w e r : T R U E Diff: 1 Topic: Financial Planning AACSB: Analytical Thinking 10 Copyright © 2023 Pearson Education, Inc. 2) A short-term goal might tak e from one to 10 years to accompl ish. Answer: FALSE Diff: 1 Topic: Financial Goals AACSB: Analytical Thinking 3) In the typical consumer's fin ancial life cycle, one differen ce between stage 2 and stage 3 is that in stage 3 you will earn more than you spend, whereas in s tage 2 you will spend more than you earn. Answer: FALSE Diff: 2 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 4) Estate-planning tools such as wills, living wills, health pr oxies, powers of attorney, and record-keeping should all be in place to help protect you, your assets, and your heirs. A n s w e r : T R U E Diff: 2 Topic: Estate Planning AACSB: Analytical Thinking 5) The major reason to make a financial plan is to A) account for your spending. B) see where you are overspending or underspending. C) achieve your financial goals. D) allow for a surplus. E) serve as a tax planning guide. A n s w e r : C Diff: 1 Topic: Financial Goals AACSB: Analytical Thinking 6) What is the significance of the financial life cycle? A) To help you to compare your situ ation with other people's si tuation B) To better understand how your financial needs will most like ly change over time C) To allow you to be more proactiv e in dealing with expected c hanges in the future and take steps today to prepare for them D) To help you realize that your orig inal plan is sufficient an d doesn't need to change E) Both B and C are significant as pects of the financial life c ycle. A n s w e r : E Diff: 3 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 11 Copyright © 2023 Pearson Education, Inc. 7) Which of the following typi cally occur(s) dur ing stage 1 of the financial life cycle? A) Initial goal setting B) Insurance planning C) Saving for goals D) Home purchase E) All the above A n s w e r : E Diff: 2 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 8) Suppose that you are a 21-year-ol d college student. What sta ge of the financial life cycle are you currently in? A) Stage 1: wealth accumulation B) Stage 2: the golden years C) Stage 3: the retirement years D) Stage 4: the formative years E) Stage 5: the educational years A n s w e r : A Diff: 2 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 9) After retirement starts, wh ich aspect of financial planning becomes imperative? A) Maintaining a regul ar pattern of saving B) Long-term borrowing commitments C) Estate planning D) Effects of inflation A n s w e r : C Diff: 2 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 10) What should you do with your goals on a frequent basis thro ughout your lifetime? A) Prioritize them B) Modify them C) Put them in writing D) All of the above A n s w e r : D Diff: 2 Topic: Financial Goals AACSB: Analytical Thinking 12 Copyright © 2023 Pearson Education, Inc. 11) An economic condition in which rising prices r educe the pur chasing power of money is termed A) deflation. B) inflation. C) stagflation. D) cash erosion. E) none of the above. A n s w e r : B Diff: 1 Topic: Inflation AACSB: Diverse and Multicu ltural Work Environments 12) When you are involved i n ________ planning, you are plannin g for your eventual death and the distribution of your w ealth to your heirs. A) prenatal B) beneficiary C) estate D) actuarial E) none of the above A n s w e r : C Diff: 1 Topic: Estate Planning AACSB: Analytical Thinking 13) Based on the Life Cycle of Financial Planning, when would b e a good time to review and possibly adjust an effective financial plan? A) A really effective financial plan doesn't need to be adjuste d. B) When you get married C) When you have children D) When the stock market goes up E) Both B and C are correct answers. A n s w e r : E Diff: 2 Topic: Financial Planning AACSB: Reflective Thinking 14) On his goals worksheet, James has written down his short-te rm goals for the next year. He has prioritized his goals and dete rmined a feasible due date by which he wants to achieve his goals. According to the textbook, the final step James needs to complete in the goals process is to A) determine an appropriate cost for each of his listed goals. B) post his goals worksheet on his refrigerator so that he can see it every day. C) contact his financial adviso r for approval of his goals. D) email himself a copy of the goa ls worksheet in case he loses the paper copy. A n s w e r : A Diff: 2 Topic: Financial Goals AACSB: Reflective Thinking 13 Copyright © 2023 Pearson Education, Inc. 15) Which stage in the Financia l Life Cycle is the longest in t erms of years? A) Stage 1: wealth accumulation B) Stage 2: the golden years C) Stage 3: the retirement years D) Stage 4: the formative years A n s w e r : A Diff: 1 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 16) According to the Keown book, you might begin to think about estate planning during this stage of the financial life cycle. A) Stage 1: wealth accumulation B) Stage 2: the golden years C) Stage 3: the retirement years D) Stage 4: the formative years A n s w e r : B Diff: 3 Topic: Estate Planning AACSB: Analytical Thinking 17) Suppose that you are a 60-year-o ld business owner. What sta ge of the financial life cycle are you currently in? A) Stage 1: wealth accumulation B) Stage 2: the golden years C) Stage 3: the retirement years D) Stage 4: the formative years A n s w e r : B Diff: 2 Topic: Financial Planning Life Cycle AACSB: Analytical Thinking 18) During which stage of the financial life cycle do many peop le make their biggest investment, the purchase of a home? A) Stage 1: wealth accumulation B) Stage 2: the golden years C) Stage 3: the retirement years D) Stage 4: the formative years A n s w e r : A Diff: 2 Topic: Financial Planning AACSB: Analytical Thinking 14 Copyright © 2023 Pearson Education, Inc. 19) What is one differ ence between stage 2 in the Financial Lif e Cycle and stage 3 in the Financial Life Cycle? Answer: During stage 2, you will earn more than you spend; whe reas during stage 3 you will spend more than you earn. Diff: 2 Topic: Financial Planning Life Cycle AACSB: Reflective Thinking 20) Explain the essence and impor tance of each of the stages in the financial life cycle. Answer: The overall financial life cycle allows you to better understand the timing and areas of financial concern that you'll pr obably experience. It allows yo u to focus on those concerns earlier and to plan ahead to avoid fut ure financial problems. Stage 1 is a time of wealth accumulation, initial goal setting, home purchase, family formation, insurance planning, saving for goa ls, and some tax and estate p lanning. It's a time to develop a regular pattern of saving because it's tempting to spend rather than save. Consumers are ages 18 through 54 in this stage. Stage 2 covers ages 55 to 64 or the golden years approaching re tirement. This is a transition from the earning years when you will earn more than you spend. Much of the financial activities will be spent in fine tuning. Consum ers put an emphasis on tax and e state planning, paying ourselves first, and insurance planning. Stage 3 consists of th e retirement years, f or most people age 6 5 and older. Consumers reap the benefits of sound planning or the losses from unsound planning. You will attempt to ensure continued financial security and perhaps work part-time. Diff: 2 Topic: Financial Planning Life Cycle AACSB: Reflective Thinking 21) Differentiate be tween short-term, intermediate, and long-te rm goals. Give examples. Answer: Short-term goals can b e accomplished within one year, such as taking a vacation. Intermediate goals take betwee n one and ten years to reach, suc h as saving for a college education or the down payment on a house. Long-term goals take more than ten years to accomplish. Retirement planning is a common long-term goal. Diff: 3 Topic: Financial Goals AACSB: Reflective Thinking 22) Why should you prioritize you r financial goals? Answer: Prioritizing goals mi ght make you realize that some of your goals are simply unrealistic, leading you to reevalua te them. However, once your final goals are in place, they become the cornerstone of your pe rsonal financial plan, serving as a guide to action and a benchmark for assessing the ef fectiveness of the plan. Diff: 2 Topic: Financial Challenges AACSB: Reflective Thinking