FINA 200 (JMSB EXAMS) WORD PROBLEMS LESSON 1 WRITTEN EXAM PRACTICE
QUESTIONS AND ANSWERS Concordia University
Question 1.
Define personal financial planning. What types of decisions are involved in a personal financial plan?
• Personal financial planning is the process of planning your spending, financing, and investing
activities, while taking into account uncontrollable events such as death or disability, in order to
optimize your financial situation. A personal financial plan specifies your financial goals,
describes the spending, financing, and investing activities that are intended to achieve those
goals, and the risk management strategies that are required to protect against uncontrollable
events such as death or disability.
Question 2.
What is an opportunity cost? What might be some of the opportunity costs of spending $10 per week on
lottery tickets?
• An opportunity cost is what you forgo as the result of a decision. Some of the opportunity costs
of spending $10 on lottery tickets every week might include foregoing lunch out once a week,
reducing debt by an additional $40 per month, or having $520 in savings at the end of the year.
Question 3.
How can an understanding of personal finance benefit you?
• An understanding of personal finance enables you to make more informed decisions about your
financial situation. You would also be able to better judge the advice of financial advisers. You
might even pursue a career as a financial adviser.
Question 4.
What are the five key components of a financial plan?
• Five key components of a financial plan are:
• 1. Budgeting and tax planning
• 2. Financing your purchases
• 3. Protecting your assets and income
• 4. Investing your money
• 5. Planning your retirement and estate
Question 5.
Define budget planning. What elements must be assessed in budget planning?
• Budget planning (budgeting) represents the process of forecasting future expenses and savings.
A first step in budgeting involves evaluating your current financial position by assessing your
income, your expenses, your assets, and your liabilities.
,Question 6.
How is your net worth calculated? Why is it important?
• Net worth is the value of what you own (assets) minus the value of what you owe (liabilities).
Net worth is a measure of your total wealth and budgeting strategies can help increase your net
worth, and thereby your wealth. For example, you can build your net worth by setting aside part
of your income to invest in additional assets or reduce your liabilities.
Question 7.
What factors influence income? Why is an accurate estimate of expenses important in budget planning?
How do tax laws affect the budgeting process?
• Income is influenced by your life stage. Exhibit 1.2 provides an overview of the six major life
stages and the key financial considerations at each stage. If expenses are not accurately
estimated, it may be difficult to reach savings goals. Many financial decisions are affected by tax
laws, such as certain types of income being taxed at a higher rate than others. By understanding
how your alternative financial choices would be affected by taxes, you can make financial
decisions that have the most favourable effect on your after-tax cash flows.
Question 8.
What is liquidity? What two factors are considered in managing liquidity? How are they used?
• Liquidity means having access to ready cash, including savings and credit, to cover unexpected
expenses. In managing your liquidity you consider money management and credit management.
Money management deals with deciding how much money to retain in a liquid form and how to
allocate the funds among short-term investment instruments. Credit management deals with
decisions about how much credit you need to support your spending and which sources of credit
to use.
Question 9.
What factors are considered in managing your financial resources?
• Factors considered in managing financial resources include how much money to maintain in
ready cash, where and in what form, versus the use of credit as a source of funds. The choice of
loan depends upon the amount required, interest rate and repayment terms.
Question 10.
What is the primary objective of investing? What else must be considered? What potential investment
vehicles are available?
• The primary objective of investing is to use funds not needed for liquidity purposes to earn a
return. Most investments are subject to risk, and you need to understand your personal
tolerance to risk in order to manage it. Potential investments include stocks, bonds, mutual
funds, and real estate.
,Question 11.
What are the three elements of planning to protect your assets? Define each element.
• A plan to protect your assets requires insurance planning. Insurance planning involves
determining the types and amount of insurance that you need such as automobile,
homeowner’s, and life insurance. Insurance reimburses you for damages to your assets, limits
your exposure to potential liabilities, or protects your income.
Question 12.
How does each element of financial planning affect your cash flows?
• Budgeting focuses on how cash received (from income or other sources) is allocated to spending,
taxes and savings (increase in available cash). Managing your financial resources focuses on
depositing a portion of your excess cash in an emergency fund (use of cash) or obtaining credit
to support your purchases (source of cash). Protecting your assets and income focuses on
determining your insurance needs and spending money on insurance premiums (use of cash).
Investing focuses on using some of your excess cash to build and grow wealth (use of cash).
Planning your retirement and estate dictates the wealth that you will accumulate by the time
you retire and its distribution before and/or after your death (use of cash). Refer to Exhibit 1.7.
Question 13.
What are the six steps in developing a financial plan?
• The six steps in developing a financial plan are:
• Step 1. Establish your “SMART” financial goals
• Step 2. Consider your current financial position
• Step 3. Identify and evaluate alternative plans that could achieve your goals
• Step 4. Select and implement the best plan for achieving your goals
• Step 5. Evaluate your financial plan
• Step 6. Revise your financial plan
Question 14.
How do your financial goals fit into your financial plan? What is a SMART goal?
• Setting your goals will identify the amount of money you need to set aside, and when, in order
to achieve the goals. A SMART goal is a goal that is specific, measurable, action-oriented,
realistic, and time-bound. For example, a goal could be specific in that you may want to save a
specific amount of money, pay down a specific amount of debt to improve your
creditworthiness, or have a specific cash flow at retirement. A goal is measurable when you can
quantify your objective and measure your progress toward achieving the goal. An action-
oriented is a goal in which you have listed specific action steps that will help you meet you’re the
goal. Realistic goals have a stronger likelihood of being accomplished. Short-term goals are those
to be accomplished in less than a year such as saving $500 for Christmas gifts. A medium-term
goal takes from one to five years to accomplish, such as paying off a 3-year loan. A long- term
, goal takes more than five years to accomplish. For example, saving for retirement over a set
number of years.
Question 15.
Name some factors that might affect your current financial position.
• Some factors that might affect your current financial position are your level of debt, your marital
status and family responsibility, your age, and your level of wealth accumulated.
Question 16.
How do your current financial position and goals relate to your creation of alternative financial plans?
• Your goals are where you want to be and your current financial position is where you are. Your
alternative financial plans will “map” how to get from one position to the other. Several
alternative financial plans are possible given one’s current financial position and goals. For
example, two alternative plans may involve different amounts of savings.
Question 17.
Once your financial plan has been implemented, what is the next step? Why is it important?
• Once you have developed and implemented a plan, you must monitor it. Monitoring the plan
will ensure that you are following the plan and that the plan is working as intended.
Question 18.
Why might you need to revise your financial plan?
• You may find you need to revise the plan to make it more realistic. In addition, your life
circumstances and financial condition may change. As your financial conditions change, your
goals may change, especially as the results of specific events such as graduating from a post-
secondary institution, getting married, or the birth of a child.
Question 19.
List some information available on the internet that might be useful for financial planning. Describe one
way you might use some of this information for financial planning purposes.
Information available on the internet useful for planning includes:
- Bank deposit rates - buy now vs. save decision.
- Prices of homes and cars in your area - planning for purchase.
- Financing rates on car loans, personal loans, and home loans - deciding how much of a loan you can
afford.
- Stock price quotations and quotations on other investments - deciding when to invest and where to
invest.
- Insurance quotations based on your needs - getting the best value for your insurance dollar.
- Tax rates - for tax planning.
