Personal Finance and Financial Planning, Exams of Accounting

Download Personal Finance and Financial Planning and more Exams Accounting in PDF only on Docsity! CFP financial planning Study Guide 6 Stages of Financial Planning CORRECT ANSWER 1. Establish client planner relationship. 2. Gather data and objectives. 3. Analyze and Evaluate financial status. 4. Develop plan and present recommendations. 5. Implement. 6. Monitor. Disposable Income (DI) CORRECT ANSWER PI - personal taxes GDP does not measure CORRECT ANSWER Utility/usefulness Per capital output What is produced or how it is allocated Quality of output Nonpaid productive output (like people mowing their own lawns) Unreported income (the underground economy) Value/enjoyment related to work The undesirable side effects of high productivity like overall well-being, pollution, congestion, etc. Measures of Consumer Attitudes CORRECT ANSWER 1. Index of Consumer Sentiment 2. Consumer Confidence Index Stats indicating consumer demand CORRECT ANSWER 1. Personal Consumption Expenditures 2. Housing Starts 3. Data on Consumer Credit 4. Marginal Employment Opportunites (overtime, length of work week, etc.) Measures of Inflation CORRECT ANSWER 1. Consumer Price Index 2. GDP deflator 3. Producer Price Index Establish Client Relationship CORRECT ANSWER Define Scope. Identify types of service. Disclose methods of payment. Determine Responsibilities. Agree to length of agreement. Gather Data CORRECT ANSWER Questionairres/Surveys Quantify goals($/time). Rank goals. Net worth can grow if... CORRECT ANSWER Assets rise in vale (appreciation) Liabilities are forgiven Income is used to increase assets Additional Assets are received by gift or inheritance. Net worth does not grow if... CORRECT ANSWER Debt is paid off using assets like cash. An asset is purchased using cash. Cash Inflows CORRECT ANSWER Salaries, wages, dividends from investments, interest from bank accounts, proceeds from a bond maturing, etc. 3 types of Cash Outlows CORRECT ANSWER 1. Fixed Outflows 2. Variable Outflows 3. Savings and Investments Fixed Outflows CORRECT ANSWER Mortgage Payments, taxes, installment loan payments, insurance premiums Variable Outflows CORRECT ANSWER Food, clothing, entertainment, utilities, recreation, medical care, etc. Savings/investment Outflows CORRECT ANSWER The purchasing of an investment (treated as an outflow but does not change net worth) On the flip sides the sale of an investment is treated as an inflow but does not change net worth. Encumbrance CORRECT ANSWER Cash Flow Statement CORRECT ANSWER Presents cash receipts and disbursements over a period of time (usually 1 year). Usually a historical record but can be prepared pro forma. Debt rules CORRECT ANSWER Consumer Debt should not exceed 20% of after tax income. Monthly housing payments should not exceed 28% of gross income (or 1 week of after tax income). Total monthly payment of debt should not exceed 36% of monthly gross income. The more diversified the sources of income... CORRECT ANSWER The more secure the client's financial position. Footnotes in financial statements CORRECT ANSWER May be used to indicate circumstances or values not otherwise disclosed: A pending lawsuit An anticipated inheritance etc. Percent of income that goes into current consumption CORRECT ANSWER No more than 90%. Liquidity Ratio CORRECT ANSWER Current Assets/Current Debts Solvency Ratio CORRECT ANSWER Net Worth/Total Assets Measures the percentage of assets that the client actually owns. First Priority of Financial Planning CORRECT ANSWER Remove financial uncertainty: Insurance Planning, emergency fund, writing a will. Second Priority of Financial Planning CORRECT ANSWER Wealth Accumulation through Investment Planning. Third Priority of Financial Planning CORRECT ANSWER Retirement and Estate Planning. The Pyramid Approach CORRECT ANSWER Base: Remove Uncertainty Second: Accumulate Wealth Third: Retire and Plan for Wealth Transfer 3 types of structured financial counseling CORRECT ANSWER Interviewing, counseling, advising Genuine Assent CORRECT ANSWER Needed for a contract to exist... cannot be given fraudulently or under duress. Parol Evidence Rule CORRECT ANSWER A written contract is deemed to be the final agreement between parties and overrides all earlier agreements. Perceived Risk CORRECT ANSWER Subjective Interpretation placed by an individual on a situation. Bounded Rationality CORRECT ANSWER There are limits to how rationally people can make economic decisions. Perceived Risk CORRECT ANSWER Subjective Interpretation placed by an individual on a situation. Bounded Rationality CORRECT ANSWER There are limits to how rationally people can make economic decisions. Opportunity Cost of Money CORRECT ANSWER When a possible return in lost because the money needed to create the return is used another way. Future Value of Money CORRECT ANSWER The value that will be available when a present sum or series of periodic sums is invested with earnings added over a period of time. Present Value of Money CORRECT ANSWER The worth today of a known amount or series of amounts to be received in the future, given a specified interest rate and number of discounting periods. Compounding/Discounting Period CORRECT ANSWER The period of time during which interest is calculated Annuity CORRECT ANSWER A specified amount of money, paid or received at a specified uniform interval for a given period of time. Ordinary Annuity CORRECT ANSWER One in which payments are received or paid at the END of each period. Periodic payment CORRECT ANSWER Payment received by the annuitant at regular intervals. Annuity Due CORRECT ANSWER The first payment is received immediately upon the inception of the annuity contract. Inflation adjusted interest rate CORRECT ANSWER (1 + interest)/(1 + inflation) Minus 1 Then times 100 Rule of 72 CORRECT ANSWER 72\interest rate = number of years it will take a sum of money to double. Capitalized Value of Income CORRECT ANSWER The amount of principal needed to provide a specified annual income given an assumed interest rate. Amortization Schedule CORRECT ANSWER Shows the amount of each payment being applied to the principal and interest over the life insurance the loan. If compounding or discounting occurs more than once per year... CORRECT ANSWER The effective interest rate will be greater than the nominal interest rate. Debt-Service Payments CORRECT ANSWER Periodic Payments a debtor makes to a creditor to pay off a loan. Serial Payments CORRECT ANSWER Inflation adjusted Payments.... increase by a constant percentage over time to keep up with inflation. Positive NPV CORRECT ANSWER Good investment, will increase wealth over time (IRR is more than acceptable). Ranking Investments options CORRECT ANSWER Should use NPV rather than IRR. Negative NPV CORRECT ANSWER Bad investment, will result in a net reduction in wealth. (IRR is less than acceptable) IRR CORRECT ANSWER The interest rate that equates the PV of inflow to the PV of outflow (NPV = 0) Coverdell Educational Savings Account CORRECT ANSWER Aka education IRA or ESA Permit nondeductible annual contributions of up to $2000 per beneficiary... but the max is phased out for high tax payers. Current Income Trust 2503(b) Crummy Invasion Trust Minor's Trust CORRECT ANSWER 2503(c) Allows transferred property to be treated as a present interest gift spot can qualify for the gift exclusion. Accumulated income taxed to the Trust, so no kiddie tax. Payable to the child in full at 21. Crummy Invasion Trust CORRECT ANSWER Child is allowed but not required to withdraw $ each year up to an amount equal to the lesser of the annual addition or a the federal gift tax exclusion. If not withdrawn, income will be taxed to the trust. Grantor specifies distribution age... no requirement. Kiddie tax can be avoided if annual withdrawals are not taken. Investment Principles for education funding CORRECT ANSWER For growth period... seek out investments that will have capital appreciation rather than high current income (avoids kiddie tax). At college age (or after 19 or 24 if kiddie tax is a concern) emphasize investments with a safe but high yields. Pell Grant CORRECT ANSWER Must demonstrate financial need. Must be enrolled at least 6 hrs. a week. Limited to undergrads. SEOGS CORRECT ANSWER Supplemental educational opportunity grant. Must be a full time student, Need-based. Offered by colleges to supplement Pell Grant funding Perkins Loans CORRECT ANSWER Federally Sponsored but administered by the college. Need based. Available to undergrads and grad students. Interest starts 9 months after schooling ends. Stafford Loans CORRECT ANSWER Made directly by the Dept. of Education. Subsidized (gov. Pays interest until 6 months after schooling ends) if based on financial need, not subsidized (interest accrued) if need is not demonstrated. Must be at least a half time student to be eligible. Payable over 10-25 years. FFEL Loan CORRECT ANSWER Family fund education loan. Structured like a Stafford loan, payable over 65 months to 10 years. PLUS Loan CORRECT ANSWER Parent Loans to Undergraduate Students Not based on need, made by the federal government to parents of full time undergrads, and to graduate and professional students. Interest accrued from the time the loan is granted. Alimony CORRECT ANSWER Deductible to payer, taxable to recipient Child Support CORRECT ANSWER Not deductible to payer, not taxable to the recipient. Consumer debt CORRECT ANSWER Short term... may be secured (like a car loan) or unsecured (like a credit card). Long Term Debt CORRECT ANSWER Business loans, home loans, etc. Cost of a mortgage includes CORRECT ANSWER Interest rate, loan origination fees, appraisal fees, credit investigation charges, title search costs, and points. Tax deductible aspects of a mortgage CORRECT ANSWER Interest paid, points purchased, state and local real estate taxes. Inevestment Advisers Act of 1940 CORRECT ANSWER Intended to protect the public and investors from malpractice by persons compensated for rendering investment advice. Regulated by SEC, and requires investment advisers to register with a he SEC. SEC def'n of Investment Adviser CORRECT ANSWER Any person who directly or through publications or writing engages in the business of advising others as to the value of securities or the advisability of investing in, purchasing, or selling securities. 3 elements that requires a person to register with the SEC as an investment adviser. CORRECT ANSWER Providing advice or performing analyses concerning the purchase or sale of securities. In the business of advising others concerning securities. Receives compensation for these services. IA-770 CORRECT ANSWER Determined that even advice of a general nature (e.g. A recommendation to buy stamps, coins, or commodities) would make a financial planner an investment adviser. If they were part of the financial planner's business and she received compensation. IA-1092 CORRECT ANSWER Reaffirmed IA 770 and made it clear that all investment advisers, not just those registered with the SEC, are subject to the antifraud provisions of the 1940 Act. Also imposed the Fiduciary responsibility on investment advisers. The financial planner is not in the business of advising if... CORRECT ANSWER Investment Advice is solely incidental to an unrelated primary business. Advice is nonspecific. The planner receives no compensation for the advice. Compensation CORRECT ANSWER As defined by the SEC is defined broadly and does not have to be paid by the client. For example commissions or any other economic benefit paid from a mutual fund company would be considered compensation. 6 categories If EXCEPTIONS from IA registration CORRECT ANSWER 1. A bank or holding company that is not also an investment company. 2. Lawyer, Accountant, Engineer, or Teacher whose advice is solely incidental and to the practice of his/her profession. 3. Any broker or dealer whose performance of advisory services is solely incidental and who receives no special compensation for these services. 4. The publisher of a bona fide newspaper, news magazine, or business or financial publication in general and regular circulation. 5. Any person whose advice, analysis, or reports relate only to securities which are direct obligations of advising r guaranteed by the US govt. 6. Other persons not within the intent of the law as determined by the SEC. Other EXEMPTIONS to IA's needing to register with the SEC. CORRECT ANSWER 1. Intrastate advisors provided all client's are in state and no advice is given on securities trading on the national exchange. 2. If all client's are insurance companies 3. Fewer than 15 clients per year and not held out to the public as an Investment Advisor 4. If all client's are venture capital funds. 5. A foreign advisor without a US place of business that manages less than $25 M and has fewer than 15 US clients. Subject to antifraud provisions of 1940 Act CORRECT ANSWER Anyone registered as an IA, and anyone not registered because of an Exemption. Those not registered because of the 6 exceptions are not subject to the 1940 act or its anti fraud provisions. ADV Part 1 CORRECT ANSWER General background information on applicant and anticipated client's. Anti Fraud Provisions CORRECT ANSWER Require full disclosure of material facts and conflicts of interest Places advisor in a Fiduciary role even when conduct does not involve securities transactions. SEC has rights to CORRECT ANSWER Investigate, compel submission of books and records, and levy fines for failure to cooperate. Suspend or revoke an advisor's registration. Refer a case to the Justice Dept. for criminal prosecution that can result in fines up to $10,000 and prison up to 5 years. Blue Sky laws CORRECT ANSWER State laws that provide for the registration of securities and advisers by a state securities administrator. Investment Advisers Supervision Coordination Act CORRECT ANSWER Advisors less than 100K register with state, over 110K with SEC (in between is advisor's choice) But all RIAs still have to follow IAA of 1940 Anyone convicted of a securities related offense in the past 10 years or a crime punishable by imprisonment for a year or longer is ineligible to be an RIA. Who has jurisdiction w/respect to fraud and criminal behavior CORRECT ANSWER States... regardless or registration or AUM. All Associated Persons are registered with... CORRECT ANSWER State. Safe Harbor/de minibus rule CORRECT ANSWER Advisor can have up to 5 clients in another state before they have to register in that state. And no state may impose more burdensome record keeping requirements than the advisor's home state. Federal Insider Trading and Securities Fraud Enforcement Act CORRECT ANSWER SEC may impose penalties for misuse of material, nonpublic information by an RIA or anyone associated with the RIA. FINRA Rules of Fair Practice CORRECT ANSWER A registered representative of one broker dealer can't 'sell away' (sell the products of another broker dealer for any form of compensation). This include RIA activities unless the supervising broker dealer specifically approves them. FINRA CORRECT ANSWER Regulates anyone selling stocks, bonds, tax shelters, options, or mutual funds. FINRA registration CORRECT ANSWER Requires association with a broker dealer, Form U-4 Registration, and passing an applicable test. Series 6 CORRECT ANSWER Can sell investment company products like mutual funds, variable life insurance, and annuities. Series 22 CORRECT ANSWER Can see tax shelters such as gas, ok, and cable TV tax shelters. (But not REITS) Series 7 CORRECT ANSWER General Securities Stocks, bonds, tax shelters, real estate syndications, REITS, and mutual funds (everything except commodities and certain options) (Negates need for Series 6 or 22) Series 3 CORRECT ANSWER Can sell commodities futures Series 62 CORRECT ANSWER Corporate Securities 6 + 22 + 62 = same trading abilities as 7 except no options. Series 63 CORRECT ANSWER Uniform Securities Agency Law Exam (USALE) Can sell securities in several states. Series 65 CORRECT ANSWER Required in more than 30 states to register as an investment adviser. Rebating CORRECT ANSWER Paying a portion of commission back to the customer - Illegal in every state Investment Company Act of 1940 CORRECT ANSWER Granted the SEC power over the Investment or security transaction of publicly owned investment companies, such as mutual funds. McCarran-Ferguson Act of 1945 CORRECT ANSWER Determined that the insurance industry would be regulated at the state rather than the federal level. Bank Holding Company Act of 1956 CORRECT ANSWER Restricted bank holding companies from taking over banks in different states. Required new bank holding companies to receive approval from the federal reserve board. Securities Investor Protection Act of 1970 CORRECT ANSWER Creates the SIPC to insure investors losses from a failing brokerage firm. ERISA 1974 CORRECT ANSWER Creates minimum funding standards for pension plans. Establishes the Pension Benefit Guaranty Corporation to insure employee pension benefits up to a certain level. Depository Institutions Deregulation and Monetary Control Act 1980 CORRECT ANSWER Phased out interest rate caps for funds on deposit. Increased FDIC limit to $100K (raised again to 250K in 2008) Depository Institution a Act of 1982 (Garn-St. Germain) CORRECT ANSWER Allows FDIC to help failing banks. Competitive Equality Banking Act of 1987 CORRECT ANSWER Restructured the federal savings and loan insurance company. Insider Trading and afraid Securities Act of 1988 CORRECT ANSWER Prohibits insider trading Financial Institutions Reform, Recovery, and Enforcement Act of 1989 CORRECT ANSWER Granted the FDIC the power to insure thrift institution deposits and eliminated the federal Savings and Loan Insurance Corporation. Federal Deposit Insurance Corporation Improvement Act 1991 CORRECT ANSWER Expanded the authority of the FDIC and allowed the FDIC to borrow Treasury funds. Riegle-Neal Interstate Banking and Branching Efficiency Act 1994 CORRECT ANSWER Allows interstate bank mergers and allows bank holding companies to take over banks in other states. National Securities Market Improvement Act of 1996 CORRECT ANSWER Created the $25M AUM floor for registering with the SEC and the $30M ceiling for registering with the state. Dodd Frank Act changed this to $100/$110M Gramm-Leach-Bliley Act 1999 CORRECT ANSWER Allows banks and insurance companies to join together to serve clients. Have customers the right to not have their information shared with third parties. International Money Laundering Abatement and Financial Antiterrorism Act of 2001 CORRECT ANSWER Stops terrorists from using funds held in US financial institutions for illegal activities. Sarbanes-Oxley Act of 2002 CORRECT ANSWER Addresses Accounting fraud and financial disclosures. Established the Public Company Accounting Oversight Board (PCAOB) to supervise accounting firms and audits. Equal Credit Opportunity Act CORRECT ANSWER Prohibits banks and credit card companies from discriminating when offering credit to customers. Fair Credit reporting Act and Consumer Credit Reporting Reform Act 1996 CORRECT ANSWER Give consumers the right to see and correct errors in their credit files. Credit files are otherwise considered confidential except for those who have a legitimate need for credit information. All others must obtain a court order. Fair and Accurate Credit Transactions Act CORRECT ANSWER Grants consumers the right to a free annual credit report. Consumer Credit Protection Act (aka TILA) CORRECT ANSWER 1. Lender must inform borrowers of the APR. 2. The cost of any credit life insurance must be disclosed. SS, pension, unemployment, and alimony can't be relinquished. Remaining debts are discharged except child support, alimony, ed loans, and taxes. Chapter 13 bankruptcy CORRECT ANSWER Filer's debts are restructured to either reduce amount or lengthen payment period. If the restructuring plan is adhered to by the debtor, the creditor can not foreclose on assets or harass the debtor to pay more than the plan calls for. Only available if the total debts are below a specified max amount and if the debtor is still an income earner. Other bankruptcy rules adopted in 2005 CORRECT ANSWER Filers must be briefed on opportunities for Credit counseling and other alternatives. Debtor/filed must complete a financial management instructional course before debts are discharged. Qualified retirement plans are exempt from creditor claims. Coverdell ESA and 529 funds are excluded from bankruptcy if contributions were made at least one year before filing. Business Cycle CORRECT ANSWER Wave like rise and fall of economic activity that is irregular in duration and amplitude. Though irregular, over time we have seen the expansion phase last longer than the contraction phase. Money supply CORRECT ANSWER Refers to deposits in banks, savings and loans, and credit unions in addition to actual physical money. M1 CORRECT ANSWER Coins, Currency and demand deposits (checkable bank account) Most Liquid M2 CORRECT ANSWER M1 plussavings accounts M3 CORRECT ANSWER M2 plus large denomination time deposits and other less spendable assets. Open Market operations CORRECT ANSWER The ways the Fed regulates the money supply: --buying or selling gov securities to stimulate or slow the economy. Ways to increase the money supply CORRECT ANSWER Buying up govt. securities Lowering discount rate Lowering the reserve requirements (rarely used) Easy Money Policy CORRECT ANSWER Open Market Purchasing by the Fed... designed to stimulate expansion in the economy. Tight Money Policy CORRECT ANSWER Open Market Selling by the Fed... contractionary, decreases the money supply. Monetarists CORRECT ANSWER Economists who argue that monetary policy should not be used to manage business cycle fluctuations. The monetary authority should focus solely on maintaining price stability. Keynesian CORRECT ANSWER Economists who hold that fiscal and monetary policy should be used to influence the economy. The government must be involved to help regulate the economy Say's Law CORRECT ANSWER Supply creates its own demand... all economic developments will self correct without government interference. Fiscal vs. Monetary Policy CORRECT ANSWER Monetary - Fed actions that regulate the money supply Fiscal - government Spending and Taxation policies. Discretionary Fiscal Policy CORRECT ANSWER The deliberate attempt by congress and the president to change economic conditions by changing the level of taxation and government spending. Nondiscretionary Fiscal Policy CORRECT ANSWER The effect of economic conditions. Policy that is implemented through the existing tax structure or budget. 3 stages of the individual financial life cycle CORRECT ANSWER 20-40 Accumulation of Wealth 40-55 Preservation of Wealth 60+ Dissipation of Wealth Accumulation Stage CORRECT ANSWER 20-40 Earnings Increasing Savings not necessarily high Major expenditures -- family, house, education Often high use of debt Need for insurance is high Preservation Stage CORRECT ANSWER 40-55 Peak Earnings Higher Assets and Increased Savings More discretionary Income Retirement Planning is Important Investment Emphasis still on Capital Appreciation Dissipation Stage CORRECT ANSWER 60+ Reduction or Elimination of Salary SS and pensions income kick in. Some assets liquidated to provide income Transition/Estate Planning is important GDP CORRECT ANSWER Total Output of the Economy The Market value of all final goods and services produced in the US during a specified period of time. GDP calculation (output/expenditures approach) CORRECT ANSWER C + I + G + Xn C - expenditures on personal consumption I - Gross Domestic Investment from Private Sources G - government Expenditures Xn - Net Exports (exp - imp) GDP calculation (income, earnings, allocations approach) CORRECT ANSWER The mnemonic "RIPSAW" breaks down as follows: GDP = R + I + P + S + A + W R = rents I = interests P = profits SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits W = wages Net Domestic Product CORRECT ANSWER NDP = GDP - Depreciation Depreciation = consumption of fixed capital. National Income (NI) CORRECT ANSWER NDP - (indirect business taxes + net from reign factor income earned in US) Personal Income (PI) CORRECT ANSWER NI - (SS contributions + corporate Income Tax + undistributed corporate profits) + transfer payments CPI calculation CORRECT ANSWER Inflation rate = (Current CPI - last year CPI) Divide by last year CPI Times 100. Prime Rate Federal Funds Rate Fed Discount Rate Commercial Paper Rates T-bill Rates Large denomination CD rates Markets Diary CORRECT ANSWER A set of 5 charts in the Wall Street journal showing: DJIA DJWSI 10 year t-note yield US dollar vs. other currencies Commodity Futures Current Yield on bonds CORRECT ANSWER Rate/price Price is expressed as a percentage of face value. So a 6% bond selling at 90% of its face value is actually yielding 6/90=6.66% Normal Yield Curve CORRECT ANSWER Varies directly... as term increases so does Yield. Inverted Yield Curve CORRECT ANSWER As term increase Yield goes down... tends to occur in inflationary periods when short term rates are pushed up by the Fed. Leading Indicators CORRECT ANSWER Must meet 3 conditions: 1.expected to lead the business cycle 2.represents a broad spectrum of economic activity 3. Must be available promptly on a monthly basis. Leading Indicators Index CORRECT ANSWER 1. The average weekly hours worked by manufacturing workers; 2. The average number of initial applications for unemployment insurance; 3. The amount of manufacturers' new orders for consumer goods and materials; 4. The speed of delivery of new merchandise to vendors from suppliers; 5. The amount of new orders for capital goods unrelated to defense; 6. The amount of new building permits for residential buildings; 7. The S&P 500 stock index; 8. The inflation-adjusted monetary supply (M2); 9. The spread between long and short interest rates; and 10. consumer sentiment. Coincident Indicators CORRECT ANSWER 1. the number of employees on non- agricultural payrolls 2. the Index of Industrial Production 3. the level of manufacturing and trade sales 4. the aggregate amount of personal income excluding transfer payments Inventories CORRECT ANSWER A stockpile of finished products, raw materials, and goods in the process of completion. Inventory levels generally reinforce economic treads but at times can act as a leading indicator (rapid inventory depletion is often an indicator of expected inflation) Inventory to Sales Ratio CORRECT ANSWER Shows how many months would be needed to liquidate inventories at existing rates of sales. Tends to average around 1.5 Rising ratios indicate an impending liquidation and recession.