Finance 1200 Fall 2005
Test 1
True/False
1. Your net worth is the value of what you own minus the value of what you owe.
2. Any funds that you have beyond what you need to remain liquid should be
invested to provide you with a return on your investment.
3. You should manage your investments so as to maximize your return and minimize
your risk.
4. Financial plans rarely differ across individuals, even if every individual is in a
different financial position.
5. We use money for two purposes—consumption and savings.
6. A business cycle is a pattern of economic activity that includes expansion,
recession, and recovery.
7. All things considered, a saver who earns 6 percent interest on a savings account
when the rate of inflation is 6 percent is losing real purchasing power.
8. When one forgoes buying a new television set because he/she spends the money
on college books. The television set is the opportunity cost of buying the books.
9. Opportunity costs are strictly financial in nature and do not involve personal tastes
and preferences.
10. Marginal cost is the incremental cost of one more unit of something.
11. Simple interest is the interest computed on principal only and without
compounding.
12. The tax advantage of an Flexible Spending Account occurs because the deducted
amounts of salary avoid federal income tax, Social Security taxes, and in most
states, state income taxes, thereby allowing selected personal expenses to be paid
with pretax income.
13. Specific goals should be measurable, attainable, relevant, and time related.
14. A balance sheet describes an individual’s financial progress over a period of time,
generally a year.
15. Monetary assets are assets and non-cash items that can readily be converted to
cash.
16. Short-term liabilities is a term used for debt obligations to be paid off within one
year.
17. The liability section of the balance sheet would include money owed to a bank or
financial institution but would not include money owed to a friend.
18. A low asset-to-debt ratio is a positive indicator of financial well-being.
19. The time value of money implies that a dollar received tomorrow is worth more
than a dollar received today.
20. The process of obtaining future values is referred to as discounting.
21. To determine the present value of a future sum, it is necessary to know the interest
rate to be earned on your deposit.
22. Keeping track of actual revenues and expenses is not important in creating one’s
cash flow (income) statement.
23. Time value calculations are more appropriate for long-term goals than for shortterm goals.
24. Variable expenses are more difficult to estimate than fixed expenses.
Finance 1200 Fall 2005
Test 1
Multiple Choice
25. A(n) ________ represents what you give up as a result of making an alternative
decision.
a. Liquidity need
b. Opportunity cost
c. Purchasing price
d. Financing cost
26. Your _______ is (are) the value of what you own minus the value of what you
owe.
a. Net worth
b. Net assets
c. net liabilities
d. budget
27. ______ is access to funds to cover any short-term cash deficiencies.
a. Money management
b. Liquidity
c. Credit management
d. Cash management
28. Jenny and Jeff are saving monthly so they can buy a home, but they are currently
renting an apartment. The apartment is part of their
a. Standard of living.
b. Level of living.
c. Savings.
d. None of the above.
29. Which of the following is usually easiest for people to forecast?
a. Income
b. Inflation
c. Interest rates
d. Economic growth
30. A good time to buy stock is when the economy is
a. In the prosperity of the expansion stage.
b. In the trough of a recession.
c. Starting into the recovery stage.
d. There is never a good time to buy stock, hide your money under your
mattress instead.
31. Dezaray Lynch received a $3,000 raise this year. This increased her salary as an
associate TV producer from $30,000 to $33,000. What percentage increase in
nominal income did Dezaray receive?
a. 14.6 percent
b. 11.3 percent
c. 10.0 percent
d. 9.1 percent
Finance 1200 Fall 2005
Test 1
32. If your income increased from $23,000 to $26,000 during a period when the rate
of inflation was 4 percent, your real income after the raise was
a. $23,000
b. $24,000
c. $25,000
d. $26,000
33. Corky, a college teaching assistant, received a raise of $1,000 from $12,000 to
$13,000 this year. If inflation was 2 percent over the same period, which of the
following is true?
a. Corky’s increase in real income was $1,000
b. Corky’s increase in real income was 8.3%
c. Corky’s increase in real income was $745
d. Corky’s increase in real income was both 8.3 percent and $745
34. Jeff and Sarah’s family income increased from $50,000 to $52,000 the past year.
Inflation was 3 percent over the same time period. Which of the following is true
regarding Jeff and Sarah’s income?
a. Their nominal income increased 4 percent.
b. Their nominal income increased 1 percent.
c. Their real income decreased 4 percent.
d. Both b and c.
35. Using the information from problem 34, how much is Jeff and Sarah’s real
income after the $2,000 increase in income?
a. $52,000
b. $50,485
c. $50,000
d. $49,685
36. Kurt spent $80 on a new sweater rather than using this money to buy his textbook
for his personal finance class. The cost of doing without his textbook is called the
______ cost.
a. Marginal
b. Utility
c. Opportunity
d. Present
37. Raymond just received a $1,500 Christmas bonus from his employer. Knowing
that he pays 27% marginal tax rate for federal income tax, that his state income
tax is 3%, and that the Social Security tax rate is 7.65%, approximately how much
of the bonus will Raymond have to spend on Christmas?
a. $1,500
b. $1,080
c. $935
d. $580
Finance 1200 Fall 2005
Test 1
38. Jacalyn is in the 30 percent marginal tax bracket. She can earn $500 investing in
a taxable bond or $375 investing in a tax-exempt bond. Which of these bonds
provide her with the most after-tax income?
a. The taxable bond
b. The tax-exempt bond
c. They provide her the same after-income tax income.
d. There is not enough information to determine.
39. Grandmother Smith has just put $20,000 into an investment earning 8% for her
granddaughter’s college education. Approximately how much will be in the
account in 15 years assuming all the interest is left in the account?
a. $67,000
b. $63,444
c. $55,180
d. $36,000
40. Betty and Bill just received $25,000 as a gift. If they decide to spend $5,000 now
and put the remaining $20,000 in an investment earning 9% compounded
annually, approximately how much will they have at the end of the eighth year?
a. $45,340
b. $42,610
c. $39,860
d. $25,520
41. Housing values are appreciating at a rate of 3% a year. Approximately how much
will your $100,000 house be worth in 10 years if this rate of appreciation
continues?
a. $134,390
b. $146,320
c. $155,080
d. $174,410
42. A balance sheet includes _____ and _________
a. Income; expenses
b. Assets; expenses
c. Income; liabilities
d. Assets; liabilities
43. Assets on the balance sheet are valued at their _______
a. Fair market value.
b. Original purchase price.
c. Replacement cost.
d. Sentimental value
44. The formula for calculating net worth is
a. Income minus expenses
b. Assets minus liabilities
c. Income minus liabilities
d. Assets minus expenses
Finance 1200 Fall 2005
Test 1
45. Food, clothing, and entertainment are examples of
a. Short-term liabilities
b. Variable expenses
c. Fixed expenses
d. Long-term liabilities
46. Jenny Santana is developing an annual budget based on her monthly cash flow.
In a typical month, Jenny experiences cash inflow of $2,200 and cash outflow of
$1,500. Based on this information, Jenny’s net cash flow in the annual budget is
a. $700
b. $7,700
c. $8,100
d. $8,400
47. The personal ______ summarizes your assets, your liabilities, and your net worth.
a. Income statement
b. Balance sheet
c. Statement of cash flow
d. Budget
48. Sarah Evans has total assets of $10,000, including a car that is currently worth
$1,500. Sarah’s liabilities total $5,000. Based on this information, what is
Sarah’s net worth?
a. -$5,000
b. $5,000
c. $10,000
d. -$10,000
49. Using the information from problem 48, if Sarah trades her old car to purchase a
new one that costs $25,000 and she writes a check for $5,000 of it and finances
the remainder of the cost over five years, what is Sarah’s net worth?
a. $30,000
b. $28,500
c. $5,000
d. $23,500
50. The time value of money implies that a dollar received today is worth _______ a
dollar received tomorrow.
a. Less than
b. More than
c. The same as
d. None of the above
51. When you graduate from college in four years, you would like to have $30,000 to
make a down payment on a house. Assuming you can earn a return of 9 percent
annually, you have to invest ______ today to realize your goal.
a. $15,055.99
b. $25,156.84
c. $21,240.00
d. $27,471.90
Finance 1200 Fall 2005
Test 1
52. Jeff Bloom is 23 years old and wants to retire when he is 45. Jeff believes that $1
million will be sufficient for his retirement. If Jeff can earn an interest rate of 7
percent annually, he has to invest ____ today to have the $1 million when he is 45
years old.
a. $226,000
b. $141,000
c. $450,000
d. $610,000
53. A tax that requires a higher income person to pay a higher percentage of his/her
income in taxes is called a ____ tax.
a. Progressive
b. Regressive
c. Proportional
d. Marginal
54. Which of the following taxes is/are progressive?
a. Federal income taxes
b. State sales taxes
c. Social security taxes
d. All of these
55. Steven Scott’s total income is $30,000, but his taxable income is only $23,450.
Therefore, his tax liability is $3,518. Steven’s average tax rate is _____ percent.
a. 7
b. 12
c. 15
d. 28
56. Jeff is trying to decide whether or not to sell his baseball card collection. He has
been offered $4,000 by a dealer who has agreed to pay Jeff this price now or in
January of next year. This year Jeff is in the 27 percent marginal tax bracket, but
next year Jeff expects to be in the 15 percent marginal tax bracket. Therefore, the
estimated income tax liability on this $4,000 income would be _____ this year
and ____next year.
a. $1,120;$1,120
b. $600;$600
c. $1,080;$600
d. $600;$1,120
57. Assuming you have a tax liability, your average tax rate
a. Equals your marginal tax rate.
b. Is greater than your marginal tax rate.
c. Is less than your marginal tax rate.
d. I have no idea and I wish Dr. Basford would quit asking these questions.
58. You are legally required to include which of the following in gross income?
a. Interest received
b. Lottery winnings
c. Illegal income
d. All of the above
Finance 1200 Fall 2005
Test 1
59. Which of the following will not affect the amount of taxes you pay?
a. Taking a third job to enhance your wealth.
b. Purchasing a home that will be financed with a mortgage.
c. Contributing a portion of your salary to your retirement account.
d. All of the above will affect the amount of taxes you pay.
60. ______ is not a filing status
a. Single
b. Married filing separate returns
c. Qualifying widow(er) with independent child
d. Head of household
61. _____ are specific expenses that can be deducted to reduce taxable income
a. Standard deductions
b. Itemized deductions
c. Exemptions
d. Adjusted expenses
Short answer
62. Stephanie Spratt wants to determine her assets, liabilities and net worth. She has
$500 in cash, $3,500 in her checking account, $1,000 of furniture, a car worth
$1,000, 100 shares of stock worth $30 a share, and a balance of $2,000 on her
credit card. What is the total value of Stephanie’s assets?
63. Using the information from problem 62, what is Stephanie’s liabilities?
64. Using the information from problem 62, what is Stephanie’s net worth?
65. Stephanie Spratt is considering purchasing a new car for $20,000. To make the
purchase, she would trade in her existing car, which has a market value of about
$1,000; write a check for $3,000 as a down payment on the car; and obtain a fiveyear loan for $16,000 to cover the remaining amount owed to the car dealer.
Assuming she began with $500 of cash; $3,500 in checking; $1,000 of furniture;
$3,000 in stocks; and her car as assets. Also assume she had $2,000 of credit card
debt, how does this new car purchase affect her net worth?
66. Assuming Stephanie Spratt’s original balance sheet (prior to purchasing the new
car) from problem 65, what is her debt-to-asset ratio?
67. Suppose that you have won the lottery and will receive $150,000 at the end of
every year for the next 20 years. As soon as you receive the payments, you will
invest them at your bank at an interest rate of 7 percent annually. How much will
be in your account at the end of 20 years (assuming you do not make any
withdrawals)?
68. Stephanie Spratt earned a salary of $38,000 this year. Assuming she is subject to
total FICA taxes of 7.65 percent, how much FICA tax will she pay?
Finance 1200 Fall 2005
Test 1
Answers
1. True
2. True
3. True
4. False
5. True
6. True
7. True
8. True
9. False
10. True
11. True
12. True
13. True
14. False
15. True
16. True
17. False
18. False
19. False
20. False
21. True
22. False
23. True
24. True
25. B
26. A
27. B
28. B
29. A
30. B
31. C
32. C
33. C
34. A
35. B
36. C
37. C
38. B
39. B
40. C
41. A
42. D
43. A
44. B
45. B
Finance 1200 Fall 2005
Test 1
46. D
47. B
48. B
49. C
50. B
51. C
52. A
53. A
54. A
55. B
56. C
57. C
58. D
59. D
60. C
61. B
62. $9,000
63. $2,000
64. $7,000
65. There would be no affect on her net worth. Her net worth would still be the same,
$7,000.
66. 22.22%
67. $6,149,250
68. $2,907