AAFM Professional Knowledge 4

Question 1

Which financial statement shows a company's assets, liabilities, and equity at a point in time?

Accepted Answer

Balance sheet

Answer

The balance sheet is a snapshot of financial position at a specific date.

Question 2

A client asks about reducing estate tax exposure through gifting. What tool leverages the annual gift tax exclusion?

Accepted Answer

Making gifts up to the annual exclusion limit each year

Answer

Annual exclusion gifts transfer wealth free of gift tax and reduce the taxable estate over time.

Question 3

What does a high debt-to-income ratio typically signal to a lender?

Accepted Answer

Greater credit risk

Answer

A high DTI means more income is committed to debt, indicating higher default risk.

Question 4

In insurance planning, the principle of 'indemnity' means the policy should do what?

Accepted Answer

Restore the insured to their prior financial position, not profit

Answer

Indemnity ensures compensation for actual loss without allowing the insured to profit from a claim.

Question 5

Which measure indicates how sensitive a stock is to overall market movements?

Accepted Answer

Beta

Answer

Beta measures a security's volatility relative to the broader market.

American Academy of Financial Management (AAFM) Practice Test