Personal Financial Statements and Net Worth Analysis Flashcards
6 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Personal Financial Statements and Net Worth Analysis flashcards as text
A client's personal balance sheet shows total assets of $285,000 and total liabilities of $112,000. What is the client's net worth?
Answer: $173,000
Net worth equals total assets minus total liabilities: $285,000 − $112,000 = $173,000. The balance sheet equation is Assets = Liabilities + Net Worth.
Which financial statement shows a client's monthly income sources and all expenses to determine whether they have a surplus or deficit?
Answer: Cash flow statement
A cash flow statement (also called an income and expense statement) tracks money flowing in (income) and out (expenses) over a period, revealing a surplus or deficit. A net worth/balance sheet is a snapshot of assets and liabilities at a point in time.
A client has monthly gross income of $5,000 and total monthly debt payments of $1,750. What is their debt-to-income (DTI) ratio?
Answer: 35%
DTI = monthly debt payments ÷ gross monthly income × 100 = $1,750 ÷ $5,000 × 100 = 35%. Lenders typically prefer a DTI below 36%, and the AFC exam expects counselors to identify clients at risk using this ratio.
On a personal net worth statement, which of the following would be classified as a liability?
Answer: Outstanding student loan balance
Liabilities are amounts owed to others. An outstanding student loan balance is a debt obligation and therefore a liability. Vehicles, checking accounts, and 401(k) balances are assets because they represent things the client owns or is entitled to.
A client saves $400 per month on a gross income of $4,000 per month. What is their savings rate, and how does it compare to the commonly recommended minimum?
Answer: 10%; meets the commonly recommended minimum of 10%
Savings rate = savings ÷ gross income = $400 ÷ $4,000 = 10%. The widely cited rule of thumb is to save at least 10% of gross income, so this client exactly meets that benchmark — though many planners recommend 15–20% for retirement adequacy.
Which financial ratio measures a client's ability to meet short-term obligations using liquid assets, and is calculated by dividing liquid assets by monthly expenses?
Answer: Liquidity ratio
The liquidity ratio = liquid assets (cash, savings) ÷ monthly expenses. It shows how many months a client could cover expenses from liquid assets alone. A ratio of 3–6 months is the emergency fund benchmark AFC counselors use. The solvency ratio measures net worth relative to total assets.