AFC Personal Financial Statements and Net Worth Analysis — Questions and Answers
Question 1: 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?
- $173,000 (Correct answer)
- $397,000
- $112,000
- $285,000
Correct 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.
Question 2: Which financial statement shows a client's monthly income sources and all expenses to determine whether they have a surplus or deficit?
- Cash flow statement (Correct answer)
- Net worth statement
- Balance sheet
- Investment portfolio summary
Correct 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.
Question 3: 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?
- 35% (Correct answer)
- 28%
- 40%
- 25%
Correct 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.
Question 4: On a personal net worth statement, which of the following would be classified as a liability?
- Outstanding student loan balance (Correct answer)
- Market value of a vehicle
- Checking account balance
- Vested 401(k) balance
Correct 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.
Question 5: 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?
- 10%; meets the commonly recommended minimum of 10% (Correct answer)
- 10%; falls below the recommended 20%
- 8%; meets the minimum
- 12%; exceeds the minimum
Correct 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.
Question 6: 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?
- Liquidity ratio (Correct answer)
- Debt service ratio
- Solvency ratio
- Investment ratio
Correct 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.
AFC Personal Financial Statements and Net Worth Analysis
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?