Certified Trust and Financial Advisor Flashcards

An excess of spending over revenue that results in both insufficient finances and a decline in net worth is known as:

Answer: Cash deficit

The definition clearly describes a "cash deficit." This occurs when an entity's expenditures exceed its income or revenue over a specific period, leading to a shortage of available funds. This imbalance directly results in insufficient finances and a reduction in the entity's overall net worth.

The ability to pay current debts is calculated by dividing total liquid assets by total current liabilities. It is:

Answer: Liquidity ratio

The definition provides both the purpose and the calculation for the "liquidity ratio." This financial metric assesses an individual's or company's ability to meet short-term obligations by comparing readily convertible assets (liquid assets) to current debts (current liabilities). A higher ratio indicates a stronger capacity to cover immediate financial commitments.

Total net worth divided by total assets determines how vulnerable a company is to bankruptcy:

Answer: Solvency ratio

The definition describes the "solvency ratio," which measures a company's ability to meet its long-term financial obligations and indicates its overall financial health. By dividing total net worth by total assets, this ratio assesses the proportion of assets financed by equity rather than debt, thus reflecting the company's vulnerability to bankruptcy. A higher solvency ratio suggests greater financial stability.

The relative amount of cash surplus achieved during a given period is shown by dividing cash surplus by net income (after taxes) as follows:

Answer: Savings ratio

The definition describes the "savings ratio," which quantifies the proportion of income that an individual or entity saves. By dividing the cash surplus (money left after expenses) by net income, this ratio indicates the relative amount of income being set aside for future use or investment. It's a key indicator of financial prudence and future financial security.

The ability to pay off debts on time is indicated by the total monthly loan payments divided by the gross (before-tax) income for the previous month.

Answer: Debt service ratio

This definition precisely describes the "debt service ratio," a financial metric used to assess an individual's or entity's capacity to manage their debt obligations. By comparing total monthly loan payments to gross monthly income, it indicates the proportion of income dedicated to servicing debt, thereby reflecting the ability to pay off debts punctually.

A cash budget is a helpful tool for money management, EXCEPT:

Answer: Enhance needles spending so you can increase the funds allocated to savings and investments

A cash budget is designed to help individuals or organizations track income and expenses, identify areas for savings, and allocate funds strategically. "Enhancing needless spending" directly contradicts the purpose of a cash budget, which aims to promote disciplined spending and optimize financial resources for goals like savings and investments, not increase unnecessary expenditures.

What is a budget control schedule?

Answer: A summary that shows how actual income and expenses compare with the various budget categories and where variances (surplus or deficit) exist

A budget control schedule is a critical financial management tool used to monitor and evaluate financial performance against planned budgets. It systematically compares actual income and expenses to the budgeted amounts for each category, clearly highlighting any variances (differences) as either surpluses or deficits. This allows for timely adjustments and better financial control.