FPQP Financial Statement Analysis Flashcards

A personal income statement primarily shows:

Answer: Income received and expenses paid over a period

A personal income statement summarizes cash inflows (income) and outflows (expenses) over a defined time period to reveal discretionary cash flow.

Discretionary cash flow on a personal income statement equals:

Answer: Total income minus all expenses (fixed and variable)

Discretionary cash flow is what remains after all income is received and all expenses—fixed and variable—are paid.

A client's debt-to-income (DTI) ratio is calculated by dividing:

Answer: Monthly debt payments by gross monthly income

The DTI ratio is monthly debt service divided by gross monthly income, and lenders typically prefer a ratio below 36%.

Which financial statement would a paraplanner use to identify opportunities to increase a client's savings rate?

Answer: Personal income statement

The personal income statement reveals income sources and expense patterns, making it the best tool for finding areas to cut spending or redirect cash to savings.

A client has gross annual income of $120,000 and annual debt payments of $30,000. What is their debt-to-income ratio?

Answer: 25%

$30,000 ÷ $120,000 = 25%, indicating one-quarter of gross income is committed to debt service.

When comparing two clients' balance sheets, which metric best measures financial leverage?

Answer: Debt-to-asset ratio

The debt-to-asset ratio (total liabilities ÷ total assets) measures what proportion of assets are financed by debt, directly reflecting financial leverage.