FPQP Financial Statement Analysis Flashcards

A client's savings rate is calculated as:

Answer: Total savings divided by gross income

The savings rate is typically expressed as total annual savings (including retirement contributions) divided by gross annual income.

Which component would NOT appear on a personal balance sheet?

Answer: Monthly utility bill

A monthly utility bill is an expense that flows through the income statement; only assets and liabilities appear on the balance sheet.

A paraplanner reviewing a client's balance sheet notices that investment assets represent only 10% of total assets. This suggests:

Answer: The client may be over-concentrated in illiquid assets like real estate

A very low investment-assets-to-total-assets ratio often indicates most wealth is held in illiquid forms such as real estate or a business, limiting flexibility.

Which trend in a client's annual net worth statements would be most concerning to a paraplanner?

Answer: Net worth declining year over year

Declining net worth year over year signals that liabilities are growing faster than assets, indicating unsustainable spending or debt accumulation.

The investment assets to net worth ratio is a useful metric because it indicates:

Answer: How much of net worth is held in productive, growth-oriented assets

This ratio shows how much of total net worth consists of financial investments that can generate growth and income, versus illiquid or personal-use assets.

A paraplanner preparing a comprehensive financial plan should update a client's net worth statement:

Answer: At every annual review at minimum

Annual updates to the net worth statement ensure the financial plan reflects current values, new liabilities, and changes in the client's overall financial position.