FPQP Financial Statement Analysis Flashcards
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Read the first 6 FPQP Financial Statement Analysis flashcards as text
Which personal financial statement shows a client's assets, liabilities, and net worth at a specific point in time?
Answer: Balance sheet (net worth statement)
A personal balance sheet, or net worth statement, is a snapshot showing total assets minus total liabilities equaling net worth on a given date.
A client's net worth is calculated as:
Answer: Total assets minus total liabilities
Net worth equals total assets (what a client owns) minus total liabilities (what a client owes).
Which ratio measures how well a client can cover short-term obligations with liquid assets?
Answer: Liquidity ratio
The liquidity ratio divides liquid assets by monthly living expenses, showing how many months a client can sustain spending without income.
On a personal balance sheet, a client's home mortgage would be classified as:
Answer: A long-term liability
A mortgage is a long-term liability because repayment extends beyond one year, distinguishing it from short-term obligations.
A client has $80,000 in liquid assets and monthly living expenses of $4,000. What is their liquidity ratio?
Answer: 20 months
$80,000 ÷ $4,000 = 20 months, meaning the client can cover 20 months of expenses with liquid assets alone.
Which of the following is classified as a liquid asset on a personal balance sheet?
Answer: Checking account balance
Checking account balances are immediately accessible without penalty or conversion delay, making them the most liquid of personal assets.
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