FPQP FPQP Financial Statement Analysis 2 — Questions and Answers
Question 1: A personal income statement primarily shows:
- What a client owns and owes
- Income received and expenses paid over a period (Correct answer)
- Investment returns versus benchmarks
- Insurance coverage versus needs
Correct 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.
Question 2: Discretionary cash flow on a personal income statement equals:
- Gross income minus taxes
- Total income minus fixed expenses
- Total income minus all expenses (fixed and variable) (Correct answer)
- Net income minus savings contributions
Correct 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.
Question 3: A client's debt-to-income (DTI) ratio is calculated by dividing:
- Total debt by net worth
- Monthly debt payments by gross monthly income (Correct answer)
- Annual debt by annual savings
- Total liabilities by total assets
Correct 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%.
Question 4: Which financial statement would a paraplanner use to identify opportunities to increase a client's savings rate?
- Net worth statement
- Investment policy statement
- Personal income statement (Correct answer)
- Insurance inventory
Correct 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.
Question 5: A client has gross annual income of $120,000 and annual debt payments of $30,000. What is their debt-to-income ratio?
- 15%
- 20%
- 25% (Correct answer)
- 30%
Correct answer: 25%
$30,000 ÷ $120,000 = 25%, indicating one-quarter of gross income is committed to debt service.
Question 6: When comparing two clients' balance sheets, which metric best measures financial leverage?
- Net worth
- Savings rate
- Debt-to-asset ratio (Correct answer)
- Investment return rate
Correct 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.
FPQP FPQP Financial Statement Analysis 2
A personal income statement primarily shows: