FPQP FPQP Financial Statement Analysis 1 — Questions and Answers
Question 1: Which personal financial statement shows a client's assets, liabilities, and net worth at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (net worth statement) (Correct answer)
- Statement of changes in equity
Correct 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.
Question 2: A client's net worth is calculated as:
- Total income minus total expenses
- Total assets minus total liabilities (Correct answer)
- Total savings minus total debt payments
- Gross income minus taxes
Correct answer: Total assets minus total liabilities
Net worth equals total assets (what a client owns) minus total liabilities (what a client owes).
Question 3: Which ratio measures how well a client can cover short-term obligations with liquid assets?
- Debt-to-income ratio
- Savings rate
- Liquidity ratio (Correct answer)
- Investment assets to net worth ratio
Correct answer: Liquidity ratio
The liquidity ratio divides liquid assets by monthly living expenses, showing how many months a client can sustain spending without income.
Question 4: On a personal balance sheet, a client's home mortgage would be classified as:
- A current asset
- A long-term liability (Correct answer)
- A current liability
- An investment asset
Correct answer: A long-term liability
A mortgage is a long-term liability because repayment extends beyond one year, distinguishing it from short-term obligations.
Question 5: A client has $80,000 in liquid assets and monthly living expenses of $4,000. What is their liquidity ratio?
- 10 months
- 15 months
- 20 months (Correct answer)
- 25 months
Correct answer: 20 months
$80,000 ÷ $4,000 = 20 months, meaning the client can cover 20 months of expenses with liquid assets alone.
Question 6: Which of the following is classified as a liquid asset on a personal balance sheet?
- Primary residence
- 401(k) account balance
- Checking account balance (Correct answer)
- Collectibles
Correct answer: Checking account balance
Checking account balances are immediately accessible without penalty or conversion delay, making them the most liquid of personal assets.
FPQP FPQP Financial Statement Analysis 1
Which personal financial statement shows a client's assets, liabilities, and net worth at a specific point in time?