Cash Flow & Debt Management Flashcards

A client's operating cash flow is $80,000 but net income is $110,000. Which scenario BEST explains this gap?

Answer: Significant increase in accounts receivable

An increase in accounts receivable means revenue was recognized but cash not yet collected, reducing operating cash flow below net income.

When evaluating a client's debt affordability, which ratio directly compares annual debt obligations to gross income?

Answer: Total debt service ratio

The total debt service ratio (TDSR) divides all annual debt payments by gross income, showing what share of income goes to debt.

A client has $15,000 in credit card debt at 22% APR and $20,000 in a car loan at 5%. Using the avalanche method, which debt should be prioritized?

Answer: Credit card, because it has the higher interest rate

The avalanche method targets the highest-interest debt first to minimize total interest paid over time.

Which cash flow statement section reflects mortgage principal payments made by a client?

Answer: Financing activities

Principal repayments on loans are classified as financing cash outflows because they reduce a financial liability.

A client wants to refinance a $300,000 mortgage from 7% to 5.5%. The closing costs are $6,000. Approximately how long is the break-even period if monthly savings are $250?

Answer: 24 months

$6,000 ÷ $250/month = 24 months to recover the refinancing costs.

Which of the following is a characteristic of a negative amortization loan?

Answer: Payments may be less than accruing interest, increasing the balance

Negative amortization occurs when minimum payments don't cover accrued interest, causing the loan balance to grow.

A client earns $6,500/month gross and has total monthly debt payments of $2,080. What is their debt-to-income (DTI) ratio?

Answer: 32%

$2,080 ÷ $6,500 = 32% DTI ratio.