RFC Cash Flow & Debt Management 2 — Questions and Answers
Question 1: A client's operating cash flow is $80,000 but net income is $110,000. Which scenario BEST explains this gap?
- Large depreciation add-back
- Significant increase in accounts receivable (Correct answer)
- Decrease in accounts payable
- High capital expenditures
Correct 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.
Question 2: When evaluating a client's debt affordability, which ratio directly compares annual debt obligations to gross income?
- Current ratio
- Debt-to-equity ratio
- Debt service coverage ratio
- Total debt service ratio (Correct answer)
Correct 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.
Question 3: 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?
- Car loan, because it has a higher balance
- Credit card, because it has the higher interest rate (Correct answer)
- Both equally to reduce total balance faster
- Neither; consolidate first
Correct 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.
Question 4: Which cash flow statement section reflects mortgage principal payments made by a client?
- Operating activities
- Investing activities
- Financing activities (Correct answer)
- Non-cash activities
Correct answer: Financing activities
Principal repayments on loans are classified as financing cash outflows because they reduce a financial liability.
Question 5: 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?
- 12 months
- 18 months
- 24 months (Correct answer)
- 36 months
Correct answer: 24 months
$6,000 ÷ $250/month = 24 months to recover the refinancing costs.
Question 6: Which of the following is a characteristic of a negative amortization loan?
- The principal balance decreases faster than a standard loan
- Payments may be less than accruing interest, increasing the balance (Correct answer)
- Interest rate adjusts downward over time automatically
- Prepayment penalties are never applied
Correct 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.
Question 7: A client earns $6,500/month gross and has total monthly debt payments of $2,080. What is their debt-to-income (DTI) ratio?
- 24%
- 28%
- 32% (Correct answer)
- 38%
Correct answer: 32%
$2,080 ÷ $6,500 = 32% DTI ratio.
RFC Cash Flow & Debt Management 2
A client's operating cash flow is $80,000 but net income is $110,000.
Which scenario BEST explains this gap?