Cfp Exam Prep Cards - Section 1 - General Principles Of Financial Planning

Front 1

The 6-steps of the Financial Planning Process are:

Back 1

1.Establish & Define Relationship
2.Gather data / get goals and objectives
3.Analyze Information
4.Develop Plan
5.Implement Plan
6.Monitor Plan

Front 2

The 6-steps of the Financial Planning Process are:

Back 2

1.Establish & Define Relationship
2.Gather data / get goals and objectives
3.Analyze Information
4.Develop Plan
5.Implement Plan
6.Monitor Plan

Front 3

The 7 Principles of Ethics and Prosessional Responsibility

Back 3

•Principle 1 – Integrity
•Principle 2 – Objectivity
•Principle 3 – Competence
•Principle 4 – Fairness
•Principle 5 –Confidentiality
•Principle 6 –Professionalism
•Principle 7 – Diligence

Front 4

What things are found on a balance sheet?

Back 4

Assets and liabilities at FMV (Full market value) / Net Worth

Front 5

What are the three types of assets in the Balance Sheet?

Back 5

1. Cash
2. Invested Assets
3. Use Assets (residence, furniture, autos)

Front 6

What are the two catagories of liabilities listed in LIABILITIES on Balance Sheet

Back 6

1. Current Liabilities (credit card balances)
2. Long-term liabilities (auto loans, mortgages, life insurance loans)

Front 7

What are examples of things that increase / decrease Net Worth on balance sheet?

Back 7

INCREASE
Shares of S&P 500 Index fund increse in value with market

DECREASE
Interest rates have a substatial increase and the client has a big bond portfolio

Front 8

What are examples events which have NO impact (increase or decrease) of Net Worth?

Back 8

1. Paying off debt with cash (repayment of a loan using funds from a savings account)

2. Buying an asset with cash (purchase of an auto 75% financed and 25% down payment - addition of auto increases assets - 25% / down payment decreases cash - 75% / financing increases liabilities - again a wash

Front 9

To determine if A / L should be on balance sheet it should have 3 characteristics:

Back 9

1. A/L fixed and determinable amount
2. Receipt or payment NOT contigent on occurence of particular event
3. Receipt or payment does NOT require future performance or service

Front 10

Be familiar with examples of liquidity (in order of liquidity)

Back 10

1. Mutual Funds
2. Cash value life insurance
3. Real Estate residence
4. Jewelry

keep in mind what kind of primary and secondary markets exist for each asset listed

Front 11

Statement of Financial Condition (Balance Sheet).
Use specific date or range?

Back 11

Specific Date
At OR As of December 31, 2005

NOT

Period beginning / ending Dec 31, 2005

Front 12

Cash Flow statement:
Specific date OR ranges?

Back 12

Ranges
Cash Flows are snapshots of ranges such as year or quarter

Front 13

What are INFLOWS on Cash Flow Statements

Back 13

1. Gross Salaries
2. Interest Income
3. Dividend Income
4. Rental Income
5. Refunds due (Tax)
6. Other incoming tax flows
7. Alimony recieved

Front 14

What are OUTFLOWS on a Cash Flow Statement

Back 14

1. Savings & Investment - by item
2. Fixed outflows (non-discretionary)
3. Fixed outflows (discretionary)
4. Variable outflows (non-discretionary)
5. Variable outflows (discretionary)

Front 15

EXAMPLES of Fixed Non-discretionary outflows

Back 15

House payments
Auto payments
Taxes

Front 16

EXAMPLES of Fixed discretionary outflows

Back 16

Club dues
Utilities

Front 17

EXAMPLES of Variable Non-discretionary outflows

Back 17

Food

Front 18

EXAMPLES of variable discretionary outflows

Back 18

Vacations
Entertainment

Front 19

Inflows - Outflows =

Back 19

Net Discretionary Cash Flow

Front 20

What does a Pro forma statement do?

Back 20

forecasts future balance sheets and cash flow statements

Front 21

Budget: Adjustable or firm?

Back 21

a budget should be adjusted monthly

Front 22

important consideration in preparing a budget is:

Back 22

inflation

Front 23

Individuals close to retirement use budgeting to figure what out?

Back 23

the best wage replacement ratio for retirement

Front 24

Consumer Debt Ratio

Back 24

Consumer debt (credit cards, auto loans and the like) should not exceed 20% of net income (gross income - taxes)

Front 25

Housing Payment Ratio

Back 25

Monthly payments on a home (P, I, T, I) should be no more than 28% of gross income

Front 26

Total Payment Ratio

Back 26

total monthly payments on all debts should be no more than 38% of gross montly income

Front 27

Renters expense - less than?

Back 27

30% of gross monthly income

Front 28

Savings and Investment should equal at least:

Back 28

5% to 10% of gross income not including reinvested dividend and income

Front 29

Bankruptcy - Chapter 11

Back 29

Allowed to reorganize

Debtor remains in possession of assets

subject to oversight of court

Front 30

Bankruptcy - Chapter 13

Back 30

Allowed to set up repayment plan

Allowed to hold on to property as long as making regular payments

file for 13 if faced with foreclosure

debts that cannot be discharged through chapter 7 can be done through 13

Front 31

Bankruptcy - Chapter 7

Back 31

has to do with liquidation (voluntary or involuntary)

extinguishes debtors responsibility for DISCHARGEBL debt

Front 32

What kind of debt is NOT dischargable through Chapter 7 bankruptcy?

Back 32

1. Back taxes (3 years)
2. Those based on fraud
3. Alimony & Child support
4. Student loans

Front 33

Supreme Court ruled recently that creditors cannot take what kind of asset from debtors in bankruptcy?

Back 33

Retirement plan assets

Front 34

Lifetime Learning credit allows how much of a credit per return? (2006)

Back 34

up to $2,000 (20% of first $10,000)

Front 35

Lifetime Learning credit avaliable for what level of education?

Back 35

Available for all years of postsecondary education and for courses to acquire or improve job skills

Front 36

Lifetime Learning Credit avaliable for how many years?

Back 36

unlimited

Front 37

Lifetime Learning qualified expenses include tuition. What is not qualified?

Back 37

Books and supplies do not qualify unless condition of enrollment

Front 38

How much credit is avaliable for HOPE Scholarship credit? (2006)

Back 38

Up to $1,500 credit per eligible student

Front 39

HOPE Scholarship Credit how long can credit be taken? (2006)

Back 39

1st & 2nd year of undergrad studies

Must be enrolled at least part-time

Front 40

Coverdell (ESAs) must be withdrawn by what age?

Back 40

30

Front 41

Coverdell (ESAs) maximum contribution amount?

Back 41

$2,000

Front 42

Savings Bonds interest exempt from what if used for qualified edu costs in same year cashed in?

Back 42

FEDERAL TAX - always excempt from State Tax

Front 43

Quanitative Data

Back 43

data tells you where the client is and what it will take to get him where he wants to go.
Fact finding interview

Front 44

Qualatative Data

Back 44

data tells you why the client wants to reach the goal. Found using a gols and objectives interview

Front 45

Emergency Fund Planning: Marketability

Back 45

the ease with which an asset may be bought or sold

Front 46

Emergency Fund Planning:
Liquidity

Back 46

the ease with which assets can be converted into cash with little risk of principle

Front 47

Emergency Fund Planning:
Real Estate
Is it liquid?
Is it marketable?

Back 47

1) Considered illiquid because it may take a while to sell and asking price need to be lowered
2) Marketable because it is relatively easy to sell a house if priced below market value

Front 48

Emergency Fund Planning:
Adequacy of reserves -
One-income family?
Two-income family?

Back 48

One-income family - 6 months
Two-income family - 3 months

Front 49

What are the four life cycle phases?

Back 49

1) Accumulation
2) Consolidation
3) Spending
4) Gifting (may mirror spending phase)

Front 50

Pell Grants

Back 50

1) given on basis of financial need

2) maximum of $3750 (undergrads only)

Front 51

Federal Supplemental Education Opportunity Grants (FSEOGs)

Back 51

1) given on basis of financial need

2) max amount $4,000

Front 52

Perkins Loans

Back 52

1) funded by Feds, administered by schools

2) limit $4000 undergrads

3) limit $6000 grads

4) 5% w/ 9 mo grace period

Front 53

CollegeSure CD

Back 53

1) Gauranteed to keep up with cost of college
2) Minimum 4%
3) if scholarship parents recieve $ back

Front 54

Education Savings:
Ownership of assets - Financial Aid

What is methodology for formula known as expected family contribution?

Back 54

Parents - as much as 47% of income - only 5.6% of assets

Students - 35% of assets

Front 55

Section 2503(c) Minors Trust

Back 55

*Allows the transferred trust property to be treated as if it were a gift of present interest to child

Front 56

Why is a 2503(c) Minors Trust used?

Back 56

* Grantors income tax bracket is high and recipients tax bracket is low

* Grantor doesnt want an appreciated asset included in his gross estate

Front 57

How is 2503(c) taxed?

Back 57

If income is distributed every year - tax to recipient

If income accumulates - taxed to the trust

Front 58

Opportunity cost

Back 58

the cost of foregone income that results from making an economic decision to purchase a piece of equipment

Front 59

Margin cost

Back 59

the cost to produce one more unit of product

Front 60

Variable cost

Back 60

cost that fluctuate with some cost driver (e.g. units produced)

Front 61

Fixed costs

Back 61

costs that do not change as a result of producing additional units (e.g. rent)

Front 62

Cost of Capital

Back 62

internal measure of a companies borrowing cost from stockholders or outside creditors

Front 63

Law of demand

Back 63

the lower the price the more consumers will buy

Front 64

LAW OF DEMAND
As price of a product increases what happens

Back 64

consumer will be able to find more substitutes and will be more responsive to price when more viable substitutions are avaliable

Front 65

LAW OF DEMAND
What is the difference between Change in Demand vs. Change in Quantity Demanded?

Back 65

Change in deman is a shift in the entire demand curve

Change in quantity demanded is a movement along the same demand curve in response to a price change

Front 66

LAW OF DEMAND
What are examples of Change in Demand? (shift in curve)

Back 66

Changes in:
Consumer income
Consumer expectations
Demographic Changes
Consumer taste and preferences
# of consumers in a market

Front 67

LAW OF DEMAND
What are examples of Change in quantity demanded (movement along demand curve)?

Back 67

Gasoline consumption increases as some of the taxes on gasoline are lowered

Front 68

Law of Supply

Back 68

the higher the price the more producers will produce

Front 69

LAW OF SUPPLY
Elasticity:

Back 69

Supply curve is elisatic when a price change leads to a great change in quantity supplied (think of rubber band)

Front 70

LAW OF SUPPLY
Inelasticity:

Back 70

Supply curve is inelastic when a price change produces only a small change in supply (think of rubber band)

Front 71

LAW OF SUPPLY
Factors that SHIFT the supply curve include:

Back 71

(a) Changes in resource prices
(b) Changes in technology
(c) Natural disasters
(d) other disruptive events

Front 72

LAW OF SUPPLY
An inferior good will have:

Back 72

negative income elasticity (as income increases, the quantity demanded will decrease)

Front 73

LAW OF SUPPLY
A normal good will have:

Back 73

positive income elasticity (as income increases, the quantity demanded will increase)

Front 74

Price controls

Back 74

the attempt to adjust the balance between supply and demand

Front 75

Market price

Back 75

the price at which a willing buyer and a willing seller acheive their objective