Mcs*2100 Chapter 1

Front 1

definition of personal financial planning

Back 1

process of managing your money to achieve economic satisfaction

Front 2

what are the 4 advantages of personal financial planning?

Back 2

- increased effectiveness in maintaining financial resources

- increased control of finances by avoiding debt

- improved personal relationships

- sense of freedom from financial worries

Front 3

what are the 6 steps of the financial planning process?

Back 3

1. determine your current financial situation
2. develop financial goals
3. identify alternative courses of action
4. evaluate alternatives
5. create and implement a financial action plan
6. re-evaluate and revise the financial plan

Front 4

Financial goals represent ______

Back 4

what you hope to achieve with your money

Front 5

Four requirements for financial goals

Back 5

1. Realistic
2. Specific dollar terms
3. Time frames
4. priority list

Front 6

opportunity cost

Back 6

what you give up by making a choice

Front 7

financial opportunity costs are measured in terms of the ____ ___ of ____

Back 7

time value of money

Front 8

what is the time value of money

Back 8

the increases in an amount of money as a result of interest earned

Front 9

time, effort and health are examples of what kind of costs?

Back 9

personal opportunity costs

Front 10

interest, liquidity and safety are examples of what kind of costs?

Back 10

financial opportunity costs

Front 11

what are the 2 main reasons Canadians have money problems?

Back 11

1. poor planning and weak money management habits

2. product availability, advertisement and selling efforts

Front 12

short-term goals are to be achieved within _____ or so

Back 12

a year

Front 13

intermediate goals have a time frame of ___ to ____ years

Back 13

2 to 5 years

Front 14

long term goals involve financial plans that are more than ___ years off

Back 14

5

Front 15

consumable-product goals occur on a ____ basis and involve items that are used up relatively _____

Back 15

periodic, quickly.

Front 16

what are durable products? how often are they purchased?

Back 16

expensive items like cars, infrequently purchased

Front 17

examples of intangible purchase goals

Back 17

relationships, education

Front 18

the life cycle approach is the idea that the average person goes through ___ basic stages in personal finance management

Back 18

four

Front 19

early years of the 'life cycle' goals:

Back 19

- creating an emergency fund
- saving for down payment
- purchasing life insurance

Front 20

middle years (30s-50s) of the life cycle goals:

Back 20

- building wealth by paying mortgage
- increasing savings and investments

Front 21

middle age goals:

Back 21

-providing adequate retirement fund

Front 22

retirement years focus

Back 22

management of previously acquired wealth

Front 23

financial goal factors to be taken into account (4)

Back 23

1. realistic
2. specific and measurable
3. time frame
4. indicate type of action to be taken

Front 24

economics definition

Back 24

the study of how wealth is created and distributed

Front 25

what is the role of the bank of canada?

Back 25

maintaing an adequate money supply by influencing borrowing, interest rates and the buying or selling of government securities

Front 26

what is the main cause of inflation?

Back 26

an increase in demand without a comparable increase in supply

Front 27

what is the consumer price index?

Back 27

a measure of the average change in the prices urban consumers pay for a fixed "basket" of goods and services

Front 28

compounding

Back 28

interest earned on previously earned interest

Front 29

intra-period compounding

Back 29

compounding more than once a year

Front 30

present value

Back 30

the current value for a future amount based on certain interest rate and a certain time period AKA discounting

Front 31

liquidity

Back 31

the ability to readily convert financial resources into cash without a loss in value

Front 32

bankruptcy definition

Back 32

set of federal laws that allow you to either restructure your debts or remove certain debts

Front 33

financial plan definition

Back 33

formalized report that summarizes your current financial situation, analyzes financial needs and recommends future financial activities

Front 34

three essential needs and skills to ensure financial security:

Back 34

1. well-conceived spending plan
2. insurance protection
3. informed about tax and investment alternatives

Front 35

money management definition

Back 35

day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

Front 36

what are the 3 major money management activities?

Back 36

1. Store and maintain documents

2. create personal financial statements (balance sheets, statements of income/outcome)

3. create a budget

Front 37

what is the purpose of a home file?

Back 37

keeping records for current needs

Front 38

important financial records should be kept in a more secure place like a financial institution called a

Back 38

safety deposit box

Front 39

how many keys does a safety deposit box contain? who keeps them?

Back 39

2- one for you and one for the financial institution

Front 40

how long should you keep tax returns?

Back 40

6 years

Front 41

5 main purposes of personal financial statements

Back 41

- summarize value of items and amounts owed
- track cash inflows by source and outflows by type
- identify strengths/weaknesses
- measure progress towards goals
- provide data for income tax return/applying for credit

Front 42

what is a personal balance sheet?

Back 42

reports what you own and what you owe

Front 43

liquid assets definition

Back 43

cash and items of value that can be converted easily to cash (money in chequing/savings account)

Front 44

what are 4 main categories of assets?

Back 44

liquid assets, real estate, personal possession, investment assets

Front 45

what are investment assets?

Back 45

funds set aside for long-term financial needs

Front 46

liabilities

Back 46

amounts owed to others (generally not including items not yet due)

Front 47

current liabilities

Back 47

debts needed to be paid within a short time

Front 48

long-term liabilities

Back 48

debts not having to be paid in full until more than a year from now

Front 49

insolvency

Back 49

the inability to pay debts when they're due because liabilities exceed te value of assets

Front 50

cash flow

Back 50

actual inflow and outflow of cash during a given time period

Front 51

most important cash inflow comes from

Back 51

employment income

Front 52

what is a cash flow statement?

Back 52

financial statement that summarizes cash receipts and payments for a period

- provides data on spending patterns

Front 53

what is 'take-home pay'?

Back 53

earnings after deductions for taxes and other items

Front 54

discretionary income definition

Back 54

money left over after paying for necessities

Front 55

2 major categories for cash outflows

Back 55

fixed expenses and variable expenses

Front 56

what are fixed expenses

Back 56

payments that don't vary from month to month (e.g. rent, tv service fees)

Front 57

what are variable expenses?

Back 57

flexible payments that change from month to month (e.g. food, utilities)

Front 58

what is a deficit cash flow?

Back 58

more cash goes out than in during a given month

Front 59

debt ratio

Back 59

liabilities divided by net worth

0.5 is the max acceptable limit

Front 60

current ratio

Back 60

liquid assets divided by current liabilities

high ratio is desirable to have cash available

Front 61

liquidity ratio

Back 61

liquid assets divided by monthly expenses

indicates number of months in which living expenses can be paid if emergency arises

Front 62

debt-payments ratio

Back 62

monthly credit payments divided by take-home pay

indicates how much person's earning's goes for debt payments
- recommend less than 20%

Front 63

savings ratio

Back 63

amount saved each month divided by gross income

recommend savings of at least 10%

Front 64

lifestyle is influenced by what 3 factors

Back 64

Career
Family
Values

Front 65

what's the common budgeting period?

Back 65

a month

Front 66

what's the suggested number of months to represent in an emergency fund?

Back 66

3-6 months

Front 67

consumer price index

Back 67

measures the general price level of consumer goods and services in Canada

Front 68

budget variance

Back 68

the difference between the amount budgeted and the actual amount received or spent

Front 69

T/F Canada has a low savings rate among industrial nations. If so, why?

Back 69

True- because many do not have an adequate amount set aside for emergencies

Front 70

pooled income

Back 70

both incomes combined, bills paid from pool

Front 71

sharing the bills

Back 71

each person responsible for paying predetermined bills

Front 72

50/50

Back 72

each person contributes equal amount of pool to cover shared expenses

Front 73

proportionate contributions

Back 73

each partner contributes a percentage of his/her income

Front 74

what are the 4 major tax categories

Back 74

property
earnings
wealth
purchases

Front 75

what is excise tax?

Back 75

tax imposed on specific goods and services such as gas, cigarettes, alcohol, tires and air travel

Front 76

what is the capital gains tax?

Back 76

the tax put on an increase in a person's wealth

Front 77

up to what percentage of monetary gains are taxable?

Back 77

50%

Front 78

taxable income

Back 78

amount of income tax owed and comparing amount with income tax payments withheld or made during the year

Front 79

employment income

Back 79

compensation for personal effort (salaries, commissions, bonuses)

Front 80

net business income

Back 80

net income from an activity that is carried out for profit, after expenses have been deducted

Front 81

investment income

Back 81

income from property, including income in the form of interest, dividends and rents net of expenses

Front 82

taxable capital gains

Back 82

net gains from the sale of capital assets such as stocks, bonds and real estate

Front 83

what is the "OAS clawback"

Back 83

payments of old age security repaid at 15% per every dollar of net income in excess of 63,511

Front 84

deductions from income + examples

Back 84

expenses deducted from total income such as child care expenses, union dues, disability support payments, investment counseling fees and certain employment-related expenses

Front 85

security options deduction

Back 85

one half of the stock option benefit included under employment income

Front 86

capital gains deduction

Back 86

one half of the eligible capital gains exemption

Front 87

net capital losses of prior years

Back 87

used to offset capital gains reported under total income that are not eligible for the capital gains deduction

Front 88

marginal tax rate

Back 88

rate of tax paid on next dollar of taxable income

Front 89

alternative minimum tax

Back 89

makes sure those who receive tax breaks still pay fair share of taxes

Front 90

tax credit

Back 90

an amount subtracted directly from amount of taxes owing

Front 91

non-refundable tax credits

Back 91

subtracted from amount of taxes owed but don't reduce net federal tax below zero

Front 92

T/F each province and territory has its own refundable and non-refundable tax credits

Back 92

true

Front 93

when does source withholding occur?

Back 93

when employers are require d to withhold tax at source and remit it to the CRA

Front 94

what form shows the amount withheld and the tax owed is either the amount you must pay or the amount you will receive

Back 94

T4 form

Front 95

what day are tax returns due to be filed by? what if you or your spouse has business income?

Back 95

April 30
June 15

Front 96

what happens if you do not submit your tax returns on time?

Back 96

adding an additional 5% penalty on any balance owing plus adding 1% of the unpaid balance for each full month the return is late to a max of 12 months

Front 97

T/F filing returns without paying the balance owing avoids you paying the 5% penalty

Back 97

true

Front 98

tax evasion

Back 98

the use of illegal actions to reduce one's taxes

Front 99

T/F CRA never modifies the tax return and filing procedures

Back 99

false- modified yearly

Front 100

what is a tax audit?

Back 100

detailed examination of your tax return from the CRA

Front 101

what's a desk audit?

Back 101

Inquiry mailed asking you to clarify or document

Front 102

what's a Field Audit?

Back 102

visits you at home/business/accountant's office to have access to records

Front 103

T/F auditor has access to all your information

Back 103

False- only to specific information

Front 104

T/F the reassessment cannot be issued more than 3 years from the last assessment

Back 104

true- except in cases of fraud or signing a waiver about an issue

Front 105

what is the highest possible level of appear within the CRA?

Back 105

appeals officer