Understand Profession, Time Value of Money, Financial Statements | AAEC 3104, Study notes of Agricultural engineering

Download Understand Profession, Time Value of Money, Financial Statements | AAEC 3104 and more Study notes Agricultural engineering in PDF only on Docsity! AAEC 3104: Exam 1 Study Guide What is This Mess? Not perfect, but I hope some guidance as you prepare for Exam 1. The numbered items are directly from the course outline and the CFP Board content list. The comments in bold are my explanation or guidance on where/ what to study or what the concept means. If you have specific questions or need interpretation of my notes, please email. I. Understanding the Profession 1. Financial planning process and introduction to CFP Board’s Financial Planning Practice Standards What is it? What can be accomplished? (pp. 6-8); Review the appendices and chapters 1 and 18 for information on the practice standards (in general) 2. Economic, social, political, and technological environmental impacts to financial planning Discussed all semester…just consider the discussions! 3. Evolution of financial planning From product sales and isolated service (e.g. insurance, investments, estate, tax) to integrated planning within an ensemble or boutique firm. What are typical payment methods (see NAPFA glossary). What is life planning? What is this is a “new” direction or dimension for financial planning 4. Content of a comprehensive plan Know the major content areas: p. 166 + Education and special need planning (i.e., handicapped child, non- traditional household, divorce, terminal illness, job change/loss, disability, etc.) 5. Certification, designations, licenses, and key participants IAR, RIA, RR, ADV, SEC, FINRA, suitability vs. fiduciary duty, Series 6, 7, 65, 66; Insurance exams; Methods of compensation – the IAR and RR comparison table as well as answers to the handout, Understanding the Profession 6. Role of the planner Coach, educator, “hub of the wheel for other professionals (i.e. CPA, attorney, trust company),” product/service provider II. Time Value of Money, Chapter 6 Formula sheet will be provided or you may use the calculator. Problems will be direct, clear, not extremely complicated. III. Financial Statements, Chapter 4 & Powerpoint, Supplement to Chapter 4 1. Statement of financial position: Net worth a. Treatment of retirement resources (pensions are not included; individually managed accounts, for example, IRA or 401(k) accounts are) b. Treatment of taxation and liquidation costs on net worth (Must consider short- or long-term capital gains, if applicable; commissions or other costs to sell; behavioral biases such as sentiment; potential for equity growth, etc.) 2. Cash flow statements (how to calculate) 3. Pro forma (definition, use) 4. Interpretation of statements (e.g. solvency/insolvency, effect of life cycle stage, trends over time, financial ratios and interpretation – together or in isolation. Which ratios: emergency fund; total debt to total net worth; total debt to total assets; front end and back end (also known as debt service), savings ratio and debt limit ratio – for the latter be sure to see the Faith Brooks ratio explanation as debt limit is not discussed in your text) Budgeting and emergency fund 1. Income projection and purchasing power (pro forma statements, inflation, or greater than inflation if relevant, such as for education (7%) or health care, if client is elderly) 2. Discretionary and non-discretionary expenses; also known as flexible/variable expenses and fixed expenses: Know examples of each and know that we attempt to reduce discretionary expenses to increase discretionary cash flow 3. Budgeting techniques: know steps and use of reserve savings fund for occasional expenses 4. Planning discretionary cash flow: Plan to increase based on I&E and budget (if applicable to the client) and then plan to distribute to achieve identified client needs, goals, or if sufficient, then “wants” 5. Emergency fund adequacy: ratio AND factors that determine 3 – 6 month range 6. Liquidity vs. marketability: need liquid assets to meet emergency needs BUT must balance lower return with potentially higher return in other accounts. Also must consider market changes and cost of sale (commissions) on marketability. In other words, you could sell stock or mutual fund shares, which are marketable as other assets, but there is a cost to make them “liquid.” 7. Liquidity substitutes: savings/checking; CDs; money market mutual fund; T-bills; life insurance cash value Financing strategies & asset acquisition 1. Credit reports and FICO: Review information on Powerpoint supplement and brochure from class 2. Types of credit 3. Bankruptcy: Basic definitional differences in Chapters 7 and 13 4. Consumer protection laws 5. Buying vs. leasing: Basic factors to consider for auto leasing 6. Computation of lease payment for auto lease 7. Impact of leasing on financial statements: Leasing is off-balance sheet (no asset, debt), but expense of lease is on I&E statement 8. Mortgage types and selection: ARM (variations on ARMs), fixed, balloon; 15 vs. 30 year; closing costs 9. How much home is affordable? Answer with 28% and 36% ratios 10. Refinancing: process, costs, cash out effect on AMT (see Powerpoints) IV. Income Tax & Tax Planning, Chapter 13 & Powerpoint All 2007 numbers if needed will be provided. For example, standard deduction amounts per filing status will be provided. For the question, you will need to know which filing status applies (single parent with 2 children; single parent whose spouse died this year) and whether to use standard or itemized deductions. 1. Filing status: know the definitions and be able to apply to a case situation 2. Gross income: definition; gross vs. gross taxable; effect of flexible spending account 3. Adjustments: basic examples? 4. Standard/itemized deductions a. Types – examples of itemized deductions by category and/or within category (general) b.Limitations— some are limited by floors [medical, 7.5% or miscellaneous, 2%] OR phase out: total amount can be reduced for higher incomes but scheduled to end 5. Personal and dependency exemptions: Tests; recall phase out can reduce for higher income, but scheduled to end 6. Taxable income – how to calculate 7. Tax liability a. Rate schedule: Capital gains (long and short term; implications for taxes paid) b.Kiddie tax: Understand how applied and when c. Self-employment tax Self-employed pay the employer and the employee share, but half is adjustment to income 8. Tax credits – how used in formula, examples of common tax credits 9. Payment of tax a. Withholding: definition b.Estimated payments: paid quarterly if not withheld by employer OR if withheld by employer, then additional estimated tax paid to offset untaxed 2nd income or unearned income from investments