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Conceptual Questions

1. 1. Net worth measures total assets minus total liabilities. It shows your true financial position.
   2. Assets = anything owned (car, savings); liabilities = debts owed (loans, credit cards).
   3. Positive net worth means more assets than debts; negative net worth means more debts than assets. Improve by reducing debts or growing assets.
   4. Cash flow tracks money coming in and out; even wealthy people can run into trouble if spending exceeds income.
   5. Fixed expenses stay constant (rent, insurance); flexible expenses vary (groceries, entertainment). Flexible expenses can be adjusted easily.
   6. Liquidity is how quickly you can access cash. Emergency funds are highly liquid.
   7. DTI measures how much income goes toward debt payments. Lenders use it to assess risk.
   8. Savings ratio is the portion of income saved. Higher savings ratios help reach long-term goals.
   9. Zero-based budgeting assigns every dollar a role until no money remains unallocated.
   10. Seek advisors when facing complex financial choices. Ask about their fee structure and fiduciary duty.

Short Calculations

1. Calculating Liabilities

Total liabilities = Total assets – Equity

Total liabilities = $80 million – $35 million = $45 million

2. Inventory Turnover Ratio

Inventory turnover = Cost of Goods Sold (COGS) ÷ Average Inventory

Inventory turnover = $400,000 ÷ $50,000 = 8

3. Days Sales Outstanding (DSO)

DSO = (Accounts Receivable ÷ Annual Sales) × 365

DSO = ($250,000 ÷ $2,000,000) × 365 = 45.63 days

4. Gross Profit Margin

Gross Profit Margin = (Gross Profit ÷ Revenue) × 100

Gross Profit Margin = ($200,000 ÷ $500,000) × 100 = 40%

5. Quick Ratio

Quick Ratio = (Current Assets – Inventory) ÷ Current Liabilities

Quick Ratio = ($120,000 – $50,000) ÷ $80,000 = 0.875

Scenario-Based Problems

1. 1. Net worth = $16,000 – $2,000 = $14,000
   2. Monthly cash flow = –$200 (negative cash flow)
   3. Checking account is more liquid.
   4. Savings ratio = 750 ÷ 5,000 = 15%
   5. DTI = 1,200 ÷ 4,800 = 25% (healthy range)
   6. Budget balances to zero.
   7. Emergency fund needed = $7,500–$15,000
   8. Easier to cut flexible expenses.
   9. Potential conflict: recommending products for commission rather than client benefit.
   10. Least liquid = D) House

Interactive Challenge

1. 1. B) Low debt and high savings
   2. C) Your monthly spending
   3. B) 3–6 months of expenses
   4. C) Groceries
   5. C) Allocate it intentionally toward goals or savings

Problem Solving 

1. 1. Net worth improvement = $15,000 over five years.
   2. Monthly surplus = $150
   3. Savings = $450; surplus = $50
   4. New savings ratio = 1,000 ÷ 5,500 ≈ 18.18%
   5. Need to save $7,000 more.