Personal Finance (D363)
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Free Personal Finance (D363) Questions
What is the formula used to calculate net worth
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Assets plus liabilities
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Assets minus liabilities
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Liabilities minus assets
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Assets divided by liabilities
Explanation
Correct Answer
B. Assets minus liabilities
Explanation
Net worth is calculated by subtracting liabilities (what you owe) from assets (what you own). This formula gives an individual’s overall financial position, providing insight into whether their assets outweigh their debts or vice versa. If the result is positive, it indicates a positive net worth, meaning assets exceed liabilities. If it’s negative, the individual owes more than they own, which represents a negative net worth.
Why other options are wrong
A. Assets plus liabilities
This option is incorrect because adding liabilities to assets does not give a true representation of an individual's net worth. In fact, it would overstate the value since liabilities represent what is owed, which should be subtracted, not added, to get a clear picture of net worth.
C. Liabilities minus assets
This is the reverse of the correct formula. Subtracting assets from liabilities would give the negative value of net worth, essentially showing how much more an individual owes than what they own, which is not the standard way to calculate net worth.
D. Assets divided by liabilities
This option is incorrect because dividing assets by liabilities does not provide a meaningful financial figure for net worth. The correct method is to subtract liabilities from assets to understand the difference between what you own and what you owe.
Which of the following best describes the concept of financial literacy
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The ability to calculate interest rates on loans and savings accounts
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The understanding of financial principles that enables individuals to make informed decisions about their money
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The process of filing taxes and understanding tax codes
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The knowledge of how to invest in the stock market
Explanation
Correct Answer
B. The understanding of financial principles that enables individuals to make informed decisions about their money
Explanation
Financial literacy refers to a broad understanding of financial concepts, such as budgeting, saving, investing, and managing debt. It empowers individuals to make informed decisions about their financial well-being, helping them manage money effectively, plan for the future, and avoid financial pitfalls.
Why other options are wrong
A. The ability to calculate interest rates on loans and savings accounts: While knowing how to calculate interest is a part of financial literacy, the concept itself is much broader, involving a wide range of financial principles beyond just interest calculations.
C. The process of filing taxes and understanding tax codes: Tax knowledge is an important financial skill, but financial literacy encompasses more than just tax filing. It includes understanding various aspects of personal finance such as budgeting, saving, and investing.
D. The knowledge of how to invest in the stock market: Investing is an aspect of financial literacy, but it is just one part of the broader concept. Financial literacy includes many other topics, such as budgeting, debt management, and saving for retirement.
What type of expense do transportation costs fall under
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Variable
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Contractual
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Inflexible
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Fixed
Explanation
Correct Answer:
A. Variable
Explanation:
Transportation costs are typically considered a variable expense because they can change based on factors such as the frequency of travel, fuel prices, or the type of vehicle used. These costs are not fixed and can fluctuate depending on usage or external conditions.
Why other options are wrong:
B. Contractual – Contractual expenses are typically those tied to fixed agreements or contracts (e.g., rent or service subscriptions). Transportation costs usually don't fall under this category, as they can fluctuate.
C. Inflexible – While transportation costs can sometimes be difficult to adjust immediately, they are not considered inflexible. The term "inflexible" refers to expenses that can't be easily altered in the short term, like fixed housing costs.
D. Fixed – Fixed expenses are regular costs that do not change from month to month, like rent or insurance. Since transportation costs fluctuate based on usage, they are not considered fixed.
Which of the following is NOT mentioned as a type of financial service in the text
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Financial planning
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Retirement planning
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Credit cards
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Insurance
Explanation
Correct Answer
C. Credit cards
Explanation
Credit cards are typically categorized under personal financial management or lending services rather than being directly part of financial services like financial planning, retirement planning, or insurance, which are more holistic and long-term financial strategies.
Why other options are wrong
A. Financial planning
Financial planning is a core financial service that helps individuals manage their finances, set goals, and make investment decisions. It involves comprehensive strategies for budgeting, saving, and investing.
B. Retirement planning
Retirement planning is a specialized financial service aimed at helping individuals prepare for retirement through savings, investments, and various retirement accounts like IRAs and 401(k)s.
D. Insurance
Insurance is a critical financial service that helps protect individuals and families from financial risk. It covers a wide range of needs, including life, health, and property insurance, and is integral to comprehensive financial planning.
Which of the following items is NOT mentioned as part of the financial records to keep
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Tax filings
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Personal diaries
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Balance sheets
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Receipts for donations
Explanation
Correct Answer
B. Personal diaries
Explanation
Personal diaries are not generally considered part of the essential financial records to keep. While they might contain personal reflections or thoughts, they do not provide necessary financial documentation for tax, legal, or financial planning purposes. Financial records typically include tax filings, balance sheets, and receipts for donations.
Why other options are wrong
A. Tax filings
Tax filings are an essential part of financial records. They are important for future reference, especially when filing taxes or for audits. Keeping records of tax filings is recommended for at least several years.
C. Balance sheets
Balance sheets are a key component of financial records. They provide a snapshot of an individual's or a business’s financial position by detailing assets, liabilities, and equity. They are necessary for financial planning and reporting.
D. Receipts for donations
Receipts for donations are important financial records. They are needed for tax purposes as they can be used to claim charitable deductions on income taxes. It is advisable to keep receipts for donations for record-keeping and potential auditing.
Individuals can develop habits that allow them to effectively manage both saving and spending. This means that one cannot be both a saver and a spender
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True
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False
Explanation
Correct Answer
B. False
Explanation
It is possible for individuals to be both savers and spenders. The key is managing these habits effectively, so one can save money while still enjoying spending on necessities and discretionary items. Developing a balanced approach to both saving and spending is crucial to financial success. The idea that a person cannot be both is a misconception, as many individuals successfully navigate both behaviors by budgeting and setting financial goals.
Why other options are wrong
A. True
This option is incorrect because it presents the idea that a person must strictly choose between saving and spending. In reality, individuals can manage both through smart financial planning and discipline. The ability to save while also enjoying some spending is a part of good financial management.
What type of business is Sterling Plus, which provides cash against a personal check
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Payday lender
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Secured credit card
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Payday loan program
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Pawn shop
Explanation
Correct Answer
A. Payday lender
Explanation
Sterling Plus, which provides cash against a personal check, is classified as a payday lender. Payday lenders offer short-term loans that are typically due on the borrower's next payday. They may cash personal checks for a fee, which functions as a short-term loan.
Why other options are wrong
B. Secured credit card
A secured credit card requires a deposit to secure a line of credit and does not involve cashing personal checks for short-term loans.
C. Payday loan program
While Sterling Plus may be related to payday loans, the company specifically offers cash against a personal check, which is characteristic of payday lenders rather than a formal payday loan program.
D. Pawn shop
Pawn shops offer loans in exchange for physical collateral, not personal checks. Sterling Plus's model of cashing checks does not align with a pawn shop business structure.
What is the purpose of keeping a master list of important documents and their locations
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To manage investment portfolios
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To quickly locate essential records in emergencies
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To keep track of all financial transactions
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To document family medical history
Explanation
Correct Answer
B. To quickly locate essential records in emergencies
Explanation
A master list of important documents and their locations is a crucial part of organizing your financial and personal records. This list ensures that in the event of an emergency, such as illness, death, or disaster, you can quickly locate vital documents such as the will, insurance policies, bank account details, and medical records. Having a centralized document list allows for faster decision-making and reduces stress during emergencies.
Why other options are wrong
A. To manage investment portfolios: While investment portfolios are important, a master list of documents is not specifically for portfolio management. It is more focused on locating essential documents across various aspects of your life.
C. To keep track of all financial transactions: Keeping track of financial transactions is important for budgeting and accounting but is not the main purpose of the master list. The master list helps you locate key documents, not transactions.
D. To document family medical history: While medical records may be part of the master list, the primary purpose of the list is to locate important documents across all areas, not just to document family medical history.
What will the cash flow statement show if expenses exceed income for the month
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A variable loss
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A surplus
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A net gain
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A deficit
Explanation
Correct Answer: D. A deficit
Explanation:
A cash flow statement shows whether an individual or business has a surplus or deficit in their cash flow. If expenses exceed income, this results in a deficit, meaning more money is being spent than earned.
Why other options are wrong:
A. A variable loss – A loss could be described as a deficit, but "variable loss" is not a standard term used in cash flow statements.
B. A surplus – A surplus occurs when income exceeds expenses, which is the opposite of the situation described.
C. A net gain – A net gain would only occur if income exceeded expenses, not the other way around. A deficit indicates a negative financial result.
Which of the following is NOT mentioned as a type of financial service
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Securities investments
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Real estate investment trusts
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Investment banking
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Mutual funds
Explanation
Correct Answer: B. Real estate investment trusts
Explanation:
While real estate investment trusts (REITs) are a type of investment option, they are not typically considered a financial service. Financial services generally refer to the broad range of services provided by institutions such as investment banking, mutual funds, and securities investments, which facilitate investment activities and financial planning. REITs, on the other hand, are a specific investment vehicle that invests in real estate assets.
Why other options are wrong:
A. Securities investments – Securities investments are indeed a financial service that involves the buying and selling of stocks, bonds, and other financial instruments.
C. Investment banking – Investment banking is a key financial service that helps individuals and organizations raise capital, manage investments, and engage in mergers and acquisitions.
D. Mutual funds – Mutual funds are an investment option and also a financial service provided by investment firms to pool money from investors and invest in diversified portfolios.
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