Certified Financial Planner (CFP) General Principles of Financial Planning and Cash Flow Syllabus

General Principles of Financial Planning and Cash Flow syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for General Principles of Financial Planning and Cash Flow in Certified Financial Planner (CFP), not a summary of it.

1. 1

   Financial Statements and Budgeting

   4 topics

   • Personal Statement of Financial Position
     • Assets classification (cash, invested, personal use)
     • Liabilities and net worth calculation
   • Cash Flow Statement Preparation
     • Inflows and fixed vs. discretionary outflows
     • Surplus and deficit analysis
   • Budgeting and Emergency Fund Planning
   • Financial Ratio Analysis
     • Liquidity and solvency ratios
     • Debt and savings ratios
2. 2

   Time Value of Money Applications

   4 topics

   • Present Value and Future Value of Lump Sums
   • Annuities and Annuities Due
     • Ordinary annuity calculations
     • Serial payments and inflation-adjusted streams
   • Net Present Value and Internal Rate of Return
   • Uneven Cash Flow and Goal Funding Calculations
3. 3

   Debt and Credit Management

   4 topics

   • Consumer and Mortgage Debt Strategies
     • Fixed vs. adjustable-rate mortgages
     • Refinancing analysis
   • Credit Scores and Reports
   • Bankruptcy and Debt Relief Options
   • Student Loan Repayment Planning
4. 4

   Economic Concepts and Education Planning

   4 topics

   • Economic Indicators and Business Cycles
     • GDP, inflation, and unemployment
     • Monetary and fiscal policy
   • Funding Higher Education
     • 529 plans and Coverdell ESAs
     • Financial aid (FAFSA, EFC/SAI)
   • Education Tax Benefits
     • American Opportunity and Lifetime Learning credits
   • Yield Curve and Interest Rate Environment

General Principles of Financial Planning and Cash Flow flashcards for Certified Financial Planner (CFP)

24 of 51 cards from the General Principles of Financial Planning and Cash Flow deck — real questions with worked answers.

1. What is a Personal (Statement of) Financial Position, and what fundamental equation does it express?

   It is a snapshot of a household's financial condition at a single point in time, listing assets, liabilities, and net worth. It expresses the accounting identity $\text{Net Worth} = \text{Assets} - \text{Liabilities}$.

2. On a personal statement of financial position, how should assets be valued and how are they typically classified?

   Assets are recorded at current fair market value (not cost). They are commonly grouped as cash/cash equivalents, invested assets, and personal-use (lifestyle) assets.

3. How are liabilities classified on a personal statement of financial position?

   By time to repayment: current (short-term) liabilities due within one year, and long-term liabilities due in more than one year. Only the outstanding principal balance is shown, not future interest.

4. What does a personal Cash Flow Statement measure, and over what period?

   It measures inflows (income) and outflows (expenses/savings) over a period of time (e.g., a month or year), showing the net cash surplus or deficit: $\text{Net Cash Flow} = \text{Inflows} - \text{Outflows}$.

5. On a cash flow statement, how are fixed expenses distinguished from variable expenses?

   Fixed expenses stay constant and are hard to change in the short term (e.g., rent, mortgage, insurance premiums, loan payments). Variable (discretionary) expenses fluctuate and are more controllable (e.g., dining out, entertainment, clothing).

6. What is a discretionary cash flow (surplus), and why does it matter in planning?

   It is the positive amount remaining after all expenses and savings are subtracted from income. A surplus can be directed toward goals such as debt reduction, investing, or building an emergency fund; a deficit signals overspending.

7. What is the standard general guideline for the size of an emergency fund?

   Three to six months of nondiscretionary (essential) living expenses, held in liquid, low-risk accounts. The larger end (6+ months) is recommended for single earners, unstable income, or self-employment.

8. In budgeting, what is the difference between a zero-based budget and an incremental budget?

   A zero-based budget assigns every dollar of income a job so income minus all allocations equals $0$, justifying each item from scratch. An incremental budget starts from the prior period's amounts and adjusts up or down.

9. Define the current ratio used in personal financial ratio analysis and state its formula.

   It measures short-term liquidity: $\text{Current Ratio} = \dfrac{\text{Monetary (Liquid) Assets}}{\text{Current Liabilities}}$. A higher value indicates greater ability to cover near-term obligations.

10. State the emergency fund (basic liquidity) ratio and what its result represents.

    $\text{Emergency Fund Ratio} = \dfrac{\text{Monetary Assets}}{\text{Monthly Nondiscretionary Expenses}}$. The result is the number of months of essential expenses covered by liquid assets; the target is roughly $3$–$6$.

11. What is the savings ratio, and what benchmark is commonly used?

    $\text{Savings Ratio} = \dfrac{\text{Annual Savings}}{\text{Annual Gross Income}}$. A common planning benchmark is saving at least $10\%$–$20\%$ of gross income for goals such as retirement.

12. Name the two key debt ratios used in mortgage qualification and their typical conforming limits.

    The front-end (housing) ratio = $\dfrac{\text{Housing Costs (PITI)}}{\text{Gross Income}} \leq 28\%$, and the back-end (total debt) ratio = $\dfrac{\text{Total Monthly Debt Payments}}{\text{Gross Income}} \leq 36\%$.

13. What does the components of PITI stand for in housing cost ratios?

    Principal, Interest, Taxes (property), and Insurance (homeowners, plus PMI if applicable). These together make up the monthly housing cost used in the front-end ratio.

14. Write the future value of a single lump sum formula and define the variables.

    $FV = PV \times (1+i)^{n}$, where $PV$ is the present value, $i$ is the periodic interest rate, and $n$ is the number of compounding periods.

15. Write the present value of a single lump sum formula.

    $PV = \dfrac{FV}{(1+i)^{n}}$, the amount today that grows to $FV$ after $n$ periods at periodic rate $i$ (discounting).

16. How do you adjust the rate and number of periods when compounding is more frequent than annual?

    Divide the annual nominal rate by the number of periods per year and multiply the years by that number: periodic rate $i = \dfrac{r}{m}$ and total periods $n = m \times t$, where $m$ is compoundings per year.

17. What is the relationship between the nominal annual rate and the effective annual rate (EAR)?

    $EAR = \left(1 + \dfrac{r}{m}\right)^{m} - 1$, where $r$ is the nominal annual rate and $m$ is the number of compounding periods per year. EAR reflects the true annual cost/return after compounding.

18. What distinguishes an ordinary annuity from an annuity due in terms of payment timing?

    An ordinary annuity pays at the end of each period; an annuity due pays at the beginning of each period. Annuity-due cash flows are discounted/compounded one period less, giving them a higher present and future value.

19. Write the present value of an ordinary annuity formula.

    $PV = PMT \times \dfrac{1 - (1+i)^{-n}}{i}$, where $PMT$ is the periodic payment, $i$ the periodic rate, and $n$ the number of payments.

20. Write the future value of an ordinary annuity formula.

    $FV = PMT \times \dfrac{(1+i)^{n} - 1}{i}$, the accumulated value of equal end-of-period payments.

21. How do you convert an ordinary annuity present or future value into an annuity due value?

    Multiply the ordinary annuity result by $(1+i)$: $PV_{due} = PV_{ordinary}\times(1+i)$ and $FV_{due} = FV_{ordinary}\times(1+i)$, because each payment occurs one period earlier.

22. Write the present value formula for a perpetuity and a growing perpetuity.

    Level perpetuity: $PV = \dfrac{PMT}{i}$. Growing perpetuity: $PV = \dfrac{PMT_{1}}{i - g}$, where $g$ is the constant growth rate and requires $i > g$.

23. Define Net Present Value (NPV) and state its formula.

    NPV is the sum of discounted cash inflows minus the initial outlay: $NPV = \sum_{t=1}^{n} \dfrac{CF_{t}}{(1+r)^{t}} - CF_{0}$, where $r$ is the required rate of return.

24. What is the NPV decision rule for accepting or rejecting an investment?

    Accept if $NPV > 0$ (adds value), reject if $NPV < 0$, and be indifferent if $NPV = 0$ (return exactly equals the required rate).

See more General Principles of Financial Planning and Cash Flow flashcards →

Planning General Principles of Financial Planning and Cash Flow for Certified Financial Planner (CFP)

General Principles of Financial Planning and Cash Flow (Certified Financial Planner (CFP)) FAQ