Question

exam #2 financial concepts: debits & credits
section 1: true or false (3 points each)
write t for true and f for false.

1. ______ adjusted gross income (agi) is calculated after subtracting all taxes from gross income.
2. ______ amortization refers to gradually paying off a loan through regular payments.
3. ______ capital gains are profits earned from selling an asset at a higher price than its purchase price.
4. ______ compound interest is calculated only on the principal amount of a loan or deposit.
5. ______ your credit limit is the minimum amount you are required to pay on your credit card.
6. ______ a credit score helps lenders determine how risky it is to lend you money.
7. ______ defaulting on a loan can negatively affect your credit score.
8. ______ equity represents ownership in an asset after liabilities are subtracted.
9. ______ federal income tax is paid only by businesses, not individuals.
10. ______ a balance sheet shows a companys financial position at a specific point in time.

section 2: multiple choice (3 points each)
circle or mark the best answer for each question.

1. what is compound interest?

a. interest that is simple and fixed
b. interest paid only once
c. interest calculated on both the initial principal and the accumulated interest
d. interest deducted from income

Explanation:

1. Adjusted Gross Income (AGI) is calculated by subtracting certain deductions from gross income, not all taxes. So it's False.
2. Amortization indeed refers to gradually paying off a loan through regular payments, True.
3. Capital gains are profits from selling an asset at a higher price than purchase price, True.
4. Compound interest is calculated on the principal and accumulated interest, not just principal, False.
5. Credit limit is the maximum amount one can borrow on a credit - card, not minimum payment, False.
6. A credit score helps lenders assess lending risk, True.
7. Defaulting on a loan can harm credit score, True.
8. Equity represents ownership in an asset after subtracting liabilities, True.
9. Federal income tax is paid by both businesses and individuals, False.
10. A balance sheet shows a company's financial position at a specific time, True.

For question 11, compound interest is interest calculated on both the initial principal and the accumulated interest, so the answer is C.

Answer:

1. F
2. T
3. T
4. F
5. F
6. T
7. T
8. T
9. F
10. T
11. C. Interest calculated on both the initial principal and the accumulated interest