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Which of the following statements regarding a financial planner's analysis of a client's cash flow statement is CORRECT?

1 The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means.
2 The analysis of the client's cash flow statement helps determine the client's net worth, or total cash surplus, by tracking cash inflows and outflows over a period of time.
3 Typically, the financial planner will encourage the client to reduce the variable expenses reported on the cash flow statement

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Final answer:

The correct statement regarding a financial planner's analysis of a client's cash flow statement is that it can help determine whether the client is living within their financial means. Option 1 is correct answer.

Step-by-step explanation:

The analysis of a client's cash flow statement by a financial planner can reveal much about the client's financial health. Regarding the correct statement, option 1 is accurate: The analysis of the client's cash flow statement can help the planner determine whether the client is living within his financial means. This is because a cash flow statement provides a detailed look at how much money is coming in and going out, highlighting whether the client is overspending relative to their income.

Option 2 is not entirely accurate as the net worth of a client is better determined through a balance sheet which tracks assets and liabilities, not through the cash flow statement which monitors inflows and outflows over a period of time. However, a cash flow statement can help in understanding the liquidity and financial flexibility of a client.

For option 3, while financial planners often encourage clients to manage their variable expenses, it is not a universal rule applicable to every client's cash flow statement. Instead, planners tailor their advice based on the specific financial situation and goals of the individual client.

Therefore, a cash flow analysis can indeed lead to recommendations about variable expenses, but this is not typically the sole or primary focus of the analysis.

User Dmitry Kaltovich
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