NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Evaluating the Financial Position of Clients
In personal financial statement analysis, the 'emergency fund ratio' is computed as liquid assets divided by which of the following?
The emergency fund ratio equals liquid assets divided by monthly non-discretionary cash outflows. It shows how many months of essential expenses, including loan EMIs, the client can cover from liquid resources if income stops, which is why essential outflows rather than income form the denominator.
- AMonthly non-discretionary cash outflowsCorrect
- BAnnual gross income
- CTotal long-term liabilities
- DMonthly investible surplus
Explanation
The emergency fund ratio measures how many months of essential expenses (non-discretionary outflows including EMIs) can be met from liquid assets. Dividing by annual income or long-term liabilities does not measure months of survival, and investible surplus is a discretionary figure.
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