Learning Objective # 3

Develop a personal balance sheet and cash flow statement.

Purpose of Personal Financial Statements

Summarize the value of the items you own and the amounts that you owe

Track your cash inflows by source and your outflows by type

Identify strengths and weaknesses in your current financial situation

Measure progress towards your financial goals

Provide data for use in filing your income tax return or applying for credit

LO#3

Personal Balance Sheet

A financial statement that reports what an individual or family owns or owes; also called a net worth statement

LO#3

Items of Value - Net Worth = Amounts Owed

(What You Own) (Your Wealth) (What You Owe)

Components of a Balance Sheet(Net Worth Statement)

Step 1: Listing Items of Value Assets– Cash and other property with a

monetary value Liquid assets: cash and items of value easily

converted to cash Real estate: home, condo, vacation property or

other land owned Personal possessions: automobiles and other

personal possessions Investment assets: funds set aside for long term

financial needs

LO#3

Components of a Balance Sheet(Net Worth Statement)

Step 2: Determining Amount Owed Liabilities – amounts owed to others

Current liabilities: debts to be paid within short time, usually less than one year

Long term liabilities: do not have to pay in full until more than a year from now

Step 3: Computing Net Worth Net Worth – the difference between total

assets and total liabilities

LO#3

Components of a Balance Sheet(Net Worth Statement)

A person with a high net worth may still have financial difficulties No liquid cash available to pay current expenses Insolvency is the inability to pay debts when they

are due because liabilities far exceed the value of assets

You can increase your net worth by; Increasing your savings Reducing your spending Increasing the value of your investments and other

possessions Reducing the amounts you owe

Net Worth is not money available for use but an indication of your financial position on a given date

LO#3

Cash Flow Statement

A financial statement that summarizes cash receipts and payments for a given period of time

+ + =

LO#3

Total cash received during that time

period

Cash outflows during the time

period

Cash surplus or

deficit

Components of a Cash Flow Statement

Step 1: Record income Income from employment; wages, salaries and

commission or self-employment income Take-home pay: earnings after deductions for taxes and other

items, also called disposable income Discretionary Income: money left over after paying for housing,

food and other expenses Savings and investment income Gifts, grants, scholarships and educational loans Government payments (CPP, welfare and EI) Amounts received from pensions and retirement

programs Alimony and child support payments

LO#3

Components of a Cash Flow Statement

Step 2: Record cash outflows Fixed expenses do not vary from month to

month Rent, mortgage, loan payments, insurance

Variable expenses are flexible payments Food, clothing, utilities

Step 3: Determine net cash flow Net cash flow can be a surplus or a deficit Used as a basis for creating a spending, saving

and investment plan.

LO#3

Analyzing Your Current Financial Situation

Your Balance SheetMeasure your progress toward your financial goals

Save and invest on a regular basisIdentify how your assets are distributed among the different categories

Each asset has its purposeCalculate your current asset allocation

Allocation of financial assets between cash, fixed income and equity investments

LO#3

Analyzing Your Current Financial Situation

Identify whether your investments are tax efficient Provide you with highest after-tax return

Identify assets that may be lost, stolen, damaged or destroyed May require insurance coverage

Summarize the types and extent of your indebtedness Borrowed to finance depreciating or

appreciating assets Many credit cards may inflate your debt ratio

LO#3

Analyzing Your Current Financial Situation

Your Cash Flow StatementCompiling your latest cash flow statements will

Highlight your sources of income Reveal whether you are overspending Help assess your spending and saving

patterns

LO#3

Ratios for Evaluating Financial Progress

Debt Ratio: Liabilities

Net Worth

Current Ratio: Liquid Assets

Current Liabilities

Liquidity Ratio: Liquid Assets

Monthly Expenses

Show relationship between debt and net worth

A high current ratio is desirable to have cash available to pay bills

Indicates the number of months in which living expenses can be paid if an emergency arises

Ratio Interpretation

LO#3

Ratios for Evaluating Financial Progress

Debt Payments Ratio: Monthly Payments

Take-Home Pay

Savings Ratio:

Amount Saved Each Month

Gross Income

Indicates how much or a persons’ earnings goes for debt payments

Financial experts recommend monthly savings of at least 10 percent

Ratio Interpretation

LO#3