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
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Personal Balance Sheet
A financial statement that reports what an individual or family owns or owes; also called a net worth statement
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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
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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
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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
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Cash Flow Statement
A financial statement that summarizes cash receipts and payments for a given period of time
+ + =
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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
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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.
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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
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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
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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
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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
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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
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