© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DEVELOPING YOUR FINANCIAL STATEMENTS AND PLANS #2

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. Define Personal Financial Statements.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Personal Financial Statements Planning tools that provide an up-to- date evaluation of your financial well-being, help you identify potential financial problems, and help you make better-informed financial decisions.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2. What are the three types of Personal Financial Statements?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Three Types of Personal Financial Statements Balance Sheet Income and Expense Statement Budget C h. # - 5 Next

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3. Define Balance Sheet.

Balance Sheet A statement of your financial position at a point in time

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4. What are the three parts of a Balance Sheet?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1.Assets 2.Liabilities 3.Net Worth

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5. What are the four types of Assets?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Assets: Things You Own Liquid assets – low-risk, cash or investments that can be converted to cash with little or no loss in value Investments – acquired to earn a return Real property – immovable property including land or a house Personal Property – movable property such as autos and home furnishings

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6. What are the two types of Liabilities?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Liabilities: Money You Owe Classification by Maturity Current or short-term -- due within a year such as utility or repair bills Long-term -- due in a year or more including mortgages, education and consumer installment loans

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Net Worth: Measure of Your Financial Worth Actual wealth or equity that individuals have in owned assets Net worth = total assets – total liabilities Net worth > 0 = SOLVENT Net worth < 0 = INSOLVENT

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Balance Sheet Equation Total Liabilities Total Assets =+ Net Worth Back

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7. Define Income and Expense Statement.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income and Expense Statement A measure of financial performance over a given time period

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8. What are the three parts of an Income and Expense Statement?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Income and Expense Statement A measure of financial performance over a given time period income (cash in)expenses (cash out)cash surplus (or deficit)

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income and Expense Statement Total Income – Total Expenses = CASH SURPLUS OR (CASH DEFICIT)

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Income: Cash In Wages and salariesBonuses and commissionsInterest and dividendsChild supportTax refundsGifts

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9. What are the two categories of Expenses ?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expenses: Cash Out Fixed Contractual, equal payments fixed rent or mortgage, insurance, cable TV payments Variable Amounts change from one period to the next credit card payments

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Expenses: Cash Out Living Expenses -- Housing, utilities, food, insurance Tax Payments -- Federal, state, local Asset Purchases -- Autos, furniture, appliances Other Payments -- Personal care, recreation, entertainment

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing the Income and Expense Statements Record income from all sources Establish meaningful expense categories Subtract total expenses from total income to get cash surplus or deficit

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10. What are the four important money management ratios?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1. Balance Sheet Ratios Solvency Ratio  Net worth at a given point in time  Indicates potential to withstand financial problems Total net worth Total assets

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Liquidity Ratio  Measures ability to pay current debts with existing liquid assets  “Current” = payment within one year Liquid assets Total current debts 1. Balance Sheet Ratios

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Savings Ratio  Shows percentage of after-tax income saved during a time period 2. Income & Expense Statement Ratios Cash surplus Income after taxes

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Debt Service Ratio Indicates ability to repay loan obligations promptly with before-tax income Total monthly loan payments Monthly gross income Back 2. Income & Expense Statement Ratios

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11. Define Budget.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Preparing & Using Budgets Budget Short-term financial planning report that helps you achieve short-term financial goals Achieving short-term goals helps you achieve longer-term goals

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12. What are the three stages in preparing a Budget?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Budgeting Process Estimating IncomeEstimating ExpensesFinalize the Cash Budget

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13. How do you deal with Budget Deficits?

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. If You End the Year in a Deficit Liquidate savings/investments Borrow to cover the deficit Cut low priority expenses; alter spending habits Increase income Back

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14. Define Time Value of Money.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Time Value of Money Putting a Dollar Value on Financial Goals A dollar today is worth more than a dollar received in the future because it can be invested and earn interest.

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of TVM Calculations Single sum — one lump sum investment with no additions or subtractions Annuity — series of equal payments made at fixed time intervals for a specified number of periods

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15. Define Future Value (FV).

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Future Value (FV) Value invested money will grow to become earning a specific rate of interest over a given time period Process of growing today’s present value to a larger future value by applying compound interest known as “compounding.”

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Future Value Formulae Future Value of a Single Lump sum Amount: – FV = Present Value x FV Factor Future Value of an Annuity: – FV = Amount Needed FV Factor

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16. Define Present Value (PV).

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Present Value (PV) Amount needed today to invest at a specific rate of interest over a given time period to accumulate a desired future amount “ Discounting” is the reverse of compounding - process of working from the future value back to present value

© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Present Value Formulae Present Value of a Single Lump sum Amount: – PV = Future Value x PV Factor Present Value of an Annuity: – PV = Amount Withdrawal PV Factor