Learning Objective # 3 Develop a personal balance sheet and cash flow statement.

Purpose of Personal Financial Statements LO#3 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

Personal Balance Sheet LO#3 Personal Balance Sheet A financial statement that reports what an individual or family owns or owes; also called a net worth statement Items of Value - Net Worth = Amounts Owed (What You Own) (Your Wealth) (What You Owe)

Components of a Balance Sheet (Net Worth Statement) LO#3 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

Components of a Balance Sheet (Net Worth Statement) 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

Components of a Balance Sheet (Net Worth Statement) 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 + + = Cash surplus or deficit Total cash received during that time period Cash outflows during the time period

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

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.

Analyzing Your Current Financial Situation LO#3 Analyzing Your Current Financial Situation Your Balance Sheet Measure your progress toward your financial goals Save and invest on a regular basis Identify how your assets are distributed among the different categories Each asset has its purpose Calculate your current asset allocation Allocation of financial assets between cash, fixed income and equity investments

Analyzing Your Current Financial Situation 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

Analyzing Your Current Financial Situation LO#3 Analyzing Your Current Financial Situation Your Cash Flow Statement Compiling your latest cash flow statements will Highlight your sources of income Reveal whether you are overspending Help assess your spending and saving patterns

Ratios for Evaluating Financial Progress LO#3 Ratios for Evaluating Financial Progress Ratio Interpretation 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

Ratios for Evaluating Financial Progress LO#3 Ratios for Evaluating Financial Progress Ratio Interpretation 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