1. 2 - 1 COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd Chapter 2 – Your Financial Statements and Plans

2. 2 - 2 Chapter 2 – Your Financial Statements and Plans Chapter 2 - Learning Goals LG 1-Describe the role of financial statements, special planning concerns, and professional financial planners in the personal financial planning process. LG 2-Put a monetary value on financial goals using time value of money concepts. LG 3-Prepare a personal balance sheet. LG 4-Generate a personal income and expense statement. LG 5-Develop a good recordkeeping system and use ratios to interpret personal financial statements. LG 6-Construct a cash budget and use it to monitor and control spending. Learning Goals

3. 2 - 3 Chapter 2 – Your Financial Statements and Plans Internet Links and On-Line Resources Planning tools and online courses through TD Canada TrustTD Canada Trust Online tools and calculators through RBC Royal BankRBC Royal Bank Fair Market Value of Your Car – VMR CanadaVMR Canada To find a financial planner in your area - Financial Planners Standard’s CouncilFinancial Planners Standard’s Council Information concerning financial professionals: Certified Financial Planner (CFP) Certified Financial Planner Chartered Life Underwriter (CLU) Chartered Life Underwriter Chartered Financial Consultant (CH.F.C.) Chartered Financial Consultant Canadian Investment Manager (CIM) Canadian Investment Manager Certified General Accountant (CGA) Certified General Accountant Certified Management Accountant (CMA) Certified Management Accountant Certified Senior Advisor (CSA) Certified Senior Advisor Chartered Accountant (CA) Chartered Accountant Elder Planners Counselor (EPC) Elder Planners Counselor Fellow of the Canadian Securities Institute (FCSI) Fellow of the Canadian Securities Institute Registered Financial Planner (R.F.P.) Registered Financial Planner  Current survey and trends on consumer spending from Statistics CanadaStatistics Canada Web Links

4. 2 - 4 Chapter 2 – Your Financial Statements and Plans Key Chapter Terms and Definitions Financial plans versus Personal financial statements Financial plans versus Personal financial statements Budgets Balance sheet Income and expense statement Flexible-benefit (cafeteria) plans Professional financial planner Time value of money Future value Compounding Annuity Rule of 72 Present value Discounting Assets Liquid assets Investments Real property Personal property Fair market value Liabilities Current (short-term liability) Open account credit obligations Long-term liability Net worth Equity Insolvency Cash basis Income Expenses (fixed and variable) Cash surplus Cash deficit Solvency ratio Liquidity ratio Savings ratio Debt service ratio Cash budget Budget control schedule Terms

5. 2 - 5 Chapter 2 – Your Financial Statements and Plans Definitions Financial Plans versus Personal Financial Statements Financial plans are the road maps that show you the way. Personal financial statements let you know where you stand financially. Terms

6. 2 - 6 Chapter 2 – Your Financial Statements and Plans Definitions Budgets Budgets are detailed, short-term financial forecasts that compare estimated income with estimated expenses, and allow you to monitor and control expenses and purchases consistent with your financial plans. Terms

7. 2 - 7 Chapter 2 – Your Financial Statements and Plans Definitions Balance Sheet An important financial statement that describes a person’s financial position – the assets that are held, less the debts owed at a particular point in time. The difference between assets and debt is net worth. Terms

8. 2 - 8 Chapter 2 – Your Financial Statements and Plans Definitions Income and Expense Statement An important financial statement that measures financial performance over time by presenting income earned and expenses incurred during a given period. Terms

9. 2 - 9 Chapter 2 – Your Financial Statements and Plans Definitions Budget A detailed and forward-looking financial report, based on expected income and expenses, that is used to monitor and control spending. Terms

10. 2 - 10 Chapter 2 – Your Financial Statements and Plans Definitions Flexible-benefit (cafeteria) plan A type of employee benefit plan that allows each employee to choose from a prescribed set of benefits so that the employee can select those benefits of greatest personal value. Terms

11. 2 - 11 Chapter 2 – Your Financial Statements and Plans Definitions Professional financial planner An individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals. Terms

12. 2 - 12 Chapter 2 – Your Financial Statements and Plans Definitions Time value of money The concept that a dollar today is worth more than a dollar received in the future; this is true as long as one can earn a positive rate of return (interest rate) on investments. Terms

13. 2 - 13 Chapter 2 – Your Financial Statements and Plans Definitions Future value The value to which an amount today will grow if it earns a specific rate of interest over a given period; can be used to find yearly savings needed to accumulate a given future amount of money. Terms

14. 2 - 14 Chapter 2 – Your Financial Statements and Plans Definitions Compounding When interest earned each year is left in the account and becomes part of the balance (or principal) on which interest is earned in subsequent years. Terms

15. 2 - 15 Chapter 2 – Your Financial Statements and Plans Definitions Annuity A sum of money that is received or paid periodically. A series of cash flows that are equal, periodic and finite. Terms

16. 2 - 16 Chapter 2 – Your Financial Statements and Plans Definitions Rule of 72 A useful approximation for estimating how long it will take to double a sum at a given interest rate. Dividing 72 by the annual compound interest rate results in a good estimate of the number of years it will take to double your money. Terms

17. 2 - 17 Chapter 2 – Your Financial Statements and Plans Definitions Present value The value today of an amount to be received in the future; it is the amount that would have to be invested today at a given interest rate over a specified time to accumulate a future amount. Terms

18. 2 - 18 Chapter 2 – Your Financial Statements and Plans Definitions Discounting The process of finding present value; the inverse of compounding to find future value. Terms

19. 2 - 19 Chapter 2 – Your Financial Statements and Plans Definitions Assets Items that you require. Terms

20. 2 - 20 Chapter 2 – Your Financial Statements and Plans Definitions Liquid assets Assets that are held in the form of cash or instruments that can readily be converted to cash with little or no loss in value; help to meet everyday needs of life and provide for emergencies and unexpected opportunities. Terms

21. 2 - 21 Chapter 2 – Your Financial Statements and Plans Definitions Investments Assets such as stocks, bonds, mutual funds, and real estate that are acquired for the purpose of earning a return rather than providing a service. Terms

22. 2 - 22 Chapter 2 – Your Financial Statements and Plans Definitions Real property Tangible assets that are immovable, such as land and anything fixed to it, such as a house; generally has a relatively long life and high cost. Terms

23. 2 - 23 Chapter 2 – Your Financial Statements and Plans Definitions Personal property Tangible assets that are movable and used in everyday life, such as automobiles, household furnishings, and jewelry. Terms

24. 2 - 24 Chapter 2 – Your Financial Statements and Plans Definitions Fair market value The actual value of an asset, or the price that it can reasonably be expected to sell for in the open market. Terms

25. 2 - 25 Chapter 2 – Your Financial Statements and Plans Definitions Liabilities Debts, such as credit card charges, installment loans, and real estate mortgages. Terms

26. 2 - 26 Chapter 2 – Your Financial Statements and Plans Definitions Current (short-term) liabilities Any debt due within one year of the date of the balance sheet. Terms

27. 2 - 27 Chapter 2 – Your Financial Statements and Plans Definitions Open account credit obligations Current liabilities that represent the balances outstanding against established credit lines (usually through credit card purchases). Terms

28. 2 - 28 Chapter 2 – Your Financial Statements and Plans Definitions Long-term liability Any debt due one year or more from the date of the balance sheet. Terms

29. 2 - 29 Chapter 2 – Your Financial Statements and Plans Definitions Net worth An individual’s or family’s actual wealth; determined by subtracting total liabilities from total assets. Terms

30. 2 - 30 Chapter 2 – Your Financial Statements and Plans Definitions Equity The actual ownership interest in a specific asset or group of assets. Terms

31. 2 - 31 Chapter 2 – Your Financial Statements and Plans Definitions Insolvency The financial state in which net worth is less than zero. Terms

32. 2 - 32 Chapter 2 – Your Financial Statements and Plans Definitions Cash basis A method of preparing financial statements in which only cash income and cash expenses are recorded. Terms

33. 2 - 33 Chapter 2 – Your Financial Statements and Plans Definitions Income Earnings received as wages, salaries, self- employment income, bonuses, and commissions, as well as interest and dividends received from savings and investments and proceeds from the sale of assets. Terms

34. 2 - 34 Chapter 2 – Your Financial Statements and Plans Definitions Expenses Money spent on living expenses and to purchase assets, pay taxes, or repay debt. Terms

35. 2 - 35 Chapter 2 – Your Financial Statements and Plans Definitions Cash surplus An excess amount of income over expenses that can be used for savings or investments, to acquire assets, or to reduce debt; results in increased net worth. Terms

36. 2 - 36 Chapter 2 – Your Financial Statements and Plans Definitions Cash deficit An excess amount of expenses over income resulting in insufficient funds that must be made up by drawing down savings or investments, reducing assets, or borrowing; results in decreased net worth. Terms

37. 2 - 37 Chapter 2 – Your Financial Statements and Plans Definitions Solvency ratio Total net worth divided by total assets; measures the degree of exposure to insolvency. Terms

38. 2 - 38 Chapter 2 – Your Financial Statements and Plans Definitions Liquidity ratio Total liquid assets divided by total current debts; measures the ability to pay current debts. Terms

39. 2 - 39 Chapter 2 – Your Financial Statements and Plans Definitions Savings ratio Cash surplus divided by after-tax income; indicates relative amount of cash surplus achieved during a given period. Terms

40. 2 - 40 Chapter 2 – Your Financial Statements and Plans Definitions Debt Service ratio Total monthly loan payments divided by monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly. Terms

41. 2 - 41 Chapter 2 – Your Financial Statements and Plans Definitions Cash budget A budget that takes into account estimated monthly cash receipts and cash expenses for the coming year. Terms

42. 2 - 42 Chapter 2 – Your Financial Statements and Plans Definitions Budget control schedule A summary that shows how actual income and expenses compare with the various budget categories and where surpluses or deficits exist. Terms

43. 2 - 43 THE END!