1. ©2012, College for Financial Planning, all rights reserved. Module 2 Financial Statements & Cash Flow Management Foundations in Financial Planning SM Professional Education Program

2. Learning Objectives 2–1: Describe the purpose or use of a statement of financial position or a cash flow statement. 2–2: Identify components of a statement of financial position or a cash flow statement. 2–3: Calculate an individual’s net worth on a given date or an individual’s net inflow for a period ending on a given date. 2–4: Analyze a statement of financial position or a cash flow statement to determine the status of an individual’s financial health. 2–5: Define a financial ratio or the use of a given ratio. 2–6: Identify a standard guideline (rule of thumb) related to a financial ratio. 2–7: Describe credit or a type of credit. 2–8: Identify factors a lender uses to evaluate a potential borrower. 2–9: Identify appropriate levels of debt. 2–10: Identify the items that are used to develop a budget. 2-2

3. Questions To Get Us Warmed Up 2-3

4. Statement of Financial Position 2-4 This financial statement is also known as a balance sheet. Purpose to provide a static snapshot of a person’s financial status as of a certain date and at a specific point in time Components Assets – Liabilities = Net Worth

5. Cash Flow Statement 2-5 (or Outflow)

6. Analysis of Financial Statements Evaluate: Emergency fund Debt level Savings pattern Asset diversification Retirement planning Income tax issues Other areas? 2-6

7. Liquidity (Solvency) Ratio Guideline Have three to six months of expenses in an emergency fund. 2-7

8. Liquid Assets to Net Worth Ratio Guideline 15% or higher 2-8

9. Savings Ratio Guideline 10% or higher 2-9

10. Debt-to-Asset Ratio Guideline 50% or lower 2-10

11. Debt-to-Income Ratio Guideline 35% or lower 2-11

12. Non-Mortgage Debt-to-Income Ratio Guideline 15% or lower 2-12

13. Net Invested Assets to Net Worth Ratios Guideline 50% or higher 2-13

14. Credit & Debt Advantages/Uses Necessity Convenience Immediate gratification Emergency Potential Problems Overspending Cost 2-14

15. Qualifying for Credit: 5 C’s Character Capital Capacity Collateral Conditions 2-15

16. Types of Credit Installment/Closed-end/Long-term Mortgages o fixed rate o conventional o government o variable rate (ARM) Auto loans Student loans Revolving/Open-end/Short-term Credit cards Overdraft protection 2-16

17. Buying vs. Leasing Factors: Cost and convenience Auto leasing Open-end: may require payment of difference between value and resale Closed-end: may have mileage surcharge Renting versus home ownership Reasons to rent Reasons to buy a home 2-17

18. Consumer Credit Laws Truth in Lending Act Fair Credit Reporting Act Fair Credit Billing Act Equal Credit Opportunity Act Fair Debt Collection Practices Act Fair Credit and Charge Card Disclosure Act 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act 2-18

19. Bankruptcy Law Consumer Credit Counseling Services Chapter 7 (full liquidation) o almost all debts erased o file only once every six years Chapter 13 (repayment) o freeze debt level o attempt to pay back most/all debt 2-19

20. Acceptable Debt Levels Debt-to-asset ratio: 50% or lower Debt-to-income ratio: 35% or lower Nonmortgage debt-to- income ratio: 15% or lower 2-20

21. This is also known as a pro forma cash flow statement. Purpose to project income and expenses over a future period of time (year) Components Inflows – Outflows = Net Projected Inflow (Outflow) Creating a Budget 2-21

22. Uses of a Budget Spend money more wisely. Live within current income. Plan for large expenditures. Set aside money for financial goals. 2-22

23. Budget Mechanics Listing budget items Recording Monitoring 2-23

24. Question 1 Which one of the following items would not be found on a statement of financial position? a.auto note balance b.annual IRA contribution c.vested retirement benefits d.mortgage balance 2-24

25. Question 2 The debt-to-income ratio measures which of the following debt measures? I.mortgage debt II.non-mortgage debt III.consumer debt IV.revolving debt a.I only b.I and III only c.II and IV only d.I, II, III, and IV 2-25

26. Question 3 Bob Humphrey’s financial situation is as follows: Cash/cash equivalents: $15,000 Short-term debts: $8,000 Long-term debts: $133,000 Tax expense: $7,000 Auto note payments: $4,000 Invested assets: $60,000 Use assets: $188,000 What is Bob’s net worth? a.$111,000 b.$122,000 c.$137,000 d.$263,000 2-26

27. Question 4 Which one of the following debt-to-asset ratios would be considered to be safe? a.less than 50% b.greater than 50% c.less than 62% d.greater than 65% 2-27

28. Question 5 Of the following types of debt, which one provides the greatest tax benefit to the individual consumer with regard to interest paid on the debt? a.auto loan debt b.credit card debt c.home mortgage debt d.student loan debt 2-28

29. Question 6 Which one of the following items of consumer legislation allows the consumer to correct errors found on their credit report? a.Fair Debt Collection Practices Act b.Equal Credit Opportunity Act c.Consumer Credit Protection Act d.Fair Credit Reporting Act 2-29

30. ©2012, College for Financial Planning, all rights reserved. Module 2 End of Slides Foundations in Financial Planning SM Professional Education Program