Chapter 2 Flashcards
Total Assets
Are the things that you own. An item is classified as an asset whether it was purchased with cash or financed using debt
What are ways to group assets?
Liquid assets, investments, real property, and personal property
What is an Investment?
Assets acquired to earn a return rather than provide a service. These assets are mostly intangible financial assets (stock, bonds, mutual funds, and other types of securities)
What is a Real Property?
Tangible asset that are immovable: land and anything fixed to it, such as a house.
What is a Personal property?
Tangible assets that are movable and used in everyday life. Such as automobiles, recreational equipment, household furnishing and appliances, clothing, jewelry etc.
What is fair market value?
The actual value of an asset, or the price for which it can reasonably be expected to sell in the open market
What are liabilities?
Debts such as credit card charges, loans, and mortgages. What you owe.
What is current, short-term liability
Any debt due within 1 year of the date of the balance sheet
What is long-term liability?
Any debt due 1 year or more from the date of the balance sheet. (Real estate mortgages, most consumer installment loans, and margin loans used to purchase securities)
What are variable expenses?
Expenses for which the amount of the payments change from period to period. Examples include: groceries, clothing, utilities, entertainment, and medical expenses.
What are fixed expenses?
Expenses that are usually contractual with a predetermined payment amount. Typically, payment is made in equal, periodic payments (for example, monthly rent) Examples are: mortgage payments, rent, contract cell phone fees, insurance, auto loans, and other installment-type loans.
The cash inflows refers to your …?
Income
The cash outflows refers to your ….?
Expenses
How is the cash surplus or deficit calculated in the income statement?
Subtracting the total income from the total expenses.
What is a cash deficit?
An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.
What is a cash surplus?
An excess amount of income over expenses that results in increased net worth.
What is the equation for debt service ratio?
Total monthly loan payments/monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly.
What is insolvency?
The financial state in which net worth is less than zero.
What is the equation for the liquidity ratio?
Total liquid asset/Total current debts; measures the ability to pay current debts.
How can we determine the net worth?
Subtracting total liabilities from total assets.
What is the equation for the savings ratio?
Cash surplus/Net income (after tax); indicates relative amount of cash surplus achieved during a given period.
What is the equation for the solvency ratio?
Total net worth/total assets; measures the degree of exposure to insolvency.
What are variable expenses?
Expenses involving payment amounts that change from one time period to the next (varies)
What are fixed expenses?
Contractual, predetermined expenses involving equal payments each period.
What is the meaning of liquidity?
Liquidity is the ease and cost at which you can convert an asset into cash.
What are the different levels of liquidity?
Very liquid, less liquid and illiquid.
