Chapter 2: Financial Statements and Management Flashcards
What is the primary focus of daily spending and saving decisions?
Financial planning
These decisions should be coordinated with needs, goals, and personal situation.
What is opportunity cost in money management?
The loss of potential gain from other alternatives when one alternative is chosen
For example, spending money on current living expenses reduces the amount you can save and invest.
List the major money management activities.
- Planning
- Measuring financial progress
- Completing tax reports
- Making investment decisions
- Determining available resources
Where are most financial records typically kept?
- Home files
- Home computer
- Online
- Safe Deposit Box
- Fireproof home safe
- Computer, tablet, phone
What are the purposes of personal financial statements?
- Summarize the value of items owned and amounts owed
- Track cash inflows and outflows
- Identify strengths and weaknesses in financial situation
- Measure progress towards financial goals
- Provide data for tax returns or credit applications
What is a personal balance sheet also known as?
Net worth statement or statement of financial position
What is the formula for calculating net worth?
Assets - Liabilities = Net Worth
What are the components of assets?
- Liquid assets
- Real estate
- Personal possessions
- Investment assets
What are current liabilities?
Debts to be paid within a short time, usually less than one year
What is a cash flow statement?
A summary of cash receipts and payments for a specific period
What are fixed expenses?
Expenses that do not vary from month to month
What is the purpose of analyzing your current financial situation?
To assess financial health and plan for future financial decisions
What is the debt ratio?
Liabilities / Net Worth
What does a high current ratio indicate?
Desirable cash availability for paying bills
What is a budget?
A specific plan for spending income
Name the seven steps to creating and implementing a budget.
- Set financial goals
- Estimate income
- Budget emergency fund and savings
- Budget fixed expenses
- Budget variable expenses
- Record spending amounts
- Review spending and saving patterns
What are common reasons for saving money?
- Unexpected expenses
- Income from interest
- Replacement of expensive items
- Buying special items
- Long-term expenses
What is the recommended percentage for monthly savings?
At least 10 percent
What should be prioritized in savings techniques?
Always ‘pay yourself first’
What is the significance of a personal income and expenditures statement?
It summarizes cash receipts and payments for a given period
What does the liquidity ratio measure?
Liquid Assets / Monthly Expenses
What is the purpose of budgeting?
To spend less than income and achieve financial goals
What is the first step in assessing your financial situation?
Complete a personal balance sheet and cash flow statement
True or False: A person with a high net worth cannot have financial difficulties.
False
A high net worth does not guarantee financial stability.
