Chapter 3 Flashcards
explain the term personal cash flow statement?
- a financial statement that measures a persons income and expenses
what are some factors that affect income?
- Stage in your career path
- type of Job
- Number of income earners in your household
What are factors affecting expenses?
- size of family
- age
- personal consumption behaviour
Define the term budget?
Cash flow statement based on forecasted cash flows for a future time
Budgets are useful for identifying either cash surpluses or cash deficits T OR F
True, cash surpluses may be then used to build emergency fund, invest in additional assets or make extra payments
What is the formula to find expected Net cash flows
Expected income - expected expenses
List the steps involved in creating a budget note?
- Anticipate cash shortages
- assess the accuracy of the budget
- forecast net cash flows over several months
- budget with a biweekly pay period, if applicable
- create an annual budget, by extending budget out for longer periods
- Improve budget
What are some alternative budgeting strategies?
- Envelope method
- Pay yourself first method
explain the envelope method
- forces you to stick to a cash only budget for expense categories that are hard to control
- create separate envelopes for each category
- only allowed to spend the money in the envelope for that category
Explain the pay yourself method
- Arrange for an automatic transfer of money from chequing to savings, that coincides with when you receive a paycheque
What are the sections found in a personal balance sheet
- Assets
- Investments
- liabilities
- Net worth
In investment, there is a low low relationship with risk + return. So the less risk, the less return. T OR F
True. The higher the risk, the higher the return
What type of investment is the riskiest and what type is the least risky?
Stocks are the riskiest, bonds are the least risky
How is liquidity measured
It is measured by the current ratio and the liquidity ratio
the higher the current ratio _________? Fill in the blank
the higher the degree of liquidity
formula for current ratio?
Liquid assets / current liabilities
what is the formula for liquidity ratio?
liquid assets / monthly living expenses
What is the formula for debt to asset ratio
total liabilities / total assets
A high debt to asset ratio means what?
An excessive amount of debt, and less financial flexibility
We should have no debt when we reach the retirement life stage. T OR F
True
What is the formula for the savings ratio?
Savings during the period/ disposable income during the period
