EXAM #2 – Definitions (CHAPTERS 4, 5, 8, 9, & 11) Flashcards
Financial Statement Analysis
the process of calculating financial ratios and comparing the actual ratios to industry established benchmarks.
Balance Sheet
a statement of financial position that represents the accounting for items the client owns (assets) and items that are owed (liabilities). The balance sheet provides a snapshot of a client’s assets, liabilities and net worth as of a stated date.
Assets
a balance sheet category that represents anything of economic value that can ultimately be converted to cash.
Personal Use Assets
a balance sheet category that includes those assets that help to maintain the client’s lifestyle.
Investment Assets
a balance sheet category that includes appreciating assets or those assets being held to accomplish one or more financial goals.
Cash and Cash Equivalents
a balance sheet category that represents assets they are highly liquid, which means they either are cash or can be converted to cash within the next 12 months with little to no price concession from the principal amount invested.
Liabilities
a balance sheet category that represents client financial obligations that are owed to creditors.
Short-term Liabilities
represent those obligations that are current in nature or due within the next 12 months.
Long-term Liabilities
financial obligations owed that are due beyond the next 12 months. Long-term liabilities are usually the result of major financial purchases and resulting obligations that are being paid off over multiple years (house, vacation, boat, student loan, etc).
Net Worth
a balance sheet category that represents the amount of total equity (assets - liabilities = net worth) a client has accumulated.
Savings Contributions
an income statement category. Examples of savings contributions include 401(k) plans 403B plans, IRAs, education, savings, and any other type of savings account.
Income
for tax purposes, is broadly defined, and means the gross amount of money in the fair market value of property services or other accreation to wealth received, but it does not include borrowed money or a return of invested dollars.
Monte Carlo Analysis
a mathematical simulation to determine the probability of success of a given plan. Monte Carlo analysis is useful for financial players to help measure the probability of assumptions being true or false.
Sensitivity Analysis
a tool used to understand the range of outcomes for each variable in a retirement plan. It rotates each variable toward the undesirable student side of the risk to determine the impact of a small change in that variable on an overall plan.
Fair Market Value
the price a willing buyer and willing seller would agree to when both have reasonable knowledge of the fact of the transaction and neither is under any compulsion to buy or sell.
Returned on investments (ROI) Ratio
a critical performance ratio as it measures the compounded rate of return on a client’s investments.
Return on Assets Ratio
this ratio measures total asset returns. This ratio must be used cautiously when the client is adding assets that leveraged with debt.
Savings Rate
a rate calculated by taking gross savings in dollars (including employee, elective referrals into 401(k) 403B and 457 plans plus any employer match) and any other savings divided by gross pay.
Debt-to-total-assets Ratio
indicates what percentage of assets is being provided by creditors. The lower this ratio, the better as it indicates that the assets owned to have a low amount of debt owed.
Housing Ratio 1
this way shall established by the bank industry reflects the proportion of gross pay on an annual or monthly basis that is devoted to housing (principal, interest, taxes, and insurance). It does not include utilities, lawn, care, maintenance, etc. The benchmark for HR one is less than or equal to 28%.
Housing Ratio 2
also referred to as HR 1+ all other debt. This ratio was established by the banking industry to determine if the total amount of that is appropriate for a given level of income. If housing ratio 2 is met, the borrower will likely qualify for a conventional loan. The benchmark for HR2 should be less than equal to 36% of gross pay on a monthly or annual basis.
Current Ratio
measures how many times the client can satisfy their short-term liabilities with current assets (cash or cash equivalents).
Emergency Fund Ratio
measures how many months of non-discretionary expenses the client has in the form of cash and cash, equivalent or current assets.
Liquidity Ratio
these ratios measure the ability to meet short-term obligations.
Debt Ratios
measure how well the client is managing the overall debt structure.
Ratios for Financial Security Goals
these ratios assess the progress of the client is making towards achieving long-term financial security goals.
Performance Ratios
these ratios determine the adequacy of returns on investments.
Horizontal Analysis
list each financial statement item as a percentage of a base and creates a trend over time.
Ratio Analysis
the process of calculating key financial ratios for a client comparing those metrics to industry benchmarks, and then making an evaluation regarding any deficiencies.
Vertical Analysis
list each line item on the income statement as a percentage of total income and present each line item on the balance sheet as a percentage of total assets. The restated percentage is known as a common size income statement or balance sheet.
