Financial Statements Flashcards
Personal Statements
1.Statement of financial position
2. Statement of cash flow
Business Statements
- Balance Sheet
- Income Statement
- Statement of Cash Flows
- Pro Forma Statements
3 Types of Debt Ratios
- Consumer Debt
- Housing Costs
- Total Debt
Personal Balance Sheet
Statement of indiv fin. position at a particular point in time, usually at the end of the year
Wealth is known as
net worth or equity
An asset
Anything owned by a business or individual that has market value
current assets
can be converted into cash in one year
non-current assets
long term cant be converted to cash in 1 year
On a balance sheet assets are listed in
Order of liquidity starting with most liquid current asset
assets are listed as what (what value)
fair market value
Cash and cash equivs
checking accts, savings, CDs, MMs, T bills that are highly liquid and reasonably risk-free
Personal Investment assets
-less liquid, used to fun longer-term financial goals
Investments (examples)
Stocks, bonds, mutual funds, investment real estate (produces income), vested amounts in IRAs or 401k. ALSO value of biz, cash val LI, stock options, collectibles
Personal use assets (2 types)
-Use assets of real property
-Use assets of personal property
Personal use assets examples
-primary residence 🏡, vacation home, autos 🚗, furnishings, jewelry💍 and equipment 🚜
- valuation of some use assets may be difficult to determine
current liability
Debt must be paid in one year
long term liability
debt that continues past one year
long term liabilities are typical incurred to
purchase assets
liabilities are listed in order of
payment priority
report which liability balances?
unpaid only
net worth is best estimate of
wealth/financial strength, what is left over if you sold everything you had and paid off all liabilities
net worth can be changed by
- positive or negative contribution to SAVINGS
- increase or decrease to ASSETS
- reduction or increase in DEBT
do contributions made to retirement plans from salary deferral add to net worth?
Yes because they come directly FROM CASH FLOW as opposed to diff part of balance sheet
Is transferring $ from checking to IRA increase in net worth?
No, cash is reduced equal to amount contributed to savings
invested assets change net worth how
as value rises or falls due to market conditions
does the payment of cash value ins. premiums increase net worth?
-Not right away assuming made from checking acct.
- will eventually as cash value grows, if/when grows higher than amount of premiums paid
Home affects net worth how?
as Fair Market Value increases or decreases based on purchase price
Do payments to outstanding debt like credit card or car payment affect net worth?
No, it offsets assets and liabilities equally.
Cash flow statement
detailed breakdown of all cash inflows ⬅️ and outflows ➡️ over a period of time⏰
excess of income over expenses increses net worth if
the excess is used for savings or to reduce debt
Personal inflows
wages, salary, bonus, tips, royalties, commissions, govt payments (veterans benefits, welfare, SS), pension, rental income, investment income
Personal outflows
typically expense items that are fixed or variable
fixed outflows (personal)
regular expenses that must be paid, mortgage 🏡, auto loan 🚗
personal variable outflows
occur at irregular intervals - discretionary like how much they spend on new furniture each year
business balance sheet
statement of financial position at specific date in time, typically end of year
biz balance sheet lists
assets, liabilities, shareholders equity
biz assets
-goods, property, intangibles that the co. owns
-can be sold, or used to make products or services the co. can sell
what generates the cash used for biz operations and liabilities?
current assets
Shareholders equity
remaining value if co. sold its assets and pay off liabilities today
Biz BALANCE SHEET formula
Assets = liabilities + shareholders equity
liability
debt or financial obligation to others
biz income statement
-how much REV 💸a co earned or lost
-operational COSTS 🛒associated w/that rev.
Income statement shows
“bottom line”
🤼♂️
-operating results expressed as NET INCOME 🥅
-reports EPS
EPS
what shareholders receive for each share, if net earnings were distributed to them
Gross sales and what are they reduced by
TOTAL REV from sale of products or services.
reduced by SALES DISCOUNTS and RETURNS to get NET sales
cost of sales
$ the co. spent on producing a finished product from raw materials
product costs
-DIRECT MATERIALS 🪵 and DIRECT LABOR 👷♀️ to manufacture
-OVERHEAD 🏭including plant ops, utilites, maintenance & supplies
gross margin
gross sales - cost of sales = gross margin (profit or loss)
technical terms operating expenses
annual DEPRECIATION of LT assets, AMORTIZATION of intangibles, R&D, sales and marketing expenses, admin
how to find income from operations
gross margin 📏 - operating expenses 🏣
business dividend and interest income
companies investments stocks, bonds, other interest bearing accts.
business interest expense
interest co. pays annually on borrowed $
net income
resulting profit or loss co made @ year end
EPS calc
net income divided by # of outstanding common shares
cash flow statement shows what
-inflow ⬅️and outflow ➡️ of cash over the accounting period
-is cash sufficient to pay for expenses, materials, and operations
where is cash flow info from
balance sheet and income statements
accrual basis
once a product or or service has been delivered 🚛 or an expense has occurred
balance sheet and income statement report on what basis
ACCRUAL basis - once a service or product has been delivered 🚛 or expense occurred📊
collection of cash typically does what
typically LAGS what is reported and doesn’t represent the actual cash receipts/disbursements over the period
biz cash flow statement definition
net increase ⬆️ or decrease ⬇️ in cash 💵 as related to OPERATING activities, INVESTING activities and FINANCING activities
biz financing activities
issuance or repayment of DEBT or SECURITIES and distribution of DIVIDENDS
business Investing activities
acquisition or disposal of assets
operating activities
cash💰 effects from producing 👷 and selling 💰 PRODUCTS or SERVICES
pro forma statements
-planning future business ops
what is needed to make a pro forma statement
CURRENT year’s 📆 income statement & estimates of final sales and expenses
maximum consumer debt limit
20%
formula for consumer debt ratio
non-mortgage debt payments/monthly take-home pay = debt limit ratio
NET Calculation
PITI
- principal
- interest
- taxes
-homeowner’s insurance
Max PITI percentage
28% of PRETAX monthly income
Front-end Ratio (not a number)
compares monthly housing expenses to gross monthly income
Gross income of 150k what is PITI limit
(150k / 12) x .28 = $3,500
Yearly housing expense = 21,600
Property tax = 5k
Homeowner’s Ins = 1k
Income = 150k what is PITI ratio
27,600 / 150,000 = 18.4% which is less than 28%
back end ratio
used by lenders to assess the TOTAL debt relative to income
target 36%
back end ratio calc.
(PITI + any monthly installment or revolving credit payments) / gross monthly income
Long term debt to net worth ratio
excluding short term debt
long term debt/net worth max ratio
over 30% should be viewed with caution
savings ratio
annual savings/annual gross income
AT LEAST 10%
savings strategies
- emergency fund
- automatic savings acct
- asset mgmt acct using dollar cost avg.
- period investment plan
- series EE bonds
- pension and IRA contribs.
clients goals emanate from
- wants and needs 🏡🚗
- life cycle events 🍼
- life transitions 👵
Current ratio
current assets/current liabilities
Debt ratio
total debt/total assets
Total long term debt ratio
long term debt/total assets
Living expense ratio
monetary assets / [annual living expenditures debt ratio /12 ]
Monthly Housing Cost ratio (this is important)
PITI (principal + interest + taxes + insurance / gross monthly income) should be less than 28% of gross monthly income
Is it possible to not meet the front end ratio but hit the back end ratio?
Yes
Does a cash flow statement show net worth?
No that is on the balance sheet
Current liabilities
cc debt, accounts payable, bank operating credit, portion of long term debt paid in next 1 year, accrued expenses and taxes payable
Current Assets include
cash, cash equiv, accounts receivable, stock investory, marketable securities, prepaid liabilities, other liquid assets
Is home equity included in net worth?
Yes
