Financial Statements, Ratios Flashcards
balance sheet definition
a listing of assets, liabilities, and net worth all with balances at a moment in time
proper dating layout for a balance sheet
“As of December 31, 20xx”
specific date
what are all assets valued at on the balance sheet
fair market value
fair market value (FMV)
the price at which a willing buyer is willing to buy and the price at which at willing seller is willing to sell
3 categories of assets
- cash and cash equivalents (current assets)
- invested assets
- personal use assets
examples of cash and cash equivalents (current assets)
cash, checking account, money market, CD maturing in less than 12 months, laddered CDs set to mature every 6 months, anything the client expects to convert to cash within 1 year
does NOT include EE savings bonds
examples of invested assets
stocks, bonds, mutual funds, retirement accounts, business ownership, any assets maturing in greater than 12 months
examples of personal use assets
residence, car, furniture, boats, clothing, any assets used to maintain the client’s lifestyle
liabilities definition
debt obligations that are owed by the client
how are liabilities valued on the balance sheet
stated at principal outstanding
current liabilities (and examples)
obligations due within the next 12 months
examples: credit cards, taxes payable, unpaid bills
long-term liabilities (and examples)
remaining balance on any outstanding debt beyond 12 months
examples: client’s house loan
net worth
difference between assets and liabilities
statement of income and expenses (aka cash flows statement)
a listing of income, savings, expenses, and taxes
fixed expenses
mortgage, car payment, boat loan, student loan payment, and generally any expense that remains constant each month
variable expenses
car repairs, entertainment expenses, utilities, charitable contributions, and generally any expense over which the client can exercise control
proper dating layout for a statement of income and expenses
“For the Year 20xx”
over a period of time
liquidity ratios (definition, list of the liquidity ratios)
measure the ability of a client to meet short-term or current liabilities
ratios: current ratio, emergency fund
debt ratios (definition, list of the debt ratios)
indicate how well a person might manage their overall debt
ratios: housing ratio, housing and all other debt ratio
performance ratios (definition, list of the performance ratios)
assess the financial flexibility of the client, as well as the client’s progress towards goals
ratios: savings ratio, rate of return on investments
current ratio definition
a measure of the client’s ability to meet short-term obligations
current ratio formula
(current assets) / (current liabilities)
emergency fund benchmark
3-6 months of non-discretionary expenses
non-discretionary expenses
includes those expenses that do not go away if you lose your job, such as mortgage, utilities, food, car loan, property taxes, insurance premiums
does NOT include income taxes, payroll taxes, and contributions to a retirement savings account
emergency fund ratio formula
(current assets) / (monthly non-discretionary expenses)
housing ratio (formula and benchmark)
formula: (monthly housing costs) / (monthly gross income)
benchmark: should be less than or equal to 28% of gross income
PITI stands for what?
Principal, Interest, Property Taxes, and Homeowners Insurance
housing and all other debt ratio (formula and benchmark)
formula: (monthly housing costs + all other recurring debt payments) / (monthly gross income)
benchmark: should be less than or equal to 36% of gross income
Adjustable Rate Mortgage (ARM)
appropriate when the client’s time in the property will be short (1-3 years)
Reverse Mortgage
the homeowner receives a monthly payment or lump sum from a bank while retaining the right to live in the house
repayment of the outstanding mortgage occurs at the homeowner’s death
appropriate when needing to generate income for elderly homeowners (62+)
savings ratio (formula and benchmark)
formula: (annual savings) / (annual gross income)
benchmark: 10-12% of gross income is the target range if a client starts saving before 32 years old (20-25% if saving starts around age 45-50)
rate of return on investments (ROI) (formula)
ROI = (ending investments - beginning investments - savings - gifts received) / (average invested assets)
average invested assets = (beginning investments + ending investments) / 2
