FUND CH4 Personal Financial Statements: Preparation and Analysis Flashcards
What 3 things does a “Balance Sheet” (statement of financial position) list?
Listing of:
o Assets- Property owned or partially owned by client
Stated at fair market value
o Liabilities- Debt obligations owed by the client
Stated at principal outstanding
o Net Worth-Difference between Assets and Liabilities
Balances are stated at a “Moment in Time”
o Fixed date
What is “Statement of Income and Expenses” and what 3 things does it list?
Listing of:
o Income
Includes salary, interest, dividends, business income
o Savings
Deposits to retirement plans, education savings
o Expenses
Both variable and fixed expenses
What is “Statement of Net Worth” ?
and give 4 Examples of transactions that appear on “Statement of Changes in Net Worth”
Explains changes in net worth that do not affect cash and have not been recorded on Statement of Income and Expense or Cash Flow Statement.
• Essentially, this statement explains changes in net worth that do not affect cash.
• Examples of transactions that appear on Statement of Changes in Net Worth.
o Assets that appreciated in value.
o Assets that depreciated in value.
o Gifts of assets other than cash that were given or received.
o Inheritances of assets other than cash.
What is “Cash Flow Statement”
Explains how cash and cash equivalents were used or generated between two balance sheets. Essentially it captures transactions that impact cash.
is an accounting tool to help explain changes in net worth between two years’ balance sheets. The statement of cash flows captures transactions that
are not part of the balance sheet or income and expense statement.
What are three important tips to being successful in preparing and using a “budget”?
o Be realistic with spending behavior.
o Budget a line item expense for miscellaneous expenses and
unforeseen expenses.
o Being successful with a budget takes practice.
What does the “Financial Statement Analysis” allow us to do?
• Financial statement analysis provides insight to a client’s strengths and weaknesses.
o Allows us to answer questions related to:
How well does the client manage debt?
How well is the client progressing toward financial
goals?
What is the client’s ability to meet ST obligations
What are 3 Comparative Financial Statement Tools?
Vertical Analysis, Horizontal Analysis, Ratio Analysis
What is Ratio Analysis?
processing key financial ratios- comparing to industry benchmarks
What is Vertical Analysis?
lists each line item on the income statement as a percentage of total income and presents each line item on the balance sheet as a percentage of total assets
What are the 3 categories Assets fall into on a “personal balance sheet”
o Cash & Cash Equivalents- Cash, checking, money market, CD (12 or less maturity), Includes any asset that the clients expects to convert to cash
within one year.
o Investments-Stocks, bonds, mutual funds, retirement accounts, business.
o Personal Use Assets- Personal residence, car, furniture, boat, clothing, Assets used to maintain the clients lifestyle.
Liabilities are classified according to the timing when they are due. What are the 2 time frames?
o Current liabilities-Obligations that are due within the next 12 months.This section excludes interest unless already incurred. Examples of current liabilities include credit card and unpaid bills.
o Long Term Liabilities-The remaining balance on any outstanding debt beyond, 12 months is a long term liability. Examples include mortgage on house, car loan, boat loan
What are 4 Limitations on Statement of Income and Expenses
o Purchase or sale of an asset. Only recurring income and expenses are included.
Typical budget line items, not asset purchases or sales.
– Budget line items are monthly recurring expenses
such as utilities, mortgage, insurance payments, etc.
– Asset purchases include stocks, mutual funds, car.
o Employer contributions to retirement plans can be
significant.
o Only employee’s contributions are captured and reported
o Does not capture gifts or inheritances.
Giving or receiving of gifts is excluded.
Receiving of inheritances is also excluded.
What are the 5 steps in the Budget Process
o Establish goals with the client.
o Determine the client’s income for a time period.
o Determine expenses, both fixed and variable.
o Determine whether the net discretionary cash flow is
positive or negative.
o Present expenses as a percentage of income for the time period being presented.
What is a limitation of the “Financial Statement Analysis”
o Only provides us with a historical perspective, it is not predictive of the future.
Horizontal Analysis
Horizontal analysis lists each item as a percentage of a base year and creates a trend over time
