Fundamentals & Insurance: Financial Statements Flashcards
Balance Sheet
- list of assets, liabilities, and NW
- snapshot at a moment in time
Net Worth
Assets - Liabilities
Cash & Cash Equivalents
- Cash, MM, CD<12months
Invested Assets
IRA, brokerage, CD> 12 months
Personal Use Assets
car, house, jewlery, furniture
Liabilities
Credit Cards, Mortgage, auto loan, student loan
Assets
- property that is owned/partially owned by client
- all assets are stated as FMV
- 3 categories (cash/cash equivalents or Current assets, invested assets, Personal Use Assets)
FMV
- price at which a willing buyer is willing to buy and the price at which a willing seller is willing to sell
Cash & CE, Current Assets
- cash, checking, MM, CD < 12 months
- includes later CDs set to mature every 6 mos
- includes anything that the client expects to convert to cash within a year
- does not include EE savings bonds
Invested Assets
- stocks, bonds, MFs, retirement accounts, business ownership, any assets maturing in > 12 months
- EE savings bonds
Personal Use Assets
- Personal Residence, car, furniture, boat, clothing, any assets used to maintain clients lifestyle
Liabilities
- debt obligations that are owed by client
- stated at principal outstanding
- either LT or ST
Current Liabilities
- due within the next 12 months
- includes interest unless already occurred
- credit cards, taxes payable, any unpaid bills such as utilities, cable, phone bill
Long-Term Liabilities
- remaining balance on any outstanding debt beyond 12 months
- outstanding balance on a loan for the clients house, car, boat
Income Statement
- Statement of CFs
- list of income, savings, expenses, and taxes
Income
- salary, interest, dividends, and business income
savings
- is an outflow to retirement plans, education savings or any other savings account
Expenses
- both fixed and varibale
Fixed expenses
- mortgage, car payment, boat pmt, student loan pmt, any expenses that remain constant each month
Variable expenses
- car repairs, entertainment expenses, utilities, charitable contributions, any expenses where the client can exercise control
Financial Statement Analysis
- gives insight to a clients strengths and weaknesses
- only shows a historical perspective, not future predictive
- allows us to answer:
how well a client manages debt
how well a client is progressing toward his financial goal
how well the client is able to meet ST obligations
Ratio Analysis
- gains additional insight into the financial situation and behavior of the client
- generate questions for the client to answer to further gain insight
Categories of Ratios
- Liquidity
- Debt
- Performance
Liquidity ratios
- measure the ability of a client to meet ST or current liabilities
Debt Ratios
- Debt Analysis
- how well a person manages their overall debt
Performance Ratios
- asses the financial flexibility of the client, as well as the clients progress towards goals
Liquidity Ratios
- Current Ratio
- Emergency Fund
Current Ratio
- Liquidity ratio that measures a clients ability to meet ST obligations
- includes cash and CE that expire in less than 12 months
Current Assets / Current Liabilities
Emergency Fund
- client needs 3-6 months in NON discretionary (fluffy) expenses
= CA / monthly non-discretionary expenses
Nondiscretionary Expenses
- include only those expenses that do not go away if you lose your job
- mortgage, utilities, food, car loan, property taxes, insurance premiums
- do NOT include: payroll taxes, contributions to a retirement account
Debt Ratios
- Housing Ratio
- Housing & All other debt Ratio
Housing Ratio 1
Monthly Housing Costs (P+I+T+I) / Monthly Gross Income
P+I+T+I
P - Principal
I - Interest
T - Taxes (property)
I - Homeowners Insurance
Housing and All Other Debt Ratio
- should be < or = 36% of GROSS income
- all other debt: auto, student loans, boat, CC, any other type of monthly debt
Monthly Housing Costs (P+I+T+I) + all other recurring debt payments / Monthly gross income
Adjustable Rate Mortgage (ARM)
- a 2/6 ARM means that the interest rate cannot increase more than 2% per year or 6% during the term of the loan
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 mtg occurs at the homeowners death
- is appropriate to generate income for elderly homeowners
- available if the homeowner is age 62 or older
Mortgage Calculations
- Monthly/annual mortgage payment
- interest expense deduction
- refinance with points
principal reduction
Performance Ratios
- Savings Ratio
- ROI
Savings Ratio
- benchmark savings ratio target is 10-12% of GI if client starts saving before 32
- if start saving at 45 or 50, then rate will be 20-25% of GI
- contributions to 401k, profit sharing plan, and ER contributions increase savings rate
Annual Savings (EE + ER contribs) / Annual Gross Income
ROI
provides insight as to the likelihood of achieving goals
= (ending investments - beginning investments - savings - gifts received) / Average Invested Assets
savings = annual salary - fixed expenses - variable expenses
average invested assets = (beginning investments + ending investments) / 2
Variable Rate Mortgage
- most appropriate time to use this type of mortgage rate is when income is expected to significantly increase in the future or you anticipate living in the house for a short period of time
Just laid off: what do you do
- file for unemployment IMMEDIATELY
Shift in Demand Curve
- Disposable income
- Income
- Taxes
- Savings
Shifts in Supply Curve
- CATs
- Competition
- Anything other than Price
- Technology
Monetary Policy
- Fed res
Fiscal Policy
- Congress
Federal Reserve
- controls the MS and influences interest rates
Congress
- controls spending and taxation, which influences the MS and interest rates
3 main goals of monetary policy
- maintain LT economic growth
- maintain price levels
- maintain employment
Increase MS
- decreases interest rates
- easing monetary policy
- buying gov securities (gov is GIVING you $ in exchange for securities)
Decrease MS
- interest rates increase
- Selling gov securities (gov is TAKING your $ in exchange for securities)
- tightening monetary policy
Monetary Policy’s 4 tools
- REDO
- reserve requirement
- excess reserves
- discount rate (overnight interest rate that banks borrow from fed)
- open market operations
Fed Funds Rate
- interest rate at which member banks borrow from each other
Congresses 3 Tools
- DST Vision
- Debt management
- Spending
- Taxes
Fair Credit Reporting Act
- right to view credit report each year
Fair Debt Collection Act
- creditors cannot call you at work and can only speak to your lawyer as instructed
Fair Credit Billing Act
- gives you 30 days to acknowledge receipt of billing dispute
- can correct errors within 90 days
- only charged $50 max to credit card company
Truth in Lending Act
- must disclose total cost of financing
CARD Act
- must be 21 to open a credit card in your own name
FDIC
- CASH ONLY
- any deposit within the US is covered
- any deposit payable outside of US is NOT covered
- money markets, stocks, bonds, mutual funds are NOT covered
chapter 7 bankruptcy
relief through liqudiation
chapter 11
relief through reorg
chapter 13
relief through adjusting debts
debts NOT discharged at bankruptcy
- alimony and child support
- 3 years of back taxes
- student loans
- debts through fraud
protected assets from bankruptcy
- rollover IRAs - unlimited protection
- IRA/Roth - $1.3M protection
- Inherited IRA - NO PROTECTION
- alimony and child support
- pensions, life insurance, annutities
Federal Programs
- Special Ed
- Social security benefits
- benefits for disabled vets
state programs
- residential services
- transportation services
- respite care services
- family support services
- day program services
- employment services
