General Principles Chapter 3 Flashcards
Net Worth
assets-liabilities
Statement of Financial Position
aka: balance sheet/net worth statement
Asset Categories
cash & cash equivalents, investments, use assets (all FMV)
Liabilities
cc balances & loans
Statement of Cash Flows
inflows - gross income
fixed outflows
variable outflows
taxes (income & fica SE)
Business Financial Statements
balance sheet, income statement, statement of cash flow
Book Value
reflects corporate balance sheet (book value of A & L = NW of business)
Capitalized Value
projected flow of income from a business converted into present value amount
= annual income/capitalization rate
Pro Forma Statement
Projected expected profitability or return of next year/longer
estimated income over expenses
Budgeting
makes clients feel constrained
guidelines: flexible, 1+ years, simple, estimate unknowns and variables
Emergency Funds
use safe and accessible vehicles for emergency fund
3 Month Emergency Fund
single w/ second source of income
married, both work w/ similar wages
married, 1 w/ 2 sources of income
6 Month Emergency Fund
Single wage earner
married, one spouse works
Housing Expenses: Debt Management Ratio
PITI or rent (principal, interest, taxes, insurance) should be less than or equal to 28% of gross income
Total Monthly Debt: Debt Management Ratio
total monthly debt should reflect less than or equal to 36% of gross income
