Module 3 Flashcards
Financial Statements, Cash Flow Management, Financing Strategies, and Financial Institutions
If the partnership interest has been held for quite a while and is considered an income-producing asset, the planner might use the present value of future income streams.
On the other hand, there may be situations in which determining the value is difficult; in such cases, a zero amount can be used.
In the case of assets subject to penalty for early withdrawal, the fair market value is still presented on the statement of financial position, unaffected by potential penalties. If there is a known sum of money or asset that is to be received by the client (such as proceeds of a life insurance policy or the sale proceeds of an asset),
you will have to make a decision concerning its inclusion on the statement as a receivable, footnoting as needed.
One item often ignored, because it isn’t actually an asset, is an inheritance. With some clients, an inheritance of a known amount may be quite certain. It may be that the death has occurred, but the distribution of the estate assets hasn’t taken place. T
The circumstances may be such that there is no concern about whether the inheritance will take place—only when it will occur. In this case, some note of it is appropriate, especially when you are providing estate planning
Common abbreviations for property ownership = S1. = spouse
Individual ownership of the named spouse (or, in a community property state, the spouse’s separate property); the name of the S1 spouse appears in the statement of financial position footnotes.
Common abbreviations for property ownership = S2. spouse 2
Individual ownership of the other named spouse (or, in a community property state, the other spouse’s separate property); the name of the S2 spouse appears in the statement of financial position footnotes
Common abbreviations for property ownership = JT. jointly
Property that is held jointly with rights of survivorship (note that the respective joint tenants are usually, but not always, married spouses; if the joint tenants are nonspouses, it will be reflected as such in the footnotes to the statement).
Assets may be titled as tenants in common (TIC)
tenant
Common abbreviations for property ownership = CP = community
Community property of the spouses
Liabilities can be listed in several different ways.
They could be listed in descending order based on the account balance, to reflect either the order in which payments are due or in the order of shorter-term to longer-term obligations.
(TE)
tenants by the entirety
Current (short-term) liabilities
are those due within one year from the statement date, such as a promissory note.
Long-term liabilities
are those due more than one year from the statement date.
Another style is to list liabilities related to
depreciating assets separate from those for appreciating assets. If the client is delinquent in payments, then the amount overdue, along with accrued interest, should be added to the outstanding principal balance. The financial planner will have to make decisions about including contingent liabilities, footnoting as needed.
Net worth
- is the difference between assets and liabilities.
- It fluctuates from statement to statement, depending on the financial transactions that take place between the dates of statement preparation.
- Comparison of net worth values over time can reveal how well the client is doing in achieving financial goals that involve a permanent increase in net worth.
Footnotes
- are an integral part of all personal financial statements and should be taken into consideration when the financial planner evaluates the client’s situation.
- Footnotes clarify items in the statement or indicate values or circumstances not disclosed in the body of the statement.
- They can also indicate relevant contingencies, such as an inheritance or a pending lawsuit that may affect future assets or liabilities.
TEST TIP
Pay attention to footnotes in practice questions and exam questions. Often, the information in the footnotes is needed to answer correctly. For instance, if a question were asked based on information in Figure 3.1 about the terms of the Smith’s mortgage loan, you would need to reference the footnotes to answer the question correctly.
the cash flow statement = Also known as the statement of cash flows,
- reveals the client’s cash receipts and disbursements over a specific period of time—monthly, quarterly, and often over one year.
- it summarizes the inflows and outflows of cash and reveals a client’s pattern of spending, saving, and investing.
PROFESSOR’S NOTE
A cash flow statement is not technically the same as an income statement. An income statement is most often used in a business context and focuses on a company’s financial performance. Revenue is recognized as income, but may not immediately result in a cash flow (think accrual accounting). Income statements are seldom, if ever, used in a personal financial planning context, except where personally owned businesses are involved
cash flow ~ is not the same as
an income statement
cash flow is used
in personal and business situations
cash flow statement and the statement of financial position are the two primary financial statements used
to evaluate an individual client’s financial situations.
Cash Inflows and Reinvestment in Financial Planning
- Cash Inflows: Include gross salaries, wages, interest, dividends, rental income, tax refunds, and other amounts received.
- Special Inflow Category: Funds withdrawn from savings or liquidated investments should be categorized separately as “savings and investments” to clarify the cash source.
- Dividends & Interest:
3.1. Reinvestment Reporting: Practitioners may either exclude reinvested dividends/interest from financial statements or show them as both an inflow and an outflow.
3.2. Net Effect: The financial impact remains the same, but some lenders and planners prefer the transparency of showing both inflows and outflows, allowing flexibility in financial decisions.
- Cash Inflows:
Include gross salaries, wages, interest, dividends, rental income, tax refunds, and other amounts received.
- Special Inflow Category:
Funds withdrawn from savings or liquidated investments should be categorized separately as “savings and investments” to clarify the cash source.
- Dividends & Interest:
3.1. Reinvestment Reporting: Practitioners may either exclude reinvested dividends/interest from financial statements or show them as both an inflow and an outflow.
3.2. Net Effect: The financial impact remains the same, but some lenders and planners prefer the transparency of showing both inflows and outflows, allowing flexibility in financial decisions.
Outflows in Financial Planning
Outflows Categories:
1. Savings and Investments: Money set aside for future financial goals.
2. Fixed Outflows: Predictable, recurring expenses with little client control (e.g., mortgage payments, insurance premiums).
3. Variable Outflows: Expenses that vary and can be controlled (e.g., food, transportation, entertainment).
RECOMMENDATION: Challenge: Clients often struggle to track all expenses, especially variable outflows.
Solution: Use financial software or apps to track spending, combining credit card statements and checking accounts into a cohesive cash flow tool.