Module 3: Financial Statements, Cash Flow Management, and Financing Strategies Flashcards
What is the statement of financial position?
Also known as the net worth statement, is a profile of what is owned (assets) and what is owed (liabilities or debts) at a given point in time
assets = liabilities + net worth
OR
net worth = assets - liabilities
Types of Assets
- Current Assets
- Invested Assets
- Personal Use Assets
Current Assets and Examples
Low-risk assets that may be readily converted to cash.
short-term CD’s (90 days or less), money markets funds, checking accounts, and savings account.
Invested Assets and Examples
Stocks, bonds, mutual funds, gems, gold and other precious metals, collectibles, investment real estate, fine art, ownership interests in closely held businesses, vested pension benefits, longer term CD’s.
Personal Use Assets
client’s residence, auto, boats, recreational real estate and personal effects like jewelry
Asset Valuation
fair market value
Types of Liabilities
- Current (short-term liabilities)
2. Long-term liabilities
Current Liabilities
Liabilities that are due within one year from the statement date
Pay attention to the footnotes, the answer could be found in them
that is all
Cash flow statement
what a client’s cash receipts and disbursements of a specific period of time
Inflows
Gross Salaries and Wages, interest and dividend income, rental income, tax refunds and other amounts received by the client. If funds are withdrawn from a savings or if invested assets are liquidated, the planner should list such inflows under a special inflow category of savings and investments to identify clearly the source of the cash.
Outflows
Two types of outflows:
- Fixed outflows
- Variable Outflows
Fixed Outflows
note payments, mortgage payments, and insurance premiums
Variable Outflows
food, transportation, clothes and entertainment
Pro Forma Cash Flow Statement
What a future cash flow will look like after implementing your recommendations
Consumer Debt Ratio
monthly consumer debt payments/monthly net income
Should not exceed 20%
Housing Cost Ratio (“Front End Ratio”)
monthly housing costs/monthly gross income
Should not exceed 28%
monthly housing costs include property tax, homeowners insurance and HOA fees.
Total Debt Ratio (“Back end Ratio”
total monthly debt/monthly gross income
Should not exceed 36%
Current Ratio
current assets/current (short-term liabilities)
Hope to be more than 1
Net-Investment-to-net-worth ratio
net investment assets/net worth
net investments exclude equity in home. An older individual should have a higher % of net investments to net worth as they get older.
What is the contributing factor to if someone should have 3 or 6 months in an emergency savings?
The number of wage earners in the pair. If they both earn a decent wage, only need 3 months.
Sources of Borrowing (4)
- Personal Loans
- Credit Cards
- Auto Loans
- Retirement Plans
Installment Loan
a loan for which the client borrows a single amount of oney and repays the balance with interest at stated intervals.
Single payment (bridge) loan
a loan that provides a short-term, temporary financing that is repaid with interest in one lump sum at the end of the term.
Two approaches to debt reduction
Snowball and Avalanche Technique
Credit Score Categories and Their Weighting
Payment History - 35% Amounts Owed - 30% Length of History - 15% New Credit - 10% Credit Mix - 10%
Closed-End Lease
The lessee agrees to pay a stated monthly fee for the use of the asset for a specified period.
FHA Mortgage Loans
Federal Government Guarantees to those who may not meet the financial underwriting requirements for a conventional home loan and has mortgage insurance
VA Loans
for service members, federal guarantee of loan, no mortgage insurance required
Conforming vs. Non-Conforming Loans
Conforming loans conform to the dollar limit requirements, anything over a certain amount is considered a “jumbo” or “non-conforming loan”
Types of Mortgages
- Fixed Rate
- Adjustable Rate
- Interest-only rate
- Balloon Mortgages
- Graduated Payment Mortgages
- Reverse Mortgages
Balloon Mortgage
a mortgage in which the borrower makes fixed payments, which are based upon the established interest rate for a long-term mortgage. However, payments are made only for a short duration and then the borrower is required to pay off the remained of the mortgage in a lump sum
Graduated Payment mortgage
The payments are lower for the first few years of mortgage repayment, then they adjust to a higher fixed payment that continues for the remainder of the loan.
