Personal and Business Financial Statements Flashcards
Current Liability
A current liability is any debt that must be paid off within one year.
Long Term Liabilities
Long-Term Liabilities usually involve sums too large for the average individual to pay off within one year. They are debt obligations that extend beyond one year. Long-term liabilities include debt on larger assets such as your home, car or student loan. Because of the nature of the assets it finances, long-term debt almost always involves larger amounts than current liabilities.
Three Types of Long Term Liabilities
Long-term portion of loans with specific repayment schedules.
Long-term liability portions of revolving debt.
Long-term liability portions of loans that do not have repayment schedules.
Long-term portion of loans with specific repayment schedules.
Long-term portion of loans with specific repayment schedules. Installment loans are loans that have a set term and each payment includes a principal and interest component. You can take out installment loans to purchase automobiles, furniture, and major appliances.
Long-term liability portions of revolving debt.
Long-term liability portions of revolving debt. This is debt on which the payment is a function of the current principal balance. For example, credit card and home equity line payments are typical examples of revolving debt.
Long-term liability portions of loans that do not have repayment schedules.
Long-term liability portions of loans that do not have repayment schedules. While these loans do not require repayment, you do pay interest on them periodically. For example: the $2,000 loan the Fowlers have on John’s insurance policy. These loans do not require repayment, but interest on them is paid periodically.
Current Ratio
The current ratio looks at the amount of current (liquid) assets compared to the amount of current liabilities. The resulting measure of your liquidity is called the current ratio or the liquid ratio.
Current Ratio Formula
Current Ratio = Current (liquid) Assets/Current Liabilities
The recommended target for this ratio is between 1.0 to 2.0.
Living Expense Ratio
The Living Expense Ratio is also referred to as the Emergency Fund Ratio. While the current ratio provides insight into the client’s ability to pay current debts from current assets, the Living Expense (or Emergency Fund) Ratio illustrates the client’s ability to withstand and weather a financial hardship. Approximately how long could the client remain solvent, without having to incur additional debt, if they found themselves out of work?
Living Expense Ratio Formula
Living Expense Ratio (Emergency Fund Ratio) = Current Assets/Monthly Living (non-discretionary) Expenses.
Savings Ratio
The Savings Ratio is simply the ratio of income available for savings and investment compared to the annual gross income. This ratio tells you what proportion of your gross income is being saved. The annual savings includes employer retirement plans and all other savings.
Savings Ratio Formula
Savings Ratio = Annual Savings / Annual Gross Income
The target for the savings ratio is generally 10%
