Unit 2 - Financial Statements: Analysis and preparation

Question 2

Describe the Statemnt of Financial Position

Answer 2

Personal Balance Sheet. Provides a snapshot of the clients net worth on any given date, usually at the end of the calendar year. December 31st

Question 3

Net Worth Formula

Answer 3

Assets - Liabilities = Net Worth or Assets = liabilites + net worth

Question 4

Key area’s of the Statement of Financial Position

Answer 4

• Assets are always presented at fair market value. Liabilities are always presented at there principal value without regard to any interest obligation
• The Net Worth of the client at any point in time is listed. The goal of the financial planner is to increase the clients net worth on annual basis.
• The respective titling of assets and liabilites shown on a propely prepared statement; this information is important to the planner and estate planning attorney.
• The footnotes shown at the bottom the statement of financial position are critical to the planner to understand the clients current financial status.

***The footnotes are important in the case questions for the CFP.

Question 5

Statement of financial positions 3 distinct categories

Answer 5

1. Total Assets (what the client owns)
2. Total liabilities (what the client owes)
3. Net Worth (what the client is worh after all the liabilites are paid in full)

Question 6

Total Asset categories

Answer 6

• Cash or Cash equivalnets
• Investments
• Pesonal use Assets

Question 7

Cash and Equivalents

Answer 7

Current short term in nature (a maturity of one year or less and commonly invested in Money Market)

Question 8

Personal Use Assets

Answer 8

One that is owned by a client for lifestyle reasons and use, not for investment. Common example would be a home or primary residence

Question 9

Total Liability Categories

Answer 9

Current (Short Term) i.e, those due within one year of the statement date or Long Term i.e. those due after one year of statement date such as a mortgage.

Question 10

Long term liabiliry need to know

Answer 10

With respect to long term liabilities, the amount placed on the statement of financial position is not the original amount of the mortgage but the current unpaid balance as of the date of the statement.

Question 11

Common Abbreviations for property ownership and titling on the SFP

Answer 11

H-individual ownership of Husband

W-Individual Ownership of Wife

JT-property that is held jointly with rights of survivorship

CP-Community property of the husband and wife

Question 12

What is the persoal statement of cash flows?

Answer 12

Summarizes the items of income (including salary/or wages) that were actually received (cash Inflows) and the expenditures actually made (cash outflows) during a specific period. Reflects the clients financial activity OVER A PERIOD OF TIME

Question 13

Savings level formula

Answer 13

Inflows - Outfolows (fixed, variable, and taxes) = savings level

Question 14

List the 3 components of the cash flow statement

Answer 14

1. Cash Inflows
2. Cash Outflows
3. Cash surpuls (savings level or discretionary income) or Cash Deficit

Question 15

Fixed outflows

Answer 15

Mortgage payments Auto note payment Insurance premiums Property taxes

Question 16

Variable outflows

Answer 16

Food Expenses Clothing expenses Utilitites expenses Travel and entertainment expenses

Question 17

Relationship between the Statement of financial position and the personal statement of cash flows

Answer 17

A clients cash flow statement may show how the clients financial position changed between two statement of financial position dates

Question 18

Cash Transaction consequences

Answer 18

Reduce cash amount of statement of financial position, one of three consequences occur.

1. Assets are increased (statement of financial position consequence)
2. Liabilities are decreased (statement of financial position consequence)
3. Cash outflows are increased (cash flow statement consequence)

Question 19

What is the business equivalent to the Statement of Financial Position?

Answer 19

The Balance Sheet. One big difference is that “net worth” on a companies blanace sheet is referred to as retianed capital.

Question 20

What is the business equivalent to the personal statement of cash flows?

Answer 20

The Income Statement. Also knows as the profit and loss statement. Shows you how profitable or un profitable a business what over the stated period.

Question 21

What is a pro forma income statement?

Answer 21

It is similar to a business income statement except that it projects for the future rather than reports the past. These documents are prepared to help the business owner so they can make operational changes ahead of time if needed.

Question 22

What is a business statement of cash flows?

Answer 22

This assists in the reconciliation of reconciliation between two balance sheets.

Three Main components

1. Cash flow from business operations
2. Cash flow from business activities
3. Cash flow from finiancing activiites of the business such as issuance of additional debt (bonds) or equity (stocks)