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    Chapter 2 Draft PDF

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    Ashley Bohol Alvarez
    Financial statements and budgets help determine your current financial position and progress toward goals. A balance sheet reports assets, liabilities, and net worth on a given date, showing if net worth is positive (solvent) or negative (insolvent). An income statement reports income and expenses over time, using the cash basis method. Financial plans evaluate major costs while financial statements show actual results via a balance sheet and income statement, along with key ratios like the solvency, liquidity, and debt service ratios.

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    Chapter 2 Draft PDF

    Uploaded by

    Ashley Bohol Alvarez
    62 views2 pages
    Financial statements and budgets help determine your current financial position and progress toward goals. A balance sheet reports assets, liabilities, and net worth on a given date, showing if net worth is positive (solvent) or negative (insolvent). An income statement reports income and expenses over time, using the cash basis method. Financial plans evaluate major costs while financial statements show actual results via a balance sheet and income statement, along with key ratios like the solvency, liquidity, and debt service ratios.

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    Financial statements and budgets help determine your current financial position and progress toward goals. A balance sheet reports assets, liabilities, and net worth on a given date, showing if net worth is positive (solvent) or negative (insolvent). An income statement reports income and expenses over time, using the cash basis method. Financial plans evaluate major costs while financial statements show actual results via a balance sheet and income statement, along with key ratios like the solvency, liquidity, and debt service ratios.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    62 views2 pages

    Chapter 2 Draft PDF

    Uploaded by

    Ashley Bohol Alvarez
    Financial statements and budgets help determine your current financial position and progress toward goals. A balance sheet reports assets, liabilities, and net worth on a given date, showing if net worth is positive (solvent) or negative (insolvent). An income statement reports income and expenses over time, using the cash basis method. Financial plans evaluate major costs while financial statements show actual results via a balance sheet and income statement, along with key ratios like the solvency, liquidity, and debt service ratios.

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    Financial goals describe your destination.

    Balance Sheet Major Headings Solvent when your Net Worth is Positive
    Financial Statements and Budgets are the ASSETS: (LIRPA) Insolvent when your Net Worth is Negative
    tools that help you determine exactly where
    Total Liquid Assets -----------------------------------------------------------
    you are in the journey.
    Total Investments Personal Income Statements are prepared
    Balance Sheet reports your Assets,
    on the Cash Basis
    Liabilities, and New Worth as of a specified Total Real Property
    date. A method of preparing financial statements
    Total Personal Property
    in which only transactions involving actual
    Income and Expense Statement reports
    Total Assets cash receipts or actual cash outlays are
    how you did over a period of time, month or
    recorded.
    year LIABILITIES AND NET WORTH: (CLLWL)
    Cash Surplus is an excess amount of
    ----------------------------------------------------------- Total Current Liabilities income over expenses that results in
    RELATIONSHIP BETWEEN FINANCIAL Total Long-term Liabilities increased net worth.
    PLANS AND FINANCIAL STATEMENTS
    Total Liabilities Income is Earnings received as wages,
    Financial Plans: salaries, bonuses, commissions, interest and
    Net Worth dividends, or gain or loss from the sale of
    • Evaluate and plan major outlays assets. Items are recurring, increases assets
    • Manage credit Total Liabilities and Net Worth
    and no impact on liabilities.
    • Secure adequate insurance coverage -----------------------------------------------------------
    • Establish savings/investment Expenses are Money spent on living costs
    programs Net Worth: Assets – Liabilities = Net Worth and to pay taxes, pay for assets, or repay
    • Manage employee benefits debt.
    Assets The fair market value of what you
    • Reduce taxes own -----------------------------------------------------------
    • Implement retirement program
    • Minimize estate taxes Liabilities: Income Statement Major Headings

    Budgets: Current – Amount you owe that is Income: (WSBIPOT)


    due within one year
    • Monitor and control income, living Wages and Salaries
    expenses, purchases, and savings Long-term – Amount you owe that is
    Self-Employed Income
    on a monthly basis. due more than one year from date
    Bonuses and Commissions
    Financial Statements: Fair Market Value What you can sell an
    asset for, that is the Net Realizable Value Investment Income
    Actual Financial Results:
    • Balance Sheet ----------------------------------------------------------- Pensions
    • Income and expense statement Other Incomes
    -----------------------------------------------------------
    Total Income Debt Service Ratio:
    Total Monthly Loan Payments / Monthly
    Gross Income
    Expenses: (HFTMCIAROT)
    ----------------------------------------------------------
    Housing and Utilities
    Cash budget reports the forecasted or
    Food
    estimated cash receipts and the forecasted
    Transportation or estimated cash expenses for the year. By
    reporting the cash budget by month, you can
    Medical identify the month that you may have a
    Clothing and Personal Care problem such as short of cash.

    Insurance and Taxes By comparing the actual cash receipts and


    expenses to the budget, you can control your
    Appliances and Furniture spending. The difference is called a
    variance.
    Recreation
    Positive Variance If actual income is
    Other Expenses
    greater than budgeted income
    Total Expenses
    Negative Variance If actual expenses are
    ----------------------------------------------------------- greater than budgeted expenses

    BALANCE SHEET RATIOS Inflation is the most prominent source of


    investment risk.
    Solvency Ratio:
    Net Worth / Total Assets

    Liquidity Ratio:
    Total Liquid Assets / Total Current Debt
    (Liabilities)

    Savings Ratio:
    Cash Surplus / Net Income

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