Personal Finance SUPA Chapter 2 Vocal

Using Financial Statements and Budgets

Financial Plans

roadmaps that show you the way, whereas personal financial statements let you know where you stand financially.

Budgets

detailed short-term financial forecasts that compare estimated income with estimated expenses, allow you to monitor and control expenses and purchases in a manner that is consistent with your financial plans

Personal Financial Statements

planning tools that provide an up to date evaluation of your financial well-being, help you identify potential financial problems, and help you make better informed financial decisions.

Balance Sheet

describes your financial position-the assets you hold, less the debts you owe, equal your net worth (general level of wealth) - at a given point in time

Income and Expense Statement

measures financial performance over time

Budgets

forward looking; they allow you to minor and control spending because they are based on expected income and expenses

Assets

What you own

Liabilities or debts

what you owe

debts such as credit card charges, loan, and mortgages

net worth

the difference between your assets and liabilities

categorizing assets:

liquid assets, investments, real property, and personal property

liquid assets

assets that are held in the form of cash or can readily be converted to cash with little or no loss in value

Investments

assets such as stocks, bonds, mutual funds, and real estate that are acquired In order to earn a return rather than provide a service

real property

tangible assets that are immovable; land and anything fixed to it, such as a house

personal property

tangible assets that are movable and used in everyday life

current, or short-term liabilities

Any debt due within one year of the date of the balance sheet

open credit card obligations

current liabilities that represent the balances outstanding against established credit lines

long term liabilities

any debt due one year or more from the date of the balance sheet

net worth

an individual’s or family’s actual wealth; determined by subtracting total liabilities from total assets

equity

the actual ownership interest in a specific asset or group of assets

insolvency

the financial state in which net worth is less than zero

cash basis

a method of preparing financial statements in which only transactions involving actual cash receipts or actual cash outlays are recorded

income

earning received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets

expenses

money spent on living expenses and to pay taxes, purchase assets, or repay debt

fixed expenses

contractual, predetermined expenses involving equal payments each period

variable expenses

expenses involving payment amounts that change from one time period to the next

cash surplus

an excess amount of income over expenses that results in increased net worth

cash deficit

an excess amount of expenses over income, resulting in insufficient funds as well as decreased net worth

solvency ratio

total net worth divided by total assets; measures the degree of exposure to insolvency

liquidity ratio

total liquid assets divided by total current debts; measures the ability to pay current debts

savings ratio

cash surplus divided by net income (after tax) indicates relative amount of cash surplus achieved during a given period

debt service ratio

total monthly loan payments divided by monthly gross (before tax) income; provides a measure of the ability to pay debts promptly

cash budget

a budget that takes into account estimated monthly cash receipts and cash expenses for the coming year

budget control schedule

a summary that shows how actual income and expenses compare with the vairious budget categories and where variances (surpluses or deficits) exist

budget variance

the difference between the budgeted and actual amount paid out or received

time value of money

the concept that a dollar today is worth more than a dollar received in the future

future value

the value to which an amount today will grow if it earns a specific rate of interest over a given period

compounding

when interest earned each year is left in the account and becomes part of the balance (or principal) on which interest is earned in subsequent years

annuity

a fixed sum of money that occurs annually

future value

future value=amount invested x future value factor

yearly savings

yearly savings = future amount of money desired/future value annuity factor

present value

the value today of an amount to be received in the future; its the amountt that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount

discounting

the process of finding present value; the inverse of compounding to find future value

present value

present value=future value x present value factor

annual withdrawal

annual withdrawal=initial deposit/present value annuity factor

initial deposit

initial deposit=annual withdrawal x present value annuity factor

real rate of return

the rate of return earned after adjusting for the effect of inflation; also referred to as the real interest rate