Financial Planning Week 2- Financial Statements & Analysis

What is money management?

:: The process of planning, organizing, directing, and controlling financial resources to achieve personal financial goals.

What are the core money management activities?

:: Maintaining financial records, preparing financial statements, budgeting.

Why are personal financial records important?

:: They support tracking, analysis, and better financial decision-making.

What is a personal financial statement?

:: Summary of what a person owns, owes, earns, and spends; reflects results of past financial decisions.

Are personal financial statements historical or future-oriented?

:: Historical.

What accounting basis do personal financial statements use?

:: Cash basis accounting.

What is cash basis accounting?

:: Income and expenses are recorded when cash is received or paid.

How do personal and business financial statements differ?

:: Businesses use IFRS and accrual accounting; personal statements use cash basis accounting.

What is a Net Worth Statement?

:: A snapshot of assets and liabilities at a specific date.

What sections are included in a Net Worth Statement?

:: Assets and liabilities.

What is the formula for net worth?

:: Net Worth = Total Assets − Total Liabilities

What does a positive net worth indicate?

:: Assets exceed liabilities.

What is an asset?

:: Anything you own with value, measured at FMV.

What is a liability?

:: Money you owe and have not fully paid.

What is the difference between liquid and non-liquid assets?

:: Liquid assets can be quickly converted to cash; non-liquid assets cannot.

How are liabilities recorded on a Net Worth Statement?

:: Using the outstanding balance on the statement date.

Name two ways to improve net worth.

:: Increase assets and reduce liabilities.

Why is positive cash flow important for net worth growth?

:: It allows savings and investments to grow assets.

What should net worth growth exceed over time?

:: Inflation.

What is a Cash Flow Statement?

:: A summary of income and expenses over a period of time.

What time period does a Cash Flow Statement cover?

:: A month or year.

What is the formula for cash flow?

:: Cash Flow = Income − Expenses

What is a cash surplus?

:: Income is greater than expenses.

What is a cash deficit?

:: Expenses exceed income.

What is net income (take-home pay)?

:: Income after deductions such as taxes, CPP, EI, and benefits.

What are fixed expenses?

:: Regular expenses that stay the same each period.

What are variable expenses?

:: Expenses that change from month to month.

What are discretionary expenses?

:: Non-essential spending.

What are non-discretionary expenses?

:: Essential spending.

What is a budget?

:: A future-oriented plan for income and expenses.

What is the purpose of a budget?

:: To improve financial position through planning.

Why can unrealistic budgets cause financial problems?

:: They can lead to overspending, debt, and cash shortages.

What does net worth analysis measure?

:: Financial progress over time.

Why is cash flow analysis important?

:: Ensures bills are paid, avoids debt, and protects credit rating.

How can excessive credit use affect cash flow?

:: High credit card balances or loans can increase monthly payments, creating deficits.

What is a key principle when creating a budget?

:: Allocate income to cover fixed, variable, and discretionary expenses realistically.

Why should a budget reflect realistic income and expenses?

:: To prevent overspending, borrowing, or creating cash flow problems.

How can a budget help achieve financial goals?

:: By planning spending and saving strategically, allowing surplus money to grow assets.

What is the CPP employee contribution rate (2026)?

:: 5.95%

What is the CPP employer contribution rate (2026)?

:: 5.95%

What is the CPP self-employed contribution rate (2026)?

:: 11.90%

What is the enhanced CPP rate?

:: 4%

What is the YBE?

:: Year’s Basic Exemption = $3,500

What is the YMPE (2026)?

:: Year’s Maximum Pensionable Earnings = $74,600

What is the YAMPE (2026)?

:: Year’s Additional Maximum Pensionable Earnings = $85,000

What is the EI employee premium rate (2026)?

:: 1.63%

What is the EI employer premium rate (2026)?

:: 2.28%

What is the maximum EI insurable earnings (2026)?

:: $68,900

How are personal assets recorded?

:: At Fair Market Value (FMV)

What is FMV?

:: Fair Market Value

What does IFRS stand for?

:: International Financial Reporting Standards

Explain CPP calculation for income ≤ YMPE.

:: Basic CPP = (Income − YBE 3,500) × 5.95%

Explain CPP calculation for income > YMPE.

:: Step 1: Basic CPP = (YMPE 74,600 − YBE 3,500) × 5.95% ; Step 2: Enhanced CPP = (YAMPE 85,000 − YMPE 74,600) × 4% ; Step 3: Total CPP = Basic + Enhanced

Calculate CPP for $55,000 income.

:: (55,000 − 3,500) × 5.95% = $3,064.25

Calculate CPP for $100,000 income.

:: Basic CPP: (74,600 − 3,500) × 5.95% = 4,229.45 ; Enhanced CPP: (85,000 − 74,600) × 4% = 416 ; Total CPP = 4,645.45

How are CPP contributions calculated for self-employed individuals?

:: They pay both portions: 5.95% + 5.95% = 11.90%; enhanced portion = 8%

Explain EI calculation formula.

:: EI = Insurable earnings × 1.63% (up to $68,900)

Calculate EI for $100,000 income.

:: 68,900 × 1.63% = $1,123.07

Calculate EI for $40,000 income.

:: 40,000 × 1.63% = $652.00

What does net worth analysis help identify?

:: Strengths and weaknesses in financial health; whether assets are growing faster than liabilities

How can analyzing cash flow prevent financial problems?

:: By identifying overspending, irregular expenses, and areas where spending can be adjusted