LO 3-2 Develop a personal balance sheet and cash flow statement

Main purposes of Personal Financial Statements

• Report your current financial position in relation to the value of the items you own and the amounts you owe

• Measure your progress toward financial goals

• Maintain information on your financial activities

• Provide data you can use when preparing tax forms or applying for credit

Personal Balance sheet: Step 1

List Items of Value: Assets

• Liquid assets

• Real estate

• Personal possessions

• Investment assets

Step 2: Determine amounts owed

Current liabilities (less than one year)

Long-term liabilities (mortgage)

Liabilities

What you owe to others

Step 3: Compute net worth

If a household has 193,000 of assets and liabilities of 88,000, then the net worth would be 105,000

193,000-88,000 = 105,000

Net worth

Difference between total assets and total liabilities

Insolvency

inability to pay debts when they are due

Net worth

An indication of your current financial position on a given date

Ways to increase net worth

1. Increasing your savings

2. Reducing spending

3. Increasing the value of investments and possessions

4. reducing the amounts owned

Cash flow

The actual inflow and outflow of cash for a given time period

Also called a personal income and expenditure statement

Process for preparing a cash flow statement

Total cash received during time period - cash outflows during time period = cash surplus or deficit

Cash flow statment: Step 1

Record income

• Wages, salaries, commissions, and self employment business income

• Savings and investment income

• Gifts, grants, scholarships and government payments such as social security, public assistance, and unemployment benefits.

• Amounts received from pension and Retirment programs

• Alimony and child support payments

Cash Flow Statement step 2

Record Cash outflows

• Fixed expenses (do not vary from month to month)

• Variable expenses (flexible payments)

Step 3: Determine Net cash Flow

• The difference between income and outflows can either be positive (surplus) or negative (deficit)

• Cash flow statement provides the foundation for preparing and implementing spending, saving and investment