Ac 371 Chapter 4

Principle Financial Statements include

Balance Sheet and Income Statement

Supplementary Financial Statements include

Statement of Net Worth and Cash Flows

Balance Sheet Equation

Assets = Liabilities + Net Worth

Personal Use Assets

Used to maintain lifestyle

Asset Ownership - Sole Ownership

One individual has all rights to the property

Tenancy in Common

Owned by two or more related/unrelated persons who hold undivided interests

Joint Tenancy with Right of Survivorship

Owned by two or more related/unrelated persons who each own an equal and undivided interest

Tenancy by the Entirety

Married couples only, both own 100% at the same time

Community Property

Any property acquired during marriage, equal and undivided interest

What is included in the income statement (statement of income and expenses)

Recurring items only

What is excluded from the income statement?

Purchase/Sale of asset, ER contributions, Gifts

Net discretionary cash flows =

Income - Savings - Expenses

Step 1 Budgeting Process

Establish goals

Step 2 Budgeting Process

Determine client’s income for a time period

Step 3 Budgeting Process

Determine expenses for the time period of the budget

Step 4 Budgeting Process

Determine whether the net discretionary cash flow is positive or negative

Step 5 Budgeting Process

Present expenses as a percentage of income for the time period

Ikea Effect

Bias in which people place higher value on things they helped build

Present Bias

More weight is given to near term payoffs

Discretionary Cash Flows

Can be avoided if income is lost

Nondiscretionary Cash Flows

Must be paid even if income is lost

Sensitivity Analysis

Analysis of how the situation if the assumptions are modified

Monte Carlo Analysis

Mathematical simulation used to determine probability of an outcome