1 / 28

Chapter 4

Chapter 4. Personal Financial Statements (Preparation and Analysis). Financial Statements Provide Information About:. Financial resources available to client How resources were acquired What the client has accomplished financially utilizing these resources. Personal Financial Statements.

tosca
Télécharger la présentation

Chapter 4

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 4 Personal Financial Statements (Preparation and Analysis) Chapter 4: Personal Financial Statements

  2. Financial Statements Provide Information About: • Financial resources available to client • How resources were acquired • What the client has accomplished financially utilizing these resources Chapter 4: Personal Financial Statements

  3. Personal Financial Statements • Balance Sheet • Income Statement • Statement of Changes in Net Worth Chapter 4: Personal Financial Statements

  4. Financial Statements are Used: • By clients to benchmark goal achievement • By planners to help clients set financial direction • By creditors & lenders to make decisions to extend, continue, or call indebtedness Chapter 4: Personal Financial Statements

  5. Balance Sheet Terms • Asset • Liability • Net Worth Chapter 4: Personal Financial Statements

  6. Asset Categories & Classifications • Cash and Cash Equivalents • Liquid – easily converted to cash • Convert to cash within a year • Investment Assets • Held for growth or income • Personal-Use Assets • Long-lived assets • Used to maintain quality of life Chapter 4: Personal Financial Statements

  7. Liability Categories & Classifications • Current Liabilities • Credit card debt & unpaid bills • Long-Term Liabilities • Debts of larger assets Chapter 4: Personal Financial Statements

  8. Valuation of Assets & Liabilities • Assets valued at FMV • Liabilities represent principal owed Chapter 4: Personal Financial Statements

  9. Sample Balance Sheet Chapter 4: Personal Financial Statements

  10. The Income and Expense Statement • Summary of client’s income and expenses over a period of time, usually one year • May focus on realized transactions, and if so, helps compare to budgeted financial goals • May be prepared in advance and used for budgeting or projections Chapter 4: Personal Financial Statements

  11. Income Statement Terms • Income • Employment • Investment • Other • Savings • Expenses • Fixed • Variable • Discretionary Chapter 4: Personal Financial Statements

  12. Sample Income Statement Chapter 4: Personal Financial Statements

  13. The Statement of Changes in Net Worth • Summarizes noncash flow changes in net worth not recorded on the income statement. Chapter 4: Personal Financial Statements

  14. Statement of Changes in Net Worth Transactions • Changes in value for assets due to appreciation or depreciation • If an asset other than cash is exchanged for some other assets • If assets other than cash are received by gift or inheritance • If assets other than cash are given to charities or noncharitable donees Chapter 4: Personal Financial Statements

  15. Sample Statement of Changes in Net Worth Chapter 4: Personal Financial Statements

  16. Ratio Analysis • The key to ratio analysis is: • Does the ratio get to the answer for the question asked? • Is there some standard or benchmark to determine whether the result is appropriate for this particular client? Chapter 4: Personal Financial Statements

  17. Ratio Analysis—The Objective • The objective of ratio analysis is twofold: • To gain additional insight into the financial situation and behavior of the client • To generate questions for the client to answer to further gain such insight Chapter 4: Personal Financial Statements

  18. Types of Ratio Analysis • Liquidity ratios – emergency fund ratio and current ratio • Debt ratios – total debt to net worth, long-term debt to net worth, debt to total assets, long-term debt to total assets, housing costs to gross income, housing and debt payments to gross income • Performance ratios – savings ratios and investment performance ratios Chapter 4: Personal Financial Statements

  19. Emergency Fund Ratio EFR = Current Assets Monthly Nondiscretionary Expenses Target of 3 to 6 months Chapter 4: Personal Financial Statements

  20. Current Ratio CR = Current Assets Current Liabilities Target of 1.0 to 2.0 Chapter 4: Personal Financial Statements

  21. Lending Ratios • Housing Costs (Mortgage payment + Property tax + Homeowners insurance) to Gross Income • Target of ≤ 28% • Housing and Debt Payments (i.e. credit card, auto loan) to Gross Income • Target of ≤ 36% Chapter 4: Personal Financial Statements

  22. Savings Ratios • Rate of Savings = Annual Savings Annual Gross Income Target of ≥ 10% (age dependent) • Discretionary Cash Flow + Savings to Gross Income Target of ≥ 10% Chapter 4: Personal Financial Statements

  23. Investment Ratios • Income on Investments = Income from Investments Average Invested Assets • ROI = EI – BI – Additional Investments Average Invested Assets Target of 9 to 12% • Investment Assets to Gross Income Chapter 4: Personal Financial Statements

  24. Vertical & Growth Analysis • Vertical analysis: • Balance sheet – each item presented as a percent of total assets • Income statement – each item presented as a percent of total income • Growth analysis: • Calculates the growth rate of certain financial variables over time using TVM tools Chapter 4: Personal Financial Statements

  25. Limitations of Financial Statement Analysis • Inflation • Use of estimates • Few benchmarks for individuals Chapter 4: Personal Financial Statements

  26. Sensitivity Analysis & Risk Analysis • Sensitivity analysis allows manipulation of input variables by small increments to determine the impact on the ratio • Risk analysis examines the uncertainty of cash flows to the individual • Business or investment risk • Financial risk Chapter 4: Personal Financial Statements

  27. Budgeting • A process of projecting, monitoring, adjusting and controlling future income and expenditures. • Savings and Consumption Habits Chapter 4: Personal Financial Statements

  28. Debt Management • Home Mortgages • Fixed-Rule Mortgages • Variable-Rate Mortgages or Adjustable-Rate Mortgages (ARMs) • Balloon Mortgages Chapter 4: Personal Financial Statements

More Related