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Transcript

  • 1. Personal Finance: An Integrated Planning Approach Winger & Frasca Chapter 3 Financial Statements and Budgets
  • 2. Major Topics
    • The Balance Sheet
    • The Income Statement
    • Evaluating Past Financial Performance
    • Achieving Goals through Budgeting
  • 3. The Personal Balance Sheet
    • Shows:
      • What a Family Owns--Its Assets
      • What it Owes--Its Liabilities
      • And its Net Worth (Wealth), the Difference Between Assets and Liabilities
    • Is Used to Measure Financial Success Over Time
  • 4. Nature of the Balance Sheet
    • Balance Sheet Equation
    • Assets (A) = Liabilities (L) + Net Worth (NW)
    • Example: $10,000 = $6,000 + $4,000
    • Illustrations:
    • (1) Family works hard and saves $5,000, which is used to acquire $2,000 more assets while reducing liabilities by $3,000. New balance sheet: $12,000 = $3,000 + $9,000. Note: increase in net worth = savings.
  • 5. Illustrations, continued
    • Beginning balance sheet: $10,000 = $6,000 + $4,000
    • A = L + NW
    • (2) Family consumes all of its income and during the year one of its assets depreciated in value by $3,000. New balance sheet: $7,000 = $6,000 + $1,000.
    • Note: Net Worth is What’s Left Over after Liabilities Are Deducted from Assets; that is: NW = A - L
  • 6. Balance Sheet for the Steele Family: 12/31/01
    • Assets $325,540
      • Liquid $ 16,240
      • Lifestyle 261,500
      • Investment 47,800
    • Liabilities $168,149
      • Current $ 8,354
      • Noncurrent 159,795
    • Net Worth $157,391
  • 7. Steeles’ Liquid Assets
    • Cash $ 240
    • Checking Account 2,400
    • Savings Account 5,600
    • 42-Month CD 5,000
    • Series EE Bonds 3,000
    • Total $16,240
  • 8. Steeles’ Lifestyle Assets
    • Residence $205,000
    • Household Furnishings 20,000
    • Automobiles and Camper 29,100
    • Jewelry, Clothing, Stamp Coll. 5,800
    • Sporting Equipment 600
    • Riding Mower 1,000
    • Total $261,500
  • 9. Steeles’ Investment Assets
    • Common Stocks $ 16,000
    • Mutual Funds 6,800
    • Cash Value: Life Insurance 4,000
    • Cash Value: Retirement Fund 21,000
    • Total $ 47,800
  • 10. Steeles’ Current Liabilities
    • Unpaid Bills $ 460
    • Credit Card Balances Due 1,720
    • Estimated Taxes Due 1,750
    • Installment Pmts Due in 1 Year 4,424
    • Total $ 8,354
  • 11. Steeles’ Noncurrent Liabilities
    • Mortgage Loan $ 152,829
    • Installment Pmts after 1 Year 4,966
    • Loan on Life Insurance Policy 2,000
    • Total $ 159,795
  • 12. Net Worth
    • Is the difference between assets and liabilities
    • The most useful concept for measuring wealth
    • Can be increased by
      • positive contributions to savings
      • increases in market values of assets you own
  • 13. The Income Statement
    • Shows:
      • A Family’s Cash Income Over a Given Period of Time, Usually a Year
      • Its Cash Expenses for the Same Period
      • And its Savings, the Difference Between the Two
    • Also Measures Financial Success: A Rising Income Facilitates Goal Achievement
  • 14. Steeles’ Income Statement: Year Ended 12/31/01
    • Salaries $75,600 97.4%
    • Other Income 2,027 2.6%
    • Total Income $ 77,627 100.0%
    • Total Expenses 75,033 96.7%
    • Savings 2,594 3.3%
  • 15. Steeles’ Major Expenses % of Total Income
    • Housing 28.0%
    • Taxes 23.3
    • Food 10.6
    • Transport. 10.3
    • Others 7.2
    • Leisure 6.5%
    • Utilities 4.8
    • Insurance 3.3
    • Clothing 2.7
  • 16. Steeles’ Major Expenses Total = $75,033
    • Housing $21,785
    • Taxes 18,070
    • Food 8,230
    • Transport. 7,998
    • Others 5,550
    • Leisure $ 5,010
    • Utilities 3,750
    • Insurance 2,520
    • Clothing 2,120
  • 17. Expenses: Inflexible ($49,133) and Flexible ($25,920)
    • Mortgage $18,285
    • Auto loans 5,668
    • Car Licenses 210
    • Utilities 3,750
    • Taxes 18,070
    • Insurance 2,520
    • Dues 200
    • Tuition, books 390
    • Allowances $ 1,300
    • Leisure 5,010
    • Home furn. 3,500
    • Gas, oil, etc.. 2,100
    • Food, cons. 8,230
    • Clothing 2,120
    • Gifts, contrib.. 2,080
    • Others 1,580
  • 18. Evaluating Past Performance
    • Did Your Income Meet or Beat Last Year’s Inflation Rate?
    • Did Your Net Worth Increase at the Same Rate as Inflation?
    • Are You Maintaining Adequate Liquidity?
    • Are You Avoiding Excessive Debt?
  • 19. Nominal Income versus Real Income
    • Nominal Income is Actual Amount Received
    • Real Income Is Nominal Income Adjusted for Inflation
    • % Change in Nominal Income Is Calculated
    • [this year’s nominal income/last year’s nominal income] - 1
    • Example: [$60,000/$50,000] - 1 = 1.20 - 1 = 0.20
    • Compare Amount to Annual Inflation Rate: 20% versus, say, 3%. Great Performance!
  • 20. Financial Ratios
    • Measure Financial Strengths and Weaknesses
    • Your Ratios Can Be Compared to Those of Other Families
    • Care Is Needed in Using Ratios: You Should Look at a Number of Ratios, Rather Than Only One; Also, A Ratio’s Trend Is Important
  • 21. Steeles’ Financial Ratios Measuring Liquidity
    • Liquid Assets to Take-Home Pay Ratio :* Liquid Assets/ Take-Home Pay = $16,240/$61,030 = 0.266 (Fair)
    • Liquidity Ratio :
    • Liquid Assets/Current Liabilities = $16,240/$8,354 = 1.94 (Good)
        • * Take-Home Pay = Salaries of $75,600 - Payroll Taxes of $14,570
  • 22. Steeles’ Financial Ratios Measuring Debt Capacity
    • Debt Ratio : Total Liabilities/Total Assets =
    • $168,149/$325,540 = 0.517 (fair)
    • Debt Service Coverage Ratio :
    • Take-Home Pay/Debt Service Charges =
    • $61,030/$24,133 = 2.53 (some weakness)
  • 23. Simple Rules for Successful Budgeting
    • Set Realistic Budget Goals--a Budget Is not a Straitjacket to Produce Only Savings
    • Stick to Simple Procedures
    • Use the Budget to Control and Direct Expenses
  • 24. Preparing an Annual Budget
    • Set Spending/Savings Goals
    • Prepare Master Budget Worksheet
    • Prepare Monthly Income and Expense Plan
    • Evaluate and Control Activities
      • Monthly
      • At Year End
  • 25. The Master Budget Worksheet
    • Has the Same Format as the Annual Income Statement
    • Allocated Amounts Should Reflect Historical Experience Plus Inflation Adjustment
    • Should Focus on Planned Savings
    • Should Be Realistic and Achievable
  • 26. The Monthly Income and Expense Plan
    • Shows Cash Flows by Month
    • Indicates Months When Cash Flow May Be Negative
    • Negative Cash Flows Require Management
      • Will Need Adequate Cash Reserves/ Or
      • Will Need to Borrow
  • 27. Recording Income and Expenses Efficiently
    • Don’t Use Cash--Paying with Checks Provides Written Record
    • Create a “Personal Voucher” to Record Any Necessary Cash Outlays
    • Code Income and Expense Accounts for Easy Summing
    • See if Your Bank Has A Recording System (at reasonable cost to you)
  • 28. Updating Income and Expense Accounts
    • Each Month Compare Actual Income or Expense with Budgeted Amount
    • The Difference is an Account Variance
    • Unfavorable Expense Variances Need Attention
      • Reduce Spending in Future Periods to Eliminate Variance
      • Ideally By Year End, Cumulative Variance = 0
  • 29. Controlling Expenses: Meals Eaten Out
    • Monthly Planned
    • Expense = $ 80.00
    • Jan. Actual $ 88.00
    • Feb. Actual 102.00
    • Mar. Actual 91.00
    • April Target 39.00
    • Monthly Cumulative
    • Variance Variance
    • ($ 8.00) ($ 8.00)
    • ( 22.00) ( 30.00)
    • ( 11.00) ( 41.00)
    • 41.00 -0-
  • 30. Next Chapter 4 Taxes