Financial Records: Income Statement and Balance Sheet


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Financial Records: Income Statement and Balance Sheet

  1. 1. Chapter 7 Financial Records: Income Statement and Balance Sheet
  2. 2. Financial Records <ul><li>Principal records most people should maintain </li></ul><ul><li>Income statement </li></ul><ul><li>Summary of income & expenses for selected time period </li></ul><ul><li>Show annual changes in savings & investment </li></ul><ul><li>Provides 1st important step in financial planning & budgeting </li></ul><ul><li>It explains the latest financial history </li></ul><ul><li>From the income statement, check whether the expenses on housing is less than 35% & its monthly payment is less than 20% from income </li></ul>
  3. 3. Income Statement <ul><li>Developing an income statement, for a period of one year </li></ul><ul><li>Steps </li></ul><ul><li>income: list down amount of income received last year from various sources - salary, allowances, dividend, rental etc </li></ul><ul><li>total the income from the various sources for the whole year </li></ul><ul><li>tax: include the income tax/taxes </li></ul><ul><li>total the taxes </li></ul><ul><li>amount for expenses, savings & investment: total income minus total tax. If it is negative, put in a bracket </li></ul>
  4. 4. Income Statement (cont.) <ul><li>6. expenses consists of two: fixed and variable </li></ul><ul><li>Fixed - housing (tax on land, tax on housing, annual payment), transportation (license, insurances, road-tax, annual payment), life insurance, educational plan/insurance </li></ul><ul><li>Variable - housing (maintenance or repair cost), clothing and food, transportation (fuel, repair/service), other expenses such as entertainment, holiday tour, gifts, party </li></ul><ul><li>7. total the fixed and variable expenses </li></ul><ul><li>8. amount for savings & investment: amount number 5 minus amount of expenses (number 7). If negative, put in a bracket </li></ul>
  5. 5. Income Statement Name: Salleh bin Ahmad Period: 1 January 2007 to 31 December 2007 <ul><li>1 Income: RM RM </li></ul><ul><li>Salleh’s salary 33,000 </li></ul><ul><li>Sarina‘s salary 30,000 </li></ul><ul><li>Dividend from ASB 1,500 </li></ul><ul><li>House rental 6,000 </li></ul><ul><li>Selling of motorbicycle 1,000 </li></ul><ul><li>2 Total income 71,500 </li></ul><ul><li>3 Tax: </li></ul><ul><li>Income tax (Salleh & Sarina) 4,000 </li></ul><ul><li>4 Total tax 4,000 </li></ul><ul><li>5 Amount for expenses , </li></ul><ul><li>Savings & investment 67,500 </li></ul>
  6. 6. Income Statement (cont.) 6 Housing expenses Fixed Variable Annual payment (loan) 12,000 Housing & land tax 300 Food 10,000 Clothing 2,000 Transportation: Fuel 1,600 Insurance 1,200 License 120 Life insurance 4,000 Annual payment (loan) 8,000 Others 800 Small total 25,620 14,400 7 Total expenses 40,020 8 Amount for savings & investment 27,480
  7. 7. Balance Sheet <ul><li>Consist of asset and liabilities </li></ul><ul><li>Asset - items that you owned, use the market value Liabilities - debts </li></ul><ul><li>Difference in asset and liabilities is the net-worth Networth= asset - liablities </li></ul><ul><li>If asset > liabilities => positive networth </li></ul><ul><li>If asset < liabilities => negative networth </li></ul><ul><li>Assets : financial asset (cash, savings or current account, receivable, investment, insurance) & fixed asset (house, land, car) </li></ul><ul><li>Liabilities: fixed & variable </li></ul>
  8. 8. Balance Sheet (cont.) <ul><li>Developing the balance sheet </li></ul><ul><li>■ At one point of time eg. Ended 31 st December 2008 </li></ul><ul><li>Steps </li></ul><ul><li>Financial assets: Cash- cash at hands, savings or current accounts </li></ul><ul><li>Financial assets: Receivables - money lend to others & might be able to retrieve. Estimate the amount of receivable </li></ul><ul><li>Financial assets: Investment - list market value of investment, bond, insurance, retirement fund (amount that are able to withdraw). Total the market values. </li></ul>
  9. 9. Balance Sheet (cont.) <ul><li>4. Total financial asset = 1 + 2 + 3 </li></ul><ul><li>Fixed assets: Property - house, land; use the market value </li></ul><ul><li>Fixed assets: Investment - retirement fund (cannot withdraw now), long-term investment - current value </li></ul><ul><li>7. Fixed assets: Car -market value </li></ul><ul><li>8. Fixed assets: Personal belongings - jewellery, antique, electrical items, furniture </li></ul><ul><li>9. Total fixed asset=5+6+7+8 </li></ul><ul><li>Total the financial and fixed asset =4 + 9 </li></ul>
  10. 10. Balance Sheet (cont.) <ul><li>11. Fixed liabilities: Balance of loan - car, hirepurchase, educational loan, housing loan </li></ul><ul><li>12. Variable liabilities: Bills to be paid - insurance premium due, credit card bill, purchasement with deferred payment, rental, tax, utility bills </li></ul><ul><li>13. Total liabilities = 11 + 12 </li></ul><ul><li>14. Net-worth = Asset - liabilities =10 - 13; if negative net­worth, put the amount in bracket. </li></ul>
  11. 11. Balance Sheet (cont.) As+r~: HM (:ash ..n~arronn~ 4,19fl 1-1.n hand t5 Toed rash 4,213 3,410. ,Oral C., (murkre valve) 4.60) &snnal6elnnging nx1 Fum~nire& hrn~z 343!1 -[0,1 per:onnl 6, &quot;mna 3343U rural asset 13 ,991 f..aL~l~hes Inzrallmen~ loan 15')1 '1'o~al Al.-.&quot; .ab...hrz d Nntxvordl 12 10
  12. 12. Changes to the Balance Sheet <ul><li>1. The value of assets changes according to market value </li></ul><ul><li>Liabilities may increase (took new loan) or reduce (repayment of loan) </li></ul><ul><li>Selling off asset will change the fixed asset to financial asset or vice-versa if buy asset </li></ul>
  13. 13. The Effect of Changes in Income Statement on the Balance Sheet <ul><li>Changes in surplus or deficit in income statement will affect the net-worth in balance sheet </li></ul><ul><li>If increase in value occur in income statement, eg. Surplus of RM2,000 of income, an increase of RM2,000 will occur in the asset category of balance sheet. The net-worth increase in the same amount (+RM2,000) </li></ul><ul><ul><ul><ul><ul><li>Before After the Surplus </li></ul></ul></ul></ul></ul><ul><li>Assets RM28,000 RM30,000 </li></ul><ul><li>Liabilities RM10,000 RM10,000 </li></ul><ul><li>Net-worth RM18,000 RM20,000 </li></ul>
  14. 14. Evaluating the Financial Situation <ul><li>1. Using balance sheet: </li></ul><ul><li>Balance sheet shows the use of money – for assets & liabilities </li></ul><ul><li>i. Referring to the asset & net-worth: </li></ul><ul><li>Higher net-worth, better financial situation </li></ul><ul><li>Guideline: 30 – 50% of networth should be in the financial asset so that cash money is easily to obtain during emergency </li></ul><ul><li>Financial asset has high liquidity </li></ul><ul><li>Liquidity- how easy or quick for an asset to be converted to cash without reduce of value </li></ul>
  15. 15. Evaluating the Financial Situation (cont.) <ul><li>ii. Referring to the assets & liabilities: </li></ul><ul><li>Compare the total cash with total liabilities </li></ul><ul><li>Cash> liabilities </li></ul><ul><li>Debt less than 50% of financial asset </li></ul><ul><li>iii. A positive change in net-worth for series of balance sheet for different time shows that liabilities is decreasing or asset is increasing or there are changes in both asset & liabilities but the asset increase > than the liabilities increase </li></ul>
  16. 16. Evaluating the Financial Situation (cont.) <ul><li>iv. To increase net-worth, increase the income or spend less than income, so there is surplus of income that could be saved </li></ul><ul><li>Other evaluation: </li></ul><ul><li>a. Ratio of asset to liability = total asset > 1 </li></ul><ul><li> total liability </li></ul><ul><li>Asset can be used to pay off the debt if ratio is equal to 1 </li></ul><ul><li>Asset>>>liability to be financially stable </li></ul>
  17. 17. Evaluating the Financial Situation (cont.) <ul><li>b. Ratio of liability to asset = total liability < 1 </li></ul><ul><li> total asset </li></ul><ul><li>The opposite of the 1 st ratio </li></ul><ul><li>Liability can be paid off by the valued of asset if ratio is 1 </li></ul><ul><li>Liability <<< asset to be financially stable </li></ul><ul><li>c. Ratio of net-worth to liability = net-worth </li></ul><ul><li>total liability </li></ul><ul><li>The use of this ratio is better than (a) to determine financial situation </li></ul><ul><li>A positive ratio shows good financial situation </li></ul><ul><li>A negative ratio shows bad financial situation </li></ul>