Developing Your Financial Statements and Plans

DEVELOPING
YOUR
FINANCIAL
#2 STATEMENTS
AND PLANS
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Learning Goals
Understand the interlocking network of financial plans and
statements
Prepare a personal balance sheet

Generate a personal income and expense statement
Develop a good record-keeping system and use ratios to interpret
personal financial statements
Construct a cash budget and use it to monitor and control spending
Describe the use of time vale of money concepts to put a monetary

value on financial goals
Mapping Out Your
Financial Future
Financial planning facilitates:
Greater Wealth
Financial Security
Attainment of Financial Goals
The Interlocking Network of
Financial Plans and Statements
Balance
Sheet
A statement of
your financial
position at a
point in time
Balance Sheet Equation
Total Liabilities
Total Assets = +
Net Worth
Assets: Things You Own
Liquid assets – Real property –

low-risk, cash or immovable property
investments that can be including land or a
converted to cash with house
little or no loss in value
Personal Property –
Investments – movable property such
acquired to earn a as autos and home
return furnishings
Liabilities: Money You Owe
Classification by Maturity
Current or short-term -- due within a year
such as utility or repair bills
Long-term -- due in a year or more including

mortgages, education and consumer
installment loans
Net Worth: Measure of Your
Financial Worth
Actual wealth or equity that individuals
have in owned assets
Net worth = total assets – total liabilities
Net worth > 0 = SOLVENT
Net worth < 0 = INSOLVENT
Median Net Worth by Age
The Income and
Expense Statement
A measure of financial performance
over a given time period
income (cash in)
expenses (cash out)
cash surplus (or deficit)
Income and Expense Statement
Total Income –
Total Expenses =
CASH SURPLUS OR
(CASH DEFICIT)
Income: Cash In
Wages and salaries

Bonuses and commissions
Interest and dividends
Child support
Tax refunds
Gifts
Expenses: Cash Out
Living Expenses -- Asset Purchases --

Housing, utilities, Autos, furniture,
food, insurance appliances
Other Payments --
Tax Payments -- Personal care,
Federal, state, recreation,
local entertainment
Expenses: Cash Out
Fixed
Contractual, equal Variable
payments fixed Amounts change
• rent or from one period
mortgage, to the next
insurance, • credit card
cable TV payments
payments
Preparing the Income and
Expense Statements
Record income from all sources
Establish meaningful expense

categories
Subtract total expenses from total

income to get cash surplus or deficit
How We Spend Our Income
Using Your Personal Financial
Statements
• Keeping good records

– Organize records
• Tracking financial progress – Ratio Analysis

– Balance Sheet Ratios
– Income and Expense Statement Ratios
Balance Sheet Ratios
Solvency Ratio
Net worth at a given point in time
Indicates potential to withstand financial
problems
Total net worth

Total assets
Liquidity Ratios
Measures ability to pay current debts with

existing liquid assets
“Current” = payment within one year
Liquid assets
Total current debts
Income & Expense Statement
Ratios
Savings Ratio
Shows percentage of after-tax income
saved during a time period
Cash surplus
Income after taxes
Debt Service Ratio
Indicates ability to repay loan obligations

promptly with before-tax income
Total monthly loan payments

Monthly gross income
Preparing & Using Budgets
Budget
Short-term financial planning report that
helps you achieve short-term financial goals
Achieving short-term goals helps you

achieve longer-term goals
Using Budgets
Monitor and control finances

Allocate income to reach goals
Implement disciplined spending
Reduce needless spending
Achieve long-term financial goals
The Budgeting Process
Estimating Income
Estimating Expenses
Finalize the Cash Budget
Dealing with Deficits
• Shift expenses from

months with deficits to
months with surpluses
• Use savings,
investments, or
borrowing to cover
temporary deficits
If You End the Year in a Deficit
Liquidate savings/investments
Borrow to cover the deficit
Cut low priority expenses;

alter spending habits
Increase income
Using Your Budgets
• Budget Control Schedule compares

actual figures with various budget
categories and shows variances
• Continually update your budget based
upon the actual figures.
Time Value of Money
Putting a Dollar Value on

Financial Goals
A dollar today is worth
more than a dollar
received in the future
because it can be
invested and earn
interest.
Types of TVM Calculations
• Single sum — one lump sum investment

with no additions or subtractions
• Annuity — series of equal payments

made at fixed time intervals for a
specified number of periods
Future Value
Value invested Process of growing

money will grow today’s present
to become value to a larger
earning a specific future value by
rate of interest applying compound
over a given time interest known as
period “compounding.”
Calculating the Future Value of a
Single Sum
Example:
What will $5000
grow to become
if invested at 5%
for 6 years?
Calculating the Future Value of a
Single Sum
Tables
(Find Future Value Factor for 6 years and
5% in Appendix A)
FV = PV x Factor
$5000 x 1.340 =
$6700
Calculating the Future Value of an
Annuity
Example:
What would you accumulate if you
could invest $5630.70 every year
for the next 6 years at 5%?
Calculating the Future Value of an
Annuity
Tables
(Find Future Value Annuity Factor for
6 years and 5% in Appendix B)
FV = PMT x Factor
$5630.70 x 6.802 =
$38,300
Present Value
Amount needed
“Discounting” is the
today to invest at a
reverse of
specific rate of
compounding -
interest over a given
process of working
time period to
from the future value
accumulate a
back to present value
desired future
amount
Calculating the Present Value of a
Single Sum
Example:
You wish to accumulate a retirement
fund of $300,000 in 25 years. If you
can invest at 5%, what single lump-
sum deposit must you make today in
order to achieve your goal?
Calculating the Present Value of
a Single Sum
Tables Calculator
(Find Present Value (Set on 1 P/YR and
Factor for 25 years and END mode.)
5% in Appendix C)
PV = FV x Factor 300000 FV
25 N
$300,000 x .295 = 5 I
$88,500 PV $88,590.83
an Annuity
Example:
You have a $300,000 retirement fund
and wish to take out equal annual
withdrawals over the next 30 years.
How much can you withdraw if interest
rates are 5% on the investment?
an Annuity
Tables
(Find Present Value Annuity Factor for
30 years and 5% in Appendix D.)
Annual withdrawal=
$300,000/15.373 =
$19.514.73

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DEVELOPING

Prepare a personal balance sheet

Construct a cash budget and use it to monitor and control spending

Describe the use of time vale of money concepts to put a monetary

Attainment of Financial Goals

Liquid assets – Real property –

Long-term -- due in a year or more including

Net worth > 0 = SOLVENT

Net worth < 0 = INSOLVENT

expenses (cash out)

cash surplus (or deficit)

Wages and salaries

Living Expenses -- Asset Purchases --

Record income from all sources

Establish meaningful expense

Subtract total expenses from total

• Keeping good records

• Tracking financial progress – Ratio Analysis

Total net worth

Measures ability to pay current debts with

“Current” = payment within one year

Indicates ability to repay loan obligations

Total monthly loan payments

Achieving short-term goals helps you

Monitor and control finances

Finalize the Cash Budget

• Shift expenses from

Borrow to cover the deficit

Cut low priority expenses;

• Budget Control Schedule compares

Putting a Dollar Value on

• Single sum — one lump sum investment

• Annuity — series of equal payments

Value invested Process of growing

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