2 - 1 COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd Chapter 2 – Your Financial Statements and Plans

COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd

2 - 1

Chapter 2 – Your Financial Statements and Plans


2 - 2

Chapter 2 - Learning Goals

LG 1 - Describe the role of financial statements, special planning concerns, and professional financial planners in the personal financial planning process.

LG 2 - Put a monetary value on financial goals using time value of money concepts.

LG 3 - Prepare a personal balance sheet.

LG 4 - Generate a personal income and expense statement.

LG 5 - Develop a good recordkeeping system and use ratios to interpret personal financial statements.

LG 6 - Construct a cash budget and use it to monitor and control spending.

Learning Goals


2 - 3

Internet Links and On-Line Resources

• Planning tools and online courses through TD Canada Trust• Online tools and calculators through RBC Royal Bank• Fair Market Value of Your Car – VMR Canada• To find a financial planner in your area -

Financial Planners Standard’s Council• Information concerning financial professionals:

Certified Financial Planner (CFP) Chartered Life Underwriter (CLU) Chartered Financial Consultant (CH.F.C.) Canadian Investment Manager (CIM) Certified General Accountant (CGA) Certified Management Accountant (CMA) Certified Senior Advisor (CSA) Chartered Accountant (CA) Elder Planners Counselor (EPC) Fellow of the Canadian Securities Institute (FCSI) Registered Financial Planner (R.F.P.)

Current survey and trends on consumer spending from Statistics CanadaWeb Links


2 - 4

Key Chapter Terms and Definitions Financial plans versus Person

al financial statements Budgets Balance sheet Income and expense stateme

nt Flexible-benefit (cafeteria) pla

ns Professional financial planner Time value of money Future value Compounding Annuity Rule of 72 Present value Discounting Assets Liquid assets Investments Real property Personal property

Fair market value Liabilities Current (short-term liability) Open account credit

obligations Long-term liability Net worth Equity Insolvency Cash basis Income Expenses (fixed and variable) Cash surplus Cash deficit Solvency ratio Liquidity ratio Savings ratio Debt service ratio Cash budget Budget control schedule

Terms


2 - 5

DefinitionsFinancial Plans versus Personal Financial Statements

Financial plans are the road maps that show you the way.

Personal financial statements let you know where you stand financially.

Terms


2 - 6

DefinitionsBudgets

Budgets are detailed, short-term financial forecasts that compare estimated income with estimated expenses, and allow you to monitor and control expenses and purchases consistent with your financial plans.

Terms


2 - 7

DefinitionsBalance Sheet

An important financial statement that describes a person’s financial position – the assets that are held, less the debts owed at a particular point in time. The difference between assets and debt is net worth.

Terms


2 - 8

DefinitionsIncome and Expense Statement

An important financial statement that measures financial performance over time by presenting income earned and expenses incurred during a given period.

Terms


2 - 9

DefinitionsBudget

A detailed and forward-looking financial report, based on expected income and expenses, that is used to monitor and control spending.

Terms


2 - 10

DefinitionsFlexible-benefit (cafeteria) plan

A type of employee benefit plan that allows each employee to choose from a prescribed set of benefits so that the employee can select those benefits of greatest personal value.

Terms


2 - 11

DefinitionsProfessional financial planner

An individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals.

Terms


2 - 12

DefinitionsTime value of money

The concept that a dollar today is worth more than a dollar received in the future; this is true as long as one can earn a positive rate of return (interest rate) on investments.

Terms


2 - 13

DefinitionsFuture value

The value to which an amount today will grow if it earns a specific rate of interest over a given period; can be used to find yearly savings needed to accumulate a given future amount of money.

Terms


2 - 14

DefinitionsCompounding

When interest earned each year is left in the account and becomes part of the balance (or principal) on which interest is earned in subsequent years.

Terms


2 - 15

DefinitionsAnnuity

A sum of money that is received or paid periodically.

A series of cash flows that are equal, periodic and finite.

Terms


2 - 16

DefinitionsRule of 72

A useful approximation for estimating how long it will take to double a sum at a given interest rate.

Dividing 72 by the annual compound interest rate results in a good estimate of the number of years it will take to double your money.

Terms


2 - 17

DefinitionsPresent value

The value today of an amount to be received in the future; it is the amount that would have to be invested today at a given interest rate over a specified time to accumulate a future amount.

Terms


2 - 18

DefinitionsDiscounting

The process of finding present value; the inverse of compounding to find future value.

Terms


2 - 19

DefinitionsAssets

Items that you require.

Terms


2 - 20

DefinitionsLiquid assets

Assets that are held in the form of cash or instruments that can readily be converted to cash with little or no loss in value; help to meet everyday needs of life and provide for emergencies and unexpected opportunities.

Terms


2 - 21

DefinitionsInvestments

Assets such as stocks, bonds, mutual funds, and real estate that are acquired for the purpose of earning a return rather than providing a service.

Terms


2 - 22

DefinitionsReal property

Tangible assets that are immovable, such as land and anything fixed to it, such as a house; generally has a relatively long life and high cost.

Terms


2 - 23

DefinitionsPersonal property

Tangible assets that are movable and used in everyday life, such as automobiles, household furnishings, and jewelry.

Terms


2 - 24

DefinitionsFair market value

The actual value of an asset, or the price that it can reasonably be expected to sell for in the open market.

Terms


2 - 25

DefinitionsLiabilities

Debts, such as credit card charges, installment loans, and real estate mortgages.

Terms


2 - 26

DefinitionsCurrent (short-term) liabilities

Any debt due within one year of the date of the balance sheet.

Terms


2 - 27

DefinitionsOpen account credit obligations

Current liabilities that represent the balances outstanding against established credit lines (usually through credit card purchases).

Terms


2 - 28

DefinitionsLong-term liability

Any debt due one year or more from the date of the balance sheet.

Terms


2 - 29

DefinitionsNet worth

An individual’s or family’s actual wealth; determined by subtracting total liabilities from total assets.

Terms


2 - 30

DefinitionsEquity

The actual ownership interest in a specific asset or group of assets.

Terms


2 - 31

DefinitionsInsolvency

The financial state in which net worth is less than zero.

Terms


2 - 32

DefinitionsCash basis

A method of preparing financial statements in which only cash income and cash expenses are recorded.

Terms


2 - 33

DefinitionsIncome

Earnings received as wages, salaries, self-employment income, bonuses, and commissions, as well as interest and dividends received from savings and investments and proceeds from the sale of assets.

Terms


2 - 34

DefinitionsExpenses

Money spent on living expenses and to purchase assets, pay taxes, or repay debt.

Terms


2 - 35

DefinitionsCash surplus

An excess amount of income over expenses that can be used for savings or investments, to acquire assets, or to reduce debt; results in increased net worth.

Terms


2 - 36

DefinitionsCash deficit

An excess amount of expenses over income resulting in insufficient funds that must be made up by drawing down savings or investments, reducing assets, or borrowing; results in decreased net worth.

Terms


2 - 37

DefinitionsSolvency ratio

Total net worth divided by total assets; measures the degree of exposure to insolvency.

Terms


2 - 38

DefinitionsLiquidity ratio

Total liquid assets divided by total current debts; measures the ability to pay current debts.

Terms


2 - 39

DefinitionsSavings ratio

Cash surplus divided by after-tax income; indicates relative amount of cash surplus achieved during a given period.

Terms


2 - 40

DefinitionsDebt Service ratio

Total monthly loan payments divided by monthly gross (before-tax) income; provides a measure of the ability to pay debts promptly.

Terms


2 - 41

DefinitionsCash budget

A budget that takes into account estimated monthly cash receipts and cash expenses for the coming year.

Terms


2 - 42

DefinitionsBudget control schedule

A summary that shows how actual income and expenses compare with the various budget categories and where surpluses or deficits exist.

Terms

2 - 43

THE END!

Documents

2 - 1 COPYRIGHT © 2008 by Nelson, a division of Thomson Canada Ltd Chapter 2 – Your Financial Statements and Plans