Lecture Personal financial planning – Chapter 5: Financial statements analysis. The goals of this chapter are: Recognize the importance of financial statements to PFP, produce and evaluate a balance sheet, construct a cash flow statement, compare finance and accounting based techniques. | Chapter 5 Financial Statements Analysis Chapter Goals Recognize the importance of financial statements to PFP. Produce and evaluate a balance sheet. Construct a cash flow statement. Compare finance and accounting based techniques. The Balance Sheet Balance sheet: A statement of financial position at a given point in time. The balance sheet consists of all assets, liabilities, and net worth. Current assets: Assets that are expected to be or can be converted into cash in the current year. Marketable investments: Assets that are traded publicly. Household assets: Assets used in day-to-day household activities. The Balance Sheet, cont. Human assets: The future income stream of household’s wage earners. Because they cannot be sold, human assets are not usually placed on balance sheets. Human-related assets: Other forms of resources in addition to human assets that are omitted from the balance sheet. The term human-related is used because the value is derived from human- related work efforts or human relationships. For example, human related assets include pension plans that pay out yearly income upon retirement. The Balance Sheet, cont. Liabilities: Items that the household owes. Credit card debts, taxes outstanding, and mortgage debt are liabilities. Liabilities can be split into current and long term, based on whether they are due within one year or beyond that period. The mortgage payment due within the year is expressed as a current liability. The Balance Sheet, cont. Household equity (household net worth): The difference between its assets and liabilities. Household equity can be relatively small or even negative when household members are young and college debt and other obligations are high. Net worth generally increases as marketable investments increase. The Balance Sheet, cont. Example: Tricia had a $20,000 savings account, owned a car valued at $12,000, and owed $9,000 that she had borrowed to help finance the car. Her net worth is: Assets | Chapter 5 Financial Statements Analysis Chapter Goals Recognize the importance of financial statements to PFP. Produce and evaluate a balance sheet. Construct a cash flow statement. Compare finance and accounting based techniques. The Balance Sheet Balance sheet: A statement of financial position at a given point in time. The balance sheet consists of all assets, liabilities, and net worth. Current assets: Assets that are expected to be or can be converted into cash in the current year. Marketable investments: Assets that are traded publicly. Household assets: Assets used in day-to-day household activities. The Balance Sheet, cont. Human assets: The future income stream of household’s wage earners. Because they cannot be sold, human assets are not usually placed on balance sheets. Human-related assets: Other forms of resources in addition to human assets that are omitted from the balance sheet. The term human-related is used because the value is derived from human- related .
