1. Learning Objective # 3
Develop a personal balance sheet and cash flow statement.

2. Purpose of Personal Financial Statements
LO#3
Purpose of Personal Financial Statements
Summarize the value of the items you own and the amounts that you owe
Track your cash inflows by source and your outflows by type
Identify strengths and weaknesses in your current financial situation
Measure progress towards your financial goals
Provide data for use in filing your income tax return or applying for credit

3. Personal Balance Sheet
LO#3
Personal Balance Sheet
A financial statement that reports what an individual or family owns or owes; also called a net worth statement
Items of Value Net Worth = Amounts Owed
(What You Own) (Your Wealth) (What You Owe)

4. Components of a Balance Sheet (Net Worth Statement)
LO#3
Components of a Balance Sheet (Net Worth Statement)
Step 1: Listing Items of Value
Assets– Cash and other property with a monetary value
Liquid assets: cash and items of value easily converted to cash
Real estate: home, condo, vacation property or other land owned
Personal possessions: automobiles and other personal possessions
Investment assets: funds set aside for long term financial needs

5. Components of a Balance Sheet (Net Worth Statement)
LO#3
Components of a Balance Sheet (Net Worth Statement)
Step 2: Determining Amount Owed
Liabilities – amounts owed to others
Current liabilities: debts to be paid within short time, usually less than one year
Long term liabilities: do not have to pay in full until more than a year from now
Step 3: Computing Net Worth
Net Worth – the difference between total assets and total liabilities

6. Components of a Balance Sheet (Net Worth Statement)
LO#3
Components of a Balance Sheet (Net Worth Statement)
A person with a high net worth may still have financial difficulties
No liquid cash available to pay current expenses
Insolvency is the inability to pay debts when they are due because liabilities far exceed the value of assets
You can increase your net worth by;
Increasing your savings
Reducing your spending
Increasing the value of your investments and other possessions
Reducing the amounts you owe
Net Worth is not money available for use but an indication of your financial position on a given date

7. LO#3
Cash Flow Statement
A financial statement that summarizes cash receipts and payments for a given period of time =
Cash surplus or
deficit
Total cash received
during that time
period
Cash outflows
during the time
period

8. Components of a Cash Flow Statement
Step 1: Record income
Income from employment; wages, salaries and commission or self- employment income
Take-home pay: earnings after deductions for taxes and other items, also called disposable income
Discretionary Income: money left over after paying for housing, food and other expenses
Savings and investment income
Gifts, grants, scholarships and educational loans
Government payments (CPP, welfare and EI)
Amounts received from pensions and retirement programs
Alimony and child support payments

9. Components of a Cash Flow Statement
Step 2: Record cash outflows
Fixed expenses do not vary from month to month
Rent, mortgage, loan payments, insurance
Variable expenses are flexible payments
Food, clothing, utilities
Step 3: Determine net cash flow
Net cash flow can be a surplus or a deficit
Used as a basis for creating a spending, saving and investment plan.

10. Analyzing Your Current Financial Situation
LO#3
Analyzing Your Current Financial Situation
Your Balance Sheet
Measure your progress toward your financial goals
Save and invest on a regular basis
Identify how your assets are distributed among the different categories
Each asset has its purpose
Calculate your current asset allocation
Allocation of financial assets between cash, fixed income and equity investments

11. Analyzing Your Current Financial Situation
LO#3
Analyzing Your Current Financial Situation
Identify whether your investments are tax efficient
Provide you with highest after-tax return
Identify assets that may be lost, stolen, damaged or destroyed
May require insurance coverage
Summarize the types and extent of your indebtedness
Borrowed to finance depreciating or appreciating assets
Many credit cards may inflate your debt ratio

12. Analyzing Your Current Financial Situation
LO#3
Analyzing Your Current Financial Situation
Your Cash Flow Statement
Compiling your latest cash flow statements will
Highlight your sources of income
Reveal whether you are overspending
Help assess your spending and saving patterns

13. Ratios for Evaluating Financial Progress
LO#3
Ratios for Evaluating Financial Progress
Ratio
Interpretation
Debt Ratio: Liabilities
Net Worth
Current Ratio: Liquid Assets
Current Liabilities
Liquidity Ratio: Liquid Assets
Monthly Expenses
Show relationship between debt and net worth
A high current ratio is desirable to have cash available to pay bills
Indicates the number of months in which living expenses can be paid if an emergency arises

14. Ratios for Evaluating Financial Progress
LO#3
Ratios for Evaluating Financial Progress
Ratio
Interpretation
Debt Payments Ratio: Monthly Payments
Take-Home Pay
Savings Ratio:
Amount Saved Each Month
Gross Income
Indicates how much or a persons’ earnings goes for debt payments
Financial experts recommend monthly savings of at least 10 percent