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Using

PERSONAL FINANCIAL
STATEMENTS and
BUDGETS

2604362 PERSONAL FINANCE


23 August 2017
Jananya Sthienchoak, Ph.D.

GenEd - Soc: Semester 1, 2017


Learning Objectives
[LO1] Ability to relate personal financial statements to
personal financial planning.
[LO2] Ability to generate personal financial statements
and evaluate personal financial position and
performance.
[LO3] Ability to construct cash budget and use it to
control spending.

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Agenda
The interlocking
network of
financial plans
and statements
Personal Financial
Statements:
Personal Balance Sheet
Personal
Personal Income and
Financial Expense Statement
Statements Ratio Analysis
Cash Budget and Budget
Control Schedule
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Financial Plans and
STATEMENTS
How personal financial statements help in personal
financial planning

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Personal Financial Planning Facilitates

Financial Security

Greater Wealth

Attainment of Financial Goals

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LO1

Financial Plans and Statements

Roadmaps that
show you the
way.

Let you know


where you
stand
financially.
Exhibit 2.1, page 44 of Personal Financial Planning 14th edition by Gitman, Joehnk, and Billingsley (Cengage Learning, 2017).
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Personal
FINANCIAL
STATEMENTS
Important personal financial statements and how to use
them to achieve financial success

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LO2

Personal Balance Sheet

Liabilities
(What you owe)

Assets
(What you own) How
much are
you
worth
today?

A statement of your financial position at a given point in time.


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Assets: Things You Own
Liquid Assets

Low-risk, cash or investments that can be converted to


cash with little or no loss in value
For everyday transactions and precautionary purposes.
Cash; bank deposits (current, savings, fixed); S/T P/Ns,
B/Es, C/Ds.

Investments

Expect future return; expect to increase net worth.


Bonds (gov/corp); stocks; derivatives; mutual funds;
retirement mutual funds (pension, provident, RMF); life
insurance; real estate.

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Assets: Things You Own (contd)

Real Property

Immovable property including land or a For Everyday


house. comfort.

No
Personal Property expectation of
future returns.

Movable property such as autos, home


furnishings, jewelry, collectible items.

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Liabilities: Money You Owe
Current or Short-Term

Due within a year.


S/T loans, credit card debts, utility bills, part
of long-term debt that is due within 1 year.

Long-Term

Due in a year or more.


Mortgages, education and consumer
installment loans.

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Net Worth: Measure of Your
Financial Worth

Net Worth =
Total Assets Total Liabilities

Solvent
sufficient assets to cover financial obligations

Insolvent
insufficient assets to cover financial obligations

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How to Increase Net Worth?

Earn more
Spend less
Save more
Invest more

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Personal
Balance
Sheet
Example

Worksheet 2.1, page 46


of Personal Financial
Planning 13th edition by
Gitman, Joehnk, and
Billingsley (Cengage
Learning, 2014).

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Personal
Income and Expense
Statement
Total Income
- Total Expenses

= Cash SURPLUS or Cash DEFICIT

A measure of financial performance over a given time period.


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Income: Cash In
Wages and salaries
Bonuses and commissions
Interest and dividends
Proceeds from sale of assets
Child support
Tax refunds
Gifts
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Expenses: Cash Out
Living Expenses

Housing, utilities, food, insurance

Tax Payments

Asset Purchases

Autos, furniture, appliances

Other Payments

Personal care, recreation, entertainment

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Expenses: Cash Out

Fixed Variable
Contractual, pre- Amounts change from
determined, equal one period to the next
payments Credit card, food,
Rent or mortgage, clothing,
insurance, cable TV entertainment
payments payments

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Personal
Income
and
Expense
Statement
Example

Worksheet 2.2, page 51


of Personal Financial
Planning 13th edition by
Gitman, Joehnk, and
Billingsley (Cengage
Learning, 2014).

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Using Your
Personal Financial Statements

Track financial progress

Prepare financial
statements periodically

Keep good records

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Tracking Financial Progress

Ratio Analysis
Balance Sheet Ratios
Solvency Ratio
Liquidity Ratio

Income and Expense Statement Ratios


Savings Ratio
Debt Service Ratio

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Balance sheet ratio:
Solvency Ratio
Shows net worth at a given time.
Indicates potential to withstand financial problems.

Total net worth


Total assets
Solvency Ratio should > 50%

Solvency Ratio = 92,465/266,485 = 34.70%


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Balance sheet ratio:
Liquidity Ratio
Measures ability to pay current debts with existing
liquid assets.
Current = payment within one year.

Total liquid assets


Total current debts
Liquidity Ratio should > 100%

Liquidity Ratio = 2,285/(1,070+11,820+2,520+800+900+600)


= 12.90%
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Income statement ratio:
Savings Ratio
Shows percentage of after-tax income
saved during a time period.

Cash surplus
Income after taxes
Savings Ratio should > 10%

Savings Ratio = 21,551/(86,715-18,319-2,100)


= 32.51%
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Income statement ratio:
Debt Service Ratio
Indicates ability to repay loan obligations promptly
with before-tax income.

Total monthly (yearly) loan payments


Monthly (yearly) gross (before-tax)income
Debt Service Ratio should < 35% and should not > 45%

Debt Service Ratio = (11,820+2,520+800+900+600)/86,715


= 19.19%
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LO3

Preparing and Using Budgets

Budgets
Short-term financial planning
report that helps you achieve
short-term financial goals.

Achieving short-term goals


helps you achieve longer-
term goals.

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Using Budgets
Monitor and control finances

Allocate income to reach goals

Implement disciplined spending

Reduce needless spending

Achieve long-term financial goals


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The Budgeting Process

Finalizing
Estimating Estimating
the cash
income expenses
budget

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Dealing with Deficits

Shift expenses from months with


Shift deficits to months with surpluses.

Use savings, investments, or borrowing


Cover to cover temporary deficits.

Increase income.
Increase

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Deficit Spending Results In

Liabilities
Assets

Net Worth

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Cash
Budget
Example

Worksheet 2.3,
page 61 of
Personal
Financial
Planning 13th
edition by Gitman,
Joehnk, and
Billingsley
(Cengage
Learning, 2014).

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Using Your Budgets
Budget Control Schedule
compares actual figures with various budget
Tool categories and shows variances.

Continually update your budget based upon


the actual figures.
Update

Keep budget balanced or at a surplus.


Check

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Budget
Control
Schedule
Example

Worksheet
2.4, page 66
of Personal
Financial
Planning 13th
edition by
Gitman,
Joehnk, and
Billingsley
(Cengage
Learning,
2014).

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