Ch. 2 Using Financial Statements and Budgets

investments

Assets such as stocks, bonds, mutual funds, and real estate that are acquired in order to earn a return rather than provide a service.

liquid assets

Assets that are held in the form of cash or that can readily be converted to cash with little or no loss in value.

personal financial statements

Balance sheets and income and expense statements that serve as essential planning tools for developing and monitoring personal financial plans.

savings ratio

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

fixed expenses

Contractual, predetermined expenses involving equal payments each period.

open account credit obligations

Current liabilities that represent the balances outstanding against established credit lines.

liabilities

Debts such as credit card charges, loans, and mortgages.

income

Earnings received as wages, salaries, bonuses, commissions, interest and dividends, or proceeds from the sale of assets.

variable expenses

Expenses involving payment amounts that change from one time period to the next.

assets

Items that one owns.

expenses

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

real property

Tangible assets that are immovable: land and anything fixed to it, such as a house.

personal property

Tangible assets that are movable and used in everyday life.

equity

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

fair market value

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

time value of money

The concept that a dollar today is worth more than a dollar received in the future.

budget variance

The difference between the budgeted and actual amount paid out or received.

insolvency

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

discounting

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

future value

The value to which an amount today will grow if it earns a specific rate of interest over a given period.

present value

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

liquidity ratio

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

debt service ratio

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

solvency ratio

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

cash deficit

An excess amount of expenses over income, resulting in insufficient funds as well as in decreased net worth.

cash surplus

An excess amount of income over expenses that results in increased net worth.

net worth

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

long-term liability

Any debt due 1 year or more from the date of the balance sheet.

current (short-term) liability

Any debt due within 1 year of the date of the balance sheet.

compounding

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

cash budget

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

budgets

A detailed financial report that looks forward, based on expected income and expenses.

balance sheet

A financial statement that describes a person's financial position at a given point in time.

income and expense statement

A financial statement that measures financial performance over time.

annuity

A fixed sum of money that occurs annually.

timeline

A graphical presentation of cash flows.

cash basis

A method of preparing financial statements in which only transactions involving actual cash receipts or actual cash outlays are recorded.

budget control schedule

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

rule of 72

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