Course 101- Unit 3

A client provides a current personal balance sheet to the financial planner during the initial data gathering phase of the financial planning process. This financial statement will enable the financial planner to gain an understanding of all of the following except the: a. Diversification of the client's assets b. Size of the client's net cash flow. c. Client's liquidity position. d. Client's use of debt

*b. Size of the client's net cash flow.*

Key focus areas for the financial planner concerning the Statement of Financial Position

-Assets are always presented at fair market value (FMV). -The Net Worth of the client on a given date is listed. -The respective titling of assets and liabilities is shown on a properly prepared statement. -The footnotes shown at the bottom of the statement of financial position are critical to the financial planner in properly understanding the clients current financial status. -Usually reflects the client's current financial status as of December 31 of any calendar year. -Net Worth=Assets-Liabilities

Nondiscretionary Expense

-a recurring or nonrecurring expense that is essential for an individual to maintain his lifestyle -examples include rent or mortgage payments, loan repayments, food, utilities, and taxes

Three consequences that can occur whenever cash is used to complete a transaction:

1. A client's assets are increased 2. A client's liabilities are decreased 3. Cash outflows are increased

Three components of the cash flow statement are:

1. Cash Inflows(Salary, Rental Income, Capital Gains...etc) 2. Cash outflows(Fixed and Variable) 3. Net Cash Flow

Total Assets may be further categorized as follows:

1. Cash and Cash Equivalents- also known as Current Assets, tend to be short term in nature. Commonly invested in the money market 2. Investments(invested assets including retirement funds) tend to be longer term and invested in the capital market. 3. Personal Use Asset- owned and used by a client as part of their personal lifestyle, not as an investment. Ex.) a home or primary residence

Statement of Financial Position is organized into three distinct categories:

1. Total Assets(what the client owns) 2. Total Liabilities(what the client owes) 3. Net Worth(what the client is worth after all liabilities are fully paid)

Budget

A budget should consider the client's financial goals and serve as a control document for future cash flows.

A client's statement of financial position reflects $540,000 in total assets, $40,000 in current liabilities, and $240,000 in long-term liabilities. Calculate the client's net worth. A. $260,000 B. $300,000 C. $500,000 D. $540,000

A. $260,000 -Total assets-total liabilities

A client has a net worth of $900,000 at the beginning of the calendar year. Calculate the clients net worth at the end of this same calendar year after the following transactions: -Repayment of a $25,000 loan using funds from a savings account -Purchase of a $40,000 automobile with a $10,000 down payment and the remaining amount financed through a credit union -A $12,000 INCREASE in the clients mutual funds account balances -A $15,000 DECREASE in the clients bond portfolio A. $897,000 B. $900,000 C. $902,000 D. $922,000

A. $897,000

Statement of Cash Flows

Also called Cash Flow Statement, summarizes the items of income(including salary, wages, or both) that were actually received (cash inflows) and the expenditures actually made (cash outflows) during a specific period ( monthly, quarterly, or annually) -Cash Flow Statement reflects the clients financial activity OVER A PERIOD OF TIME....not a particular date. - inflows-outflows(fixed, variable, and taxes)=NET CASH FLOW

Statement of Financial Position

Also known as the Personal Balance Sheet or Net Worth Statement. -Provides a snapshot of a clients net worth on a given date, usually at the end of a calendar year.

Identify the item that should be included on the statement of financial position. A. Auto loan payment B. Auto loan balance C. Original mortgage amount D. Section 401(k) elective deferrals

B. Auto loan Balance

Six months ago, a client purchased a new bedroom suite for $6,500. For purposes of preparing accurate financial statements, the purchase would appear as I. A use asset on the client's net worth statement II. An investment asset on the client's net worth statement III. A variable outflow on the client's historic cash flow statement IV. a fixed outflow on the client's cash flow statement A. I, II and III B. I and III C. II and IV D. IV only E I, II, III and IV

B. I and III

Total Liabilities can be further classified in to either Current(Short-term) liabilities or Long-term liabilities

Current(Short-term) Liabilities- Due less than one year from the statement date, such as a primary note Long-term Liabilities- Due one year or more from the statement date, such as a mortgage

A client's emergency fund should be kept in liquid assets....Examples

Examples -Checking Accounts -Savings Accounts -Money market deposit accounts -Money market mutual funds accounts -Time deposits (certificates of deposit) that are close to maturity(less than one year)

Discretionary Expense

Is a recurring or nonrecurring expense for an item or service that is either nonessential or more expensive than necessary.

Robert Smith asks for your help in preparing his cash flow statement. He tells you that his salary before taxes is $250,000 and that he has NO mortgage on his home. Which of the following statements is true about Robert's cash flow statement? ① The value of the home would be an income source since there is NO mortgage. ② The value of the home would be an asset. ③ The taxes on his salary would be a liability. ④ The taxes on his salary would be an expense.

④ The taxes on his salary would be an expense