©2012, College for Financial Planning, all rights reserved.

Module 2Financial Statements &

Cash Flow Management

Foundations in Financial PlanningSM Professional Education Program

Learning Objectives

2–1: Describe the purpose or use of a statement of financial position or a cash flow statement.

2–2: Identify components of a statement of financial position or a cash flow statement.

2–3: Calculate an individual’s net worth on a given date or an individual’s net inflow for a period ending on a given date.

2–4: Analyze a statement of financial position or a cash flow statement to determine the status of an individual’s financial health.

2–5: Define a financial ratio or the use of a given ratio.

2–6: Identify a standard guideline (rule of thumb) related to a financial ratio.

2–7: Describe credit or a type of credit.

2–8: Identify factors a lender uses to evaluate a potential borrower.

2–9: Identify appropriate levels of debt.

2–10: Identify the items that are used to develop a budget.2-2

Questions To Get Us Warmed Up

2-3

Statement of Financial Position

2-4

Cash Flow Statement

2-5

(or Outflow)

Analysis of Financial Statements

Evaluate:• Emergency fund• Debt level• Savings pattern• Asset diversification• Retirement planning• Income tax issues• Other areas?

2-6

Liquidity (Solvency) Ratio

GuidelineHave three to six months of expenses in an emergency fund.

2-7

expensesMonthly

assets(liquid)equivalentcashandCashLiquidityBasicRatio

Liquid Assets to Net Worth Ratio

Guideline15% or higher

2-8

worthNet

assetsLiquidRatio Worth-Net-to-Assets-Liquid

Savings Ratio

Guideline10% or higher

2-9

incomeGross

)sinvestmentand(SavingsRatioSavings

Debt-to-Asset Ratio

Guideline• 50% or lower

2-10

assetsTotal

debtTotal Asset-to-DebtRatio

Debt-to-Income Ratio

Guideline35% or lower

2-11

pay home- takeAnnual

repaymentsdebt AnnualRatio Income-to-Debt

Non-Mortgage Debt-to-Income Ratio

Guideline15% or lower

2-12

payhome-takeAnnual

repaymentsdebtmortgage-nonAnnual mortgage-Non RatioIncome-to-Debt

Net Invested Assets to Net Worth Ratios

Guideline50% or higher

2-13

worthNet

assetsinvestmentNet toassetsinvestmentNetratioworthNet

Credit & Debt

Advantages/Uses• Necessity• Convenience• Immediate gratification• EmergencyPotential Problems• Overspending• Cost

2-14

Qualifying for Credit: 5 C’s

• Character• Capital• Capacity• Collateral• Conditions

2-15

Types of Credit

Installment/Closed-end/Long-term• Mortgages

o fixed rateo conventionalo governmento variable rate (ARM)

• Auto loans• Student loansRevolving/Open-end/Short-term• Credit cards• Overdraft protection

2-16

Buying vs. Leasing

Factors: Cost and convenienceAuto leasing• Open-end: may require payment of

difference between value and resale• Closed-end: may have mileage surchargeRenting versus home ownership• Reasons to rent• Reasons to buy

a home

2-17

Consumer Credit Laws

• Truth in Lending Act• Fair Credit Reporting Act• Fair Credit Billing Act• Equal Credit Opportunity Act• Fair Debt Collection Practices Act• Fair Credit and Charge Card Disclosure Act• 2010 Dodd-Frank Wall Street Reform and

Consumer Protection Act

2-18

Bankruptcy Law

• Consumer Credit Counseling Services• Chapter 7 (full liquidation)

o almost all debts erasedo file only once every six years

• Chapter 13 (repayment)o freeze debt levelo attempt to pay back

most/all debt

2-19

Acceptable Debt Levels

• Debt-to-asset ratio: 50% or lower

• Debt-to-income ratio: 35% or lower

• Nonmortgage debt-to-income ratio:

• 15% or lower

2-20

Creating a Budget

2-21

Uses of a Budget

• Spend money more wisely.• Live within current income.• Plan for large expenditures.• Set aside money for financial goals.

2-22

Budget Mechanics

• Listing budget items• Recording• Monitoring

2-23

Question 1

Which one of the following items would not be found on a statement of financial position? a. auto note balanceb. annual IRA contributionc. vested retirement benefitsd. mortgage balance

2-24

Question 2

The debt-to-income ratio measures which of the following debt measures?I. mortgage debtII. non-mortgage debtIII. consumer debtIV. revolving debta. I onlyb. I and III onlyc. II and IV onlyd. I, II, III, and IV

2-25

Question 3

Bob Humphrey’s financial situation is as follows:• Cash/cash equivalents: $15,000

• Short-term debts: $8,000

• Long-term debts: $133,000

• Tax expense: $7,000

• Auto note payments: $4,000

• Invested assets: $60,000

• Use assets: $188,000What is Bob’s net worth?

a. $111,000b. $122,000c. $137,000d. $263,000

2-26

Question 4

Which one of the following debt-to-asset ratios would be considered to be safe?a. less than 50%b. greater than 50%c. less than 62%d. greater than 65%

2-27

Question 5

Of the following types of debt, which one provides the greatest tax benefit to the individual consumer with regard to interest paid on the debt?a. auto loan debtb. credit card debtc. home mortgage debtd. student loan debt

2-28

Question 6

Which one of the following items of consumer legislation allows the consumer to correct errors found on their credit report?a. Fair Debt Collection Practices Actb. Equal Credit Opportunity Actc. Consumer Credit Protection Actd. Fair Credit Reporting Act

2-29

©2012, College for Financial Planning, all rights reserved.

Module 2End of Slides

Foundations in Financial PlanningSM Professional Education Program