HS 300 Flashcards – Module 4

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[h] HS300 – Module 4

[q] Balance sheet

[a] A finacial statement that reflects an individuals assets, liabilities, and net worth. Reflects a family’s net worth for a specific point in time.

[q] Accounting equation

[a] Can be expressed in the following ways:

Assets – Liabilities = Net Worth

Assets = Liabilities + Net Worth

Assets – Net Worth = Liabilities

[q] Assets

[a] The section of the balance sheet that represents property owned by an individual or family. Shown on the left side of a two-column balance sheet.

[q] Liabilities

[a] The section of the balance sheet that represent amounts owed by an individual or family to creditors. Shown on the right side of a two-column balance sheet.

[q] Major Categories of Assets on a Balance Sheet

[a] Categories:

Cash and Cash Equivalents.

Investment Assets.

Personal Assets.

[q] Current Assets

[a] Assets on a balance sheet that can be converted to cash within one year.

[q] Investment Assets

[a] Assets that are intended to help achieve specific financial goals. Includes stocks, mutual funds, and retirement accounts.

[q] Personal Assets

[a] Non-financial assets that are used primarily for enjoyment by individuals. Includes a personal residence and furniture.

[q] Short-term Liabilities

[a] Debt that is typically incurred for convenience. The debt is usually payable within one year.

[q] Long-term Liabilities

[a] Debt that is typically incurred to purchase personal use assets. The debt typically has a term longer than one year.

[q] Net Worth

[a] An amount reported on a balance sheet that represents what remains if all assets are sold at fair market value and all debts are paid off.

[q] Liquidity Ratios

[a] Balance sheet ratios that measure an individual’s ability to convert assets into cash. Represents the ability to meet short-term or current liabilities.

[q] Emergency Fund Ratio

[a] A type of liquidity ratio that determines how many months of non-discretionary cash flows a client can cover with current liquidity. An appropriate benchmark is 3-6 months.

[q] Emergency Fund Ratio Formula

[a] Ratio = Cash and Cash Equivalents / Monthly Non-discretionary Expenses

[q] Nondiscretionary Expenses

[a] Expenses that will continue to occur even if an individual loses their job.

[q] Current Ratio

[a] A type of liquidity ratio that determines an individual’s ability to pay current liabilities.

[q] Current Ratio Formula

[a] Ratio = Cash and Cash Equivalents / Current Liabilities

[q] Debt Ratios

[a] Balance sheet ratios that measure an individual’s debt and can be used to determine the amount of debt an individual can handle.

[q] Good Debt

[a] Debt that has a relatively low interest rate and a payback period that is less than the underlying asset’s life.

[q] Bad Debt

[a] Debt that has a high interest rate and a payback period that exceeds the underlying asset’s life.

[q] Debt to Asset Ratio

[a] A type of debt ratio that reflects the portion of assets owned that are financed by debt.

[q] Debt to Asset Ratio Formula

[a] Ratio = Total Debt / Total Assets

[q] Housing Ratio 1

[a] A type of debt ratio that represents the proportion of gross pay used for housing costs. Also called the basic or front end ratio. The target ratio is 28% or less.

[q] Housing Ratio 1 Formula

[a] Ratio = Monthly Housing Costs / Monthly Gross Income

[q] Housing Ratio 2

[a] A type of debt ratio that represents the proportion of gross pay used for all debt costs. Also called the broad or back end ratio. The target ratio is 36% or less.

[q] Housing Ratio 2 Formula

[a] Ratio = (Monthly Housing Costs and Other Debt Payments) / Monthly Gross Income

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