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PFP 3301 Chapter 2

Terms

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an important financial statement that describes a person's financial position at a given point in time
balance sheet
important financial statement that measures financial performance over time by presenting income earned and expenses made during a given period
income/expense statement
detailed financial report looking forward based on expected income and expenses, used to monitor and control spending
budget
type of employee benefit plan wherein the employer allocates a certain amount of money, and the employee "spends" that money for benefits selected from a menu covering everything from child care to health and life insurance to retirement benefi
flexible-benefit (cafeteria) plan
an individual or firm that helps clients establish financial goals and develop and implement financial plans to achieve those goals
professional financial planner
the concept that a dollar today is worth more than a dollare received in the future; this is true as long as one can earn a postivie rate of return (interest rate) on investments
time value of money
the value to which an amount today will grow if it earns a specific rate of interest over a given period; can be used to find the yearly savings needed to accumulate a given future amount of money
future value
when interest earned each year is left in the account and becomes part of the balance or principal on which interest is earned in subsequent years
compounding
a fixed sum of money that occurs annually
annuity
useful approximation for estimating how long it will take to double a sum at a given interest rate; dividing 72 by the annual compount interest rate rewults in a good estimate of the number of years it will take to double your money
rule of 72
the value today of an amount to be received in the future; it is the amount that would have to be invested today at a given interest rate over a specified time period to accumulate the future amount
present value
the process of finding present value; the inverse of compounding to find future value
discounting
items that one owns
assets
assets that are held in the form of cash or can readily be converted to cash with little or no loss to value; help to meet everyday needs of life and provide for emergencies and unexpected opportunities
liquid assets
assets susch as stocks, bonds, mutual funds, and real estate that are acquired for the purpose of earning a return rather than providing a service
investments
tangible assets that are imovable, such as land and anything fixed to it, such as a house; generally has a relatively long live and high cost
real property
tangible assets that are movable and used in everyday life; includes items such as automobiles, household furnishings, and jewelry
personal property
the actual value of an asset, or the price that it can reasonably be expected to sell for in the open market
fair market value
debts, such as credit card charges, installment loans, and real estate mortgages
liabilities
any debt due within one year of the date of the balance sheet
current (short-term) liability
current liabilities that represent the balances outstanding against established credit lines, usually through credit card purchases.
open account credit obligations
any debt due one year or more from the date of the balance sheet
long-term liability
an individual's or family's actual wealth; determined by subtracting total liabilities from total assets
net worth
the actual ownership interest in a specific asset or group of assets
equity
the financial state in which net worth is less than zero
insolvency
a method of preparing financial statements in which only cash income and cash expenses are recorded
cash basis
earnings received as wages, salaries, selfpemployment income, bonuses, and commissions; interest and dividends received from savings and investments; and proceeds from the sale of assets
income
contractual, predetermined expenses involving equal payments each period (typically each month)
fixed expenses
expenses that involve payments that change from one time period to the next
variable expenses
an excess amount of income over expenses that can be used for savings or investments, to acquire assets, or to reduce debt; results in increased net worth
cash surplus
an excess amount of expenses over income reulting in insufficient funds that must be made up by drawing down savings or investments, reducing assets, or borrowing; results in decreased net worth
cash deficit
total net worth divided by total assets; measures the degree of exposure to insolvency
solvency ratio
total liquid assets divided by total current debts; measures the ability to pay current debts
liquidity ratio
cash surplus divided by after-tax income; indicates relative amount of cash surplus achieved during a given period
savings ratio
total monthly loan payments divided by monthly gross -before tax- income; provides a measure of the ability to pay debts promptly
debt service ratio
liabilities divided by total assets
debt ratio
a budget that takes into account estimated monthly cash receipts and cash expenses for the coming year
cash budget
a summary that shows how actual income and expenses compare with the various budget categories and where surpluses or deficits exist
budget control schedule
difference between balance sheet and income/expense statement
balance sheet at given point in time; inc./exp. statement over a period of time
value of house is what you paid for it unless
you get it appraised
net worth is calculated how
assets - liabilities
balance sheet equation
assets = liabilities + net worth
net worth is positive then you are
solvent
net worth is negative then you are
insolvent
total income - total expenditures =
cash surplus or deficit
effective rate calculation
amount of interest earned during the year / amount of money invested or deposited
forms of revolving credit
overdraft protection lines, unsecured personal credit lines, and home equity credit lines
info collected by credit bureau from subscribers, creditors, public court records, and the consumer
credit reports
whats on credit report
age, ss#, adresses, employment history, credit history, criminal convictions and judgements, two years of inquiries
why is credit scoring important
helps you get loans, etc.

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