PFP 3301 Chapter 2
Terms
undefined, object
copy deck
- 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.