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Related Flashcards
Cards In This Set
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What is a financial liability? How do you determine the amount owed on current and long-term liabilities? Give examples of each.
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A liability is something that is owed or the borrowing of money. Current liabilities must be paid off within the next year. (The unpaid balance on your credit cards represents a current liability since it must be paid off.) Long-term liabilities are due beyond a year's time (usually much larger debt, like a home, car, or student loan).
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List the three most important reasons for keeping accurate financial records.
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1) Without adequate records, it's extremely difficult to prepare taxes. 2) A strong record-keeping system allows you to track expenses and know exactly how much you're spending and where you're spending it. (If you don't know where and how much you're spending, you don't have control of your finances.) 3) Organized record keeping makes it easier for someone else to step in during an emergency and understand your financial situation.
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Your friend Dario wants to know why he should establish a budget. Tell him what info he needs.
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A budget is a plan for controlling cash inflow and outflows, and the purpose is to keep income in line with expenditures plus savings. Begin with your most recent annual personal income statement--examine last year's total income, determine what your taxes will be to get an estime of anticipated after-tax income available for living expenditures (called take-home pay). With take-home pay, try to reduce spending and increase saving...and finally, subtract anticipated living expenditures from anticipated take-home pay to determine income available for savings and investment.
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Personal balance sheet
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A statement of your financial position on a given date. Includes the assets you own, the debt/liabilities you've incurred, and your level of wealth (referred to as net worth)
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Assets
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What you own
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Liabilities
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What you owe
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Net worth or equity
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A measure of the level of your wealth. It is determined by subtracting the level of your debt or borrowing from the value of your assets
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Fair market value
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What an asset could be sold for rather than what it cost or what it will be worth sometime in the future
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Tangible asset
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A physical asset, such as a house or a car, as opposed to an investment
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Blue book
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A listing of used-car prices, giving the avg. price a particular year and model sells for and what you might expect to receive for it as a trade-in.
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Insolvent
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The condition in which you owe more money than your assets are worth
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Income statement
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A statement that tells you where your money has come from and where it has gone over some period of time
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Variable expenditure
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An expenditure over which you have control. That is, you are not obligated to make that expenditure, and it may vary from month to month.
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Fixed expenditure
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An expenditure over which you have no control. You are obligated to make this expenditure, and it is generally at a constant level each month
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Budget
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A plan for controlling cash inflows and outflows. Based on your goals and financial obligations, a budget limits spending in different categories.
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