Personal Financial Statements - sfafn.com

1 Overview Personal Financial Statements provide a su mmary of an in di vidual s financia l situati on . The mos t common ly use d Financial Statements are the Net Worth Statement and the Cash Fl ow Statement . The Net Worth Statement re prese nts an individual s assets, liabilities, and net worth as of a parti cular date. The Cash Flow Statement sh ows an individual s receipts and in come and disburse ments and expe nse s for a specific period of time. In other words, the Cash Flow Statement ill ust ra tes the in dividual s inflows and ou tflows and whether there is a cash flow surplus or deficit.

2 Both the Net Worth Statement and the Cash Flow Statement are essenti al to ol s in evaluating and mon itoring an individual s Financial status. They sh ou ld be prepared, re vised, and analyzed re gularly to see if the individual i s making progre ss towards achieving their Financial goals. Si tua tions The preparati on of Personal Financial Statements is the initial step in helping an individual determ ine his or her Personal fi nancial goals. Personal fi nancial Statements are also util ized in t he followin g situations as: The basis for the cash flow analysis and projection process The first step in the budgeting process Proof to a lender of the individual s ability to make loan payments as well as show adequate securi ty for a loan Part of the needs analysis require d to determine any sh ortfalls in life, disability income, property and casu alty , and/or extende d care insura nce Personal Financial Statements Page 1 of 6 Descriptions To prepare complete Financial Statements .

3 There are numerous sources fr om which the infor mation necessary for preparing su ch st atements may be found, for example: Checking and sa vings accou nt Statements , CD certificates, checkbook re gi sters Br okerage account Statements and mutual fund Statements Employee benefi t Statements [ , 40 1( k) and ot her employee benefi t plan st atements, such as employee stoc k purc hase plan, sto ck opt ion plan, re stricted stoc k plan, deferre d compensa tion plan, profit-sh aring plan, etc.] Payroll check stubs for salary, bonus, expense al lowance, and payroll deduction amou nts Appraisa l reports for any propert y, business interests, or ot her assets Not es receivable doc uments Doc uments re lated to th e value of the individual s ownership in a business, limited partnership, l imited li ability corporation, etc.

4 Income tax re turns (the last 2 to 3 years, if possible) Life insura nce and annuity st atements Sa fe deposit box invento ry The individual s Personal Financial management computer software re cords Loan doc uments mortgages, vehicle purc hase s, and ot her Personal loans Cre dit card Statements The cl ient (i .e., completi ng a detailed fa ct finder wi th the fi nancia l plannin g professional) Logist ics Net Worth Statement The basic design of the Net Worth Statement is Assets Less: Liabili ties = Net Worth. On the Net Worth Statement, as sets are usu ally listed according to the degree of liquidity wi th the most liquid assets li sted fi rst.

5 In addition, assets sh ou ld be prese nted at the estimated curre nt value, not at th e cost basis and/or purchase amount. Examples of the kinds of assets and the order in whic h they may be listed are : Cash and cash equivalents (e .g. , cash , bank accounts, money market mutual funds, and Treasu ry bills) Life insura nce poli cy cash values Ac cou nts re ceivables; bonus receivable Fixed income investments not in re tirement accounts (e .g. , CDs, bon ds, and bond funds) Equity investments not in re tirement accounts (e.)

6 G. , st oc k and st oc k mutual funds) Re al estate Closely held busin ess intere sts Re mainder interests in trust(s) Re tirement and employee benefi t re lated assets Personal residence and second re sidence(s) Personal property (e .g ., vehic les, home fu rn ish ings, je welry, art work, collectible s, etc.) Hu man Capital ( , the prese nt value of an individual s expected future labor income.) Page 2 of 6On the Net Worth Statement, liabilities cou ld be prese nted in the order of maturity or next to the asset. For example, cre dit card balances wou ld be li sted before longer term debts su ch as vehic le loans and mortgages.

7 In addition, li abilities sh ou ld be sh own at the estimated curre nt amount ( , balance). Examples of the kinds of lia bilities and the order in whic h they may be listed are : Cre dit cards and charge accounts Income taxes payable Miscell aneou s accou nts payable Ba nk loans (secure d then unse cure d) Life insura nce policy loans Vehicle loans Student loans Mortgages on Personal residence(s) (e .g. , primary mortgage, home equity line of cre dit, home equity loan, home improvement loan) Mortgages on investment Real estate Loans to cl osely held businesses Af ter the Net Worth Stat ement is compiled, it wi ll provide a curre nt Financial snap sh ot of the individual s assets and li abilities and whether they have a po siti ve or negative net worth.

8 It prese nts an individual wi th an organize d re fe re nce point to evaluate their curre nt Financial position and how that re lates to their Financial goals. Pre paration of the Net Worth Statement is also the initial step in bo th the investment planning process and the debt analysis process. Cash Flow Statement The basic design of the Cash Fl ow Statement is Receipts and Income Less: Disbursements and Expens es = Net Cas h Flo w. On the Cash Flow Statement, receip ts and in come are listed fi rst. Examples of the kinds of receipts and income and the order in which they may be listed are: Sa lary, wages, and ot her earned income (e.)

9 G. , commission s, expe nse allowances, directo r s fees, se con d jo b) Bonuse s Gifts Transf er typ e payments (e .g. , ta x re fu nds, child support, alimon y, Soc ial Se curity benefi ts, Veteran s benefi ts) Interest (taxable then nontaxable) Dividend and royalty income Re alized capital gains Income from re al estate in vestments An nuity income Other i ncome (e .g. , trust income, business income, se verance income) The di sbursements and expenses are listed next on the Cash Flow Statement. There are three main categories of expense s: non discre tionary, se mi- di sc re tionary, and discre tionary.

10 Non discre tionary expense s are also known as fi xed expense s and the individual normally has li mite d, if any, control over these . Se mi- discre tionary expense s may not be complete ly eliminated but the in di vidual may have some con trol over them. Disc re tionary expense s are luxuries and may be completely elimin ated as a nonessential item if necessary. Page 3 of 6 Examples of the three types of expense s 4 of 6 Nondiscreti onary Expenses Mortgage and other home-re lated loans; rent payments Installment loan and lease payments Utili ties Income taxes Other taxes ( , FICA, re al estate and Personal propert y ta xes)