COMM 229 Notes – Chapter 2/3

Module 2:

Net Cash flow = disposable income - expenses

 Leads to either cash surplus or cash defecit

Balance Sheet - Net worth = total assets - total liabilities

Buying something using credit has 0 impact on net worth

Appreciation with assets can increase net worth (depreciation counter)
Cash surplus leads to asset injection -- cash deficit leads to liquifying assets

Cash flow surplus or deficit changes net worth either negative or positive based on surplus or deficit

Liquid Assets
Saving, chequing, cashable GIC

Non-Liquid Assets
 Household Assets
Car, furniture, property
 Investments
Stocks, bonds, mutual funds, real estate

Liabilities
Current liabilities: personal debts that will be paid off soon (within a year)

Long Term liabilities: debts that will be paid off in over a year

Financial Ratio Analysis:

Current Ratio - Current assets / current liabilities
 Want ratio to be higher than 1, this indicates someone can pay off their short term liabilities

Liquidity Ratio - Liquid assets / monthly living expenses

 Emergency relief, how many months can someone cover using current liquid assets, ratio should
be between 3.0-6.0 (says textbook) however that is incredibly high and opportunity cost is
considered. That money could be invested

Debt-to-Asset-Ratio - Total liabilities / total assets

 Calculate your level of potential borrowing power, want the ratio to be more than 1

Saving Ratio - Savings during period n / disposable income during period n

 How much money are you saving each period, negative number indicates cash deficit

Module 3:

First Self Assessment Review Questions

Bills annual savings is 9%, if he currently saves $6750, how much will he need to increase to 11%

6750/0.09=75000
75000*0.11=8250
8250-6750=1500
1500 extra is what he will need to save

John made an investment for 4 years, he obtained a total of 20,736 from his bank. The interest rate was
20%. What was his interest on interest

Compound interest: PV= 20736/(1+0.2)^4=10000

Simple interest: P*r*t = 10000*(0.2*4)=8000

Together they equal 18000 so interest on interest is 20736-18000=2736

Personal Taxing Objectives

 Importance of taxing
 File a tax return
o Steps involved in tax return
 Major deductions available to tax payer
 Tax credits to lower tax payable
 Difference among tax planning, tax evasion, and tax avoidance
 Tax planning strategies to reduce tax payable

You pay 0 taxes on capital gains made on your principle residence, the same is not true with regards to a
rental/investment property

Homeowners pay property tax based on the mill rate