Week 5 Financial Records (Sem 1 2022223)

Personal Financial
Statements
1
Personal Financial
Statements
Overall
Objective:
To examine and understand the concepts of net

worth, cash flow management and the implications
of financial rations on the ‘financial health’(asset
quality and solvency situation) of the individual.
2
Personal Financial
Statements
Students must be able to:
• State the Main Personal Financial Statements
• Explain and Construct a Net Worth Statement
• Classify the Various Assets Into Broad Categories

• Explain the Assets Quality and Solvency Situation
of a Client
• Compute the Existing Liabilities Based on the
Current Principal Outstanding
• Construct the Income Statement
• Determine the Net Cash Surplus
• Evaluate If the Cash Flow is Sufficient to Meet Major Objectives
• Undertake Some Key Financial Ratio Analysis
• Establish if the Client Has Enough Passive Income to Retire
3
Personal Financial Statements
• Personal finance = financial issues that can affect an

individual
• Financial statement provide u with an indication of ur
financial condition & can help with budget planning
• A budget is a forecast of future cash inflows & outflows.
It provides guidance about how to reach the personal
goals u set. It gives u a detailed roadmap to ur financial
future.
• There are 2 types of budget: Personal cash flow
statement & Personal balance sheet (net worth)
4
Personal Financial
Statements
Statement of Net Worth
( shows Values)
Evaluate client’s Construct Personal
Financial Financial Statements
situation Cash Flow Statement
(shows Cash Movements)
Information gained :
• a snap shot of the finances
• discover the history and trend of finances
• an ability or lack of ability and even competence or non-competence to
manage finances
• His risk profile will also be reflected by his financial statement
5
Statement of Net Worth Balance Sheet
3 ASSETS What the client

possesses on that
S date
E
C
T LIABILITIES What the client
I owes others on that
O date
N
S NET WORTH Client’s Equity/
ownership on that
date 6
Net Worth IT’S A MEASURE OF THE

CLIENT’S
WEALTH
ASSETS LIABILITIES NET WORTH
= +
Cash/Cash Short - The portion

Equivalents Term of the total
Liabilities net assets
Investment (< 1 year) that the
Assets Long-Term client owns
Liabilities at that
Personal-Use (> 1 year) point in
Assets time
7
ASSETS SHOWN AT THE FAIR MARKET VALUE
Cash/Cash Equivalents:
These can be converted to cash within a few days
or on short notice (little/no loss in value).
Cash/Cash
Equivalents
Investment Assets:
Investment
These are less liquid and will take some time to be
Assets converted to cash and some investment assets can be
categorized as retirement assets which can only be
Personal-Use realized upon retirement like the EPF.
Assets
Personal-Use Assets:
Personal property whose primary purpose is to
provide maintenance of one’s everyday lifestyle.
Generally depreciate in value over time.
The placement of the assets into the various categories depends on why the asset was acquired
8
and the individual views the asset.
how
ASSETS SHOWN AT THE FAIR MARKET VALUE
Cash/Cash Equivalents:
Savings account, fixed deposits, Checking
account, Money market account, Life insurance cash
value
Investment Assets:
CLASSIFICATION EPF, Equities, Unit trust, Stock portfolio, Savings,
Bonds, Property for rental
Personal-Use Assets:
Personal residence, Automobiles,Art/coin/stamp
collection,Personal property (e.g. furniture and
fittings, jewellery, clothing)
9
Personal Financial
Statements
ASSET
ANALYSIS
In personal financial statements on Assets, it has to be

ascertained :
•whether the assets belong to the husband or wife, or both
(jointly owned)
• whether it is a tenancy in common (no right of survivorship) or
a joint tenancy (creates a right of survivorship)
• rights of survivorship (a situation in which ownership rights
automatically pass to surviving co-owners on an owner's death)
•if one of the spouses should die will the particular asset be sold
or will it remain in the family?
10
Personal Financial
Statements
Emergency Use Assets
• An emergency fund is critical to any reasonable financial plan.

• It’s the money set aside for life’s unexpected events.
• Assets are needed for emergency use in which case they have to be
liquid.
• Exactly how much is needed depends on the circumstances
• Most planners believe that an emergency fund that can cover 6
months
expenses will be a safe bet.
What are expenses? What is an emergency?
11
LIABILITIES
Short-term or Current Liabilities

Short -Term
Mortgage, Credit card bills, Auto loan, income
Liabilities tax payable, due rent, bills, insurance premiums etc
(debts that
must be paid
off within 1 Long-term Liabilities
year) Education, housing loans, consumer installment
Long-Term loans etc
Liabilities
(debts that
will take
longer than
1 year to
pay off)
12
Personal Financial
Statements
• Net worth = Value of your total assets MINUS The sum

of your total liabilities
• In other words, if you sold all of your assets today &
paid off your debt (liabilities), the remaining amount
would be your net worth
• Net worth is an easy way to measure your wealth &
allow you to track your wealth over time
13
Personal Financial
Statements
CASH FLOWS Provides information on the client’s cash movements
Can be FIXED or VARIABLE in nature
CASH OUTFLOWS
CASH INFLOWS
Living Expenses
Salaries
Loan payments
Bonuses
Rental
INCOME Income tax
Maid’s salary
Interest income
Life insurance
Gratuities
premiums
Other Income
IN Credit cards
(Scholarship) OUT
Rent
14
Personal Financial
Statements
Personal Cash Flow Statement

• Cash inflows – any money that you have coming in
• Factors that affect cash inflows:
• Stage in your career path, which is closely related
to your life stage (See Exhibit 2.2)
• Type of job – based on skill level & demand
• Number of income earners in your household
15
Personal Financial
Statements
A line graph representing cash inflows on the vertical axis and age on the horizontal axis. There
are three segments: college, where there are few cash inflows; career, where there are much
greater cash inflows that increase constantly over time; and retirement, where cash inflows are
much smaller and increasing at a much lower rate than they did during career. 16
Personal Financial
Statements
Personal Cash Flow Statement

• Cash outflows – any money that you have going out.
• Typically impacted by
• Family size
• Age
• Your personal spending habits (Some people spend all
of their income and more while others spend mainly on
necessities and concentrate on saving for the future).
• Personal cash flow statement allows you to easily track
where your money comes from & where it goes.
17
Personal Financial
Statements
CASH FLOWS CAN BE SURPLUS, DEFICIT OR IN
EQUILIBRIUM
CASH CASH OUTFLOWS

INFLOWS SURPLUS
Salaries Living Expenses
Bonuses Loan payments OR
Rental
Interest
minus Income tax
Maid’s salary = DEFICIT
income Life insurance
Gratuities premiums OR
Other Income Credit cards
IN
EQUILIBRIUM
18
Personal Financial
Statements
Analysis of Cash Inflows
• Inflows are vital for the survival of the family
• The stability of inflows is important to financial planning
• The inflows also reveal if the person is able to retire
• The composition of passive income to active or earned income reveals

his dependence on employment or business engagement.
• Investment income must ultimately replace his active income during

retirement.
• It will be necessary to estimate the future increase in income as well.
19
Analysis of Cash Inflows
The following issues must be studied in analyzing inflows
Stability of income
Fluctuation of income
Deductions from gross

income
20
Analysis of Cash Outflows (Expenses)
The primary analysis involves separating fixed expenses from the variable
expenses
Fixed Expenses Variable Expenses
Loan commitments. Credit card Electricity, shopping, utility bills,

payments, Alimony and child clothing, entertainment,
support payments, Taxes, Insurance childcare, vacations etc
21
Analysis of Cash Outflows

(Expenses)
The following issues must be studied in analyzing outflows
Fixed versus variable

expenses
The degree of control on

expenses
Necessary versus
unnecessary expenses
22
Personal Financial
Statements
Analysis of Cash Outflows (Expenses)
•In most situations the income is fixed and therefore it is in the analysis of
expenses that a surplus can be derived to put into savings.
•The most important distinction is the division of expenses into fixed and
variable.
•The type of expenses will also reveal the urgency and importance of the
expense. Normally, it takes quite an effort to reduce a fixed expense.
•Variable expenses – 2 categories (necessary & discretionary). Discretionary

expenses which can be deferred or postponed or even avoided will allow
savings to be accumulated to meet important long term objectives.
23
Personal Financial
Statements
How cash flow affects the personal balance sheet

(statement of net worth)?
• Wealth is built by using net cash flows to invest in more

assets without increasing liabilities
• OR Net cash flows can be used to decrease liabilities
which will increase net worth (wealth)
• Note that net worth can change even if net cash flows
are zero; for example, the value of an asset or
investment increases or decreases
24
Personal Financial
Statements
Relationship between cash flow & wealth
25
Net worth increases when you...
1) cut back on spending

2) increase savings
3) increase income
4) increase investment
5) pay off debt especially high-interest credit card
balances
Analysis of Financial Situation
Some of the common areas to evaluate will be as follows:

1. Emergency fund
 Does it exist
 Is it sufficient for the individual’s need
 If insufficient can it be built up from net cash flow or can some assets be converted for this
purpose.
2. Level of debt
 What is the current level of debt
 What are the types of debt
 Are there sufficient cash flows to expedite settlement or can other assets be used to liquidate
the expensive debts
3. Level of savings
 How liquid is his portfolio
 Are his savings adequate to meet his objectives
4. Diversification of assets
 How diversified are his assets holdings
 What is his asset allocation strategy
5. Level of preparation for retirement
 Are assets being accumulated for retirement
 Will he meet his retirement objectives 26
Analysis of Financial Situation
Some of the common areas to evaluate will be as follows:

6 Tax situation
 Is tax a real burden for the individual?
 What investments are being taxed?
 Can he apply some established tax planning ideas?
 If in employment can he re-structure his employment package for better after-tax cash
flow?
 What are his chances for deferred compensation?
 Is he having an appropriate business tax entity?
7. Assets and Income at risk

 What assets are exposed to natural perils
 Disability and health risk cover
 Hospitalization and medical cover
 How much survivor income can the assets generate
 Level, type and adequacy of insurance coverage
28
PERSONAL FINANCIAL
RATIOS
• Financial ratios are numerical calculations designed to
simplify the process of evaluating your financial strength &
the progress of your financial condition
• Ratios serve as tools or yardsticks to develop saving, spending
& credit-use patterns consistent with your goals
29
CATEGORIES OF PERSONAL FINANCIAL RATIOS
30
PERSONAL FINANCIAL
RATIOS
•Liquidity refers to the ease and speed with

 BASIC LIQUIDITY which an asset can be converted into cash
RATIO
•The asset should not be disposable at a loss or at
a very much reduced margin
•The idea of a liquid asset implies getting the

market value or as close to it as possible at the time
of disposal.
31
BASIC LIQUIDITY
RATIO
 BASIC This measures the client’s liquidity position over

LIQUIDITY the short term
RATIO
 BASIC 3 - 6 Monthly Expenses

LIQUIDITY cushion
RATIO
Basic Liquidity Ratio = Cash/Cash

Equivalents
Monthly Expenses
32
Checking account 3,000
Savings account 5,000
Fixed deposits 10,000
Money market account 10,000
Life insurance cash value 8,000
Total cash/cash equivalents 36,000
Basic Liquidity Ratio = Cash/Cash Equivalents

Monthly Expenses
33
Personal Financial
Statements Cash Outflows
Savings and investments 7,200
Fixed payments on loans/credit

cards/insurance
18,000
Mortgage payments/rents
9,000
Auto loan payments
3,500
Insurance premiums
12,000
Taxes (Pay as you earn)
7,200
Credit card payments 49,700
(minimum payments)
Total fixed outflow
Variable payments 17,000

9,000
Food
10,800
Transportation costs
11,000
Clothing and personal
care products 1,600
Sports and 14,000
Entertainment/vacations 2,400
Medical/dental care for family 2,000
Utilities and household expenses 69,800
Child expenses (food, clothing, and education) 126,700
Basic Liquidity Ratio = Cash/Cash Equivalents

Monthly Expenses
The monthly expenses = Total outflow = 126,700 = 10,558

12
12
Cash or cash equivalents plus other liquid investments =

36,000
Basic Liquidity Ratio = RM36,000 =
3.41 RM10,558
35
LIQUID-ASSETS-TO-NET WORTH
RATIOS
The ratio of the client’s liquid assets to
 LIQUID-ASSETS-TO the net worth, ie. what amount a person net
NET WORTH RATIO worth should be in cash
 LIQUID-ASSETS-TO Experts recommend a minimum of 15% as a

NET WORTH RATIO benchmark for adequacy
Liquid-Assets-to-Net Worth Ratio = Liquid assets

Net Worth
36
Personal Financial
Statements
Stock portfolio (market value as at 31-12-2007) 15,000
Savings Bonds 20,000
EPF balance 90,000
15,000
Unit trusts (Net asset value)
NIL
Property for rental
140,000
Total investment asset value
Personal use assets
Personal residence (market value) 200,000

35,000
Automobiles (current market value)
not valued
Art/coin/stamp collection
Personal property (e.g. furniture and fittings, Jewellery, clothing) 30,000
Total value of personal use assets 265,000

Total Assets 441,000
Liabilities and Net Worth
Liabilities
Housing mortgage (principal balance) 130,000

Auto loan balance (the remaining full term payment outstanding) 45,000
Credit card balances (each card reflected separately) 20,000
Other loans and commitments (Overdraft) 10,000
Total liabilities
34205,000
Net Worth 236,000
LIQUID-ASSETS-TO-NET WORTH
RATIOS
The ratio of the client’s liquid assets
 LIQUID-ASSETS-TO (cash/cash equivalent) to
NET WORTH RATIO the net worth.
Liquid-Assets-to-Net Worth Ratio = Liquid assets

Net Worth
= RM36,000 =
15.25%
RM236,000
38
SAVINGS
RATIO
The percentage of the gross income of the
 SAVINGS RATIO client that is set aside for future consumption.
 SAVINGS RATIO Experts recommend a minimum ratio of

10% (a good start).
Savings Ratio = Savings

Gross Income
39
Cash Inflows 72,000

Salaries and cash perquisites
Dividends received (net) 5,000
Interest income 2,500

Distributions from unit trusts 3,200
Bonuses 12,000
Total Inflows 94,700
Savings = RM7,200 ( see Slide 31 )
Savings Ratio = Savings

Gross Income
= RM7,200
RM94,700
= 7.6%
31
Personal Financial
Statements
DEBT-TO-ASSETS
RATIO
 DEBT-TO This is the measure of the client’s ability to pay

ASSETS RATIO debts with the total available assets.
 DEBTS-TO Experts recommend a ratio of 50% or below as the

ASSETS RATIO Benchmark
Debts-to-Assets Ratio = Total Debts

Total Assets
41
Liabilities
Cash & Cash Equivalent 36,000

Housing mortgage (principal balance) 130,000
Investment assets 140,000
Auto loan balance (the remaining full term 45,000

Personal used assets 265,000
payment outstanding)
Credit card balances (each card reflected 20,000

separately)
Total cash/cash equivalents 441,000
Other loans and commitments (Overdraft) 10,000
Total liabilities 205,000
Debts-to-Assets Ratio = Total Debts =

RM205,000 Total Assets
RM441,000
= 46.49%
42
Personal Financial
Statements
DEBT SERVICE
RATIO
This ratio compares the client’s annual or
 DEBT monthly payments to service debts with
SERVICE the client’s take home pay.
RATIO
 DEBT SERVICE Experts recommend a ratio of 35% or

RATIO lower. If above 50% is too excessive.
Debts Service Ratio = Total Annual Loan Repayments

Annual Take Home Pay
43
Personal Financial
cards/insurance Statements
Cash Inflows
Salaries and cash perquisites 72,000
Mortgage payments/rents 18,000
Auto loan payments 9,000 Distributions from unit trusts 3,200
Bonuses 12,000
Insurance premiums 3,500 Total Inflows 94,700
Taxes (Pay as you earn) 12,000
Credit card payments (minimum payments) 7,200
Total fixed outflow 49,700
1. Annual debt = mortgage debt + auto loan + credit card payment = 34,200
2. Annual take home pay = 94,700 less taxes of 12,000 = 82,700
Debts Service Ratio = Total Annual Loan Repayments = RM34,200 =

41.35%
44
RM82,700
Personal Financial
Statements
NON MORTGAGE DEBT SERVICE
RATIO
This ratio compares the client’s annual payments
 NON- to service all debts (excluding mortgages) with
MORTGAGE his or her take home pay.
DEBT SERVICE
RATIO
 NON-
MORTGAGE A healthy ratio is 15% or lower
DEBT SERVICE
RATIO
Non- = Total Annual Loan Repayments
Mortgage
Debts Service Ratio Annual Take Home Pay
45
Personal Financial
cards/insurance Statements
Cash Inflows
Salaries and cash perquisites 72,000
Mortgage payments/rents 18,000
Auto loan payments 9,000 Distributions from unit trusts 3,200
Bonuses 12,000
Insurance premiums 3,500 Total Inflows 94,700
Taxes (Pay as you earn) 12,000
Credit card payments (minimum payments) 7,200
Total fixed outflow 49,700
1. Annual debt = auto loan + credit card payment = 16,200

2. Annual take home pay = 94,700 less taxes of 12,000 = 82,700
Non-mortgage Debt Service Ratio = Annual Non-mortgage Debt Repayments = RM16,200 =

19.59%
46
RM82,700
Personal Financial
Statements
NET INVESTMENT ASSETS TO NET WORTH
RATIO
This ratio compares the value of investment
 Net Investment assets (excluding the personal-use assets)
Assets to Net with net worth
Worth Ratio
 Net Investment The recommended ratio is 50% and above,

Assets to Net and the percentage should increase as
Worth Ratio retirement approaches
Net Investment Assets Net Investment Assets

= to Net Worth Ratio Net Worth
47
Stock portfolio (market value as at 31-12-2007) 15,000
Savings Bonds 20,000
EPF balance 90,000
Unit trusts (Net asset value) 15,000
Property for rental NIL
Total investment asset value 140,000
Net Worth = RM
236,000
Net Investment Assets = Net Investment Assets =

to Net Worth Ratio RM140,000 Net Worth
RM236,000
45
Personal Financial
Statements
THE END
46

Week 5 Financial Records (Sem 1 2022223)

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Personal Financial

To examine and understand the concepts of net

Students must be able to:

• State the Main Personal Financial Statements

• Explain and Construct a Net Worth Statement

• Classify the Various Assets Into Broad Categories

• Personal finance = financial issues that can affect an

Statement of Net Worth Balance Sheet

3 ASSETS What the client

Net Worth IT’S A MEASURE OF THE

Cash/Cash Short - The portion

In personal financial statements on Assets, it has to be

• An emergency fund is critical to any reasonable financial plan.

Short-term or Current Liabilities

• Net worth = Value of your total assets MINUS The sum

Personal Cash Flow Statement

Personal Cash Flow Statement

CASH CASH OUTFLOWS

• The stability of inflows is important to financial planning

• The inflows also reveal if the person is able to retire

• The composition of passive income to active or earned income reveals

• Investment income must ultimately replace his active income during

• It will be necessary to estimate the future increase in income as well.

Analysis of Cash Inflows

The following issues must be studied in analyzing inflows

Deductions from gross

Analysis of Cash Outflows (Expenses)

Fixed Expenses Variable Expenses

Loan commitments. Credit card Electricity, shopping, utility bills,

Analysis of Cash Outflows

Fixed versus variable

The degree of control on

•Variable expenses – 2 categories (necessary & discretionary). Discretionary

How cash flow affects the personal balance sheet

• Wealth is built by using net cash flows to invest in more

Relationship between cash flow & wealth

1) cut back on spending

Analysis of Financial Situation

Some of the common areas to evaluate will be as follows:

Analysis of Financial Situation

Some of the common areas to evaluate will be as follows:

7. Assets and Income at risk

CATEGORIES OF PERSONAL FINANCIAL RATIOS

•Liquidity refers to the ease and speed with

•The idea of a liquid asset implies getting the

 BASIC This measures the client’s liquidity position over

 BASIC 3 - 6 Monthly Expenses

Basic Liquidity Ratio = Cash/Cash

Savings account 5,000

Fixed deposits 10,000

Money market account 10,000

Life insurance cash value 8,000

Total cash/cash equivalents 36,000

Basic Liquidity Ratio = Cash/Cash Equivalents

Savings and investments 7,200

Fixed payments on loans/credit

Variable payments 17,000

Basic Liquidity Ratio = Cash/Cash Equivalents

The monthly expenses = Total outflow = 126,700 = 10,558

Cash or cash equivalents plus other liquid investments =

 LIQUID-ASSETS-TO Experts recommend a minimum of 15% as a

Liquid-Assets-to-Net Worth Ratio = Liquid assets

Personal residence (market value) 200,000