20141217040239_12. MPU3313 MPU2313 Topic 8

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INTRODUCTION

Generally, personal financial statements are prepared to properly plan and tosort out the financial matters of an individual. There are particular objectives thatrequire the preparation of personal financial statements, such as obtaining a loan,

planning of income tax, retirement planning and estate planning. In our dailylives, if we wanted to reduce our weight, we have to weigh ourselves. If we aredetermined to be a skilful driver, we need to time our laps. Therefore, if we wantto be rich or financially free, then we have to design and create our own financialstatements.

An individual can actually be described as a business. We receive money or cashand we have money to spend. We have things that we own and things that weowe. If we could not find a way to gauge progress and differentiate what reallyworks and what does not, then we are lost without any direction, in terms of our

TTooppiicc

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PersonalFinancialStatements

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1.

Explain the importance of personal financial statements;

2.

Describe balance sheet or net worth statements;

3.

Describe the types of assets;

4. Describe cash flow statements; and

5. Analyse financial ratios.

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TOPIC 8 PERSONAL FINANCIAL STATEMENTS 123

finances. Keeping track of personal finances can help prevent m credit card debt,losing ones home or retiring without any savings. In addition, somethingdelightful may happen when you start to evaluate your progress. If you fail to

look at your financials about once a month, it shows that you are not seriousabout achieving financial freedom.

IMPORTANCE OF PERSONAL FINANCIALSTATEMENTS

What is a personal financial statement? Every one of us has our own definition ofwhat a personal financial statement is. For example, a personal financialstatement tells us how strong our financial position is. As in business, thepersonal financial statements can comprise assets and liabilities. Throughunderstanding personal financial statements, we can learn many importantlessons. Firstly, it will allow us to manage and organise our assets. Assets hereinclude investment of individuals or personal ownership of things that generate

income and profit for individuals. This can be stocks, precious metals like goldand silver, businesses and real estate. Liabilities are expenditures and will notgenerate any revenue for the individual.

The important factor here is assets, which are things possessed that generaterevenue and enhance individual net worth. The net worth of the individualrepresents the wealth of the individual from the personal finance point of view.

Let us say, if you incur personal expenditure of $20,000 a year and your networth is $80,000 and if you are unable to generate any income, then it will take

you four years to have $0 net worth. Another important lesson that you can learnis that every month, it is vital for the individual to take note of his or her positivecash flow in the financial statement. Cash flow is the amount available aftersubtracting your expenses from the income you generate. A positive cash flowwill allow you to build good financial management skills, especially inaccumulating wealth over the long term.

8.1

ACTIVITY 8.1

Discuss with your course mates the importance of personal financialstatements.

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TOPIC 8 PERSONAL FINANCIAL STATEMENTS124

By managing your personal finance, you learn how to protect assets, buildbusiness, invest profits and maximise value. You will find that in the currentinformation age, wise financial management and eagerness for knowledge will

allow individuals to develop and grow wealth. You will realise that there will bemany benefits to having wealth, such as providing for your family and lovedones as well as helping the needy. The best part about developing your skills inpersonal finance is that, like other kinds of learning, it is also a process ofcontinuous learning and you can grow by consistently applying your knowledge.

BALANCE SHEET OR NET WORTHSTATEMENT

The term balance sheet is adopted from accounting. Balance sheets and incomestatements are prepared by accountants or account executives mainly forbusiness use. They use a double-entry bookkeeping system to produce a balancesheet. The balance sheet will show that all assets will balance with the liabilitiesand owners equity. The income statement surplus will be carried forward to the

balance sheet under owners equity, which is called net worth

. Another termused for this statement is s

ource and application of funds

.

The information which appears in this statement is based on historicalinformation. Accountants employ historical cost and not market values.However, in personal finance, we need to adopt current values. Therefore, wewill need to know the market value of our assets and the current value of ourliabilities.

Assets (A) = Liabilities (L) + Net Worth (NW)

Example 1:

A family has a current balance sheet equation as follows:

A = $10,000; L = $7,000; therefore, NW = $3,000.

The family works hard at saving and is able to save $5,000. It uses $2,000 toacquire more assets and uses the remaining $3,000 to pay off some debt. Its new

balance sheet equation is: A = $12,000; L = $4,000; NW = $8,000.

Increased savings have resulted in an increased net worth.

8.2

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Example 2:

Beginning balance sheet equation (A = L + NW)

A = $10,000; L = $7,000; therefore, NW = $3,000

Another family spends all of its income and does not save anything. At the sametime, one of its assets depreciates in value by $3,000. Its new balance sheetequation is as follows:

$7,000 = $6,000 + $1,000.

8.2.1 Assets

Assets

can be divided into different classes or categories. Analysing the variousclasses of assets is very important in financial planning. There are three majorcategories of assets:

(a)

Cash or cash equivalents (also known as liquid assets);(b) Investment assets; and

(c)

Personal use assets.

The placement of assets into various categories depends on the reason the assetswere acquired and how the assets are viewed by the individual. For example, ifyou have acquired a painting for viewing and have no plan to resell it, the assetwill be classified as a personal asset. However, if the painting was bought for itspotential value appreciation in the future and it will eventually be sold, then it

will be put under the investment asset category.

ACTIVITY 8.2

With your course mates, discuss the types of assets included in a networth statement.

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In accounting, assets are categorised as current assets and fixed assets. Thoseassets that have a shelf life of less than 12 months are categorised as currentassets. Current assets will be converted into cash within 12 months. Meanwhile,

fixed assets are utilised in the business for more than one accounting period.Fixed assets are used to assist in the production of goods and services. From apersonal finance perspective, we look at the purpose and use of assets. Table 8.1shows an example of the assets column in a balance sheet.

Table 8.1:

Asset Column in a Balance Sheet

Cash/cash equivalents

Checking account XXX

Savings account XXX

Fixed deposits XXX

Money market account XXX

Life insurance cash value XXX

Total cash/cash equivalents XXXX

Investment assets XXX

Stock portfolio XXX

Savings bonds XXX

EPF balance XXX

Unit trusts (Net assets value) XXX

Property for rental XXX

Total investment assets value

XXXX

Personal use assets

Personal residence XXX

Automobiles XXX

Art/stamp/coin collection XXXPersonal Property(e.g., furniture, fittings,

jewellery, clothing)XXX

XXXX

TOTAL ASSETS

XXXXX

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8.2.2 Analysis of Assets

Cash or cash equivalents can be turned into cash within a short period of time.

Investments are assumed to be less liquid and it will take a longer time to beconverted into cash. Other investment assets can be classified as retirementassets, which can only be realised after retirement, like the Employees ProvidentFund (EPF) (see Figure 8.1). Meanwhile, personal use assets are assets whichportray the individuals lifestyle. They are unable to generate income and allthese assets are made known in their current fair market value.

Figure 8.1:Logo of EPF

Sometimes, it is difficult to value some assets such as business ownershipinterest. To value a business interest, accounting concepts can be utilised.Otherwise, we can just forecast the fair market value which can be acquired on awilling buyer-willing seller basis. Business valuation is important for thepurpose of estate planning. In personal financial statements, assets are alsoknown as things that belong to a husband and wife, whether it is owned by bothhusband and wife, whether survivorship rights exist, whether it is joint tenancy

or tenancy in common.

(a) Emergency Use of AssetsWe need assets for emergency use and those assets must be liquid or can beconverted into cash in a short period of time. Having cash, or cashequivalents, as an emergency fund is a wise thing to do. But how much isneeded depends on the situation. Normal emergency funds can cover sixmonths of expenses, which is considered a safe amount to have. However,not all assets must be kept liquid. Assets are needed to finance our long-term objectives. Therefore, we need our asset values to appreciate to fund

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our long-term objectives. Long-term assets usually have greater futurevalue compared to short-term assets. Sometimes, assets are also needed to

be used as hedging against inflation. The growth rate of the assets must be

higher than the rate of inflation. In view of that, it is very important to havelong-term assets in personal financial planning.

(b) Personal Use AssetsIt is normal for us to have a large portion of value in our personal useassets. Your house and cars will be the biggest value of your personalassets. Nevertheless, those assets will not contribute to income generationduring the retirement period. During retirement age, income for livingexpenses is always a major concern for people. Due to that, havinginvestment or financial assets to generate passive income is very crucial to

most people.

8.2.3 Liabilities

The balance sheet, or net worth statement, shows a clients outstanding debts orloans. It will show the loan principal or outstanding debt up to the present date.If you stand as a guarantor to a loan applicant, there is a chance that a liabilitywill exist. Thus, it will be wise to take note of the situation and monitor the loanperformance carefully. Many people face financial problems when they stand asguarantors for a loan applicant. Even though it is very risky to be the signatory,

banks still persist on this issue. There are many instances where people faceproblems as a result of being kind to friends and family and agreeing to becometheir guarantor.

(a) Short-term and Long-term Liabilities

Liabilities can be categorised into two groups: short-term and long-term.From the accounting point of view, short-term liabilities must be settledwithin 12 months. Some short-term liabilities that need to be settled in ashort period of time are outstanding balances on credit cards and debt.Mortgage debts are also cleared on a monthly basis. In personal finance,

once you incur a liability, it becomes a current and short-term liability.Even though most loans are long term, their payments are made on amonthly basis. Any failure to pay the loan payment will cause the bank tocall in the loan. Problems of this nature can cause messy financialsituations.

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Assets charged to the bank as collateral will be pulled back or will be soldby the bank in order to recover the outstanding amount. This will leave theloan borrower in a financial turmoil. If the borrower is declared bankrupt,

the problem will be compounded, where the insolvency department willcome in and take over the management of borrowers income and assets.

(b) Contingent LiabilityIf you lease or rent a property for a specific period, the entire full-termoutstanding amount can be considered as a liability. This financialcommitment will affect your net worth. This is what we call a contingentliability. You are obliged to make payment or redeem contingent liabilitiesif they become unfavourable to you. Contingent liabilities that seem to beless likely to happen can be put as a footnote in the statement. Table 8.2

shows the liability column in a balance sheet.Table 8.2:

Liability Column in a Balance Sheet

Liabilities and Net Worth

Liabilities

Housing Mortgage

(principal balance) XXX

Auto loanbalance (the remaining outstanding of full term payment) XXX

Credit cardbalances (each credit card reflected separately) XXX

Other loans and commitments XXXTOTAL LIABILITIES XXXX

Net Worth

The difference between Total Assets and Total Liabilities XXXX

ACTIVITY 8.3

Discuss the type of liabilities in a net worth statement.

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8.2.4 Net Worth

In simple words, net worth is the amount of your total assets minus your total

liabilities. Liabilities are borrowings or loans and this includes your car loan,study loan, mortgage and credit card balances. Meanwhile, assets are things thatare owned by you. These can include your car, cash, jewellery and retirementsavings. Therefore, the net worth can change based on the value of these assetsand liabilities. If the amount of your assets is greater than that of your liabilities,than your personal net worth is positive. If the amount of your assets amount isless than the amount of your liabilities, then your net worth is negative. Table 8.3shows an example of a personal net worth statement.

Table 8.3:Personal Net Worth Statement

ASSETS RM RM

Real Estate

Market value of home 300,000

Non-retirement savings

Emergency funds 7,000

Savings 12,500

Investments 60,000

Retirement account

AIA 45,000

Total Assets 424,500

LIABILITIES

Real Estate

Mortgage 150,000

Personal Debt

Credit Cards 6,000

Car loan 4,000Student loan 25,000

Total Liabilities

185,000

PERSONAL NET WORTH

239,500

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8.2.5 Cash Flow Statement

The cash flow statement is probably more important than the net worth

statement. Cash flow statements reveal the cash coming in and the cash goingout. In other words, it shows your income and expenses for a given period. Therewill be a net income if your total income exceeds your total expenses and therewill be net deficit if your total expenses exceed your total income. You definitelycannot spend any money that you do not have. Therefore, deficits will be coveredthrough loans or borrowing.

Many of us are doing what the government is doing, where budget deficit isfinanced through borrowings. For the government, the reason to borrow andspend is to fuel the economy. For us, we have a budget deficit to fulfil our needs

and wants for todays consumption. We want to consume the goods and servicesat present and, therefore, we are willing to use our future income for our presentneeds and wants. Our debt will increase and very soon half of our income will bespent to pay our loans and borrowings. Even the government in Malaysia todayutilises more than 50% of the revenue every year to pay its fixed loancommitments. The government uses 25% of the revenue to pay the benefits andremuneration of civil employees and another 25% used as expenditure for thedevelopment of the country. These borrowings will continue to take place inorder to grow the economy. Therefore, we must be aware of this drawback. Thegovernment has the ability and capacity to increase taxes and print money

whereas we cannot. This shows that we must be able to live within our means.We must ensure that our cash inflow must always be greater than our cashoutflow (see Table 8.4).

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Table 8.4:Cash Flow Statement

Cash Inflows

Salaries and cash perquisites XXXDividend received XXX

Interest income XXX

Distributions from unit trusts XXX

Bonuses XXX

Total Inflows XXXX

Cash Outflows

Savings and Investments XXX

Fixed payment on loans/credit cards/insurance

Mortgage payments/rents XXX

Auto loan payments XXX

Insurance premiums XXX

Taxes (Pay as you earn) XXX

Credit card payments (minimum payments) XXX

Total Fixed Outflows XXXX

Variable payments

Food XXX

Transportation cost XXX

Clothing and personal care products XXX

Sports and entertainment/vacations XXX

Medical/dental care for family XXX

Utilities and household expenses XXX

Child expenses (food, clothing and education) XXX

Miscellaneous XXX

Total Variable Outflows

XXXX

Total Outflows XXXX

NET INFLOW

XXXXX

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(a) Active Income versus Passive IncomeActive income is very well known to us. Income that is generated from ourown active efforts to earn cash is called active income. For most of us, this

involves doing some kind of traditional job. We can also derive activeincome through our effort to get cash from a side business or odd jobs. Thiskind of income is called active income because we have to performsomething. When we perform something, we need to expend considerableeffort or time. You are still considered as an active income earner even ifyou sit in an office without doing any physical work. This is because youare required to go through the work process and need to perform certaintasks. Even though it does not require physical involvement, it requires youto think.

Meanwhile, when you earn from the money that you put to work for you, itis known as passive income. There are some people who believe thatincome derived from short duration of activities is also known as passiveincome. However, this requires very minimum effort to maintain the flowof income. For instance, you take some time to design a website andassociate it with the advertising site. You just need to spend minimum timeand effort upfront only. After that you are no longer required to spendmore time and effort. Cash will flow in with very minimum of continuouseffort.

(b) Cash Inflow Analysis

Cash inflows are very important to ensure the survival of the family. Whendiscussing financial planning, the steadiness of cash inflows is crucial. Cashinflows will indicate whether you can achieve early retirement bycomparing your passive income to active income. Income generated frominvestment eventually must replace your active income during retirement.You need to approximate the increase of the income in the future as well.

Below are the areas that must be considered when analysing cash inflows:

(i) Income Stability

The stability of income is not only important, but it also helps you toenlarge it. We work very hard in our lives looking for good income.Once we reach mid-life, there will be some disturbances to our incomeand therefore the stability of income is very crucial. Those whoventure into business experience some uncertainty in their income.Many of these people go through lasting problems to the position oftheir income.

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(ii) Income FluctuationUsually, income fluctuation is experienced by those who are involvedin business or are self-employed. Our fixed commitments can cause a

challenge to those getting irregular incomes. Individuals who fall inthis situation must have a half-year emergency fund to manage theseunbalanced income patterns. It is normal to have middle-age crisisand change in career. Some people try to go on their own after beingemployed for so long. These circumstances will result in somedisruptions in income and it could cause a loss in savings. Althoughmany people can get through these business hurdles, there are alsomany of them who fail due to lack of business sharpness, capital ormarketing skills.

(iii)

Deduction from Gross IncomeIn Malaysia nowadays it is common for various deductions to bemade from ones income via payroll in Malaysia. Since the introductionof Scheduled Tax Deduction scheme, taxes are currently subtractedfrom gross salary. The computation of these taxes is based on incomeestimates for the current year. Upon the final submission of taxreturns, necessary adjustments will be made. Some other directdeductions that can cause a reduction in net income received are loanrepayments and saving contributions. Many people will have nothingleft after all their deductions via payroll. Incomes can be shown asgross income where all the deductions made are known as expenses.By doing this, we can know where all our income is going.

8.2.6 Expenses AnalysisExpenses are very crucial and they are the main component that people areconcerned about when it comes to their personal finances. In most circumstanceswhere income is fixed, any excess that will be put in savings can be derived fromexpenses analysis. However, it is important to differentiate between fixedexpenses and variable expenses. The type of expense also reflects the urgencyand importance of the expenses. Long term objectives can be achieved byforgoing or postponing discretionary expenses, which will allow us toaccumulate savings.

SELF-CHECK 8.1

1. Explain cash inflows and cash outflows.

2. Discuss the different types of income.

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Savings and investments are categorised into two separate categories. Wesometimes hear people ask, Do you save and spend the balance or do you spendfirst and save the balance? This goes to show the importance of savings and

investments, and they are placed in separate category.

Loan commitments comprise common fixed payments. Credit cards are deemedto be fixed because people have the tendency to only pay the minimum amountof their outstanding balance. Other things like payment of alimony and childsupport payments will be more common in the future due to the increasedincidence of divorces.

Tax is another important category. Taxes are categorised as fixed to explain theP.A.Y.E. (pay as you earn) system. However, taxes depend on income earned.With regards to self-assessment and current year tax system, we need toapproximate our income correctly to ensure the tax at the source is sufficient tocover the final tax calculation.

Meanwhile, it is difficult to trace or monitor variable expenses because paymentwill normally be made in cash from our pocket. We need to be disciplined andwrite down all these expenses for our analysis in the future. It is advisable tohave a system where we can record our incurred expenses within the same day.We will feel that trying to keep record of these expenses is a difficult task unlesswe adopt the imprest cash system for the use of our cash and credit cards.

(a)

Fixed versus Variable Expenses

The main analysis will include differentiating the fixed expenses fromvariable expenses. Using current income to settle the fixed commitments iscompulsory. Even though there are guidelines about how much burden ofdebt we can accept, many of us do not abide by these guidelines. Personalloan and credit cards (see Figure 8.2) can adversely interrupt our cash flow.These easily approved debts are usually very high cost. Interest chargedand paid on these two kinds of debt can be better used or saved for moreworthy things in the future.

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Figure 8.2: Use of credit cards can interrupt our cash flow

(b) Degree of Control Over Expenses

If our objective is to save money, then we need to analyse our expenses anddecide whether those expenses can be forgone to place in our savings plan.The level of control that we have over our expenses is very important. Theway we spend our money will decide our lifestyle. If we want to save someof our money, we must put aside some of our lifestyle expenses. Some ofthe expenses are related to our habits, such as alcohol, cigarettes andentertainment, which are difficult to forgo. Obviously, it is not easy to let gomuch of our lifestyle expenses. Nevertheless, if we give priority toachieving our goals, we will have to trim our expenses wherever we can. Ifour money is placed in some committed savings scheme, we will be less

likely to spend it. We may reduce our spending and lavishness because wehave less cash after putting aside some of our money. Provident funds, realestate and even life insurance are some examples committed scheme.

(c) Necessary versus Unnecessary Expenses

It is really a bad financial habit if we want to follow and compete with otherpeople in terms of lifestyle spending. We need to check whether ourexpenses are necessary or if they can be forgone. The quality and cost-

benefit ratio of our expenses need to be observed. One of the main areas ofanalysis is our choice of education. Nowadays, college education is quite

expensive. If we make a wrong decision in this matter, it will hurt ourfinances. There are many cases where students change their course midway and sometimes after they graduate. Sometimes parents tend to beignorant in understanding the needs and wants of their children. Manyparents try to persuade their children to follow the parents values. Otherparents may let their children make this important decision on their ownwithout proper guidance. Therefore, the right decision for a good educationwill allow parents to save their precious cash flows.

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(d) Net Cash InflowWe always hope that we will have a net inflow, where our income is greaterthat our expenses. Nevertheless, we need to realise that net cash inflow can

occur because of the difference in time, mistakenly recorded or evenincorrect accounting. When there is excess in the net cash flow, we will findthat there is an increase in our cash in hand and cash in bank. However,when expenses are greater than our income, the extra expenses will befinanced through borrowings or loans. Nowadays, with credit cards, wecan make use of plastic money to enlarge our spending power. By makingpayment for only 5% of the outstanding credit card balance, we can borrowor leverage up to 20 times. Therefore, our concern here is not the netsurplus but the variable and fixed cash outflows.

8.2.7 Financial Ratio Analysis

In accounting, financial ratios can be used as a tool to examine our financialposition. Numbers generated from statistics are less likely to deceive us even

though those numbers are not always telling the complete truth. Therefore, thereare some ratios that can be utilised in financial planning. In order to calculate therations, we need to prepare our financial statement. The following ratiocalculations are based on Table 8.5 and Table 8.6.

(a) Basic Liquidity RatioLiquidity is the ability to convert an asset into cash within a short period oftime. Disposing the asset should not result in any loss being incurred or theasset being sold at a much lower margin. We can sell many things at a highdiscount. Liquid assets imply that we can get the market value or very close

to market value when we dispose of our asset. A basic liquidity ratio showshow many months your cash or cash equivalents assets and other liquidinvestments could continuously cover your expenses in case there is noincome.

To obtain monthly expenses, we need to take the total outflow divided bytwelve months.

= RM110,000/12 = RM9,167

SELF-CHECK 8.2

Discuss the type of expenses in a cash flow statement.

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Cash or cash equivalents plus other liquid investments = RM30,000

Basic Liquidity Ratio = RM30,000/RM9,167 = 3.27

The ratio shows that your cash or cash equivalents assets and other liquidinvestments could cover your expenses for less than three and a halfmonths in case there is no income. Based on the rule of thumb, it would bewise to have three to six months covered by your liquid assets in case of anemergency.

(b) Liquid Assets to Net Worth RatioA liquid asset to net worth ratio tells the size your net worth in the form ofliquid assets. The lowest accepted rate would be 15%.

Liquid asset to net worth ratio equals liquid assets divided by your networth.

(RM30,000/RM173,000) 100 = 17.34%

Your liquid asset to net worth ratio indicates that you have more than theminimum of acceptable rate of 15%.

(c) Savings RatioThe savings ratio specifies the proportion of gross income that you put

aside for future spending. These savings are very crucial to meet yourretirement objectives. A savings ratio of 10% is assumed to be good.

Savings ratio = savings divided by gross income

= (RM8,000/RM92,000) 100 = 8.70%

In this instance, your savings does not include your EPF contribution. Youjust assume that your salary is net after deducting the EPF contributions. Ifyou want to take the EPF contribution into account, then the savings ratewill be 12% + 11% + 8.7% = 31.7%.

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(d) Debt to Asset RatioThis ratio gauges your capability to meet your debt. It is also ameasurement of your solvency. It shows how much assets you have to

settle your debts. Debt to asset ratio of 50% or lower is assumed to be on thesafe side.

Debt to asset ratio = total debt divided by total assets

RM183,000 / RM356,000 = 51.4%

You may have enough income to cover your expenses but may still notnecessarily be in a good position to settle your debts by using youravailable assets. This is not a good situation because you will remain indebt since you are unable to settle your debts. An additional or sudden

appreciation in your asset value could be one of the avenues for you to clearyour debt. However, if you remain in this position, you are prone to

bankruptcy.

You may also face a situation where you have assets but do not haveincome to make repayments towards your debt. Not all assets can bedisposed of easily and in a short period of time, such as your business, andthis will cause you to face cash problems.

(e) Debt Service Ratio

This is an important ratio that explains the availability of percentage ofyour income to cover debt payments of your mortgage and consumer loans.A rate of less than 35% implies that you are in a strong position to settleyour debt repayments.

Debt service ratio = annual debt divided by annual take home pay

Annual debt = mortgage debt + auto loan + credit card payment

= RM17,000 + RM8,000 + RM6,000

= RM31,000

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Annual take home pay = RM92,000 RM11,000

= RM81,000

Debt service ratio RM31,000 / RM81,000 = 38.27%

The above example shows that you are quite comfortable with the debtrepayments even though it is slightly higher than ideal debt service ratio.

This ratio variation is non-mortgage debt service ratio.

Non-mortgage debt service ratio = annual non-mortgage debt repaymentsdivided by annual take home pay

The lower ratio is desirable. Non-mortgage debt service ratio that is lessthan 15% is assumed to be healthy. A ratio of 20% signifies a high situationof non-mortgage debt.

In this instance: RM34,000 RM17,000 = RM17,000

= RM17,000 / RM81,000

= 20.98%

(f) Net Investment Assets to Net Worth Ratio

This ratio calculates the proportion of investment assets to net worth. Thisimplies on-going capital accumulation. A high ratio signifies that you have

built up sufficient financial or investment assets that can create investmentincome during your retirement years.

Net investment assets to net worth ratio = net investment assets divided bynet worth

= RM116,000 / RM173,000

= 67.05%

In this instance, a net investment asset to net worth ratio is very good. Itshows you are very concerned about asset accumulation and have beenaccumulating assets quite well.

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Table 8.5: Balance Sheet or Net Worth Statement as at 31/12/2013

Cash/Cash equivalents RM

Current account 4,000Savings account 3,000

Fixed deposits 7,000

Money market account 6,000

Life insurance cash value 10,000

Total cash/cash equivalents 30,000

Investment assets

Stock portfolio (market value as at 31/12/2013) 16,000

Savings bonds 18,000

EPF balance 70,000

Unit trust (net asset value) 12,000

Property for rental 0

Total investment asset value 116,000

Personal use assets

Personal residence (market value) 150,000

Automobiles (market value) 30,000

Art/coin/stamp collection 10,000

Personal property (furniture, fittings, jewellery and clothing) 20,000

Total value of personal use assets 210,000

TOTAL ASSETS 356,000

Liabilities and net worth

Liabilities RM

Housing mortgage (principal balance) 120,000

Auto loan balance (the remaining full term payment outstanding) 40,000

Credit card balances 15,000

Other loans and commitments (overdraft) 8,000

TOTAL LIABILITIES 183,000

Net Worth

(Difference between total assets and total liabilities) 173,000

Total Liabilities and Net Worth equals Total Assets) 356,000

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Table 8.6: Cash Flow Statement for the Year Ended 31/12/2013

Cash inflows RM

Salaries and cash pre-requisites 70,000Net dividends received 4,000

Interest income 2,000

Distributions from unit trusts 3,000

Bonuses 13,000

Total inflows 92,000

Cash outflows

Savings and investments 8,000

Fixed payments on loans/credit cards/insurance

Mortgage payments/rentals 17,000

Auto loan payments 8,000

Insurance premiums 4,000

Taxes (pay as you earn) 11,000

Credit card payments (minimum payments) 6000

Total fixed outflows 46,000

Variable payments

Food 15,000

Transportation 8,000

Clothing and personal care products 11,000

Sports/entertainment/vacations 10,000

Medical/dental care 2,000

Utilities and household expenses 12,000

Child expenses (food, clothing and education) 3,000

Miscellaneous 3,000

Total variable outflows 64,000

Total outflows 110,000

Net inflow outflow) 18,000)

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20141217040239_12. MPU3313 MPU2313 Topic 8

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