EBU 1063 Smart Money Management LECTURE 2 Quiz

Purpose of a Balance Sheet

• Provides a snapshot of an entity's financial position at a specific point in time.
• Aids in assessing the assets, liabilities, and equity, providing insights into liquidity and solvency.

Calculating Net Worth

• Calculated by subtracting total liabilities from total assets.
• Formula: Net Worth = Total Assets - Total Liabilities.

Assets in Financial Management

• Resources with economic value owned by an individual or organization.
• Includes cash, investments, properties, equipment, and inventory.

Focus of Financial Planning or Budgeting

• Aims to allocate resources efficiently to meet future financial goals.
• Involves prioritizing spending, saving, and investment strategies.

Role of a Professional Financial Planner

• Assists in evaluating financial health through analysis of current assets and liabilities.
• Provides guidance on achieving long-term financial objectives, risk management, and investment strategies.

Evaluating Financial Health: "Where Does All Your Money Go"

• Emphasizes tracking spending habits to understand cash flow and budgeting effectively.
• Highlights areas where expenses can be reduced or optimized for better financial management.

Formula for Calculating Net Worth

• Net Worth = Total Assets - Total Liabilities.

Liabilities

• Considered obligations or debts owed by an individual or organization.
• Examples include loans, credit card debt, and mortgages.

Negative Net Worth

• Indicates that liabilities exceed assets, suggesting financial distress or insolvency.
• Reflects a potentially precarious financial position requiring action.

Current Ratio Calculation

• Current Ratio = Current Assets / Current Liabilities.
• Measures short-term liquidity and ability to cover immediate obligations.

Living Expenses Covered Ratio Aim

• Aims to cover 3 to 6 months of living expenses.
• Ensures financial stability in case of emergencies or income disruption.

Purpose of the Savings Ratio

• Assesses the proportion of income set aside for savings or investments.
• Indicative of financial discipline and preparedness for unexpected expenses.

Debt Ratio Greater Than 1

• Suggests that total debts exceed total assets.
• May indicate a riskier financial situation requiring attention.

Long-term Debt Coverage Ratio Less Than 2.5

• Indicates potential difficulty in covering long-term debt obligations.
• Suggests the need for reassessment of financial strategy or debt management.

Importance of Record-Keeping

• Essential for accurate tracking of income, expenses, and financial performance.
• Facilitates informed decision-making and compliance with financial regulations.

Role of Financial Ratios

• Help individuals evaluate financial health and make informed decisions.
• Provide insights into liquidity, profitability, efficiency, and solvency.

Test your knowledge on calculating net worth, analyzing income and expenditures, using financial ratios, and setting up a financial plan or budget. This quiz covers the topics discussed in Lecture 2: Getting your finances in order.