PF Ch2. Planning with personal financial statements

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Questions and Answers

What is the primary purpose of creating a personal balance sheet?

To track spending habits

To evaluate investment options

To calculate monthly expenses

To determine net worth (correct)

Which of the following best describes current liabilities?

Short-term debts that need to be paid within one year (correct)

Liabilities that include mortgage payments

Any debts related to future financial commitments

Debts that are due in more than one year

What type of asset includes cash and checking accounts?

Non-liquid assets

Liquid assets (correct)

Investment assets

Household assets

What is included in long-term liabilities on a personal balance sheet?

Mortgage payments Signup and view all the answers

How often should a personal balance sheet be updated?

Periodically, as needed Signup and view all the answers

When calculating net worth, what is the correct formula?

Total assets - Total liabilities Signup and view all the answers

Which type of asset is represented by stocks in a balance sheet?

Investment assets Signup and view all the answers

What was the total amount of total liabilities reported in the example personal balance sheet?

$2,000 Signup and view all the answers

What was the total cash inflows for Stephanie's revised personal cash flow statement?

$2,500 Signup and view all the answers

Which expense category had a forecasting error that resulted in overspending?

Clothing Signup and view all the answers

What was the net cash flow for the end of the month?

-$300 Signup and view all the answers

How much did Stephanie actually spend on groceries compared to the forecast?

$300 forecast; $280 actual Signup and view all the answers

Which of the following expenses showed no forecasting error?

Rent Signup and view all the answers

The difference between the expected cash outflows and actual cash outflows indicates what?

Budget deficit Signup and view all the answers

What component is essential for assessing an individual's financial health via a balance sheet?

Total liabilities Signup and view all the answers

Which type of liability would the cellular expenses fall under?

Current liability Signup and view all the answers

What is the total amount of liabilities shown on Stephanie Spratt's personal balance sheet after purchasing a new car?

$18,000 Signup and view all the answers

If a person's net worth is calculated by subtracting total liabilities from total assets, what will happen if their liabilities increase without a corresponding increase in assets?

Net worth may become negative. Signup and view all the answers

Which of the following reflects a long-term liability on a personal balance sheet?

Mortgage Signup and view all the answers

Which of the following statements is true regarding cash flows and net worth?

Net worth can change even if net cash flows are zero. Signup and view all the answers

What impact do favorable economic conditions typically have on a personal balance sheet?

Increased job opportunities and income. Signup and view all the answers

What approach is recommended to build wealth using net cash flows?

Use net cash flows to invest in assets and decrease liabilities. Signup and view all the answers

Which type of liability is a car loan classified as on a personal balance sheet?

Long-term liability Signup and view all the answers

Which scenario depicts a negative impact on an individual's net worth?

Loss of a job without income replacement. Signup and view all the answers

Study Notes

Personal Balance Sheet

A personal balance sheet helps determine your net worth.
It is recommended to update it periodically to track changes in net worth.

Stephanie Spratt’s Personal Balance Sheet

Total assets are $9,000.
Total liabilities are $2,000.
Net Worth is $7,000.

Stephanie Spratt's Personal Balance Sheet with a New Car

Total liabilities increased to $18,000 with the addition of the car loan.
Net Worth remains $7,000.

Impact of the Economy on a Personal Balance Sheet

Favorable economic conditions increase job opportunities and income.
Unfavorable economic conditions result in job losses and income reductions.
Net worth can decrease to negative levels due to economic downturns.

Relationship Between Cash Flows and Wealth

Wealth is built by investing net cash flows in assets without increasing liabilities.
Use net cash flows to reduce liabilities and increase net worth.
Net worth can change even with zero net cash flow if asset values fluctuate.

How Cash Flows Affect the Personal Balance Sheet

Wealth is built by using net cash flows to invest in assets without increasing liabilities.
Net cash flows can be used to decrease liabilities, which will increase net worth.
Net worth can change even if net cash flows are zero; for example, the value of an asset or investment increases or decreases.

Stephanie Spratt’s Revised Personal Cash Flow Statement

Actual cash inflows are 2,500despiteaforecastingerrorof2,500 despite a forecasting error of 2,500despiteaforecastingerrorof0.
Actual cash outflows were $2,800 due to forecasting errors in specific categories.
Total net cash flow is -300,withaforecastingerrorof−300, with a forecasting error of -300,withaforecastingerrorof−300.

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Description

Explore the concept of a personal balance sheet and its role in determining net worth. This quiz covers updates on assets, liabilities, and the impact of economic conditions on personal finances. Learn how cash flows relate to building wealth and navigating financial changes.