FIN2106 Lecture Notes - Lecture 3: Total Return, Effective Interest Rate, Nominal Interest Rate
FIN2106 Module Three – Chapter 3
- Financial reports and budgets provide direction by helping individuals work towards specific financial
goals, which is the essence of personal financial planning. It tells where an individual stands
financially
oA balance sheet summarises a person’s financial position at a certain point in time, a
snapshot take on a given day. Just like a balance sheet for a business or a company, a
personal balance sheet represents a summary of what is owned (assets), what is owed
(liabilities) and net worth.
Balance sheet equation: Assets = Liabilities + Net Worth (Owner’s Equity)
oAssets an item of property owned by a person or company, regarded as having value and
available to meet debts.
Amounts are based on fair market values.
Assets include liquid assets, investment assets and personal or lifestyle assets
oLiabilities a thing for which someone is responsible, especially an amount of money owed.
Current Liabilities
Long-term Liabilities
oNet Worth which is the amount of money that would remain after selling all owned assets at
their fair market values and paying off all liabilities.
oAn income and expenditure statement captures the various financial activities that have
occurred over a time period, normally a year. If done prospectively, it is called a budget. It
consists of three major parts: Income, Expenditures and Cash surplus or deficit. Can be done
on two account systems:
Business – Accrual Basis
Household – Cash Basis
oIncome can be made in many different ways such as:
Wages and Salaries
Bonuses and Commissions
Self-employment income
Interest and dividend from investments
Pensions or annuity incomes
Rent received from investment properties
Child support payments
Social security benefits
oExpenditures include;
Living expenses
Asset purchases
Tax payments
Debt payments
oCash surplus (or deficit) = income less expenditures
For savings
For investment properties
To acquire assets
To reduce debts
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Document Summary
Financial reports and budgets provide direction by helping individuals work towards specific financial goals, which is the essence of personal financial planning. It tells where an individual stands financially: a balance sheet summarises a person"s financial position at a certain point in time, a snapshot take on a given day. Just like a balance sheet for a business or a company, a personal balance sheet represents a summary of what is owned (assets), what is owed (liabilities) and net worth. Balance sheet equation: assets = liabilities + net worth (owner"s equity: assets an item of property owned by a person or company, regarded as having value and available to meet debts. Assets include liquid assets, investment assets and personal or lifestyle assets: liabilities a thing for which someone is responsible, especially an amount of money owed. If done prospectively, it is called a budget. It consists of three major parts: income, expenditures and cash surplus or deficit.
