Exercise 1.1

Points to remember:

• A cash flow statement shows how much money has come in as income, and how much money has left in expenses. By subtracting your expenses from your income, you can tell if you have a surplus or a deficit in income.

• Fixed expenses recur at specific intervals. Rent and car payments are examples of fixed expenses. Variable expenses change over time. Examples of variable expenses are food and utilities.

• Once you have completed entering your income and expenses, you will need to determine if you have a monthly surplus (income exceeds expenses) or a deficit (expenses exceed income).

• Having a budget and using a cash flow statement can help you anticipate shortages and surpluses. For example, in December your outflow will be greater than normal because you would like to purchase Christmas gifts. However, in the summer months your cash inflow may be higher because of a summer job. By using a cash flow statement, you can more easily identify the flow of income and expenses.

• A balance sheet is a snapshot of what is happening in your financial life. It covers your overall wealth at a specific point in time. An asset is everything you own that has monetary value. Assets can be classified as monetary (cash or near cash), tangible (personal property) or investment assets (stocks and bonds).

· Liabilities are what you owe. Liabilities can be classified into short-term (debt repaid within one year) or long-term (longer than one year).

• Remember that an asset can also be a liability. For example, a car with a value of $5,000 would be listed in the asset column. If there were an outstanding loan balance of $2,500, it would be reflected in the long-term liability column.

• Once you have listed the value of your assets and balances of your liabilities, you will determine your net worth. Assets – Liabilities = Net Worth

• By completing a balance sheet, you can easily identify strategies to increase net worth. You should update your balance sheet at least once a year.

Below you will find the data and worksheet to complete a balance statement and a cash flow ( income and expense ) statement.

MONTHLY CASH FLOW EXERCISE

Use the following cash flow statements to fill out the Monthly Cash Flow Statement worksheet.

1. You pay a $150 car payment.

2. You receive your monthly gross salary of $2,000.

3. You pay rent of $450 per month.

4. You pay your medical insurance of $75 a month.

5. You pay your renter’s insurance of $20.

6. You pay your car insurance of $50.

7. You pay for monthly groceries $200.

8. Your monthly utilities are due.

9. You owe $125.

10. Your monthly bill for gasoline comes in and you must pay $75.

11. It’s your mother’s birthday. You purchase a $50 present.

12. Taxes come out of your paycheck. Federal Tax $150 State Tax $50 Social Security $150

13. You go to a movie with a friend that costs $10.

14. You put $100 into savings for a vacation at the beach.

15. You hit a pothole and have a flat tire.

16. You must pay $75 for a new one.

17. You go out to dinner with friends. Your bill is $25.

18. You find the perfect outfit for your date this weekend. You pay $100 for the outfit

Cash Flow Statement Worksheet

BALANCE SHEET EXERCISE

Use the following statement to fill out the Balance Sheet worksheet.

1. You have $1250 in your checking account.

2. You have $1750 in your revolving savings account.

3. You purchased a computer last summer and it is valued at $500.

4. You received a graduation gift of a watch and it is valued at $300.

5. You purchased new furniture for your apartment. It is valued at $1,000, but you still owe $400.

6. Your car is valued at $5,000, but you still owe $1,500.

7. You owe $300 on a credit card.

8. You have put $1,000 into a Roth IRA.

9. You participate in your employer’s 401k program. You have saved $5,000.

10. You need a root canal procedure at your dentist office. You owe $400.

11. You just cashed your income tax refund of $1,000.

12. You purchased a flat-screen TV that is valued at $500.

13. You have $75 in cash. You have a student loan balance of $20,000.

14. You purchase a condo for $60,000 and you owe $45,000.

15. You and your best friend move into your new condo. They pay you $450 a month in rent.