Of course, an income statement is not enough to determine a potential client's financial situation. You also need an individual balance sheet that shows assets, liabilities and net worth:
|Individual Balance Sheet as of 01 JULY 20xx|
|Marketable securities (stocks, mutual funds)||$28,000|
|Furnishings and collectibles||$22,000|
|Certificates of deposit||$7,000|
|Total current assets||$87,000|
|Mortgage (current portion)||$25,000|
|Taxes and penalties payable||$5,000|
|Auto lease payments payable (current portion)||$3,000|
|Other current obligations||$2,000|
|Total current liabilities||$28,000|
|Liquid net worth||(Total current assets minus total current liabilities)||$59,000|
|Life insurance value||$60,000|
|Retirement accounts and savings bonds||$470,000|
|Total deferred assets||$650,000|
|Mortgage payments (non-current portion)||$200,000|
|Auto lease payments (non-current portion)||$3,000|
|Total deferred liabilities||$203,000|
|Deferred net worth||(Deferred assets minus deferred liabilities)||$447,000|
|Net worth||(Liquid net worth plus deferred net worth)||$506,000|
- Current assets are those things of value that can be turned to cash within the year. Current liabilities are those obligations that must be paid within the year.
- Deferred assets are all those assets that are not current and, likewise, deferred liabilities are those liabilities that are not current.
- Liquid net worth is current assets minus current liabilities.
- Deferred net worth is deferred assets minus deferred liabilities.
- Total net worth is liquid net worth plus deferred net worth.
When looking at the balance sheet, it is prudent to ensure the prospective client has a cash reserve of at least half a year's pay before suggesting she lock into any long-term investments. In this case, the prospect makes $55,000 in half a year (income statement: half of annual salary plus bonus) and has $58,000 in cash and marketable securities, so she appears to be a genuine candidate for a registered representative's services.
You do not know when the CDs or bonds can be cashed in without penalty, so it is best to assume they are not cash-equivalent. Furnishings and collectibles, although they represent a significant amount of current assets, are not cash equivalents.
Personal FinanceHere's an analysis of how to adjust liabilities and assets to improve net worth.
InvestingNet worth is the amount by which assets exceed liabilities. Another way to say this is, it's the value of everything you own, minus all your debts.
InvestingTotal liabilities are the combined debts an individual or company owes.
TaxesDeferred tax liability is a tax that has been assessed or is due for the current period, but has not yet been paid. The deferral arises because of timing differences between the accrual of the ...
TaxesA Deferred Tax Asset is an asset on a company’s balance sheet that may be used to reduce taxable income. It is the opposite of a deferred tax liability, which describes something that will increase ...
RetirementDiscover the major advantages and disadvantages offered by deferred compensation plans for retirement as compared to a 401(k) plan.
InvestingLearn about the components of the statement of financial position and how they relate to each other.
InvestingCurrent Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
InvestingDetermine your net worth by making your own cash flow statement and balance sheet.