Series 7
Determining Customer Objectives - Client Balance Sheet
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:
Item Details
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.
| Individual Balance Sheet as of 01 JULY 20xx | ||
| Current Assets | ||
| Checking/savings | $30,000 | |
| Marketable securities (stocks, mutual funds) | $28,000 | |
| Furnishings and collectibles | $22,000 | |
| Certificates of deposit | $7,000 | |
| Total current assets | $87,000 | |
| Current Liabilities | ||
| Mortgage (current portion) | $25,000 | |
| Consumer debt | $18,000 | |
| 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 |
| Deferred assets | ||
| Home equity | $120,000 | |
| Life insurance value | $60,000 | |
| Retirement accounts and savings bonds | $470,000 | |
| Total deferred assets | $650,000 | |
| Deferred liabilities | ||
| 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 |
Item Details
- 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.
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