Chapter 7Chapter 7

Financial Records: Income Statement and

Balance Sheet

Financial RecordsFinancial RecordsPrincipal records most people should maintainPrincipal records most people should maintain

Income statementIncome statement Summary of income & expenses for selected Summary of income & expenses for selected

time periodtime period Show annual changes in savings & Show annual changes in savings &

investmentinvestment Provides 1st important step in financial Provides 1st important step in financial

planning & budgetingplanning & budgeting It explains the latest financial historyIt explains the latest financial history From the income statement, check whether From the income statement, check whether

the expenses on housing is less than 35% & the expenses on housing is less than 35% & its monthly payment is less than 20% from its monthly payment is less than 20% from incomeincome

Income StatementIncome StatementDeveloping an income statement, for a period of Developing an income statement, for a period of

one year one year

StepsSteps

1.1. income: list down amount of income received income: list down amount of income received last year from various sources - salary, last year from various sources - salary, allowances, dividend, rental etcallowances, dividend, rental etc

2.2. total the income from the various sources for total the income from the various sources for the whole yearthe whole year

3.3. tax: include the income tax/taxestax: include the income tax/taxes

4.4. total the taxestotal the taxes

5.5. amount for expenses, savings & investment: amount for expenses, savings & investment: total income minus total tax. If it is negative, total income minus total tax. If it is negative, put in a bracketput in a bracket

Income Statement (cont.)Income Statement (cont.)6. expenses consists of two: fixed and variable6. expenses consists of two: fixed and variable

Fixed - housing (tax on land, tax on housing, Fixed - housing (tax on land, tax on housing, annual payment), transportation (license, annual payment), transportation (license, insurances, road-tax, annual payment), life insurances, road-tax, annual payment), life insurance, educational plan/insuranceinsurance, educational plan/insurance

Variable - housing (maintenance or repair cost), Variable - housing (maintenance or repair cost), clothing and food, transportation (fuel, clothing and food, transportation (fuel, repair/service), other expenses such as repair/service), other expenses such as entertainment, holiday tour, gifts, partyentertainment, holiday tour, gifts, party

7. total the fixed and variable expenses7. total the fixed and variable expenses

8. amount for savings & investment: amount 8. amount for savings & investment: amount number 5 minus amount of expenses (number number 5 minus amount of expenses (number 7). If negative, put in a bracket7). If negative, put in a bracket

Income StatementIncome StatementName: Salleh bin AhmadName: Salleh bin AhmadPeriod: 1 January 2007 to 31 December 2007Period: 1 January 2007 to 31 December 2007

11 Income:Income: RMRM RMRM

Salleh’s salarySalleh’s salary 33,00033,000

Sarina‘s salarySarina‘s salary 30,00030,000

Dividend from ASBDividend from ASB 1,500 1,500

House rentalHouse rental 6,000 6,000

Selling of motorbicycleSelling of motorbicycle 1,000 1,000

22 Total incomeTotal income 71,50071,500

33 Tax:Tax:

Income tax (Salleh & Sarina) 4,000Income tax (Salleh & Sarina) 4,000

44 Total taxTotal tax 4,000 4,000

55 Amount for expensesAmount for expenses,,

Savings & investmentSavings & investment 67,50067,500

Income Statement (cont.)Income Statement (cont.)

6 Housing expenses Fixed VariableAnnual payment (loan) 12,000Housing & land tax 300Food 10,000Clothing 2,000Transportation:Fuel 1,600Insurance 1,200License 120Life insurance 4,000Annual payment(loan) 8,000Others 800Small total 25,620 14,400

7 Total expenses 40,0208 Amount for savings

& investment 27,480

Balance SheetBalance Sheet Consist of asset and liabilitiesConsist of asset and liabilities Asset - items that you owned, use the Asset - items that you owned, use the

market value Liabilities - debtsmarket value Liabilities - debts Difference in asset and liabilities is the Difference in asset and liabilities is the

net-worth Networth= asset - liablitiesnet-worth Networth= asset - liablities If asset > liabilities => positive networth If asset > liabilities => positive networth If asset < liabilities => negative networthIf asset < liabilities => negative networth Assets : financial asset (cash, savings or Assets : financial asset (cash, savings or

current account, receivable, investment, current account, receivable, investment, insurance) & fixed asset (house, land, car)insurance) & fixed asset (house, land, car)

Liabilities: fixed & variableLiabilities: fixed & variable

Balance SheetBalance Sheet (cont.)(cont.)

Developing the balance sheetDeveloping the balance sheet

■ ■ At one point of time eg. Ended 31 st December At one point of time eg. Ended 31 st December 20082008

StepsSteps

1.1. Financial assets: Cash- cash at hands, savings Financial assets: Cash- cash at hands, savings or current accountsor current accounts

2.2. Financial assets: Receivables - money lend to Financial assets: Receivables - money lend to others & might be able to retrieve. Estimate the others & might be able to retrieve. Estimate the amount of receivableamount of receivable

3.3. Financial assets: Investment - list market value Financial assets: Investment - list market value of investment, bond, insurance, retirement fund of investment, bond, insurance, retirement fund (amount that are able to withdraw). Total the (amount that are able to withdraw). Total the market values.market values.

Balance SheetBalance Sheet (cont.)(cont.)

4. 4. Total financial asset = 1 + 2 + 35. Fixed assets: Property - house, land; use the market value 6. Fixed assets: Investment - retirement fund (cannot withdraw now), long-term investment - current value

7.7. Fixed assets: Car -market valueFixed assets: Car -market value

8.8. Fixed assets: Personal belongings - Fixed assets: Personal belongings - jewellery, antique, electrical items, furniturejewellery, antique, electrical items, furniture

9.9. Total fixed asset=5+6+7+8 Total fixed asset=5+6+7+8

10.10.Total the financial and fixed asset =4 + 9Total the financial and fixed asset =4 + 9

Balance SheetBalance Sheet (cont.)(cont.)

11.11. Fixed liabilities: Balance of loan - car, hirepurchase, educational loan,

housing loan12. Variable liabilities: Bills to be paid - insurance premium due, credit card bill, purchasement with deferred payment, rental, tax, utility bills13. Total liabilities = 11 + 1214. Net-worth = Asset - liabilities =10 - 13; if negative net worth, put the amount in bracket.

Balance SheetBalance Sheet (cont.)(cont.)

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(:ash..n~arronn~ 4,19fl1-1.n hand t5Toed rash 4,213

3,410.

,OralC., (murkre valve) 4.60)

&snnal6elnnging nx1Fum~nire&elerni.al hrn~z 343!1

-[0,1 per:onnl 6, "mna 3343U

rural asset 13,991f..aL~l~hesInzrallmen~ loan 15')1

'1'o~al Al.-.".ab...hrz dNntxvordl 12 10

Changes to the Balance SheetBalance Sheet

1.1. The value of assets changes The value of assets changes according to market valueaccording to market value

2.2. Liabilities may increase (took new Liabilities may increase (took new loan) or reduce (repayment of loan)loan) or reduce (repayment of loan)

3.3. Selling off asset will change the fixed Selling off asset will change the fixed asset to financial asset or vice-versa if asset to financial asset or vice-versa if buy assetbuy asset

The Effect of Changes in Income The Effect of Changes in Income Statement on the Balance SheetStatement on the Balance Sheet

Changes in surplus or deficit in income statement Changes in surplus or deficit in income statement will affect the net-worth in balance sheetwill affect the net-worth in balance sheet

If increase in value occur in income statement, If increase in value occur in income statement, eg. Surplus of RM2,000 of income, an increase of eg. Surplus of RM2,000 of income, an increase of RM2,000 will occur in the asset category of RM2,000 will occur in the asset category of balance sheet. The net-worth increase in the balance sheet. The net-worth increase in the same amount (+RM2,000)same amount (+RM2,000)

BeforeBefore After the SurplusAfter the Surplus

AssetsAssets RM28,000RM28,000 RM30,000RM30,000

LiabilitiesLiabilities RM10,000RM10,000 RM10,000RM10,000

Net-worthNet-worth RM18,000RM18,000 RM20,000RM20,000

Evaluating the Financial Evaluating the Financial SituationSituation

1.1. Using balance sheet:Using balance sheet:

Balance sheet shows the use of money – for Balance sheet shows the use of money – for assets & liabilitiesassets & liabilities

i.i. Referring to the asset & net-worth:Referring to the asset & net-worth: Higher net-worth, better financial situationHigher net-worth, better financial situation Guideline: 30 – 50% of networth should be Guideline: 30 – 50% of networth should be

in the financial asset so that cash money is in the financial asset so that cash money is easily to obtain during emergency easily to obtain during emergency

Financial asset has high liquidityFinancial asset has high liquidity Liquidity- how easy or quick for an asset to Liquidity- how easy or quick for an asset to

be converted to cash without reduce of be converted to cash without reduce of valuevalue

Evaluating the Financial Evaluating the Financial SituationSituation (cont.)(cont.)

ii.ii. Referring to the assets & liabilities:Referring to the assets & liabilities: Compare the total cash with total liabilitiesCompare the total cash with total liabilities Cash> liabilitiesCash> liabilities Debt less than 50% of financial assetDebt less than 50% of financial asset

iii.iii. A positive change in net-worth for A positive change in net-worth for series of balance sheet for different time series of balance sheet for different time shows that liabilities is decreasing or asset shows that liabilities is decreasing or asset is increasing or there are changes in both is increasing or there are changes in both asset & liabilities but the asset increase > asset & liabilities but the asset increase > than the liabilities increase than the liabilities increase

Evaluating the Financial Evaluating the Financial SituationSituation (cont.)(cont.)

iv.iv. To increase net-worth, increase the To increase net-worth, increase the income or spend less than income, so income or spend less than income, so there is surplus of income that could be there is surplus of income that could be savedsaved

Other evaluation:Other evaluation:

a.a.Ratio of asset to liability = Ratio of asset to liability = total assettotal asset > 1 > 1

total liabilitytotal liability

Asset can be used to pay off the debt if ratio Asset can be used to pay off the debt if ratio is equal to 1is equal to 1

Asset>>>liability to be financially stableAsset>>>liability to be financially stable

Evaluating the Financial Evaluating the Financial SituationSituation (cont.)(cont.)

b.b.Ratio of liability to asset = Ratio of liability to asset = total liability total liability < 1< 1

total assettotal asset The opposite of the 1The opposite of the 1stst ratio ratio Liability can be paid off by the valued of asset if Liability can be paid off by the valued of asset if

ratio is 1ratio is 1 Liability <<< asset to be financially stableLiability <<< asset to be financially stable

c.c.Ratio of net-worth to liability = Ratio of net-worth to liability = net-worthnet-worth

total liabilitytotal liability The use of this ratio is better than (a) to determine The use of this ratio is better than (a) to determine

financial situationfinancial situation A positive ratio shows good financial situationA positive ratio shows good financial situation A negative ratio shows bad financial situationA negative ratio shows bad financial situation