Financial skills development and practical applications

Financial Skills

Financial Statements

Financial Item

Amount

Income

Expenses

Assets

Liabilities

Cash at bank

Account Receivable

Interest Income

Equipment Owned

Cheque Accounts

Interest Charges

Loans

Accounts Payable

Petty Cash

Sales Revenues

Office Equipment

Insurance Payable

Wages Payable

GST Payable

Total

Income Statement

P. Smith

For the year ending 30 June 2009

Income

Interest income 380

Sales Revenues 33,900

Total Income 34,280

Less: Expenses

Interest Charges 800

Accounts Payable 500

Insurance Payable 1,280

Wages Payable 1,950

GST Payable 1,500

Total Expenses 6,030

PROFIT (or LOSS) 28,250

Balance Sheet

P. Smith

As at 30 June 2009

Assets

Cash at Bank 152,000

Accounts Receivable 1,500

Interest Income 380

Equipment Owned 1,500

Cheque Accounts 2,000

Petty Cash 185

Sales Revenues 33,900

Office Equipment 100,000

Total Assets 291,465

Liabilities

Interest Charges 800

Loans 120,000

Accounts Payable 500

Insurance payable 1,280

Wages Payable 1,950

GST Payable 1,500

Total Liabilities 126,030

NET WORTH -- generally, the balance sheet should reveal equal values of the assets and the liabilities; yet, this is not the case in this scenario and the most plausible explanation in this sense could be given by the omission of some information on liabilities entries, such as owner's equity. Assuming that this is the case, the net worth of P. Smith is impossible to calculate. Based however on the given data, the net worth is calculated by subtracting the value of the long-term assets from that of the total liabilities. Long-term assets include the Equipment Owned 1,500 and the Office Equipment 100,000, for a total value of 101,500. Smith's net worth is then 126,030 -- 101,500 = 24,530.

Q10 -- Time Value of Money

The concept of TMV, or time value of money, was designed to help individuals and investors assess their investment or saving opportunities in light of the money they own, or could own, and the value this money has in the present and in the future. The theory generally states that one dollar is more valuable now than in the future. The explanation is a simple one and looks at the income the respective dollar is able to generate for its possessor. To best understand the concept, it is important to look at a clear example -- say an individual has loaned his friend $10, but the friend now says that he cannot pay it back until next year. The first individual wonders how much will $10 be worth in one years' time. If he accepts that his friend does not return the loan, its value in one year will go down in an indirect relationship with the increases in inflation and will as such worth less. If on the other hand, the individual asks his friend to return the money, he can place it in an investment with a 15% interest rate and, by the end of the year, the $10 will be worth $11.5. In this order of ideas, we come to the realization that having money now is more valuable than having it in the future as, through time, money has the ability to multiply, if wisely invested.

Q11 -- Cash Budgeting

Cash budgeting is a complex process, with a simple definition however. It sees that organizational managers conduct an analysis and estimation of the cash which is expected to enter and leave the organization. The process refers to "an estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities" (Investopedia, 2009). This process is not only useful, but it is also necessary as it has the ability to sustain the economic agent in reaching his goals. For instance, cash budgeting has the ability to estimate the actual worth and costs of an investment and reveals as such whether or not the company should invest its financial resources in the respective investment opportunity.

Q12 -- Depression and Recession Phases of a Business Cycle