Question

practice quiz 3 - 2

1. what are the main purposes of personal financial statements?
2. what does a personal balance sheet tell you about your financial situation?
3. for the following items, identify each as an asset (a), liability (l), cash inflow (ci), or cash outflow (co):

monthly rent
interest on savings account
college savings account
electric bill
automobile loan
collection of rare coins
mortgage amount
market value of automobile

1. jan franks has liquid assets of $6,300 and monthly expenses of $2,100. based on the liquidity ratio, she has ______ months in which living expenses could be paid if an emergency arises. how might financial ratios be used when planning and implementing financial activities?

Explanation:

Step1: Define personal financial statements purpose

Personal financial statements help in tracking income, expenses, assets, and liabilities for personal financial management, assessing financial health, and making informed financial decisions.

Step2: Explain personal balance - sheet

A personal balance sheet shows your financial position at a specific point in time by listing your assets (what you own), liabilities (what you owe), and net - worth (assets minus liabilities).

Step3: Categorize items

Monthly rent is a cash outflow (CO) as it is an expense. Automobile loan is a liability (L) as it is money owed. Interest on savings account is a cash inflow (CI) as it is income. Collection of rare coins is an asset (A) as it has value. College savings account is an asset (A) as it is money set aside and has value. Mortgage amount is a liability (L) as it is debt. Electric bill is a cash outflow (CO) as it is an expense. Market value of automobile is an asset (A) as it has value.

Step4: Calculate liquidity ratio

The liquidity ratio formula is $\text{Liquidity Ratio}=\frac{\text{Liquid Assets}}{\text{Monthly Expenses}}$. Given liquid assets of $\$6,300$ and monthly expenses of $\$2,100$, then $\text{Liquidity Ratio}=\frac{6300}{2100}=3$. So she has 3 months in which living expenses could be paid if an emergency arises. Financial ratios are used to analyze financial health, set financial goals, and make decisions like saving, investing, or borrowing.

Answer:

1. To track income, expenses, assets, and liabilities for personal financial management, assess financial health, and make informed financial decisions.
2. It shows your financial position at a specific point in time by listing assets, liabilities, and net - worth.
3. Monthly rent: CO; Automobile loan: L; Interest on savings account: CI; Collection of rare coins: A; College savings account: A; Mortgage amount: L; Electric bill: CO; Market value of automobile: A
4. 3. Financial ratios are used to analyze financial health, set financial goals, and make decisions like saving, investing, or borrowing.