ReviewLesson 8 – Slide 17 (Net Worth)Lesson 9 – Entire Lesson (w/out in-class exercises)Begin Lesson 10 (new in-class exercises)

Lesson 10

Open your note books to a clean sheet of paper, get out your pencil or pen and calculator and be prepared to

calculate several ratios.The exam will have similar questions.

Statement of Cash Flow

Statement of Net Worth

Debt to Asset Ratio is a measure most commonly used by individuals to see how much they own as compared to how much they are borrowing. A ratio under 1 means that a majority of the assets are owned by the individual (equity). A ratio above 1 means that the individual has financed their assets (lifestyle) by borrowing, and there is great risk that if their income is interrupted, they will lose everything.

Debt Ratio = total liabilities/total assets(commonly used for personal finances)

Debt ratio compares debt to assets ( debt : assets).A lower debt ratio is better to have.The smaller the liability (debt) over the asset, the more you own.

More is better.This ratio tells us how heavily the individual is financed.It does not consider short term debt, because short term debt is

usually a smaller amount and is expected to be paid in full soon.

This ratio is a leverage measure that tells you how much of the business assets, including share holders equity is leveraged against long term debt. It does not consider current liabilities (short term).

Debt to Net Worth Ratio = Total Liabilities/Net Worth(commonly used for business)

Example(choose the scenario you would prefer to be in yourself)

AAll of my debt (liabilities) totals 50,000 RMBEverything I own is worth 100,000 RMB50,000 = 1 = 1:2100,000 2

ORB

All of my debt totals 100,000RMBEverything I own is worth 50,000 RMB100,000 = 2 = 2:150,000 1

If you had to sell everything, which

scenario would you prefer to be in?

A OR B

Answer

Scenario A – If I sold everything, I would still have 50,000 RMB remaining.

Scenario B – If I sold everything, I would be 50,000 RMB short and owe that money.

Liquidity ratio = liquid assets/monthly expenses

Liquidity ratios show the number of months that living expenses can be paid without cash inflow.

A higher liquidity ratio is good.

Using the examples, calculate the liquidity ratio.

Debt payments ratio = monthly credit payments/take-home pay

Debt payment ratio should be below 20%

Using the example, calculate the Debt Payment Ratio.

Savings ratio = monthly savings/gross income

Your savings ration should be no less than 10%.

Using the example, calculate the monthly Savings Ratio.

Additional Exercises

1. Create your own Net Worth Statement. Go into great detail. Include as much as possible.

2. Create a fictional Net worth statement for a family of 3. The husband and wife are both 35 years old and have one child who is 6 years old. Use your imagination.

Consider this a head start on your first financial plan which is due Friday October 28th

Bonus Marks = preparation for the test1. Prepare a net worth statement for yourself2. Prepare a detailed statement of cash flow for

yourself, for last month3. Prepare a monthly budget4. Monitor the budget and show variances

This must be typed – Handwritten submissions will not receive bonus marks.

Bonus

1. Do an online search to see if you can find the savings rate in China.

2. How does your family savings ratio compare to the average? Ask you parents if you like. Explain a little bit about their thought and ideas about savings.

This must be typed – Handwritten submissions will not receive bonus marks.

Go to Lesson 11