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Personal Finance
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Personal
finance is the application of the principles of
finance to the monetary decisions of an individual or
family unit.It addresses the ways in which individuals or
families obtain, budget, save and spend monetary
resources over time, taking into account various
financial risks and future life events. Components of
personal finance might include checking and savings
accounts, credit cards and consumer loans, investments in
the stock market, retirement plans, social security
benefits, insurance policies, and income tax management.
A key component of personal finance is financial
planning, a dynamic process that requires regular
monitoring and reevaluation. In general, it has five
steps:
Assessment: One's personal financial situation can be
assessed by compiling simplified versions of financial
balance sheets and income statements. A personal balance
sheet lists the values of personal assets (e.g., car,
house, clothes, stocks, bank account), along with
personal liabilities (e.g., credit card debt, bank loan,
mortgage). A personal cash flow statement lists personal
income and expenses.
Setting goals: Two examples are "retire at age 65
with a personal net worth of $200,000 American" and
"buy a house in 3 years paying a monthly mortgage
servicing cost that is no more than 25% of my gross
income". It is not uncommon to have several goals,
some short term and some long term. Setting financial
goals helps direct financial planning.
Creating a plan: The financial plan
details how to accomplish your goals. It could include,
for example, reducing unnecessary expenses, increasing
one's employment income, or investing in the stock
market.
Execution: Execution of one's personal financial plan
often requires discipline and perseverance. Many people
obtain assistance from professionals such as accountants,
financial planners, investment advisers, and lawyers.
Monitoring and reassessment: As time passes, one's
personal financial plan must be monitored for possible
adjustments or reassessments.
Typical goals most adults have are paying off credit
card and or student loan debt, retirement,
college costs for children, medical
expenses, and estate planning.
Usefulness and limitations of income statement
Income statements should help investors and creditors
determine the past performance of the enterprise; predict
future performance; and assess the risk of achieving
future cash flows.
However, information in an income statement has several
limitations:
items that might be relevant but cannot be reliably
measured are not reported (e.g. brand recognition and
loyalty)
some numbers depend on accounting methods used (e.g.
using FIFO or LIFO accounting to measure inventory level)
some numbers depend on judgments and estimates (e.g.
depreciation expense depends on estimated useful life and
salvage value).
In financial accounting, a cash flow
statement or statement of cash flows is a financial
statement that shows a company's incoming and outgoing
money (sources and uses of cash) during a time period
(often monthly or quarterly). The statement shows how
changes in balance sheet and income accounts affected
cash and cash equivalents, and breaks the analysis down
according to operating, investing, and financing
activities. As an analytical tool the statement of cash
flows is useful in determining the short-term viability
of a company, particularly its ability to pay bills.
International Accounting Standard 7 (IAS 7), is the
International Accounting Standard that deals with cash
flow statements.
People and groups interested in cash
flow statements include accounting personnel, who need to
know whether the organization will be able to cover
payroll and other immediate expenses
potential lenders or creditors, who want a clear picture
of a company's ability to repay
potential investors, who need to judge whether the
company is financially sound
potential employees or contractors, who need to know
whether the company will be able to afford compensation.
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