Financial statements reflect your financial condition. They help you measure where you are now. Then, as time passes and you prepare your financial statements periodically, you can use them to track your progress toward financial goals. Good financial statements are also a must when you apply for a loan. This project will help you to evaluate your current financial condition.
Look back at the discussion in this chapter on balance sheets and income and expense statements, and prepare your own. If you're doing this for the first time, it may not be as easy as it sounds! Use the following questions to help you along.
Have you included all your assets at fair market value (not historical cost) on your balance sheet?
Have you included all your debt balances as liabilities on your balance sheet? (Don't take your monthly payment amounts multiplied by the number of payments you have left - this total includes future interest.)
Have you included all items of income on your income and expense statement? (Remember, your paycheck is income and not an asset on your balance sheet.)
Have you included all debt payments as expenses on your income and expense statement? (Your phone bill is an expense for this month if you've already paid it. If the bill is still sitting on your desk staring you in the face, it's a liability on your balance sheet.)
Are there occasional expenses that you've forgotten about, or hidden expenses such as entertainment that you have overlooked? Look back through your checkbook, spending diary, or any other financial records to find these occasional or infrequent expenses.
Remember that items go on either the balance sheet or the income and expense statement, but not on both. For example, the $350 car payment you made this month is an expense on your income and expense statement. The remaining $15,000 balance on your car loan is a liability on your balance sheet, while the fair market value of your car at $17,500 is an asset.
After completing your statements, calculate your solvency, liquidity, savings, and debt service ratios. Now, use your statements and ratios to assess your current financial condition. Do you like where you are? If not, how can you get where you want to be? Use your financial statements and ratios to help you formulate plans for the future.