Question

Discuss how reviewing your assets and liabilities will assist you in financial planning. What is the real value of understanding your personal Balance Sheet, your personal Income and Expense Statement and the ratios on page 39, ie. solvency ratio.

Answer 1

Reviewing the asset and liabilities will tell you about your current financial situation it tells about the financial position of particular entity at the moment whereas Income and expense statement give the view of the financial position at the end of year. With the help of financial statement one can easily find the different ratios related to the liquidity, solvency, profitability and etc.

These ratios give the real value of the entity, once can find wether company or person has enough cash to take care of its current liability or whether it is generating good profit by analysing return on asset, return on equity and etc. These measure will help to comparing the performance with another entity.

One can find the solvency ratio using these financial statement.

Solvency ratio = (net income + depreciation)/(stort term liabilites + long term liabilities)

this ratio will give wether company is generating enough cash to takle its liabilities. Higher value of solvency ratio signifies that company can handle its liabilities, otherwise there will be huge probablity of default if the value is less.