Chapter 2

Chapter 2 01/20/22 Solvency Ratio: Total Net worth divided by Total assets Liquidity: total Liquid assets divided by Total current debt (liabilities) Liquid assets include cash, savings accounts, money market accounts, and certificates of deposit. Savings Ratio: Relates to cash slurps from balance sheet to net income from the income statement. Debt Service Ratio: provides a measure of the ability to pay debts promptly. Debt service ratio = total monthly loan payments divided by monthly gross income Cash Budget: reports the forecasted or estimates cash receipts and the forecasted or estimates cash expenses for the year. By reporting the cash budget by month, you can identify the month that you may have a problem such as short of cash. By comparing the actual cash receipts and expenses to the budget, you can control your spending. The difference is called a variance. A dollar today is worth more than a dollar received in the future. Future Value: The value to which an amount today will grow if it earns a specific rate of interest over a given period. Annuity: A fixed sum of money that occurs annually
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