Foundations, Part 3
Question 1: Explain the difference between personal property and real property and define fair market value.
Answer 1: Personal property is property than can easily be moved, such as jewelry, cars, clothing, electronics, furniture, and appliances. Personal property usually decreases in value with use. Real property is a physical asset that cannot be moved such as land or buildings. Real property generally has a long life span and a dollar value that increases over time. Fair market value is what an asset is actually worth, meaning the dollar amount it could command in the marketplace.
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Question 2: Explain how to prepare a personal balance sheet.
Answer 2: A personal balance sheet should be prepared at least annually, and more frequently if possible. First, list the current market value for all assets. To get an accurate number for liquid and investment assets, look at checking, savings, and investment account statements. The Kelley Blue Book will help determine the value of your car, and by checking advertisements for comparable homes you can get an idea of the value of yours. Second, write down short-term and long-term liabilities, and be sure to include charges that may not have shown up on your statement yet. Third, calculate your net worth. Subtract the total of all of your liabilities from the total of all of your assets and this will give you the equity of your total assets.
Question 3: Explain what an income and expense statement is, its three parts, and how it differs from a balance sheet.
Answer 3: An income and expense statement shows where and how money is being spent. There are three parts to it: income, expenses, and cash surplus (the difference between your income and expenses). The income and expense statement is done on a cash basis, which means it only uses those transactions that involve actual cash receipts. A balance sheet only shows one’s financial situation at a given point in time, whereas an income and expense statement shows all of the financial activities that occurred over a period of time.
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