This html article is produced from an uncorrected text file through optical character recognition. Prior to 1940 articles all text has been corrected, but from 1940 to the present most still remain uncorrected. Artifacts of the scans are misspellings, out-of-context footnotes and sidebars, and other inconsistencies. Adjacent to each text file is a PDF of the article, which accurately and fully conveys the content as it appeared in the issue. The uncorrected text files have been included to enhance the searchability of our content, on our site and in search engines, for our membership, the research community and media organizations. We are working now to provide clean text files for the entire collection.
L y°u Probably financed it through a credit union, or some other lending
often h anCe S^eet ‘s a difficult to read, ties -i °|rin”’ statement of assets, liabili- with „ If1 worth- generally associated re^^'y difficult and boring annual H?w‘SSUed by "Corporate America.” On hn- ?any annual reports do you have
Ship? 1 already know the
this m , , question, and, mercifully, read a00? S co'umn is not on “how to those "fnnual Report.” However, for home ° ^°U w*10 contemplate buying a you vvh* Car’ °r 3 te*evisi°n. for those of finally f WUnt t0 carry a credit card, and Usin,, ’ °.r lh°se ot you who contemplate
gesuhau '1 T ‘he ,uture’ 1 str°ng>y sug- somi k ,y°U earn h°w t0 construct a pcr-
Th ^ anCe sheet-
business b0ttfm line”~as we say in this n°t be h- ° any credit transaction will the Car USCd on your looks, the color of personal0Kd,rive’ or anything other than a refWt. balance sheet that accurately A ty your current net worth. lowln,,a 3nce shcct i-s defined in the fol- oiiuait manner: assets minus liabilities
wl net worth
Us na‘are assets and liabilities? Most of I obably own cars. Your car is an hank, .
bili,^ tbis 8enerated a personal lia bility tk arnount °f the loan is that lia- tennin jf. car has a net worth. You de- remai C ta*S net worth by subtracting the valti,,nir® p)an balance from the current r~ °t the car.
and inC|S come 'n aH shapes and sizes, in» C Uc*e such things as cash in check- bonds'1 , sav'ngs accounts, stocks and anCe | Iac cash value of your life insur- boats °anS madc to friends or relatives, 'ngs -Cars’ real estate, personal furnished -i lnC,',me tax refunds, art. jewelry, 'ntoca k e*se lbat can be converted as l value at some time in the future, mo a?les I'ttbilities include the o\ye ^a^C on your house, income tax you ’ btoney borrowed from your friend,
°Ceet,in8s / August 1987
your electric bill, monthly rent on your apartment, your child’s tuition bill, and insurance premiums.
When you are asked by the lending institution or credit company to complete a “statement of financial condition,” simply list your assets and your liabilities. How do you determine the value of these assets and liabilities? For the most part, liabilities are easy to value. After all, you should know what your car loan and mortgage balances are. Assets, on the other hand, can be more difficult to value. In some cases, common sense must be applied, especially since most assets appreciate or depreciate in value over time.
You must estimate the real value of each of your assets. For example, you might own a diamond ring that has an appraised value of $10,000. It is probably acceptable to list the asset at the appraised value on the balance sheet, but you should be aware that the cash value of the diamond is less than one half the appraised value—and the lending institution will be likewise aware. If you own a home, you might want to check a real estate agent for current values in your area, because you can use the market value of your home, rather than your purchase price, as the determinant of the asset value.
Identifying the financial value of assets and the limits of your liability is greatly aided by the fact that, especially on the asset side, all items are evaluated in terms of their ability to be converted to cash. Cash is king!
Each of you must be able to construct a balance sheet. If you have a personal computer, you may wish to purchase one of the programs available for this purpose. By better understanding the basics of building a personal balance sheet, the chances are greater that your credit requests will be honored. But, even more important than the ability to get credit is that the ability to create a good personal balance sheet is basic to making sound financial decisions.
We must strive to create appreciating assets, while reducing liabilities. The next time you contemplate a purchase of an asset that will create a liability, use your balance sheet knowledge—how will that asset enhance your net worth? Don’t just rely on a lending institution to determine if you are capable of increasing your liabilities—see for yourself!
A1 Baker is vice president for investments at Pruden- tial-Bache Securities in Annapolis, MD. He has 17 years of experience on Wall Street, both as an individual and institutional stockbroker. A1 welcomes reader queries—send your questions and comments to: A1 Baker, Proceedings, U. S. Naval Institute, Annapolis, MD, 21402.
139