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Net Worth and Net Income

Net Worth and Net Income. Debt- ful Debby has $1,000 in cash but owes her friend Shady Pete $800. Debt-less Dolores has $900 in cash and has no liabilities. Who is wealthier? Who is in a better financial situation? Who is worth more? Why?.

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Net Worth and Net Income

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  1. Net Worth and Net Income

  2. Debt-ful Debby has $1,000 in cash but owes her friend Shady Pete $800. Debt-less Dolores has $900 in cash and has no liabilities. Who is wealthier? Who is in a better financial situation? Who is worth more? Why?

  3. Net worth tells us a person’s wealth at a single point in time.  Therefore, it captures how much a person has left to use for consumption. Net Worth: The value of assets minus liabilities

  4. NW = Net Worth (NW is a single variable) A = Assets L = Liabilities Net Worth Accounting Equation: NW = A - L

  5. Emilio has $1,500 in assets and $450 in liabilities. What is his net worth? We know that NW=A-L  We also know that A=1,500 and L=450 Therefore, substituting in the values for variables, NW=1,500-450=1,050 Emilio’s net worth is $1,050 Example 1

  6. Ava has $220 in cash, and she owns a car worth $3,000. She owes her brother $80, and her mother $300. Let’s calculate her net worth. Her assets are her cash and her car, so A=220+3,000=3,220 Her liabilities are her debts to her brother and mother, so L=80+300=380 If we substitute these values into the accounting equation, we get  NW=3,220-380=2,840 Ava's net worth is $2,840 Example 2

  7. Sasha has a net worth of $200 and liabilities worth $1,400. What is the value of his assets? Example 3 • Strategy 2 • The accounting equation is NW=A-L, but we want to solve for A, so we need to rearrange it to create an equivalent equation. • This gives us A=NW+L • If we substitute in the values, we get A=200+1,400=1,600The value of Sasha's assets is $1,600 • Strategy 1 • Substitute the values into the accounting equation first.  • This gives us 200=A-1,400  • Now solve for A: A=200+1,400=1,600  • The value of Sasha's assets is $1,600

  8. Gross Income: The sum of all sources of income Net Income: The value of gross income minus expenses

  9. NI = Net Income (NI is a single variable) I = Gross income  E = Expenses Net Income Accounting Equation: NI = I – E

  10. Alysia has gross income of $800 and expenses of $350, what is her net income? I=800 and E=350 NI=I−E=800−350=450 Alysia's gross income is $450 Example 1

  11. Ian earns $2,300 in wages and receives $190 in cash as a birthday present from his Mom. He also spends $700 on food, and $570 on clothes. What is Ian’s net income? I=2300+190=2490 and E=700+590=1270 NI=I−E=2490−1270=1220 Ian's net income is $1,220 Example 2

  12. Sophie has gross income of $800 and a net income of $5, what is the value of her expenses? NI=I−E  Therefore, 5=800−E Therefore, E=800−5=795 Sophie's expenses are $795 Example 3

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