The Financial Statements of harry and Belinda Johnson Suggest Budgeting Problems Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 min- utes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortu- nately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented be- low. Note that the cash flow statement covered the first six months of their marriage.
The Financial Statements of harry and Belinda Johnson Suggest Budgeting Problems Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 min- utes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortu- nately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented be- low. Note that the cash flow statement covered the first six months of their marriage.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
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The Financial Statements of harry and Belinda Johnson Suggest Budgeting Problems
Harry has worked at a medium-size interior design firm for five years and earns a salary of $4,080 per month. He also receives $3,000 in interest income once a year from a trust fund set up by his deceased father’s estate. Belinda earns a salary of $6,400 per month, and she has many job-related benefits including flexible benefits program, life insurance, health insurance, a 401(k) retirement program, workplace financial education, and a credit union. The Johnsons live in an old apartment located approximately halfway between their places of employment. However, their rent will increase by $100 a month in July. Harry drives about ten minutes to his job, and Belinda travels about 15 min- utes via public transportation to reach her downtown job. Harry and Belinda’s apartment is very nice, but small, and it is furnished primarily with furniture given to them by some of his friends. Soon after getting married, Harry and Belinda decided to begin their financial planning. Fortu- nately each had taken a college course in
-
(a) Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets.
-
(b) Using the data from the cash-flow statement de- veloped by Harry and Belinda, calculate a
liquidity ratio , asset-to-debt ratio, debt-to-income ratio, debt payments-to-disposable income ratio, and invest- ment assets-to-total assets ratio. What do these ra- tios tell you about the Johnsons’ financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new vehicle loan? -
(c) The Johnsons enjoy a high income because both work at well-paying jobs. They have spent parts of three evenings over the past several days discussing their financial values and goals together. As shown
in the upper portion of Figure 3-5, they have estab- lished three long-term goals: $6,000 for a European vacation to be taken in 2020, $5,000 needed in October 2021 for a down payment on a new au- tomobile, and $30,000 for a down payment on a home to be purchased in December 2023. As shown in the lower portion of the figure, the Johnsons did some calculations to determine how much they had to save for each goal—over the near term—to stay on schedule to reach their long-term goals as well as pay for two vacations and an anniversary party. After developing theirbalance sheet and cash-flow state- ment (shown below), the Johnsons made a budget for the year (shown in Table 3-6 on page 97). They then reconciled various conflicting needs and wants until they found that total annual income was close to the total of planned expenses. Next, they created a revolving savings fund (Table 3-8 on page 99) in which they were careful to include enough money each month to meet all of their short-term goals. When developing their cash-flow calendar for the year (Table 3-7 on page 98), they noticed a prob- lem: substantial cash deficits in November and December. Make specific recommendations to the Johnsons on how they could make reductions in their budget estimates. Do not offer suggestions that would alter their new lifestyle drastically, as the couple would reject such ideas.
Transcribed Image Text:CHAPTER 3 Financial Statements, Tools, and Budgets 109
110 PART 1 Financial Planning
(a) Briefly describe how Harry and Belinda probably
determined the fair market prices for each of their
tangible and investment assets.
Tangible Assets
Automobile (3-year old Toyota)
Personal property
37.6%
$11,000
2,300
1,700
$15,000
7.9%
2.1% CASE
1.0%
Utilities
1,320
5.8%
51.3%
Furniture
(b) Using the data from the cash-flow statement de-
veloped by Harry and Belinda, calculate a liquidity
ratio, asset-to-debt ratio, debt-to-income ratio, debt
payments-to-disposable income ratio, and invest-
ment assets-to-total assets ratio. What do these ra-
tios tell you about the Johnsons' financial situation?
Should Harry and Belinda incur more debt, such as
credit cards or a new vehicle loan?
660
Cell phones
Auto gas/maintenance/repairs
Doctor's and dentist's bills
Total Tangible Assets
Jul ri
To
Investment Assets
1,150
1,140
1.8%
lar
$ 1,170
2,400
$ 3,570
$29,230
Harry's retirement account
4.0%
1.8%
8.2%
12.2%
Belinda's retirement account
Jul
ing
ficie
he
$4
Medicines
350
0.5%
ac
Total Investment Assets
Total Assets
100.0%
1,200
1.9%
Clothing and upkeep
Church and charity
Gifts
LIABILITIES
550
0.9%
Short-Term Liabilities
Visa credit card
(c) The Johnsons enjoy a high income because both
work at well-paying jobs. They have spent parts of
three evenings over the past several days discussing
their financial values and goals together. As shown
in the upper portion of Figure 3-5, they have estab-
lished three long-term goals: $6,000 for a European Vehicle loan (First Credit Union)
vacation to be taken in 2020, $5,000 needed in
October 2021 for a down payment on a new au-
tomobile, and $30,000 for a down payment on a
home to be purchased in December 2023. As shown
in the lower portion of the figure, the Johnsons did
some calculations to determine how much they had
to save for each goal–over the near term-to stay
on schedule to reach their long-term goals as well as
pay for two vacations and an anniversary party. After Marriage)
developing their balance sheet and cash-flow state-
ment (shown below), the Johnsons made a budget
for the year (shown in Table 3-6 on page 97). They
then reconciled various conflicting needs and wants
until they found that total annual income was close
to the total of planned expenses. Next, they created
a revolving savings fund (Table 3-8 on page 99) in
which they were careful to include enough moncy
cach month to meet all of their short-term goals.
When developing their cash-flow calendar for the
year (Table 3-7 on page 98), they noticed a prob-
lem: substantial cash deficits in November and
1,070
940
390
1.3%
1.7%
Target credit card
Dental bill
ab
eb
45
0.2%
1.5%
Public transportation
Personal allowances
400
1.4%
3.8%
ca
2,400
960
Total Short-Term Liabilities
835
2.9%
Long-Term Liabilities
Entertainment
1.5%
su
st
wa
of
$13,800
8,200
$22,000
$22,835
$ 6,395
$29,230
47.2%
780
1.2%
Student loan (Belinda)
Total Long-Term Liabilities
Total Liabilities
Family holiday trip
Summer vacation
28.1%
1,200
1.9%
bud
75.3%
78.1%
Miscellaneous
560
0.9%
Net Worth
21.9%
$22,940
$63,650
36.0%
Total Variable Expenses
Total Expenses
SURPLUS (DEFICIT)
CASE
Total Liabilities and Net Worth
100.0%
99.8%
0.2%
Cash-Flow Statement for Harry and Belinda Johnson
July 1-December 31, 2017 (First Six Months of
$130
Bu
Ste
Kan
is ha
regul
bills
Cash Flow
Dollars
Percent
INCOME
Harry's gross income
Belinda's gross income
Interest
$24,000
36,600
180
37.6%
57.4%
nd Ma
nandez
their late 30s, have two chil-
and ph, age 15. Victo s had
vith a l appl
nedica
icles
0.3%
Ma
Harry's trust fund
Total Income
3,000
$63,780
4.7%
100.0%
rd ba
EXPENDITURES
sto
ria
ree b
puld r
ain ho
ntrol
Fixed Expenses
ds a
$ 9,600
1,800
120
Rent
15.1%
ez
2.8%
Health Insurance
Life insurance
ave
0.2%
December. Make specific recommendations to the
Johnsons on how they could make reductions in
their budget estimates. Do not offer suggestions
that would alter their new lifestyle drastically, as the
couple would reject such ideas.
Renter's insurance
Automobile insurance
220
0.3%
res o
600
6.3%
ege,
Auto loan payments
Student loan payments
Cable TV and Internet
2,940
1,800
960
4.6%
rog
the
2.8%
1.5%
oup
Savings/emergencies
Harry's retirement plan
Belinda's retirement plan
960
1.5%
1,170
2,400
10,200
3,000
4,640
1.8%
Balance Sheet for Harry and Belinda Johnson
3.8%
January 1, 2018
Federal income taxes
16.0%
wh
n
ctor
ASSETS
State income taxes
4.7%
nfusea
us i
ear
7.3%
Monetary Assets
Cash on hand
Savings (First Credit Union)
Savings (Far West Savings Bank)
Savings (Homestead Credit Union)
Checking (First Credit Union)
Total Monetary Assets
Social Security taxes
Automobile registration
Total Fixed Expenses
net wor
$ 1,100
1,200
4,000
2,260
2,100
$10,660
month
the "m
month
3.8%
300
0.5%
4.1%
$40,710
63.8%
13.7%
Variable Expenses
is now
Savings money market fund
Food (home)
Food (out)
$ 3,000
3,800
1,860
ftheir a
te and &
eir net h and on
7.7%
4.7%
bile has
they are
They li
not hav
7.2%
6.0%
cterize the
36.5%
2.9%
ects
Transcribed Image Text:o o o o o
o o o o o o c
Table 3-6
2018 Unfinished Annual Budget Estimates for Harry and Belinda Johnson
Sear
Yearly
Monthly
Table 3-7
Cash-Flow Calendar for Harry
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
Total
Averages
and Belinda Johnson
INCOME
Harry's salary
4,080
4,080 4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
4,080
48,960
4,080.00
1
2
Belinda's salary
6,400 6,400 6,400
6,400
6,400
6,400
6,400
6,400
6,400
6,400
6,400
6,400
76,800
6,400.00
Estimated
Income
Estimated
Surplus/
Deficit (1-2)
Interest
30
30
30
30
30
30
30
30
360
30.00
Cumulative
30
30
30
30
Month
Expenses
Surplus/Deficit
Income from trust
3,000
3,000
250.00
January
$ 10,510
$ 10,277
$233
$ 233
TOTAL INCOME
10,510 10,510 10,510 10,510 10,510
10,510
10,510
13,510 10,510 10,510 10,510
10,510 129,120 10,760.00
February
10,510
$ 10,277
233
$ 466
EXPENSES
Fixed Expenses
March
10,510
10,267
243
$ 709
Rent
1,600 1,600 1,600
1,600
1,600
1,600
1,700
1,700
1,700
1,700
1,700
1,700
19,800
1,650.00
April
10,510
10,272
238
$ 947
Health insurance
300
300
300
300
300
300
350
350
350
350
350
350
3,900
325.00
May
10,510
10,277
233
$1,180
Life insurance
20
20
20
20
20
20
20
20
20
20
20
20
240
20.00
Home purchase fund
500
500
500
2,500
208.33
June
10,510
10,507
3
$1,183
500
500
Renter's insurance
220
220
18.33
July
10,510
10,457
53
$1,236
Automobile insurance
600
600
1,200
100.00
August
13,510
13,477
33
$1,269
490
490
490
5,880
490.00
Auto loan payments
Student loan payments
490
490
490
490
490
490
490
490
490
300
300
300
300
300
300
300
300
300
300
300
300
3,600
300.00
September
10,510
10,457
53
$1,322
100
100
100
100
100
100
100
100
100
100
100
1,200
100.00
October
Savings/emergencies
Harry's retirement plan
Belinda's retirement plan
100
10,510
10,437
73
$1,395
195
195
195
195
195
195
195
195
195
195
195
195
2,340
195.00
November
10,510
10,895
-385
$1,010
400
400
400
400
400
400
400
400
400
400
400
400
4,800
400.00
1,920
December
10,510
11,095
-585
$ 425
Cable TV and Internet
160
160
160
160
160
160
160
160
160
160
160
160
160.00
Federal income taxes
1,700 1,700
1,700
1,700
1,700
1,700
1,700
1,700
20,400
1,700.00
Total
$129,120
1,700
500
1,700
1,700
500
1,700
$128,695
$425
6,000
9,600
State income taxes
500
500
500
500
500
500
500
500
500
500
500.00
Social security taxes
Automobile registration
Total fixed expenses
800
800
800
800
800
800
800
800
800
800
800
800
800.00
renewal fees, property taxes, back-to-school supplies, vet grooming and checkups, den-
tal cleanings, magazine subscriptions, special haircuts, one-time tickets for whatever,
birthdays, and Christmas (travel, decorations, gifts). Table 3-8 shows the Johnsons' re-
volving savings fund. When preparing their budget, the Johnsons realized that they
were going to have significant deficits.
300
300
25.00
6,565 6,565 6,565
6,565
6,565
7,165
6,715
7,435
7,215
7,215
7,515
7,815
83,900
6,991.67
Variable Expenses
Savings money market
Revolving savings fund
Food (home)
3,400
1,780
6,600
400
3,000
283.33
250
250
210
250
190
240
200
190
148.33
550
550
550
550
550
550
550
550
550
550
550
550
550.00
300
300
3,600
300.00
Table 3-8
Revolving Savings Fund for Harry
and Belinda Johnson
Food (out)
300
300
300
300
300
300
300
300
300
300
220
2,640
1,320
Utilities
220
220
220
220
220
220
220
220
220
220
220
220.00
110
110
110
110.00
Cell phones
Auto gas repairs
110
110
110
110
110
110
110
110
110
220
220
220
220
220
220
220
220
220
220
220
220
2,640
220.00
Large
Expenses
Amount
Needed
Deposit Into
Fund
Withdrawal
Fund
Balance
Doctor/dentist/
100
100
100
100
100
100
100
100
100
100
100
100
1,200
100.00
out-of-pocket
Month
From Fund
Medicines
60
60
60
60
60
60
60
60
60
60
60
60
720
60.00
January
$
$ 250
$ 0
$ 250
2,040
Clothing and upkeep
Church and charity
170
170
170
170
170
170
170
170
170
170
170
170
170.00
February
250
$ 500
100
100
100
100
100
60
100
100
100
100
100
100
1,160
96.67
Gifts
80
80
110
75
140
120
60
60
50
400
300
1,475
122.92
March
210
$ 710
1,920
Public transportation
Personal allowances
160
160
160
160
160
160
160
160
160
160
160
160
160.00
April
$ 960
250
500
500
500
500
500
500
500
500
500
500
500
500
6,000
500.00
May
190
$1,150
Entertainment
150
150
150
150
150
150
150
150
150
150
150
150
1,800
150.00
European vacation
400
400
400
400
400
400
200
200
200
200
200
200
3,600
300.00
June
$1,150
Summer vacation
200
200
200
200
200
200
1,200
100.00
July
Summer
1,200
240
$1,390
42
42
42
42
42
42
42
42
40
40
500
41.67
Anniversary dinner party
Miscellaneous
42
42
vacation
100
100
100
100
100
100
100
100
100
100
100
100
1,200
100.00
3,222
3,280
44,795
3,732.92
August
$1,390
Total variable
3,712 3,712 3,702
3,707
3,712
3,342
3,742
6,042
3,242
3,380
expenses
September
200
$1,590
TOTAL EXPENSES
10,277 10,277 10,267 10,272 10,277 10,507 10,457
13,477 10,457 10,437 10,895 11,095 128,695 10,724.58
October
190
$1,780
53
73
-585
425
Difference (available
for spending,
saving, investing,
and donating
Revolving savings
withdrawals
233
233
243
238
233
53
33
-385
November
Gifts/Other
385
460
$1,320
December
Dinner
585
220
$1,100
Party/Other
385
585
Total
$2,170
$1,780
$680
-$390
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