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 minutes 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. Fortunately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented below. Note that the cash flow statement covered the first six months of their marriage. Balance Sheet for Harry and Belinda Johnson January 1, 2018 ASSETS Monetary Assets Cash on hand 1,110 3.8% Savings (First Credit Union) 1,200 4.1% Savings (Far West Savings Bank) 4,000 13.8% Savings (Homestead credit union) 2,260 7.8% Checking account (First Credit Union) 2,100 7.2% Total monetary assets $10,670 36.7% Tangible Assets Automobile (3-year old Toyota) 11,000 37.9% Personal property 2,100 7.2% Furniture 1,600 5.5% Total tangible assets $14,700 50.6% Investment Assets Harry's retirement account 1,170 4.0% Belinda's retirement account 2,500 8.6% Total investment assets $ 3,670 12.6% Total Assets $29,040 100.0% LIABILITIES Short-Term Liabilities Visa credit card 390 1.3% Target credit card 45 0.2% Dental bill 410 1.4% Total short-term liabilities $ 845 2.9% Long-Term Liabilities Vehicle loan (First Credit Union) 13,800 47.5% Student loan (Belinda) 8,000 27.5% Total long-term liabilities $21,800 75.1% Total Liabilities $22,645 78.0% Net Worth $ 6,395 22.0% Total Liabilities and Net Worth $29,040 100.0% Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2017 (First Six Months of Marriage) Cash Flow Dollars Percent INCOME Harry's gross income 24,480 37.1% Belinda's gross income 38,400 58.1% Interest 180 0.3% Harry's trust fund 3,000 4.5% Total Income $66,060 100.0% EXPENDITURES Fixed Expenses Rent 9,600 14.5% Health insurance 1,800 2.7% Life insurance 120 0.2% Renter's insurance 220 0.3% Automobile insurance 600 0.9% Auto loan payments 2,940 4.5% Student loan payments 1,800 2.7% Cable TV and Internet 960 1.5% Savings/emergencies 960 1.5% Harry's retirement plan 1,170 1.8% Belinda's retirement plan 2,400 3.6% Federal income taxes 10,200 15.4% State income taxes 3,000 4.5% Social Security taxes 4,640 7.0% Automobile registration 300 0.5% Total Fixed Expenses 40,710 61.6% Variable Expenses Savings money market fund $ 3,000 4.5% Food (home) 3,800 5.8% Food (out) 1,860 2.8% Utilities 1,320 2.0% Cell phones 660 1.0% Auto gas/maintenance/repairs 1,150 1.7% Doctor's and dentist's bills 1,140 1.7% Medicines 350 0.5% Clothing and upkeep 1,200 1.8% Church and charity 550 0.8% Gifts 1,070 1.6% Public transportation 940 1.4% Personal allowances 2,400 3.6% Entertainment 960 1.5% Family holiday trip 780 1.2% Summer vacation 1,200 1.8% Miscellaneous 560 0.8% Total Variable Expenses $22,940 34.7% Total Expenses $63,650 96.3% SURPLUS (DEFICIT) 130 0.2% Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets. Using the data from the cash-flow statement developed by Harry and Belinda, calculate the following financial ratios. Round your answers to two decimal places. Liquidity ratio % Asset-to-debt ratio % Debt-to-income ratio % Debt payments-to-disposable income ratio % Investment assets-to-total assets ratio % What do these ratios tell you about the Johnsons' financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new vehicle loan?
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 minutes 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. Fortunately each had taken a college course in personal finance. After initial discussion, they worked together for three evenings to develop the financial statements presented below. Note that the cash flow statement covered the first six months of their marriage. Balance Sheet for Harry and Belinda Johnson January 1, 2018 ASSETS Monetary Assets Cash on hand 1,110 3.8% Savings (First Credit Union) 1,200 4.1% Savings (Far West Savings Bank) 4,000 13.8% Savings (Homestead credit union) 2,260 7.8% Checking account (First Credit Union) 2,100 7.2% Total monetary assets $10,670 36.7% Tangible Assets Automobile (3-year old Toyota) 11,000 37.9% Personal property 2,100 7.2% Furniture 1,600 5.5% Total tangible assets $14,700 50.6% Investment Assets Harry's retirement account 1,170 4.0% Belinda's retirement account 2,500 8.6% Total investment assets $ 3,670 12.6% Total Assets $29,040 100.0% LIABILITIES Short-Term Liabilities Visa credit card 390 1.3% Target credit card 45 0.2% Dental bill 410 1.4% Total short-term liabilities $ 845 2.9% Long-Term Liabilities Vehicle loan (First Credit Union) 13,800 47.5% Student loan (Belinda) 8,000 27.5% Total long-term liabilities $21,800 75.1% Total Liabilities $22,645 78.0% Net Worth $ 6,395 22.0% Total Liabilities and Net Worth $29,040 100.0% Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2017 (First Six Months of Marriage) Cash Flow Dollars Percent INCOME Harry's gross income 24,480 37.1% Belinda's gross income 38,400 58.1% Interest 180 0.3% Harry's trust fund 3,000 4.5% Total Income $66,060 100.0% EXPENDITURES Fixed Expenses Rent 9,600 14.5% Health insurance 1,800 2.7% Life insurance 120 0.2% Renter's insurance 220 0.3% Automobile insurance 600 0.9% Auto loan payments 2,940 4.5% Student loan payments 1,800 2.7% Cable TV and Internet 960 1.5% Savings/emergencies 960 1.5% Harry's retirement plan 1,170 1.8% Belinda's retirement plan 2,400 3.6% Federal income taxes 10,200 15.4% State income taxes 3,000 4.5% Social Security taxes 4,640 7.0% Automobile registration 300 0.5% Total Fixed Expenses 40,710 61.6% Variable Expenses Savings money market fund $ 3,000 4.5% Food (home) 3,800 5.8% Food (out) 1,860 2.8% Utilities 1,320 2.0% Cell phones 660 1.0% Auto gas/maintenance/repairs 1,150 1.7% Doctor's and dentist's bills 1,140 1.7% Medicines 350 0.5% Clothing and upkeep 1,200 1.8% Church and charity 550 0.8% Gifts 1,070 1.6% Public transportation 940 1.4% Personal allowances 2,400 3.6% Entertainment 960 1.5% Family holiday trip 780 1.2% Summer vacation 1,200 1.8% Miscellaneous 560 0.8% Total Variable Expenses $22,940 34.7% Total Expenses $63,650 96.3% SURPLUS (DEFICIT) 130 0.2% Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets. Using the data from the cash-flow statement developed by Harry and Belinda, calculate the following financial ratios. Round your answers to two decimal places. Liquidity ratio % Asset-to-debt ratio % Debt-to-income ratio % Debt payments-to-disposable income ratio % Investment assets-to-total assets ratio % What do these ratios tell you about the Johnsons' financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new vehicle loan?
Chapter3: Financial Statements, Tools, And Budgets
Section: Chapter Questions
Problem 1FPC
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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 minutes 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. Fortunately each had taken a college course in
| Balance Sheet for Harry and Belinda Johnson | ||||
| January 1, 2018 | ||||
| ASSETS | ||||
| Monetary Assets | ||||
| Cash on hand | 1,110 | 3.8% | ||
| Savings (First Credit Union) | 1,200 | 4.1% | ||
| Savings (Far West Savings Bank) | 4,000 | 13.8% | ||
| Savings (Homestead credit union) | 2,260 | 7.8% | ||
| Checking account (First Credit Union) | 2,100 | 7.2% | ||
| Total monetary assets | $10,670 | 36.7% | ||
| Tangible Assets | ||||
| Automobile (3-year old Toyota) | 11,000 | 37.9% | ||
| Personal property | 2,100 | 7.2% | ||
| Furniture | 1,600 | 5.5% | ||
| Total tangible assets | $14,700 | 50.6% | ||
| Investment Assets | ||||
| Harry's retirement account | 1,170 | 4.0% | ||
| Belinda's retirement account | 2,500 | 8.6% | ||
| Total investment assets | $ 3,670 | 12.6% | ||
| Total Assets | $29,040 | 100.0% | ||
| LIABILITIES | ||||
| Short-Term Liabilities | ||||
| Visa credit card | 390 | 1.3% | ||
| Target credit card | 45 | 0.2% | ||
| Dental bill | 410 | 1.4% | ||
| Total short-term liabilities | $ 845 | 2.9% | ||
| Long-Term Liabilities | ||||
| Vehicle loan (First Credit Union) | 13,800 | 47.5% | ||
| Student loan (Belinda) | 8,000 | 27.5% | ||
| Total long-term liabilities | $21,800 | 75.1% | ||
| Total Liabilities | $22,645 | 78.0% | ||
| Net Worth | $ 6,395 | 22.0% | ||
| Total Liabilities and Net Worth | $29,040 | 100.0% |
| Cash-Flow Statement for Harry and Belinda Johnson July 1-December 31, 2017 (First Six Months of Marriage) | ||||
| Cash Flow | Dollars | Percent | ||
| INCOME | ||||
| Harry's gross income | 24,480 | 37.1% | ||
| Belinda's gross income | 38,400 | 58.1% | ||
| Interest | 180 | 0.3% | ||
| Harry's trust fund | 3,000 | 4.5% | ||
| Total Income | $66,060 | 100.0% | ||
| EXPENDITURES | ||||
| Fixed Expenses | ||||
| Rent | 9,600 | 14.5% | ||
| Health insurance | 1,800 | 2.7% | ||
| Life insurance | 120 | 0.2% | ||
| Renter's insurance | 220 | 0.3% | ||
| Automobile insurance | 600 | 0.9% | ||
| Auto loan payments | 2,940 | 4.5% | ||
| Student loan payments | 1,800 | 2.7% | ||
| Cable TV and Internet | 960 | 1.5% | ||
| Savings/emergencies | 960 | 1.5% | ||
| Harry's retirement plan | 1,170 | 1.8% | ||
| Belinda's retirement plan | 2,400 | 3.6% | ||
| Federal income taxes | 10,200 | 15.4% | ||
| State income taxes | 3,000 | 4.5% | ||
| Social Security taxes | 4,640 | 7.0% | ||
| Automobile registration | 300 | 0.5% | ||
| Total Fixed Expenses | 40,710 | 61.6% | ||
| Variable Expenses | ||||
| Savings |
$ 3,000 | 4.5% | ||
| Food (home) | 3,800 | 5.8% | ||
| Food (out) | 1,860 | 2.8% | ||
| Utilities | 1,320 | 2.0% | ||
| Cell phones | 660 | 1.0% | ||
| Auto gas/maintenance/repairs | 1,150 | 1.7% | ||
| Doctor's and dentist's bills | 1,140 | 1.7% | ||
| Medicines | 350 | 0.5% | ||
| Clothing and upkeep | 1,200 | 1.8% | ||
| Church and charity | 550 | 0.8% | ||
| Gifts | 1,070 | 1.6% | ||
| Public transportation | 940 | 1.4% | ||
| Personal allowances | 2,400 | 3.6% | ||
| Entertainment | 960 | 1.5% | ||
| Family holiday trip | 780 | 1.2% | ||
| Summer vacation | 1,200 | 1.8% | ||
| Miscellaneous | 560 | 0.8% | ||
| Total Variable Expenses | $22,940 | 34.7% | ||
| Total Expenses | $63,650 | 96.3% | ||
| SURPLUS (DEFICIT) | 130 | 0.2% |
- Briefly describe how Harry and Belinda probably determined the fair market prices for each of their tangible and investment assets.
- Using the data from the cash-flow statement developed by Harry and Belinda, calculate the following financial ratios. Round your answers to two decimal places.
Liquidity ratio % Asset-to-debt ratio % Debt-to-income ratio % Debt payments-to-disposable income ratio % Investment assets-to-total assets ratio %
What do these ratios tell you about the Johnsons' financial situation? Should Harry and Belinda incur more debt, such as credit cards or a new vehicle loan?
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