Personal Financial Planning Study Set 5

Business

Quiz 2 :

Developing Your Financial Statements and Plans

Quiz 2 :

Developing Your Financial Statements and Plans

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Use future or present value techniques to solve the following problems. a. Starting with $15,000, how much will you have in 10 years if you can earn 6 percent on your money If you can earn only 4 percent b. If you inherited $45,000 today and invested all of it in a security that paid a 7 percent rate of return, how much would you have in 25 years c. If the average new home costs $275,000 today, how much will it cost in 10 years if the price increases by 5 percent each year d. You think that in 15 years, it will cost $212,000 to provide your child with a 4-year college education. Will you have enough if you take $70,000 today and invest it for the next 15 years at 5 percent If you start from scratch, how much will you have to save each year to have $212,000 in 15 years if you can earn a 4 percent rate of return on your investments e. If you can earn 4 percent, how much will you have to save each year if you want to retire in 35 years with $1 million f. You plan to have $750,000 in savings and investments when you retire at age 60. Assuming that you earn an average of 8 percent on this portfolio, what is the maximum annual withdrawal you can make over a 25-year period of retirement
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Stan and Elizabeth Carpenter are preparing their 2016 cash budget. Help the Carpenters reconcile the following differences, giving reasons to support your answers. a. Their only source of income is Stan's salary, which amounts to $5,000 a month before taxes. Elizabeth wants to show the $5,000 as their monthly income, whereas Stan argues that his take-home pay of $3,917 is the correct value to show. b. Elizabeth wants to make a provision for fun money, an idea that Stan cannot understand. He asks, "Why do we need fun money when everything is provided for in the budget"
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Persons SC and EC are in the processing of preparing their cash budget for 2016. However, they have a few disagreements on how to do so.
a.
Person SC believes that their only source of income, Person SC's salary, should be listed at its gross amount of $5,000 a month. Person EC believes the cash budget show instead show the actual take home pay amount of $3,917 a month.
Person EC is correct. The cash budget should show the actual take home salary amount of $3,917 a month.
This is because the purpose of a cash budget is to show actual cash inflows - which is generally something that can be controlled. Budgeting for items such as taxes withheld, insurance contributions, and other paycheck withholdings is more difficult. Thus, including actual take home pay on the cash budget will give an accurate representation of a person's disposable income.
b.
Person EC wishes to include a category titled " fun money " in the cash budget, while Person SC believes that it is unnecessary.
Person EC is correct. Cash budgets should include a provision for fun money.
Fun money in a cash budget is money allocated to each family member to spend as they wish. Including this provision in their cash budget will give Person SC and EC some financial independence, as well as help to form a healthy family budget relationship.

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How can accurate records and control procedures be used to ensure the effectiveness of the personal financial planning process
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Accurate records and control procedures in financial planning process:
The effective control procedures and the efficient recording of the data help in effective financial planning. The recording and the controlling process should be done in the following ways:
• Prepare your financial statement at least once in a year.
• Good records help your spouse and relative in case of emergency.
• Prepare comprehensive list of the records of your funds, their locations and key advisers.
• The important and permanent documents should be kept in safe deposit box.
• Prepare the list of what you own and owe.
• Update your financial statements and review your financial progress.

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Put yourself 10 years into the future. Construct a fairly detailed and realistic balance sheet and income and expense statement reflecting what you would like to achieve by that time.
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Scott Bennett is preparing his balance sheet and income and expense statement for the year ending June 30, 2016. He is having difficulty classifying six items and asks for your help. Which, if any, of the following transactions are assets, liabilities, income, or expense items a. Scott rents a house for $1,350 a month. b. On June 21, 2016, Scott bought diamond earrings for his wife and charged them using his MasterCard. The earrings cost $900, but he hasn't yet received the bill. c. Scott borrowed $3,500 from his parents last fall, but so far, he has made no payments to them. d. Scott makes monthly payments of $225 on an installment loan; about half of it is interest, and the balance is repayment of principal. He has 20 payments left, totaling $4,500. e. Scott paid $3,800 in taxes during the year and is due a tax refund of $650, which he hasn't yet received. f. Scott invested $2,300 in some common stock.
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What is an income and expense statement What role does it serve in personal financial planning
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What is the balance sheet equation Explain when a family may be viewed as technically insolvent.
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Alex Mikhailov recently graduated from college and moved to Atlanta to take a job as a market research analyst. He was pleased to be financially independent and was sure that, with his $45,000 salary, he could cover his living expenses and have plenty of money left over to furnish his studio apartment and enjoy the wide variety of social and recreational activities available in Atlanta. He opened several department-store charge accounts and obtained a bank credit card. For a while, Alex managed pretty well on his monthly take-home pay of $2,893, but by the end of 2015, he was having trouble fully paying all his credit card charges each month. Concerned that his spending had gotten out of control and that he was barely making it from paycheck to paycheck, he decided to list his expenses for the past calendar year and develop a budget. He hoped not only to reduce his credit card debt but also to begin a regular savings program. Alex prepared the following summary of expenses for 2015: img After reviewing his 2015 expenses, Alex made the following assumptions about his expenses for 2016: 1. All expenses will remain at the same levels, with these exceptions: a. Auto insurance, auto expenses, gas and electricity, and groceries will increase 5 percent. b. Clothing purchases will decrease to $2,250. c. Phone and cable TV will increase $5 per month. d. Furniture purchases will decrease to $660, most of which is for a new television. e. He will take a one-week vacation to Colorado in July, at a cost of $2,100. 2. All expenses will be budgeted in equal monthly installments except for the vacation and these items: a. Auto insurance is paid in two installments due in June and December. b. He plans to replace the brakes on his car in February, at a cost of $220. c. Visits to the dentist will be made in March and September. 3. He will eliminate his bank credit card balance by making extra monthly payments of $75 during each of the first six months. 4. Regarding his income, Alex has just received a small raise, so his take-home pay will be $3,200 per month. Critical Thinking Questions 1. a. Prepare a preliminary cash budget for Alex for the year ending December 31, 2016, using the format shown in Worksheet 2.3. b. Compare Alex's estimated expenses with his expected income and make recommendations that will help him balance his budget. 2. Make any necessary adjustments to Alex's estimated monthly expenses, and revise his annual cash budget for the year ending December 31, 2016, using Worksheet 2.3. 3. Analyze the budget and advise Alex on his financial situation. Suggest some long-term, intermediate, and short-term financial goals for Alex, and discuss some steps he can take to reach them. REFERENCE: img
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Explain what cash basis means in this statement: "An income and expense statement should be prepared on a cash basis." How and where are credit purchases shown when statements are prepared on a cash basis
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Distinguish between fixed and variable expenses , and give examples of each.
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Financial statements reflect your financial condition. They help you measure where you are now. Then, as time passes and you prepare your financial statements periodically, you can use them to track your progress toward financial goals. Good financial statements are also a must when you apply for a loan. This project will help you to evaluate your current financial condition. Look back at the discussion in this chapter on balance sheets and income and expense statements, and prepare your own. If you're doing this for the first time, it may not be as easy as it sounds! Use the following questions to help you along. 1. Have you included all your assets at fair market value (not historical cost) on your balance sheet 2. Have you included all your debt balances as liabilities on your balance sheet (Don't take your monthly payment amounts multiplied by the number of payments you have left-this total includes future interest.)3. Have you included all items of income on your income and expense statement (Remember, your paycheck is income and not an asset on your balance sheet.)4. Have you included all debt payments as expenses on your income and expense statement (Your phone bill is an expense for this month if you've already paid it. If the bill is still sitting on your desk staring you in the face, it's a liability on your balance sheet.)5. Are there occasional expenses that you've forgotten about, or hidden expenses such as entertainment that you have overlooked Look back through your checkbook, spending diary, or any other financial records to find these occasional or infrequent expenses. 6. Remember that items go on either the balance sheet or the income and expense statement, but not on both. For example, the $350 car payment you made this month is an expense on your income and expense statement. The remaining $15,000 balance on your car loan is a liability on your balance sheet, while the fair market value of your car at $17,500 is an asset. After completing your statements, calculate your solvency, liquidity, savings, and debt service ratios. Now, use your statements and ratios to assess your current financial condition. Do you like where you are If not, how can you get where you want to be Use your financial statements and ratios to help you formulate plans for the future.
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Use Worksheet 2.2. Ross and Cindy Adams are about to construct their income and expense statement for the year ending December 31, 2015. They have put together the following income and expense information for 2015: img img Using the information provided, prepare an income and expense statement for the Adamses for the year ending December 31, 2015 (follow the form shown in Worksheet 2.2). img
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Is it possible to have a cash deficit on an income and expense statement If so, how
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Rob and Lisa Lawrence are a married couple in their mid-20s. Rob has a good start as an electrical engineer and Lisa works as a sales representative. Since their marriage four years ago, Rob and Lisa have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Lawrences have done no financial planning. Lisa has just learned that she's two months pregnant. She's concerned about how they'll make ends meet if she quits work after their child is born. Each time she and Rob discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Lisa can't understand his attitude because her income will be completely eliminated. To convince Lisa that there's no need for concern, Rob points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Rob also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Lisa asks about the long-run implications for their finances, Rob says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Rob also emphasizes that Lisa can go back to work in a few years if necessary. Despite Rob's arguments, Lisa feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2015: img img Critical Thinking Questions 1. Using this information and Worksheets 2.1 and 2.2, construct the Lawrences' balance sheet and income and expense statement for the year ending December 31, 2015. 2. Comment on the Lawrences' financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Lawrences continue to manage their finances as described, what do you expect the long-run consequences to be Discuss. 3. Critically evaluate the Lawrences' approach to financial planning. Point out any fallacies in Rob's arguments, and be sure to mention (a) implications for the long term, as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order Be sure to discuss the role that long- and short-term financial plans and budgets might play. (Reference Worksheets 2.1 and 2.2) img img
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Explain two ways in which net worth could increase (or decrease) from one period to the next.
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What are the two types of personal financial statements What is a budget, and how does it differ from personal financial statements What role do these reports play in a financial plan
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Here is a portion of Ralph Grissom's budget record for April 2016. Fill in the blanks in columns 5 and 6. img
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Use Worksheet 2.3. Prepare a record of your income and expenses for the last 30 days; then prepare a personal cash budget for the next three months. (Use the format in Worksheet 2.3, but fill out only three months and the Total column.) Use the cash budget to control and regulate your expenses during the next month. Discuss the impact of the budget on your spending behavior, as well as any differences between your expected and actual spending patterns. REFERENCE: img
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Describe the balance sheet, its components, and how you would use it in personal financial planning. Differentiate between investments and real and personal property.
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Use Worksheet 2.1. Teresa Blankenship's banker has asked her to submit a personal balance sheet as of June 30, 2015, in support of an application for a $6,000 home improvement loan. She comes to you for help in preparing it. So far, she has made the following list of her assets and liabilities as of June 30, 2015: img From the data given, prepare Teresa Blankenship's balance sheet, dated June 30, 2015 (follow the balance sheet form shown in Worksheet 2.1). Then evaluate her balance sheet relative to the following factors: (a) solvency, (b) liquidity, and (c) equity in her dominant asset. REFERENCE : img
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