BAF 143 Ch 2

Ryan and Nicole have ​$210,749 in​ assets, and the following​ liabilities: Mortgage ​$51,948 Car loan $3,356 Credit card balance $849 Student loans $17,191 Furniture note​ (6 months) $1,470 What are their current​ liabilities? What are their​ long-term liabilities? What is their net​ worth?

1) $2,319 2) $72,495 3) $135,935

Angela earns $2,340 per month before taxes in her​ full-time job and ​$1,050 before taxes in her​ part-time job. Her employers withhold about $911 per month from her checks to pay taxes. What is​ Angela's disposable​ income? Why is it important to track disposable​ income?

1) $2,479 2) Disposable income is typically the difference between gross income​ (salary) and income taxes. It is important to track disposable income for budgeting purposes.

Ryan and Nicole have the following​ assets: Fair Market Value Home ​$94,300 Cars $24,986 Furniture $15,337 Stocks $11,045 Savings account $5,365 Checking account $2,341 Bonds $18,261 Cash $746 Mutual funds $7,684 Land $21,125 What is the value of their liquid​ assets? What is the value of their household​ assets? What is the value of their​ investments?

1) $8,452 2) $134,623 3) $58,115

Which of the following is​ true?

Household assets include items normally owned by a household​, such as a car.

Cash inflows are monies paid in such​ as:

Interest and wages.

How can peer pressure affect your cash​ outflows?

Some people spend money to keep up with their peer group. They may buy cars or a house that is similar to their peers even though they cannot afford it which in turn leads to financial problems.

What two personal financial statements are most important to personal financial​ planning?

The personal cash flow statement and the personal balance sheet

The process of creating an annual budget begins​ with:

a monthly​ budget, is extended out for the​ year, and is adjusted to reflect anticipated changes in cash flows.

Net cash flows​ are:

cash inflows ​- cash outflows.

Liabilities represent

debt

long-term liabilities are:

debt that will take longer than a year to pay off

List your monthly cash outflows. Will everyone have similar cash​ outflows? ​Everyone's cash outflows will differ depending​ on:

family​ status, family​ size, age, and personal consumption behavior.

A budget is​ a:

forecast of cash inflows and cash outflows developed to determine whether your anticipated cash inflows are sufficient to meet your cash outflows.

Justin's stock portfolio increased in value during the​ year, and the balance on his mortgage declined. What happened to his net worth over the course of the​ year? ​Justin's net​ worth:

increased since his asset values increased and his liabilities decreased.

When a​ period's budget indicates a​ cash:

surplus​, you can determine the amount that you will have available to invest in additional assets determine the amount that you will have available to invest in additional assets.

How does a personal balance sheet help you track your net​ worth? Your personal balance sheet​ lists:

the market value of the things you own​ (assets) and also your current debts​ (liabilities). Your assets minus your liabilities is equal to your net worth.

What is a personal balance​ sheet? The personal balance sheet​ summarizes:

what you own, what you owe, and your net worth.

Angela's monthly disposable income is $3,109. She has monthly expenses of $2,734 (including recreational expenses of ($381​) and net cash flow of $375 per month. Angela makes a budget based on her personal cash flow statement. In two​ months, she must pay $448 for tags and taxes on her car. How will this payment affect her net cash flow for that month and how might Angela handle this​ situation?

​Angela's cash outflows will exceed her cash inflows by ​$73 for that month. She might take the amount out of​ savings, or she could set aside $36.50 for each of the next two months.

​Angela's disposable income is $2,219. Angela inspects her checkbook and her credit card bills and determines that she has the following monthly​ expenses: Rent $516 Internet $84 Electricity $92 Water $13 Cellular $40 Groceries $377 Car expenses $274 Health insurance $197 Clothing and personal items $152 Recreation $279 What is​ Angela's net cash​ flow?

$195 Worked solution Net cash flows help determine the amount of cash that can be allocated toward savings and other purposes. Net cash flows are equal to cash inflows​ (disposable income) minus cash outflows​ (expenses) and can be found using the following​ equation: Net Cash Flows=Cash Inflows−Cash Outflows The amount of​ Angela's disposable​ income, or cash​ inflows, each month is​ $2,219. Cash outflows are monthly expenses of rent ​($516​), internet ​($84​), electricity ​($92​), water ​($13​), cellular ​($40​), groceries ​($377​), car expenses ​($274​), health insurance ​($197​), clothing ​($152​), and recreation ​($279​). To calculate the cash​ outflows, use the following​ formula: Monthly Expenses = Rent + Internet + Electricity + Water + Cellular + Groceries + Car Expenses + Health Insurance + Clothing and Personal Items + Recreation ​ Therefore, MonthlyExpenses=$516+$84+$92+$13+$40+$377+$274+$197+$152+$279=$2,024 The total amount of​ Angela's monthly​ expenses, or cash​ outflows, is ​$2,024. ​ Therefore, the net cash flow is calculated​ as: Cash Flows=$2,219−$2,024=$195 ​ Angela's net cash flow is ​$195.

​Angela's monthly disposable income is $2,719. She has monthly expenses of $2,467 ​(including recreational expenses of ​$352​) and net cash flow of $252 per month. Angela makes a budget based on her personal cash flow statement. In two​ months, she must pay $302 for tags and taxes on her car. How much can Angela expect to save in the next 12​ months?

$2,722

Jarrod is a college student. All of​ Jarrod's disposable income is used to pay his​ college-related expenses. Although he has no liabilities​ (Jarrod is on a​ scholarship), he does have a credit card that he typically uses for emergencies. He and his friend went on a vacation in New York City costing ​1$,300​, which Jarrod charged to his credit card. Jarrod has ​$43 in his​ wallet, but his bank accounts are empty. Jarrod has an old TV worth about ​$194. ​Jarrod's other assets total about ​$157. What is​ Jarrod's debt-to-asset​ ratio? What does this indicate about​ Jarrod's financial​ position?

1) 329.95 ​percent, which indicates that if Jarrod loses his​ job, he would not be able to pay off his debt. Worked Solution Debt levels that exceed assets could result in an inability to cover upcoming debt payments. A​ debt-to-asset ratio greater than 100.00 percent implies a negative net worth and a potential for not being able to pay off a debt. Debt level can be measured relative to assets using the following​ equation: Debt-to-Asset Ratio = Total Liabilities / Total Assets × 100 Total liabilities include current and​ long-term liabilities and total assets include liquid​ assets, household​ assets, and investments. The amount of​ Jarrod's total liabilities is ​$1,300. To calculate​ Jarrod's total​ assets, use the following​ formula: Total Assets = Cash + TV + Other Assets ​ Therefore, Total Assets = $43 + $194 + $157 = $394 The amount of​ Jarrod's total assets is ​$394. ​Therefore, Debt-to-Asset Ratio = $1,300 / $394 × 100 = 329.95% Jarrod has a​ debt-to-asset ratio of 329.95​%. A​ debt-to-asset ratio greater than 100.00% implies a negative net worth and a potential for not being able to pay off a debt. If Jarrod loses his​ job, he would not be able to pay off his debt.

Remi and Raina will both receive ​$102,000 from their grandfather when they graduate college next month. Remi went to a public university and accumulated ​$30,000 in total student loan debt. Raina attended a private college and accumulated ​$178,000 in total debt. Assume that neither Remi or Raina have additional assets or debts other than those described here. Calculate the net worth of Remi and Raina after receiving their inheritance.

1) Remi's net worth after graduation is ​$72,000 2) Raina's net worth after graduation is ​$−76,000

Angela's monthly disposable income is $2,677. She has monthly expenses of $2,323 ​(including recreational expenses of ​$328​) and net cash flow of $354 per month. Angela makes a budget based on her personal cash flow statement. In two​ months, she must pay $422 for tags and taxes on her car. As a​ result, Angela can expect to save $3,826 in the next 12 months. Angela analyzes her personal budget and decides that she can reduce her recreational spending by ​$83 per month. How much will that increase her annual​ savings? What will her annual savings be​ now? Are there any other spending categories she might be able to​ reduce?

1) ​Angela's annual savings will increase by ​$996 2)Her annual savings will now be ​$4,822. 3) Yes. She could review her grocery list and clothing and personal items to see if she is purchasing any unnecessary items.