Chapter 02 - Using Financial Statements and Budgets

9) Aspects of budgeting The following statements describe various aspects of budgeting. Indicate whether each statement is true or false. True or False: When estimating expenses, developing an amount that one can live within is the best approach.

False

5) Check the correct category for each of the following items. Note: for purposes of this exercise, consider cash in and out for this couple regardless of whether the item is for personal or business use. 1) Cost of business meals 2) Annual bonus 3) Plumbing bill

1) Cash Out/Expense 2) Cash In/Income 3) Cash Out/Expense

3) 1) Property taxes, current year 2) Car insurance 3) Two-year loan to purchase investment securities 4) A college-level educational loan 5) Outstanding principal on your primary residence not due in the current year

1) Current Liability 2) Current Liability 3) Long-Term Liability 4) Long-Term Liability 5) Long-Term Liability

2) Choose the correct category for each asset in the following table. 1) Pearl necklace 2) The brick patio in your backyard 3) Fur coat 4) Money market fund 5) Your house 6) Money stuffed in a mattress 7) 401(k) 8) Rental property in Playa Negra, Costa Rica

1) Personal Property 2) Real Property 3) Personal Property 4) Liquid Assets 5) Real Property 6) Liquid Assets 7) Investments 8) Investments

10) Pedro and Lucy started to create a budget (based on last year's income and expense statement) but got stuck. They know that you have learned how to create budgets and are asking for your help. They would like you to input the correct values for the first three months of next year 1) Pedro's Salary 2) Total Income 3) Rent 4) Food 5) Automobile 6) Insurance 7) Fun Money 8) Cash surplus (deficit) 9) Cumulative Surplus (deficit)

March Column: 1) $1,313 2) $2,494 3) $450 4) $25 5) $360 6) $225 7) $208 8) $828 9) $2,934

10) This is because: (Looking at the completed budget, what single item would you recommend that they add to their budget? = Savings and Investments)

The couple needs to budget for contingencies and save for future goals.

7) Financial statement ratios play an important role in understanding and interpreting financial data. The solvency, liquidity, savings, and debt service ratios are important tools that will provide you with information, helping you chart and improve your personal financial planning. Complete the equations for each of the following financial statement ratios. Solvency RatioSolvency Ratio = _____________ / ______________ Liquidity RatioLiquidity Ratio = _______________ / ________________ Savings Ratio = _____________ / ________________ Debt Service Ratio = _______________ / __________________

Total Net Worth / Total Assets Total Liquid Assets / Total Current Debts Cash Surplus / Income after taxes Total Monthly Loan Payments / Monthly Gross Income

2) As you gather asset information, it is important to identify and record all assets. Regardless of asset category, all assets listed on the balance sheet should be recorded at _________________________.

fair market value

2) The items you own, or your _________, are classified regardless of whether they were purchased for cash or financed with debt. A useful way to group assets is on the basis of their underlying categories: liquid assets, investments, real property, and personal property.

assets

4) With their balance sheet in place, Andy and Kim can compare their total liabilities to their total assets to generate a more realistic view of their current wealth position. The Federal Reserve Bulletin provides data on median net worth, broken down by age brackets. - Based on the Federal Reserve Bulletin data, the Garzas are ________ the median net worth for their age group. - Their _____ would be considered their dominant asset. - Based on their liabilities, it ______________ appear that they have adequate liquid assets to meet their bill payments and to cover any small, unexpected expenses. - Their balance sheet lists their house at 8% higher than the purchase price. The equity in their home is __________________.

- above - home - does not - $122,000.16

5) If the equation results in a positive number, a ________________ exists. If the equation results in a negative number, a __________________ exists.

- cash surplus - cash deficit

9) Aspects of budgeting The following statements describe various aspects of budgeting. Indicate whether each statement is true or false. True or False: In situations where an annual budget deficit exists, cutting expenses from the budget is optimal.

True

9) Aspects of budgeting The following statements describe various aspects of budgeting. Indicate whether each statement is true or false. True or False: To finalize the budget, compare projected income to projected expenses. When income equals or exceeds total expenses, it is considered a balanced budget.

True

9) Aspects of budgeting The following statements describe various aspects of budgeting. Indicate whether each statement is true or false. True or False: When estimating income, include amounts that you can control, like bonuses and rental income.

True

2) The balance sheet equation and assets Preparing a personal balance or statement of financial position helps get a handle on your financial well-being. A balance sheet has three parts that, when taken together, summarize your financial picture. Complete the following balance sheet equation by selecting the correct term for each piece of the formula. (Total Assets) = (Total Liabilities) + (Net Worth)

What you own = What you owe + Your equity

3) Recall that the balance sheet equation states that net worth equals total assets minus total liabilities. Identifying assets and recording them is one of the first steps in balance sheet preparation. In some instances, assets are acquired with cash. In others, often large purchases, they are acquired by securing debt (for example, a bank loan or a department store charge). Regardless of how an asset is acquired, items purchased through financing have associated debt which is owed by you and must be repaid in the future. These items, or _____________, are generally classified according to maturity. Check the category to which each of the items belong.

liabilities

9) What is a budget? A budget is a ________________ report that helps achieve financial goals. A cash budget is a valuable money management tool that helps you:

short-term

10) Pedro and Lucy started to create a budget (based on last year's income and expense statement) but got stuck. They know that you have learned how to create budgets and are asking for your help. They would like you to input the correct values for the first three months of next year 1) Pedro's Salary 2) Lucy's Salary 3) Total Income 4) Rent 5) Puget Sound Energy 6) Verizon 7) Food 8) Automobile 9) Public transportation 10) Insurance 11) Parent's Loan 12) Fun Money 13) Total Expenses 14) Cash surplus (deficit) 15) Cumulative Surplus (deficit)

Total for Three Months: 1) $3,939 2) $3,543 3) $7, 482 4) $1,350 5) $150 6) $75 7) $270 8) $1,080 9) $600 10) $225 11) $174 12) $624 13) $4,548 14) $2,934 15) $2,934

11) Next use the following table of future value factors or your financial calculator to calculate the future value of this money in six years. The account will have a balance of $_______________ in six years (rounded to two decimal places).

$10,507.00

13) You just found out that you had a very eccentric uncle who lived quietly in the Bronx. He left you $25,000. You just saw the movie The Bucket List and have decided that you want to put some money away so that in 12 years, you can start fulfilling items on that list. With whatever money you have left, you'll pay off some bills. You have found an investment instrument that will pay 7% interest annually. Use the scenarios along with the following factor table data to answer each of the questions. Note that the complete Future Value and Future Value Annuity tables (as well as the Present Value and Present Value Annuity tables) are located in the appendix in your text. Now the 12 years have passed, and you are ready to pull some money out of your fund. You talked to your investment advisor who says you can take this money and move it into a fund that will earn 8% interest annually. And you envision tackling most of your bucket list items over the next 15 years. What is the annual amount you will have to spend for your bucket list activities?

$3,359

12) Wagner Family The Wagners have saved $5,000 towards their goal to have $50,000 for a down payment on a house in 6 years. They will put the $5,000 in an account along with money they will deposit annually. They don't know how much that annual deposit should be, so they've asked you to calculate it They have found a savings institution that will pay 6% interest. What is the amount of money the Wagners will need to deposit annually (rounded to the nearest two decimal places) to achieve their down-payment goal?

$6,154.95

12) Audette Family The Audettes have set a goal to have $50,000 for a down payment on a house in 6 years. They have not saved anything so far. They have asked you to calculate how much they will need to put away each year to achieve their $50,000 down-payment goal. They have found a savings institution that will pay 6% interest. What is the amount of money the Audettes will need to deposit annually (rounded to the nearest two decimal places) to achieve their down-payment goal?

$7,173.60

3) Now that you have an understanding of assets and liabilities, an easy formula can determine your net worth. Again, recalling that net worth equals total assets minus total liabilities, complete the following statements. - ____________: The fair market value of assets owned less liabilities owed - __________: The amount left after selling assets and paying off all liabilities - _____________: Net worth is less than zero

- Net worth - Equity - Insolvency

5) For example, your mortgage would be considered a _________ expense, because _______________________________________. Conversely, grocery bills would be considered ____________, because the actual amount is _______________.

- fixed - the payment amount is set by contract - variable - not known

5) Preparing an income and expense statement helps in answering the question, "Where does all my money go?" This statement takes __________ and subtracts ________________ to determine an individual's or a family's cash surplus or deficit situation.

- income - expenses

6) Good record keeping is an important discipline as you map out your financial goals. Imagine if you were notified of an IRS audit: How difficult would it be to get all the necessary past information together? If you have all the data in a single, well-organized place, however, you will be ready for any situation. How do you get organized? - One good record-keeping tip is to prepare your financial statements at least ________________. - Ideally, keeping _____________ will help you summarize all your transactions. - A ledger has sections where data is recorded for what you own or your ________ ; what you owe or your ________________ ; your cash inflows or your __________; and your cash outflows or your _______________

- once a year - a ledger - assets - liabilities - income - expenses

1) Personal Financial Planning: Statements, Reports, and Plans As you begin your journey toward financial security, it is important to develop road maps to help you navigate your route. Preparing and interpreting personal data is the cornerstone of personal financial planning. The following reports and statements constitute personal financial planning. Complete each definition. 1) ________________________ are the road maps used on the journey to financial security. 2) _________ are ____________________________, which are based on expected income and expenses. These reports are used to monitor and control spending habits. 3) ________________________________ are the umbrella under which important statements and reports reside. 4) One statement is the _______________, which outlines one's financial position. Essentially, this statement is comprised of ________ (things that are owned) less _____ (things that are owed), resulting in an individual's _________. 5) The other statement is the ____________________, which measures financial performance over a period of time.

1) - Financial plans 2) - budgets - forward looking reports 3) - Personal financial statements 4) - balance sheet - assets - debts - net worth 5) - income and expense statement

3) Acquiring assets by taking on debt is one way you can accumulate assets. And many of these loans will fall into the category of long-term liabilities. But, in order to present them on the balance sheet correctly, the following must be known about the loan. Complete each statement as it applies to loans. 1) Loans: Regardless of the type of loan, only the ____________________________________ is shown on the balance sheet. 2) The ________ loan balance is not what is currently owed but what ____________________________. 3) Loan amount: The portion of a loan listed as a liability on the balance sheet is only the ______________________.

1) - latest outstanding loan balance 2) - initial - was originally borrowed 3) - loan's principal

11) You have an eccentric aunt who has promised to deposit $7,000 in a savings account in your name. She has stated that you will not have access to the money for six years but that the money will be earning 7% interest. At the designated future date, the principal and interest will be yours to purchase a new car. First gather the relevant data by completing the following table. 1) Present Value: 2) Period: 3) Rate of Interest: 4) Future Value Factor:

1) $7,000 2) 6 3) 7.0% 4) 1.5

6) Skip and Jackie Garcia have been married for over two years. They have been trying to save for a down payment on a house, but they feel that there is never anything left over to save. They talked with their parents who suggested that they prepare an income and expense statement. Skip and Jackie put together the following worksheet. 1) Name: Jackie Garcia 2) Savings account 3) Total Income 4) Utilities - gas, electric, water 5) Auto loan: 6) Taxes - Skip's income and Social Security 7) (2) Total Expenses 8) Cash Surplus or Deficit (1 - 2)

1) 17,813 2) 16 3) 39,460 4) 1,740 5) 3,780 6) 3,375 7) 36,919 8) 2,541

9) Budgeting Examples For each of the following scenarios, indicate whether the individual made a correct choice or an incorrect choice when preparing a budget. 1) Nathan is a sales rep who, based on last year, averaged $2,200 of monthly commission before taxes. He should include this in his budget. 2) Stella was just notified that her contribution to the company's health plan is increasing by 3.5%. It's a company expense, so Stella doesn't include it in her budget. 3) As Sam was reconciling his checkbook, he realized that he incurred $13.25 last month for ATM withdrawals. He looked back at the last six months and realized that he averaged the same amount each month. This is an unexpected expense and shouldn't be listed in his budget. 4) Every year the Wus buy a big item or take a trip with a single annual bonus Barb receives. They included this in their budget.

1) Incorrect Choice 2) Incorrect Choice 3) Incorrect Choice 4) Correct Choice

10) Pedro and Lucy started to create a budget (based on last year's income and expense statement) but got stuck. They know that you have learned how to create budgets and are asking for your help. They would like you to input the correct values for the first three months of next year 1) Lucy's Salary 2) Total Income 3) Puget Sound Energy 4) Food 5) Public transportation 6) Parent's loan 7) Total expenses 8) Cash surplus (deficit) 9) Cumulative Surplus (deficit)

February Column: 1) $1,181 2) $2,494 3) $50 4) $90 5) $200 6) $58 7) $1,441 8) $1,053 9) 2,106

2) You are calculating your net worth, and you have determined that your assets total $110,000, and your liabilities total $90,000. Your net worth is therefore _______________.

$20,000

13) You just found out that you had a very eccentric uncle who lived quietly in the Bronx. He left you $25,000. You just saw the movie The Bucket List and have decided that you want to put some money away so that in 12 years, you can start fulfilling items on that list. With whatever money you have left, you'll pay off some bills. You have found an investment instrument that will pay 7% interest annually. Use the scenarios along with the following factor table data to answer each of the questions. Note that the complete Future Value and Future Value Annuity tables (as well as the Present Value and Present Value Annuity tables) are located in the appendix in your text. What is the amount you should invest today to have $28,750 in 12 years?

$12,765

4) The following is a partial balance sheet for Andy and Kim Garza. Complete the balance sheet by determining their total assets, total current liabilities, long-term liabilities, and net worth. - Total Current Liabilities: - Total Long-Term Liabilities: - (1) Total Assets: - (2) Total Liabilities: - Net Worth (1) - (2) - Total Liabilities and Net Worth: Based on the completed balance sheet, the Garzas' net worth is _________________

- $4,917.99 - $39,999.84 - $176,085.77 - $44,917.83 - $131,167.94 - $176,085.77 - $131,167.94

6) Which of the following are important steps in financial record keeping? Check all that apply.

- Safely disposing of unneeded documents - Maintaining records for tax and insurance purposes

5) Categorize the expenses listed in the following table. 1) Internet access fees 2) Property taxes

1) fixed 2) fixed

10) Looking at the completed budget, what single item would you recommend that they add to their budget?

Savings and Investments

9) Aspects of budgeting The following statements describe various aspects of budgeting. Indicate whether each statement is true or false. True or False: To remedy a short-term budget surplus, shift additional income to a month where a deficit exists.

True

7) Dan Young has prepared his annual financial statements in order to analyze the data. The data provided are items from Dan's balance sheet and income and expense statement. Use the data provided to calculate Dan's financial statement ratios. Enter your answers as percentages rounded to two decimal places. For example, .15006 would be entered as "15.01%." Dan's solvency ratio: _______% Dan's liquidity ratio: _______% Dan's savings ratio: _______% Dan's debt service ratio: ______%

- 35.00% - 20.00% - 12.19% - 18.00%