Unit 2 Project

Learning Goals:

Understand how financial statements & ratios and basic tax fundamentals impact the financial planning process. Due to their limited knowledge in personal finance they are in a desperate need of your help! They want to know how well they are doing financially and how could they improve their situation.

Based on information they provided to you:

1. Construct their Balance Sheet and their Cash Flow Statement.

2. Calculate their financial well-being using the financial ratios.

3. Provide any recommendations if necessary.

David's Salary

$75,000

Rose's Salary

$55,000

Home value

$250,000

Mortgage payment

$15,000

Car' fair market value

$13,500

Checking Account balance

$10,000

Groceries

$4,000

Investment Account balance (that holds mutual funds)

$10,000

Car Loan Payment

$1,200

Past Due Utility Bill

$200

Utilities

$1,800

Credit Card balance

$5,000

Entertainment

$4,000

Car's loan balance

$2,000

Stamp Collection

$3,500

Gas

$2,700

Mortgage balance

$120,000

Credit Card payments

$3,300

Jewelry

$6,000

Savings set aside each year towards a new car

$500

Tax Refund

$1,000

Money Market Account balance

$5,500

401(k) Account balance

$6,000

Cash

$1,000

Auto Insurance payments

$900

Cash Flow Statement

(also known as Income Statement)

David and Rose Jones

January 1 - December 31

CASH INFLOWS

Income

Annual Amount

David's Salary

$75,000

Rose's Salary

$55,000

Total Cash Inflows

CASH OUTFLOWS

LIVING EXPENSES

Fixed Expenses

Annual Amount

Savings set aside each year towards a new car

$500

Auto Insurance payments

$900

Total Fixed Expenses

Variable Expenses

Total Variable Expenses

Total Living Expenses

NET UNIDENTIFIED CASH FLOW

David and Rose Jones

Balance Sheet as of December 31

ASSETS

LIABILITIES & NET WORTH

Monetary Assets

Amount

Current Liabilities

Amount

Total Current Liabilities

Total Monetary Assets

Long-Term Liabilities

Investment Assets

Total Investment Assets

Total Noncurrent Liabilities

Retirement Assets

Total Liabilities

Total Retirement Assets

Net Worth

Housing

Total Housing

Automobiles and Personal Property

Total Automobiles and Personal Property

Total Assets

Total Liabilities and Net Worth

Financial Well-Being Analysis

David and Rose Jones

RATIOS

Area

Calculation

Ratio

Recommended

Living Expenses Covered Ratio

Monetary Assets / Monthly Living Expenses

3 to 6 months

Debt Ratio

Total Liabilities / Total Assets

less than 1

Debt Service to Income Ratio

Annual Debt Payments / Gross Annual Income

less than 36%

Saving Ratio

Annual Savings / Annual Living Expenses

10% or more

Investment Assets to Total Assets Ratio

(Investment Assets + Retirement Assets) / Total Assets

10% or more

Based on your Financial Well-Being Analysis, how well is David and Rose managing their finances? Explain.

Do you see any areas of concern? If yes, provide recommendations on how can they improve.