STATEMENT OF CASH FLOWS Nigel and Elizabeth Buckingham January 1, 2016 to Decemb
ID: 2593946 • Letter: S
Question
STATEMENT OF CASH FLOWS
Nigel and Elizabeth Buckingham
January 1, 2016 to December 31, 2016
(Expected to be similar in 2017)
CASH INFLOWS
Salaries
Nigel – salary
$
39,000
Elizabeth – salary
30,000
Investment income*
1,635
Total inflows
$
70,635
CASH OUTLOWS
Savings – house down payment
$
1,800
Reinvestment of investment income
1,635
401(k) contribution
1,170
Total Savings
$
4,605
FIXED OUTFLOWS
Child Support
$
6,000
Life insurance payment (to trustee)
2,100
Rent
9,900
Renters insurance
720
Utilities
1,080
Telephone (home)
540
Telephones (cell)
900
Auto payment principal and interest
5,400
Auto insurance
4,950
Gas, oil, maintenance
3,600
Student loans
3,600
Credit card debt
4,500
Furniture payments
1,952
Total fixed outflows
$
45,242
VARIABLE OUTFLOWS
Taxes – Nigel FICA
$
2,984
Taxes – Elizabeth FICA
2,295
Taxes – federal tax withheld
7,393
Food
4,800
Clothing
1,500
Entertainment/vacation
1,920
Total variable outflows
$
20,892
Total cash outflows
$
70,739
Discretionary cash flows (negative)
$
(104)
*$510 from dividends and $1,125 from other investment sources.
STATEMENT OF FINANCIAL POSITION
Nigel and Elizabeth Buckingham
January 1, 2017
ASSETS1
LIABILITIES AND NET WORTH
Cash and equivalents
Liabilities2
Cash
$
500
Credit card 1
$
8,000
Savings account
1,000
Credit card 2
1,862
Total cash and equivalents
$
1,500
Student loan – Nigel3
45,061
Auto loan – Elizabeth
21,179
Invested assets
Furniture loan
2,300
Federal Express stock (100 shares)4
$
5,000
Total liabilities
$
78,402
TECHO stock (100 shares)
7,200
Growth mutual fund
13,900
401(k) account
1,500
Net worth
$
(78)
Total invested assets
$
27,600
Use assets
Auto – Elizabeth
$
26,474
Truck – Nigel
4,000
Motorcycle – Elizabeth
1,000
Personal property and furniture
17,750
Total use of assets
$
49,224
Total assets
$
78,324
Total liabilities and net worth
$
78,324
Notes to Financial Statements
1Assets are stated at fair market value.
2Liabilities are stated at principal only as of January 1, 2017, before January payments
3Nigel’s parents took out the student loans, but he is repaying them. Nigel paid $2,732 in interest in 2016.
4Federal Express’s current dividend is $3.40 per share.
-----------------------
Calculate the following financial ratios for the Buckinghams
a. Liquid Assets / Debt Payments-
b. Net Worth / Total Assets-
c. Total Debt / Total Assets-
d. Annual Housing and Debt Payments / Annual Gross Income-
e. Annual Savings / Annual Gross Income-
STATEMENT OF CASH FLOWS
Nigel and Elizabeth Buckingham
January 1, 2016 to December 31, 2016
(Expected to be similar in 2017)
CASH INFLOWS
Salaries
Nigel – salary
$
39,000
Elizabeth – salary
30,000
Investment income*
1,635
Total inflows
$
70,635
CASH OUTLOWS
Savings – house down payment
$
1,800
Reinvestment of investment income
1,635
401(k) contribution
1,170
Total Savings
$
4,605
FIXED OUTFLOWS
Child Support
$
6,000
Life insurance payment (to trustee)
2,100
Rent
9,900
Renters insurance
720
Utilities
1,080
Telephone (home)
540
Telephones (cell)
900
Auto payment principal and interest
5,400
Auto insurance
4,950
Gas, oil, maintenance
3,600
Student loans
3,600
Credit card debt
4,500
Furniture payments
1,952
Total fixed outflows
$
45,242
VARIABLE OUTFLOWS
Taxes – Nigel FICA
$
2,984
Taxes – Elizabeth FICA
2,295
Taxes – federal tax withheld
7,393
Food
4,800
Clothing
1,500
Entertainment/vacation
1,920
Total variable outflows
$
20,892
Total cash outflows
$
70,739
Discretionary cash flows (negative)
$
(104)
*$510 from dividends and $1,125 from other investment sources.
Explanation / Answer
Liquidity Ratio:
In accounting, the term liquidity is defined as the ability of a company to meet its financial obligations as they come due. The liquidity ratio, then, is a computation that is used to measure a company's ability to pay its short-term debts. There are three common calculations that fall under the category of liquidity ratios. The current ratio is the most liberal of the three. It is followed by the acid ratio, and the cash ratio. These three ratios are often grouped together by financial analysts when attempting to accurately measure the liquidity of a company.
Current Ratio:
The current ratio indicates a company's ability to pay its current liabilities from its current assets. This ratio is one used to quickly measure the liquidity of a company. The formula for the current ratio is:
Current Ratio = Current Assets ÷ Current Liabilities
Note that this formula considers all current assets and current liabilities. Current assets are those assets that are expected to turn into cash within one year. Examples of current assets are cash, accounts receivable, and prepaid expenses. Also included in this category are marketable securities such as government bonds and certificates of deposit. Current liabilities are those debts that are expected to be paid or come due within a year. Examples of current liabilities are accounts payable, payroll liabilities, and short-term notes payable.
Fixed Assets to Net Worth:
Fixed assets to net worth is a ratio measuring the solvency of a company. This ratio indicates the extent to which the owners' cash is frozen in the form of fixed assets, such as property, plant, and equipment, and the extent to which funds are available for the company's operations (i.e. for working capital).
Calculation (formula):
Fixed assets to Net Worth = Net fixed assets / Net worth
Norms and Limits:
Fixed assets to net worth ratio 0.75 or higher is usually undesirable, as it indicates that the firm is vulnerable to unexpected events and changes in the business climate. But the term "fixed assets" (non-GAAP term) has different interpretations so it's difficult to use and compare this ratio. That is why weprefer to use similar ratio "Non-current assets to net worth" implicating IFRS term "Non-current assets".
Total debt to total assets:
Total debt to total assets is a leverage ratio that defines the total amount of debt relative to assets. This enables comparisons of leverage to be made across different companies. The higher the ratio, the higher the degree of leverage, and consequently, financial risk. This is a broad ratio that includes long-term and short-term debt (borrowings maturing within one year), as well as all assets – tangible and intangible.
The debt to total assets ratio is an indicator of financial leverage. It tells you the percentage of total assets that were financed by creditors, liabilities, debt.
Debt-to-income ratio:
A personal finance measure that compares an individual’s debt payment to his or her overall income. A debt-to-income ratio (DTI) is one way lenders (including mortgage lenders) measure an individual’s ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
A low debt-to-income ratio demonstrates a good balance between debt and income. Conversely, a high DTI can signal that an individual has too much debt for the amount of income he or she has. According to studies of mortgage loans, borrowers who have lower DTIs are more likely to successfully manage monthly debt payments, so lenders prefer to see low numbers.
Savings-to-Income Ratio
How much of your income are you allocating to savings? This ratio will help you gauge that.
Savings-to-income Ratio = amount saved ÷ annual income
This information is located on the cash flow statement. We can see that this couple puts $12,000 per year in their 401(K) and another $6,000 per year away in investment plans. We will assume that the $4,500 going into education is funding education expenses and is not considered “savings.” The annual income for this couple is $107,000, for the following equation:
Savings-to-income Ratio = ($12,000 + $6,000) ÷ $107,000
Savings-to-income Ratio = $18,000 ÷ $107,000
Savings-to-income Ratio = .1682 or 16.82%
This couple is currently saving nearly 17% of their income. This is a good amount to be saving, especially when you consider the fact that they are paying off their mortgage and student loans. Once these two obligations are taken care of, this couple should be able to save an even higher percentage.
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