Question

Which of the following are fixed expenses (check all that apply)? A utility bill A monthly salary Groceries A membership at a golf course The principal part of a mortgage payment. Property Tax on a primary residence.

Answer 1

Fixed expenses refer to those expenses which will not change even if the sales volume increases or even if there is a change in activity level. They are paid regularly which may be monthly, yearly, weekly or quarterly. A utility bill refers to electricity bills, telephone bills, etc which are paid every month irrespective of the sales volume or the profits earned by a business. So, it is a fixed expense. A monthly salary is a fixed expense because the organization will have to pay a fixed amount to the employees irrespective of the hours worked by them. Groceries may not be treated as fixed expenses because there is no fixed period after which we need to incur such expenses. We cannot predict how much we have to pay each month for groceries and we also cannot predict when do we have to pay. It is only when the groceries are about to be exhausted that we plan to buy and restock them. So, it is not considered as a fixed expense. A membership at a golf course is also a fixed expense because we have to pay the monthly subscription fee in order to continue the membership. It will continue to be a fixed expense till the time we want to be a member of the golf course. The principal part of a mortgage payment is not a fixed expense as it is not considered as an expense. The payment of interest is the expense. The principal part is a reduction of a liability. Property Tax is charged by the local government. In this case, the property tax on a primary residence is a fixed cost because it has to incurred every year and does not change due to change in sales volume or production level of the business.

Cash outflow is the amount of cash flowing out of business due to its operations, investments or financing activities.. Interest on a mortgage payment is a cash outflow because it has been paid during a period. A utility bill is also a cash outflow as it is paid on a regular basis by the business. Interest on a savings account does not mean cash outflow because when you have a savings account, the bank pays you an interest, so no cash is flowing out of the business. A monthly salary is a cash outflow as the organization has to pay its employees every month. Groceries do not represent cash outflow because it is done for regular purposes, not for any operation, investment, or any financing activities of a business. Dividend payment on investments is a cash outflow because in order to pay the dividends the business needs to use its cash. It is part of the financing activities of business. A membership at a golf course is not a cash outflow in the context of a business as it does not require any payment relating to the operations of a business. A lottery win will definitely bring in cash. So, there is no question of cash flowing out.  

Financial plans are made to help make best decisions about money, cash inflow and outflow in a course of time so that the goals are achieved. So, the goals in a financial plan should be described in quantitative terms and defined qualitatively in terms of cost and timing of each goal. This is because when the cost should be incurred, when the goal is to be achieved, finding out the best possible means to earn profits with optimum costs involved definitely requires qualitative definition.

The Net Worth is the net value of assets that you own after subtracting the liabilities.So, we increase net worth either by increasing our assets or reducing our liabilities. Using a debit card to pay for a night of bowling decreases your assets. So, it does not increase net worth. Cash in GIC to pay off a student loan is considered to be increasing net worth as any investment is increasing the asset. Depositing cash in Tax free savings account is also increasing net worth for the same reason. Using a credit card to buy a cell phone does not affect net worth in any way because on one hand, money is decreasing and on the other a cell phone, which is an asset is increasing.