Question

Current income receipts – Expenditure out of current income = Change in holdings of financial assets – change in debt and equity outstanding.

Deficit Budget Unit: E>R; and so $\Delta$D > $\Delta$​​​​​​​FA

Surplus – Budget Unit: R>E and thus $\Delta$​​​​​​​FA> $\Delta$​​​​​​​D

Balanced Budget unit (BBU): R=E and therefore $\Delta$​​​​​​​D = $\Delta$​​​​​​​FA

Jack and Jill are small business owners who run a hot dog stand licensed to operate outside a business shopping district. They have been so successful that they believe a second a hot dog stand in the area also would be profitable . The capital expense to set it up would be $10,000 and they are conisdering several options. Use a spread sheet to evaluate these options . by inserting i) their receipts in column 1 ii) their expenses in column 2 iii) change in financial assets in column 3 and iv) change in their debt in column 4. State whether they would have a surplus-budget unit or a deficit-budget unit under each option.

a. Their sales for the month turn out to be $12,000 and their expenses are $9,500 they borrow $10,000 for the new hot dog stand.

b. Their sales for the month turn out to be $15,000 and their expenses $9,5000 they $5000 in stock and borrow the remaining funds needed to finance the new hot dog stand.

c. Their sales for the month turn out to be $8,000 and their expenses are $9,500 they choose neither to borrow any funds nor build the second hot dog stand.

d. Their sales for the month turn out to be $9500 and their expenses also are $9500 they use $5000 in their bank account (with no other assets and sales) to help finance the new hot dog stand.

Answer 1

a. Solution:

Receipts	Expenses	Change in Financial assets	Change in debt
12,000	9,500		7,500

Thus there would be a deficit budget

　

b. Solution:

Receipts	Expenses	Change in Financial assets	Change in debt
15,000	19,500	-5,000	500

Thus there would be a surplus budget

　

c. Solution:

Receipts	Expenses	Change in Financial assets	Change in debt
8,000		-1,500

Thus there would be a deficit budget

　

d. Solution:

Receipts	Expenses	Change in Financial assets	Change in debt
8,000	$19,500	-5,000	6,500

Thus there would be a deficit budget