Question

Accountancy

Liam and Marta live in London. Both are teachers, with Liam in full time and Martart-time paid employment. When they bought a flat together in June 2018 the mortgage broker talked them through repayment and interest-only mortgages. They decided to use their savings as a deposit and chose a repayment mortgage, which by June 2020 was standing at £100,000. The market value of their flat had increased by 10% over this time period on the original purchasing price of £110,000.

Together, in June 2020 the couple earn a net monthly income of £4000 and their expenditure has averaged £4200 a month over the last two years. In June 2020 their car loan is down from £4,000 to £2,500, their current account balance has dropped to zero and they have an overdraft on their current account of £1500. Meanwhile their savings account holds just £300. They also owe £3000 on a credit card. The rest of their balance sheet has not changed since June 2018.  

They are reviewing their finances as they are considering improving their home by installing a new kitchen.

Table 1 shows their balance sheet and financial ratios in June 2018.

Table 1 Liam and Marta’s household balance sheet – June 2018


June 2018

Assets

113,120

Liquid assets

3,120

Cash

120

Current account

2,000

Instant access savings account(s)

1,000

Other liquid assets

0

Other assets

110,000

Home

110,000



Liabilities

110,000

Short-term liabilities

1,000

Overdraft

0

Credit card

1,000

Other short-term liabilities

0

Other liabilities

109,000

Personal loans

4,000

Mortgage

105,000



Ratios


Net worth / wealth

3,120

Current asset ratio

3.12

Leverage ratio

97.24

 Using the information provided in Table 1, complete the couple’s balance sheet for June 2020.


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Answer #1
  • Below is analysis of couple`s financial situation using Financial ratios:
    • Net Worth: Couple`s networth has been increase over the period of two years by 11,300,mainly due to increase in market value of the flat by 10%. It is positive sign of better financial situation.
    • Current Asset Ratio: Couple`s current assets ratio is down to 0.09 in June-2020.which is showing worst financial liquidity situation.Maintainig certain level liquidity is essential to ward off any unforeseen financial hardships.
      • Here,Couple`s monthly shortage is 200 ( 4200 - 4000) as their monthly income is not sufficient to pay off their monthly expense. which is Negative sign of Financial situation.
    • Leverage Ratio: Couple`s leverage ratio is lower by 9.12% compare to June-2018,which is positive sign of better financial situation as this ratio is showing increase in Value of total assets as compare to increase in value of liabilities.
  • On the basis of above Analysis,couple should not take decision to improve their home.

Liam and Martas household balance sheet Jun-2018 Jun-2020 Assets 113, 120 121,420 Liquid Assets 3,120 420 Cash 120 120 Curre

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