Question

Terry and Evelyn Becker are a married couple in their mid-20s. Terry has a good start as an electrical engineer and Evelyn works as a sales representative. Since their marriage four years ago, Terry and Evelyn have been living comfortably. Their income has exceeded their expenses, and they have accumulated an enviable net worth. This includes $10,000 that they have built up in savings and investments. Because their income has always been more than enough for them to have the lifestyle they desire, the Beckers have done no financial planning.

Evelyn has just learned that she's pregnant. She's concerned about how they'll make ends meet if she quits work after their child is born. Each time she and Terry discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Evelyn can't understand his attitude because her income will be completely eliminated. To convince Evelyn that there's no need for concern, Terry points out that their expenses last year, but for the common stock purchase, were about equal to his take-home pay. With an anticipated promotion and an expected 10 percent pay raise, his income next year should exceed this amount. Terry also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their stock if they get in a bind. When Evelyn asks about the long-run implications for their finances, Terry says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Terry also emphasizes that Evelyn can go back to work in a few years if necessary.

Despite Terry's arguments, Evelyn feels that they should carefully examine their financial condition in order to do some serious planning. She has gathered the following financial information for the year ending December 31, 2017.

Salaries		Take-home Pay		Gross Salary
Terry		$52,500		$76,000
Evelyn		29,200		42,000
Item				Amount
Food				$5,902
Clothing				2,300
Mortgage payments, including property taxes of $1,400				11,028
Travel and entertainment card balances				1,600
Gas, electric, water expenses				1,990
Household furnishings				4,500
Telephone				640
Auto loan balance				4,650
Common stock investments				8,000
Bank credit card balances				275
Federal income taxes				22,472
State income tax				5,040
Social security contributions				9,027
Credit card loan payments				2,210
Cash on hand				85
2012 Nissan Sentra				14,600
Medical expenses (unreimbursed)				600
Homeowner's insurance premiums paid				1,300
Checking account balance				485
Auto insurance premiums paid				1,600
Transportation				2,800
Cable television				680
Estimated value of home				185,000
Trip to Europe				5,300
Recreation and entertainment				4,000
Auto loan payments				2,150
Money market account balance				2,400
Purchase of common stock				7,000
Addition to money market account				200
Mortgage on home				148,000

1. Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Beckers' balance sheet and income and expense statement for the year ending December 31, 2017. Enter all expense amounts as positive values.

   Balance Sheet
   Name(s): Terry & Evelyn Beckers				Date: December 31, 2017
   ASSETS				LIABILITIES
   Liquid assets:				Current liabilities:
   Cash on hand	$			Bank credit card balances	$
   In checking				Travel & entertainment card balances
   Money market funds and deposits
   Investments:				Long-term liabilities:
   Stocks				Primary residence mortgage
   				Auto loans
   Real Property:
   Primary residence
   Auto(s): 2012 Nissan				(II) TOTAL LIABILITIES	$
   Household furnishings
   				NET WORTH [(I) - (II)]	$
   (I) TOTAL ASSETS	$			TOTAL LIABILITIES & NET WORTH	$

   Income & Expense Statement
   Name(s): Terry and Evelyn Beckers
   For the Year	Ending		December 31, 2017
   INCOME			AMOUNT
   Terry		$
   Evelyn
   	TOTAL INCOME	$
   EXPENSES
   Mortgage payments		$
   Gas, electric, water
   Phone
   Cable TV
   Food
   Auto loan payments
   Transportation expense
   Medical expenses - unreimbursed
   Clothing expense
   Homeowner's insurance premiums
   Auto insurance premiums
   Income and Social Security taxes paid
   Vacation (Trip to Europe)
   Recreation and entertainment
   Credit card loan payments
   Purchase of common stock
   Addition to money market account
   	TOTAL EXPENSES	$
   	CASH SURPLUS (DEFICIT)	$

2. Comment on the Beckers' financial condition regarding (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. Round the answers to two decimal places. Enter your answers as a percentage.

   a.	Solvency ratio	%
   b.	Liquidity ratio	%
   c.	Savings ratio	%
   d.	Debt Service ratio	%

   If the Beckers continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.

   
   
3. Critically evaluate the Beckers' approach to financial planning. Point out any fallacies in Terry's observations, and be sure to mention (a) implications for the long term as well as (b) the potential impact of inflation in general and specifically on their net worth. What procedures should they use to get their financial house in order? Be sure to discuss the role that long- and short-term financial plans and budgets might play.
   

Answer 1

Balance Sheet
Assets	Amount	Liabilities	Amount
Cash on Hand	85	Current Liabilities
Cash in Checking	485	Bank Credit card balance	275
Money market account balance	2400	Travel card balance	1600
Investents		Long Term Liabilities
Stocks	7000	Primary residence Loan	148000
		Auto loan	4650
Real Property
Primary residence	185000
Personal property
Autos	14600	Total Liabilities	154525
Household furnishing	4500	Net worth	59545
Total Assets	214070	Total Liabilities and Net worth	214070

Income and Expense Statement

Wage Salaries	Terry	76000
	evelyn	42000
Total Income		118000
Expenses
Housing	Rent	11028
	Repair	-
Utilities	Gas	1990
	Phone	640
	Cable Tv	680
Food	Grocery	5902
Transportation	Auto Loan payment	2150
	gas oil repair	2800
Medical	Doctor	600
Clothing	Clothes	2300
Taxes	Fedral,State,Social security	36539
Insurance	Home Insurance	1300
	auto insurance	1600
Recreation	Vacation	5300
	Other recreation	4000
Other items	Purchase of stock	7000
	addition to money market	200
	credit card loan payment	2210
Total Expenses		86239
cash surplus		31761

Ratios
Solvency Ratios	Total Net worth/Total Assers	=59545/214070	27.81%
Liquidity Ratio	Liquid assets /current debts	=85+485+2070/275+1600	1.584
Savings ratio	Cash surplus/income tax	=31761/53371	59.51
debt service ratio	Monthly loan payment/monthly gross income	= 1098/9833	11.16

3. At this point the key to their future is maintaining two income family. Long term if if both income continue, the becker will build there net worth.

While inflation is the constant threat , the impact will be on there real property and large priced persona property They have a car and a house , thus until those must be replaced inflation must of less concerned to them.

With birth of child and evelyn quitting her job , the becker financial status will change.The information indicates that they are award of potential changes and that they think future financial status will be secured.