Critical Thinking Case 1 The Webbs' Version of Financial Planning 23.67 Ashton and Melody Webb are a married couple in their mid-20s. Ashton has a good start as an electrical engineer and Melody works as a sales representative. Since their marriage four years ago, Ashton and Melody 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 Webbs have done no financial planning. Melody 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 Ashton discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Melody can't understand his attitude because her income will be completely eliminated. To convince Melody that there's no need for concern, Ashton 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. Ashton 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 Melody asks about the long-run implications for their finances, Ashton says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Ashton also emphasizes that Melody can go back to work in a few years if necessary. Despite Ashton's arguments, Melody 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, 2020. Salaries Take-home Gross Pay $44,200 25,048 Wages and salaries - Ashton Wages and salaries - Melody Item Food Clothing Mortgage payments, including property taxes of $1,400 Travel and entertainment card balances Gas, electric, water expenses Household furnishings Telephone Salary $64,000 36,000 Amount $5,902 2,300 11,028 1,500 1,990 4,500 600 600 4,650 7,500 175 19,044 4,058 7,650 2,210 85 Telephone Auto loan balance Common stock investments Bank credit card balances Federal income taxes State income tax Social security contributions Credit card loan payments Cash on hand 2015 Nissan Sentra Medical expenses (unreimbursed) Homeowner's insurance premiums paid Checking account balance Auto insurance premiums paid Transportation Cable television Estimated value of home Trip to Europe Recreation and entertainment Auto loan payments Money market account balance Purchase of common stock Addition to money market account Mortgage on home 16,100 600 1,300 485 1,600 2,800 680 185,000 5,300 4,000 2,150 2,900 8,500 200 148,000 1. Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Webbs' balance sheet and income and expense statement for the year ending December 31, 2020. Enter all expense amounts as positive values. BALANCE SHEET Name(s): Ashton and Melody Webb Date: December 31, 2020 ASSETS LIABILITIES Liquid Assets Current Liabilities 1. Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Webbs' balance sheet and income and expense statement for the year ending December 31, 2020. Enter all expense amounts as positive values. BALANCE SHEET Name(s): Ashton and Melody Webb Date: December 31, 2020 ASSETS LIABILITIES Liquid Assets Current Liabilities Cash on hand $ 85 Bank credit card balances In checking Travel and entertainment card balances Money market funds and deposits Investments Long-Term Liabilities Common stocks Mortgage on home - loan balance Auto loans Property Home Auto(s): 2015 Nissan Sentra Total Liabilities $ Household furnishings Net Worth (Assets - $ Liabilities) Total Assets $ Total Liabilities and Net $ Worth INCOME AND EXPENSE STATEMENT Name(s): Ashton and Melody Webb For the [month or year]: Year Ended December 31, 2020 AMOUNT INCOME Wages and salaries - Ashton Wages and salaries - Melody 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 Webbs' 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 .. Critical Thinking Case 1 The Webbs' Version of Financial Planning 23.67 Ashton and Melody Webb are a married couple in their mid-20s. Ashton has a good start as an electrical engineer and Melody works as a sales representative. Since their marriage four years ago, Ashton and Melody 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 Webbs have done no financial planning. Melody 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 Ashton discuss the matter, he tells her not to worry because "we've always managed to pay our bills on time." Melody can't understand his attitude because her income will be completely eliminated. To convince Melody that there's no need for concern, Ashton 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. Ashton 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 Melody asks about the long-run implications for their finances, Ashton says there will be "no problems" because his boss has assured him that he has a bright future with the engineering firm. Ashton also emphasizes that Melody can go back to work in a few years if necessary. Despite Ashton's arguments, Melody 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, 2020. Salaries Take-home Gross Pay $44,200 25,048 Wages and salaries - Ashton Wages and salaries - Melody Item Food Clothing Mortgage payments, including property taxes of $1,400 Travel and entertainment card balances Gas, electric, water expenses Household furnishings Telephone Salary $64,000 36,000 Amount $5,902 2,300 11,028 1,500 1,990 4,500 600 600 4,650 7,500 175 19,044 4,058 7,650 2,210 85 Telephone Auto loan balance Common stock investments Bank credit card balances Federal income taxes State income tax Social security contributions Credit card loan payments Cash on hand 2015 Nissan Sentra Medical expenses (unreimbursed) Homeowner's insurance premiums paid Checking account balance Auto insurance premiums paid Transportation Cable television Estimated value of home Trip to Europe Recreation and entertainment Auto loan payments Money market account balance Purchase of common stock Addition to money market account Mortgage on home 16,100 600 1,300 485 1,600 2,800 680 185,000 5,300 4,000 2,150 2,900 8,500 200 148,000 1. Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Webbs' balance sheet and income and expense statement for the year ending December 31, 2020. Enter all expense amounts as positive values. BALANCE SHEET Name(s): Ashton and Melody Webb Date: December 31, 2020 ASSETS LIABILITIES Liquid Assets Current Liabilities 1. Using this information and Worksheet 2.1 and Worksheet 2.2, construct the Webbs' balance sheet and income and expense statement for the year ending December 31, 2020. Enter all expense amounts as positive values. BALANCE SHEET Name(s): Ashton and Melody Webb Date: December 31, 2020 ASSETS LIABILITIES Liquid Assets Current Liabilities Cash on hand $ 85 Bank credit card balances In checking Travel and entertainment card balances Money market funds and deposits Investments Long-Term Liabilities Common stocks Mortgage on home - loan balance Auto loans Property Home Auto(s): 2015 Nissan Sentra Total Liabilities $ Household furnishings Net Worth (Assets - $ Liabilities) Total Assets $ Total Liabilities and Net $ Worth INCOME AND EXPENSE STATEMENT Name(s): Ashton and Melody Webb For the [month or year]: Year Ended December 31, 2020 AMOUNT INCOME Wages and salaries - Ashton Wages and salaries - Melody 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 Webbs' 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