Question

Just after graduation, you have joined ABC Financial Advisors as a Paraplanner. Your first job is to prepare basic financial statements and analyse the financial situation of a client. The prepared Fact Sheet based on information provided by the client reveals the following information. The client, Ms Rae Adams, is employed as a Management Trainee at YZ Manufacturing. Her gross salary for the financial year is $72,000. In addition, the employer contributes 9.5% of her gross salary into a personal superannuation fund. Ms Adams’ total tax liability in 2016 is $14,947.00. In addition, she received non-taxable rental income of $200 and tax-free interest income of $190.

Ms Adams has contributed $5,200 to her personal superannuation account. She paid union fees of 1% of her gross salary and $1,080 in healthcare expenses. Ms Adams’ household and entertainment expenses were $12,250 and $8,500 in 2018, respectively. Also, Ms Adams paid $15,500 against the mortgage loan and another $6,500 for a credit card loan.

Ms Adams has her own home which is worth $650,000. A month ago, her contents were valued by her insurer for $150,000. Furthermore, she has a car worth $25,000 and a savings account balance of $8,000. Her accumulated superannuation balance is $155,000. The outstanding balances on the mortgage loan and credit card were $350,000 and $10,000 respectively.

a) Using the above financial data, prepare the following information for Ms Rae Adams:

i. personal balance sheet;

ii. personal cash flow statement;

iii. Net Worth Ratio;

iv. Quick Ratio;
v. Savings Ratio;
vi. Debt Service Ratio.

b) Comment on the financial situation of the client using the completed financial statements and the ratios.

Answer 1

1. Cash Flow Statement

I. Inflow:

a. Salary $72,000

b. Non Taxable Rental Income $ 200

c. Tax free Interest $ 190

I. Total Inflow $72,390

II. Outflow:

a. Tax payment $14,947

b. Contribution to Superannuation fund $5,200

c. Union Fees(@1% of $72,000) $720

d. Healthcare expenses $1,080

e. Household expenses $12,250

f. Entertainment expenses $8,500

g. Repayment of Mortagage Loan $15,500.

h. Repayment of Credit Card Loan $6,500

II. Total Outflow $64,697

III. Net Inflow (1-2) $7,693

IV. Less: Closing balance of saving Bank $8,000

V. Opening balance of saving bank (4-3) $307

2. Personal Balance Sheet

Liabilities	Amt ($)	Assets	Amt ($)
Capital Account (Balance Figure)	3,18,000	Fixed Assets:
Capital Account (Accumulated Super Annuation Fund)	1,55,000	Immovable Property-House	6,50,000
Long Term Borrowing:		Other Contents	1,50,000
Mortgage Loan	3,50,000	Car	25,000
Short Term Borrowing:		Current Assets:
Credit Card Loan	10,000	Bank Balance	8,000
TOTAL	8,33,000	TOTAL	8,33,000

3. Net Worth Ratio:

Net Worth is equal to Total Assets / Outside borrowing = $8,33,000/$(350,000+10,000)

=$8,33,000/$3,60,000= 2.31

4. Quick Ratio

Quick ratio is equal to Current Assets divide by current liabilities/ Short term borrowing

Current Assets $8,000

Short Term Borrowing $10,000

Net Quick Ratio = $8000/$10,000 = 0.8

5. Saving ratio is net inflow ie Total Inflow less Total Outflow

saving Ratio = $72,390-$64,697 = $7,693

6.Debt Service Ratio is equal to Capital divide by Long tern borrowing

Debt Ratio = Capital/Long Term Borrowing = $4,73,000/$3,50,000 =1.35

7. Comment on financial Situation:

i. Cash flow is positive hence inflows are sufficient to cover all expenses and outflow

ii. Net Worth Ratio is greater than 1 hence it show that outside liability will be paid as when required.

iii. Quick ratio is less than one hence a small risk is there if short term liabilities need to be paid in short notice.

iv. Saving ratio is positive hence indicate addition to net worth.

v. Debt service ratio is more than 1 hence indicate equity are sufficient to cover all long term borrowing.