Question

Puneet and Theresa Chatterjee are both twenty-eight years old and have a two-year old child, Edward. They have asked you to construct financial statements based on the information provided below. Use this information to calculate the following financial ratios:

• Current Ratio

• Emergency Fund Ratio

• Savings Ratio

• Debt Ratio

• Long-term Debt Coverage Ratio

• Debt-to-Income Ratio •

Front End Mortgage Ratio

• Back End Mortgage Ratio

Summarize the Chaterjees’ financial situation based on your analysis of these financial ratios.

Income and expense (cash flow) information:

• Income: Puneet and Theresa earned 95,000 in salary. Puneet earned $50,000 as a data analyst, and Theresa made $45,000 as a nursing supervisor. Puneet and Theresa also received $35 in interest from their money market account, which they reinvested.

• Taxes: Their W-2 tax statements indicate that they paid $7,267 in FICA taxes, $10,500 in federal income tax, and $2,900 in state income taxes. Real estate taxes on their home were $1,800. Personal property taxes on the two vehicles they own equal $360.

• Insurance: Medical insurance is provided by their respective employers; however, they must pay a portion of the premium, which amounted to $1,400. Their personal automobile policy premiums totaled $1,600. Homeowner’s insurance premiums for the year were $1,200. Puneet and Theresa own term life insurance policies, and they paid $500 in premiums for both policies.

• Loan payments: Mortgage payments amounted to $20,253. Auto loan repayment for their two vehicles totaled $6,600. Student loan payments for Theresa’s student loans when she was working toward her master’s degree in nursing equal $4,500 for the year, and the boat payments for the year equal $3,112.

• Savings payments: Puneet and Theresa contributed $4,000 to their retirement accounts, $1,200 to an education fund for their child, and $1,200 to their money market account, and the $35 in interest that they reinvested in the money market account.

• Daily living expenses: Puneet and Theresa estimate, based on checking account records and credit card statements, that they spent approximately $4,000 on food at home. Clothing expenditures were estimated to be $1,800; laundry and dry-cleaning expenses were $300; and personal care expenses were $1,000. Day care for Edward was $6,000. Expenses for gas and maintenance for their vehicles were $2,000. This year there were no auto repair costs.

• Variable expenses: They estimate that they spent $1,600 on entertainment, which includes dining out and admission charges for plays, movies, and sporting events. Puneet and Theresa also spent $1,500 on recreation and travel, which is how they categorize vacation expenses. Charitable contributions for the year totaled $2,000. Hobby expenses were $360 for the year. Gifts for family and friends throughout the year were $2,000.

• Utilities: Utilities for the year cost $4,000, which included $1,840 for gas and electricity, $720 for water, and $1,440 for telephone, Internet access, and cable television. 84 Case Approach to Financial Planning • Home maintenance and improvements: They spent $1,200 annually in this category. • Miscellaneous expenses: Unreimbursed medical expenses amounted to $300.

Answer 1

ANS ; a ) part = CURRENT RATIO = CURRENT ASSETS/CURRENT LIABILITIES

Current assets ratio should 2: 1

but in this case we have calculate ratio mentioned below

current assets = total i year income

current liabiltes = total 1 year expenses

=95000/37111=2.55 /

b part = EMERGENCY FUND RATIO = CURRENT ASSETS / MONTHLY NON DISCRETIOINARY EXPENSES

= 95000/28995=327

C PART = SAVING RATIO = It should be 20% every mnth

TOTAL EXPENSES = 22560/12 DIVIDED BY 95000/12=1800 DIVIDED BY 7917 MULTIPLY BY 100=23.74%

D PART =DEBT RATIO = LIABILTES / ASSESTS =71856/95000 = 0.75

LIABILTES= ALL DEBT AND MONTHLY EXPENSES

E PART =LONG TERM DEBT RATIO=44289/95000= 0.4662

TOTAL DEBT = 44289

F PART = FRONT END MORTGAGE = MONTHLY MORTGAGE/MONTHLY GROSS INCOME= 20523/12 DIVIDED BY 95000/12]=

1710.25=7917=0.216

G PART = DEBT TO INCOME RATIO =MONTHLY DEBT /MONTHLY INCOME=34745/12 DIVIDED BY 95000/12=2895.42 DIVIDED BY 7917=0.365

H PART = BACK MORTGAGE RATIO =34745/12 DIVIDED BY 95000/12 =2895.42 DIVIDED BY 7917=0.365

  

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b) part = EMERGENCY FUND RATIO= LIQUID ASSETS / CURRENT LIABILITIES

c) part = SAVINGS RATIO =

d) part = DEBT RATIO =

e) part = LONG TERM DEBT COVERAGE RATIO =

f) part =DEBT TO INCOME RATIO =

g) part =BACK END MORGAGE RATIO =