BASICS – FINANCIAL STATEMENT, TIME VALUE OF MONEY

The Gutierrez family would like your help in revising the financial plan. Review the Gutierrez
family’s financial and personal information before answering the following questions.

FINANCIAL STATEMENT ANALYSIS

1. Using the January 2018 asset and liability information, develop a balance sheet for the
Gutierrez family. Regular expenditures for things like utilities, rent, etc. are included on
a balance sheet only if there are unpaid bills due. Assume the Gutierrez family has no
unpaid bills. Assets on a balance sheet are listed at their current market value, not the
purchase price. Liabilities are listed at the current outstanding balance. What is the
Gutierrez family’s net worth?

2. Using the income and expenditure information for 2017, complete a cash flow statement
for the Gutierrez family. Date this statement January through December of 2017. Use the
"cash flow" concept for this financial statement including all money inflows as income
and all outflows as expenditures. This is not a monthly cash flow statement, but for the
entire year.

The distinction between fixed and variable income and expenses is open to interpretation.
You will not be graded on this distinction. Try to differentiate, but be sure to total your
entries for each row in the third column of the cash flow statement.

Did The Gutierrez family have a cash surplus or a cash deficit in 2017? What impact
would the 2017 cash surplus (deficit) have on the June 1, 2018 balance sheet?

3. Based on The Gutierrez family’s financial statements constructed in questions 1 and 2,

calculate the following ratios:
 Liquidity ratio
 Debt Service Ratio
 Solvency Ratio
 Savings Ratio

See your textbook for guidance on what to include when calculating the financial ratios.

4. Based on the information in the original case and in the financial statements, list at least 4
positive and 4 negative aspects of the Gutierrez family’s current financial position.

TIME VALUE OF MONEY ANALYSIS

After reading your text, you now probably realize that The Gutierrez family’s financial goals are
not defined well enough in the original case to serve as the basis for their financial plan and cash
budget. Upon further thought, they restated their financial goals as follows (in no particular
order):
 Short Term (1 Year)
o Pay off American Express by December 2018.
 o Reduce discretionary spending by at least $200 a month so they can put that
money into savings.
o Purchase a new car for Nick

 Intermediate Term (2-5 Years)

o Establish an emergency fund of $4,800 by September 2019.
o Begin a college savings plan for the children
o Purchase a beach vacation house

 Long Term (6+)

o Start saving more aggressively for retirement.
o Travel.

 To establish a regular savings program in an amount that will accomplish these stated goals.

5. Using time value of money calculations, how much would the Gutierrez family have to
save in 2018 to be on track in meeting the goals listed above?

The Gutierrez family expects to receive $90,000 from Maria’s grandmother’s estate
within the next two months and would like to use this inheritance to fund some of the
goals.

Use the following assumptions:

 Investment Return on regular savings accounts: 1.0%
 Investment Return on CD accounts: 1.2% and 1.4%

How much would they need to commit to these goals? Which goal do you recommend
they allocate the inheritance money? Determine how much they will have to save
annually to meet the goals—you are not looking for lump sum contributions. You will
not need time value calculations to determine the amount of savings required to meet the
Gutierrez family’s retirement goal –they say they would like to save 5% of gross salary.
Remember to label each goal AND add the required sums for each goal together to find
the TOTAL ANNUAL SAVINGS required to meet these goals.

DEBT MANAGEMENT ANALYSIS

1. Given Nick and Maria’s amount of debt (including all liabilities), do these debts hinder
their ability to reach their financial goals? Do you recommend they pay off these debts
before funding all or some of their goals? If yes, explain how doing so will help Nick
and Maria reach their financial goals faster? If no, explain why doing so will not help
them reach their goals?

2. Set a goal to pay it off within one year. Using the 2017 expenses from your case study,
establish a plan for Nick and Maria to reach this goal that includes the order in which the
credit cards are to be paid off, the length of time it will take to pay off each credit card,
and the total interest paid from the beginning of the plan until the debt is eliminated.
 a. According to the plan you established, can Nick and Maria reach their goal of
paying off their credit card debt by December 2018?
b. Should Nick and Maria pay off their credit cards before buying a vacation home?

3. Can Nick and Maria achieve all of the stated goals in Assignment 1 given their current
income and expenditure patterns? If not, what specific recommendations would you
make to help them balance their budget and/or achieve their goals? These
recommendations could focus on changes in their income, expenditures, and/or goals.

INVESTMENT ANALYSIS

1. Nick and Maria’s other financial goals, as you know, include:

 Short Term (1 Year)
o Pay off Credit Cards by December 2018.
o Reduce discretionary spending to prepare for the children’s college education.
o Purchase a new car for Nick.

 Intermediate Term (2-5 Years)

o Establish an emergency fund.
o Begin a college savings plan for the children.
o Purchase a beach vacation house.

 Long Term (6+ years)

o Start saving more aggressively for retirement.
o Travel.

For each of the goals listed above, recommend 1) the specific type of account and 2) the
type of investments they should consider. Type of account means a type of retirement
plan (such as a Roth IRA, etc.), an education funding plan (such as a Coverdell or 529
plan), or a taxable account (not a tax-deferred account). Type of investments means a
specific mutual fund, stock, bond, money market account, CD, etc.

To investigate mutual funds, ETFs and stocks, go to the website www.zacks.com and
click on the toolbar titled Screening. Use the “Basic Mutual Fund Screener” for mutual
funds to determine a list of appropriate funds for Nick and Maria to use for each of their
goals. You will be able to set the parameters to determine which mutual funds are the
most appropriate to helping Nick and Maria achieve their goals. [For example setting the
“Objective Description” to “Inv. Grade Bond-Short” yields 192 results.] From your list,
recommend funds and give the reasons that you chose that particular fund or funds for
each of their goals. Please turn in a copy of your search results and the criteria you used
to screen funds with your project. If you choose to use money market accounts or CDs
use the website www.bankrate.com to locate accounts. If you suggest 529 Savings Plans
www.savingforcollege.com is a great site to compare these plans. Please include the
name of the account and the reasons that you selected it.
Go to the website www.vanguard.com and click on ‘Go to Personal Investors Site’. Then click
on ‘Investing’ tab and then ‘Account Type’. Be sure to consider their other investments for a
suggestion for their overall portfolio.1

1
The vanguard website is a great resource to help you get acclimated with the different types of accounts and the
rules that govern each particular account.