Reference no: EM131768648

Question - Sireli Williamson and Arti Devi is a married couple in their mid 20s. Sireli is a financial analyst and Arti works as a sales representative. Since their marriage four years ago, Sireli and Arti have been living comfortably. Their income has exceeded their expenses and they have accumulated a net worth of nearly $45,000. This includes the $10,000 that they have built up in savings and investments. Because their income has always been more than adequate to allow them to live in the fashion they desire, Williamsons have done no financial planning.

Arti has just learnt that she is two months' pregnant and is concerned about how they will make ends meet if she quits work after her child is born. Each time she and Sireli discuss the matter, Sireli tells her not to worry because 'we have always managed to pay our bills on time'. Arti cannot understand his attitude, because her income will be completely eliminated. To convince Arti that there is no need for concern, Sireli points out that their expenses for necessities last year were $24 885, which just about equaled his take-home pay of $26 480.

With an anticipated promotion to a managerial position and an expected 10% pay raise, his income next year should exceed this amount. Sireli also points out that they can reduce luxuries (trips, recreation, and entertainment) and can always draw down their savings or sell some of their shares if they get in a bind. Arti asks about the long-run implications for their finances; Sireli replies that there will be 'no problem' because his boss has assured him that he has a bright future with the company. Sireli also emphasizes that Arti can go back to work in a few years if necessary. In spite of Sireli's somewhat convincing arguments, Arti 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 31 December 2009:

Salaries Sileri Arti	Take-home pay ($) 26480 18090	Gross Salary ($) 38350 26000
Item Food Clothing Mortgage payments Travel and entertainment card balances Gas, electric, water expenses Household furnishings Telephone Car loan balance Share investments Bank credit card balances Income taxes Credit card loan payments Cash on hand 2001 Nissan car Medical expenses (not reimbursed) Homeowner's insurance premiums paid Cheque account balance Car insurance premiums paid Transportation Cable television Estimated value of home Trip to Europe Recreation and entertainment Car loan payments Money market account balance Purchase of common stock Addition to money market account Mortgage on home		amount 4,200 2,300 9,400 2,000 1,990 4,500 640 2,650 7,500 675 16,940 2,210 85 7,000 600 400 485 800 2,800 480 98,000 5,000 4,000 2,150 2,500 7,500 500 70,000

Requirements -

1. Using this information and Worksheets 2.2 and 2.3, construct the Williamsons' 31 December 2009 balance sheet and income expenses statement for the year ending 31 December 2009.

2. Comment on the Williamsons' financial condition with respect to (a) solvency, (b) liquidity, (c) savings, and (d) ability to pay debts promptly. If the Williamsons continue to manage their finances as described, what do you expect the long-run consequences to be? Discuss.

3. Critically evaluate the Williamsons' approach to financial planning. Point out any fallacies in Sireli's arguments, and be sure to mention (a) implications for the long term, (b) the potential impact of inflation, and (c) the impact 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.