The Statement of Financial Position - Case Study Example

The ACA Financial Planners 5th may 2016 Jerry and jones 5th may 2016 The report on the nature of the Asset and risk profile for jerry and Jones We undertook a comprehensive analysis of your assets and income in order to provide an understanding of your current situation and recommended future investment alternatively that we deem will best help you after the age of retirement. Form our analysis, we recommends that an asset worth and the income is substantial in terms venture viability. We used the forecasting tool alike the superannuation and net present value in order to establish the size of funding needed at the time of retirement that will be sufficient to fund your cost of living. The summary of asset and income appraisal depict that a forecast of 2017 is considered important because, it will lead to a growth in net worth of the assets which implies that by the year ending 2017, Jerry and Jone will have sufficient cash to venture in cash generating investment so as to enhance their living standards after retirement. We provide a comprehensive analysis of asset evaluation below. Yours kindly Amy Jones 1.0 Cash flow statement for the three years ending 2017   Jerry Jenny Total 2016 2016 2017 Salary Income $ 105,000.00 $ 50,000.00 $ 155,000.00 $ 159,650.00 $ 164,440.00 Investment $ - $ - Commonwealth Bank shares 625 shares $ - $ 25,000.00 $ 25,000.00 $ 26,250.00 $ 27,563.00 Saving account with Bundoora credit union $ 26,900.00 $ 26,900.00 $ 28,245.00 $ 29,657.00 Term deposit with Bundoora credit union – 3 month rolling balance $ 165,000.00   $ 165,000.00 $ 173,250.00 $ 181,913.00 less; Deductible expense $ 296,900.00 $ 75,000.00 $ 371,900.00 $ 387,395.00 $ 403,573.00 Work related expenses $ (1,500.00) $ (1,000.00) $ (2,500.00) $ (2,575.00) $ (2,652.00) Insurance $ 592,300.00 $ (3,000.00) $ (3,090.00) $ 3,183.00 Entertainment     $ (4,300.00) $ (4,429.00) $ (4,562.00) Utilities $ (8,000.00) $ (8,240.00) $ (8,487.00) Motor vehicle expenses   $ (8,500.00) $ (8,755.00) $ (9,018.00) Sundries $ (2,000.00) $ (2,060.00) $ (2,122.00) Cash income before tax $ 1,184,600.00 $ 149,000.00 $ 1,333,600.00 $ 358,246.00 $ 379,915.00 less; tax (Working) $ (72,917.25) $ (32,777.40) $ (105,694.65) $ (108,865.00) $ (112,132.00) after tax income $ 1,111,682.75 $ 116,222.60 $ 1,227,905.35 $ 249,381.00 $ 267,783.00 Less; household expense $ (25,800.00) $ (26,574.00) $ (27,371.00) One off capital item           Personal car $ (16,000.00) $ (16,000.00) $ (16,480.00) $ (16,974.00) Family home     $ (250,000.00) $ (267,500.00) $ (294,812.00) Surplus deficit $ 1,095,682.75 $ 116,222.60 $ 936,105.35 $ 188,208.00 $ 196,409.00 2. Balance sheet for the three years ending 2017   Owner Amount 2016   2016 2017 Balance Sheet           Lifestyle assets Owner Amount Family home Joint $ 620,000.00   $ 663,400.00 $ 709,838.00 Boat Jenny $ 50,000.00 $ 51,500.00 $ 53,045.00 Home Contents (Insured value) Joint $ 80,000 Joint $ 90,000.00       Motor Vehicles (Insured value) John $ 60,000 joint $ 64,000.00     $ 824,000.00 $ 824,000.00 $ 714,900.00 $ 762,883.00 Investment assets Commonwealth Bank shares 625 shares Jenny $ 25,000.00   $ 26,250.00 $ 27,563.00 Saving account with Bundara credit union jerry $ 26,900.00 $ 28,245.00 $ 29,657.00 Term deposit with Bundoora credit union – 3 month rolling balance jerry $ 165,000.00   $ 173,250.00 $ 181,913.00 Superannuation (ComSuper) – conservative fund jerry $ 195,000.00 $ 204,750.00 $ 214,988.00 Superannuation (Hesta Superannuation) – capital stable fund jenny $ 135,000.00 $ 546,900.00 $ 574,245.00 $ 602,957.00 Total assets $ 1,370,900.00 $ 1,721,640.00 $ 1,819,961.00 Less Borrowings Home mortgage (5.8% p.a.) Joint $ (25,400.00) $ (23,927.00) $ 22,539.00 $ 21,232.00 Credit cards (16.5% p.a.) Joint $ (6,000.00) $ 5,010.00 $ (4,183.00) $ 3,493.00 Car loan (8.5% p.a.) Joint $ (4,100.00) $ (35,500.00) $ (32,483.00) $ (29,722.00) Net Worth $ 1,316,483.00 $ 1,707,513.00 $ 1,814,964.00 The statement of financial position provides that, there will a growth in net worth of Jerry and Jones and as a results, it means that there shall be sufficient financing by the year ending 2017. This will ensure that Jerry and Jones have an investment portfolio that will create more cash such as investment in securities. Jerry and Jone as a result should make sure that the financial forecast is sufficient and reliable since, this will ensure that the cash needed for investment growth is available and sufficient cash for superannuation as well (Barbara Smith, 2014). 3. 1 Accrued superannuation Calculation of the tax computation Tax calculation       Jerry Jenny Taxable Income Tax on Taxable Income Marginal Tax Employment income Tax payable Rate     salary 105000 50000 $0 - $18 Nil 0 Tax 0   $18,201 - $37,000 $0 + 19% over $18,200 19%   $ 19,950.00 $ 9,500.00 $37,001 - $80,000 $3,572 + 32.5% over $37,000 33%   $ 34,650.00 $ 13,365.00 $80,001 - $180,000 $17,547 + 37% over $80,000 37%   $ 38,850.00 $ 10,115.06 $180,000 + $54,547 + 47%* over $180,000 47% Net tax payable $ 72,917.25 $ 32,777.40 Superannuation for 20 years to year ending 2030 Year Age Salary increase Salary Contribution Opening super balance ADD; Employer contribution Contribution rate Less;15% contribution tax Add; net earning Closing super balance 2016 45 130% $ 155,000 115% 330000 $ 14,275 150% $ 21,413 $ 936,105 $ 346,416 2016 46 130% $ 159,650 115% 379500 $ 16,124 150% $ 24,186 $ 936,105 $ 398,043 2017 47 130% $ 164,440 115% 436425 $ 17,656 150% $ 26,483 $ 936,105 $ 456,729 2018 48 130% $ 169,373 115% 501889 $ 19,333 150% $ 28,999 $ 936,105 $ 524,122 2019 49 130% $ 174,454 115% 577172 $ 21,170 150% $ 31,754 $ 936,105 $ 601,517 2020 50 130% $ 179,688 115% 663748 $ 23,181 150% $ 34,771 $ 936,105 $ 690,406 2021 51 130% $ 185,078 115% 763310 $ 25,383 150% $ 38,074 $ 936,105 $ 792,500 2022 52 130% $ 190,630 115% 877807 $ 27,794 150% $ 41,691 $ 936,105 $ 909,770 2023 53 130% $ 196,349 115% 1009478 $ 30,435 150% $ 45,652 $ 936,105 $ 1,044,477 2024 54 130% $ 202,240 115% 1160899 $ 33,326 150% $ 49,989 $ 936,105 $ 1,199,224 2025 55 130% $ 208,307 115% 1335034 $ 36,587 150% $ 54,880 $ 936,105 $ 1,377,109 2026 56 130% $ 214,556 115% 1535289 $ 40,062 150% $ 60,094 $ 936,105 $ 1,581,361 2027 57 130% $ 220,993 115% 1765583 $ 43,868 150% $ 65,803 $ 936,105 $ 1,816,031 2028 58 130% $ 227,623 115% 2030420 $ 48,036 150% $ 72,054 $ 936,105 $ 2,085,661 2029 59 130% $ 234,451 115% 2334983 $ 52,599 150% $ 78,899 $ 936,105 $ 2,395,472 2030 60 130% $ 241,485 115% 2685230 $ 57,596 150% $ 86,394 $ 936,105 $ 2,751,466                         Jerry Jenny Opening balance $ 195,000 $ 135,000 Rate of employer contribution 9.50% 9.50% Annual rate of return 15% 15% Contribution tax 5.2 4.9 Current salary $ 105,000 $ 50,000 Salary increase 3% 3% Years to retirement 0.15 0.15 4.1 The risk profile of the Jerry and Jone According to the depicted state of affairs of Jerry and Jone, it is apparent that they are aggressive investors and they portray asset reserve ratio of 76% which is a huge. In this regards, the couple need to venture part of their funds so as to capitalize on returns when they retire. Jerry and Jone must make sure that thy venture in a diversified portfolio in order to minimize risk and increases the returns in investment. Their right class of the group as a result is very volatile and consequently the portfolio portrays a risky portfolio though with high return. In this regards, Jerry and Jones assets portray a liquidity ratio 1; 5 which implies that their debt to asset ratio is one to five which is quite manageable. In this a regards, the asset worth is high making it low risk which is an indication that the investment alternative would lead to high returns. Jerry and Jones must be risk adverse investors to get high returns form volatile investment. This sis because, there is a strong correlation between highly risky portfolio and high returns. Jerry and Jone risk profile is aggressive due to the fact it requires carrying out of their alternative as well as the should comprehend the extent to which their risk exposure would have impact on their returns. The class of this venture is focused on venture with high initial capital outlay so as to secure their future cost of living after the age of retirement (Barbara Smith, 2002). 4.1 The couple’s current asset allocation (across all their investments including super)     Current Asset Allocation     Name of investment Cash Fixed Interest Property Australian shares Total Fixed home     $ 480,000.0   $ 480,000.0 Boat     $ 20,000.0   $ 20,000.0 Cars     $ 35,000.0   $ 35,000.0 Commonwealth Bank shares       $ 25,000.0 $ 25,000.0 Term deposit with Bundoora $ 165,000.0       $ 165,000.0 Home mortgage   $ 14,500.0     $ 14,500.0 Personal car loan   $ 1,360.0     $ 1,360.0 credit card   $ 990.0     $ 990.0 Total of asset class in $ terms $ 165,000.0 $ 16,850.0 $ 535,000.0 $ 25,000.0 $ 741,850.0 Total of asset class in % terms 22 2 72 3 100 The above table depicts that the existing asset allotment is valued to be 22%. The implication is that Jerry and Jone as ventured much on long term investment. The existing asset allotment is steady with the risk of couple due to the fact, they are an objective of venturing in long terms investment that will yield high return in the future which will be ideal in financing their cost of living at the age of retirement. The amount of free cash is very high as compared to cash invested, in this regards, the couple risk profile is considered risky due to the fact that they will spend less cash in their superannuation when they retire and thus, the existing asset allotment should reconsidered so as to minimize the ratio of reserves to savings (John Day, 2014). 5.1 investigating the risk and situation Analyzing financial situation   Balance sheet   concerned with a person’s net worth   Net worth ratio   {total net worth/total assets} $824000-$35500)$/1370900=0.6 Liquidity ratio =liquid assets/current debt $824000/$546900=1.5 Cash flow statement   concerned with generating a cash surplus   Savings ratio cash surplus= (savings)/Net income after tax $936105.35/1227905.35=0.8 Debt service ratio ={monthly loan repayments/Monthly net income after tax} $35500/$102408.78=0.4 It can be observed from the above working that the state of finance for the couple that there is high retention rate implying that the asset allotment for the couples is risky; a lot of cash has been held whilst less has been invested to guarantee future financial commitment of the couples after they retire. In this regards, it implies that the couples risk profile is high current and thus, a company need to appraise such an investment so as to grow the wealth of the couples, they may also grow the amount of super deposited into their account so as to secure the future financial wealth (John Day, 2014). The ratio of liquidity is 1.5 as explained above which implies that asset risk is manageable because amount of asset if it is compared to debt. The couple must take advantage on the current liquidity situation to invest in diversified portfolio. The net worth rati0 0.6 which is ideal since it depict that the risk is less. The ratio is graphically explained below in order to provide a comprehension of the trend in couple’s risk profile and evaluating areas in which they capitalize on venture possibilities to c=increase the financial wealth of the couples in the near future. The graph of financial situation 5.2four possible financial strategies that the couple may be able to use to improve their short-term and long-term financial situation. Financial projection (Use of Superannuation) Projecting the future financial performance at year one is deem to be important because the value of funds that Jerry and Jone needs at the time of retirement is high and thus it is significant to establish the amount required at the when they retire. This can only be attained by discounting future cash to year one to establish the cash needed and saved in the superannuation or any venture project that will yield high returns. The ideal projecting tool that would provide a clear understanding as to the amount to reserve every year in order have cash at the time of retirement is the users of superannuation because, the it evaluates the value of the cash required and amount allotted to create more cash every year in order fund the living style of the couples when they retire (Toten, 2006). The effect of Asset diversification Asset diversification is the procedure of having a diversified venture alternatives in order to reduce risk and increases return. The importance of having an investment diversification to the couples is that, there will be a reduction in risk on investment and increased returns due to venture in volatile securities. The volatility measures the variations and the utmost return, the justification for holding portfolio investment is to consider an ideal venture alternative for the couples that would lead to high return in the long run. Time value for money (Use of NPV) Discounting future cash flows to year one is important in identifying the amount to be invested now in order to realize positive cash flows. Discounting is considered as the protection of the cash to be ventured now. An informed venture verdicts on the basis of financial circumstance of the future venture performance that is deem important for the couple at the time of retirement is mandatory. The benefits of discounting future cash flows at current year is that it will provide amount that need to be invested now in n=order to realize positive NPV at the time of retirement. The benefit is that the model provide the amount of cash to be realized in the future are the specified rate now which in return provides a clear understanding of the external environment in which the couples will venture their finance to secure the future life after they retire (Warren McKeown, 2014). Asset diversification Holding a diversified portfolio ventures will reduce the risk of investment and maximizes return. An investors must hold a portfolio of investment in order to increase the return and reduce the risk on investment. 6. The appropriateness of the strategy for the couple Liquidity risk as 2017 will be {Asset/liability) Liquidity= (%189961/$54447=33.4 As depicted in the workings above, it can be observed that the liquidity ratio for the year ending 2017 will be high hence the implication is a that the couple risk profile will be least and thus deeming the venture proposal important. It might also be depicted that the net income as well as the newt asset of the Couples will increase drastically by end of 2017 which makes an investment verdicts to be appropriate for the couples (Warren McKeown, 2012). Balance of term deposit by 2017 will be $18, 1913 Deposit 20% Amount as deposit= {20%*$18, 1913=$36,383 Price range is -5%+5% Price range= {1.05*$218296) =$229,210.4 Or at {95%*$219296} =$207,381 Amount needed to be borrowed from bank will, be {$229219-$1819113=$47,297 Jerry and Jones will be in a position to afford the loan repayment because, it might depicted that worth of the assets by the year ending 2017 shall be $229,210-$207,381 hence it might be able to finance the term deposit up to 418,9113. The excess of $47297 shall be financed using the loan. The value to funded using the loan is deem to be insignificant to the couples and consequently, they repay the debt with ease taking into consideration that the value of the income by the year ending 2017 and also the amount of loan needed, their net income will be security for the loan. This is because the value ratio is 39 i.e. {$819961/$47287=39}.this value is high implying that the value of asset by year ending 2017 will be enough to finance the loan and the interest as well (John Day, 2014). Reference list Barbara Smith, ‎.K., 2002. Personal Financial Planning and Superannuation. Barbara Smith, ‎.K., 2011. The Superannuation Handbook 2008-09. Barbara Smith, ‎.K., 2014. DIY Financial Planning: Creating Wealth Through Careful. John Day, ‎.B.‎.D., 2014. Australian Financial Planning Handbook. Toten, M., 2006. Financial Planning - Page 35. Warren McKeown, ‎.K.‎.O., 2012. Financial Planning, Google. Warren McKeown, ‎.K.‎.O., 2012. Financial Planning, Google eBook. Warren McKeown, ‎.K.‎.O., 2014. Financial Planning. Read More