Problem 1 - Accounting

Question

At the beginning of the 2010 school year, Britney Logan decided to prepare a cash budget for the months of September, October, November, and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget: Cash balance, September 1 (from a summer job) . . . . . . . . . . . . . . . . . . . . . . . $7,000 Purchase season football tickets in September . . . . . . . . . . . . . . . . . . . . . . . . . 100 Additional entertainment for each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 Pay fall semester tuition on September 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800 Pay rent at the beginning of each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 Pay for food each month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Pay apartment deposit on September 2 (to be returned Dec. 15) . . . . . . . . . . . . 500 Part-time job earnings each month (net of taxes) . . . . . . . . . . . . . . . . . . . . . . . . 900 a. Prepare a cash budget for September, October, November, and December. b. Are the four monthly budgets that are presented prepared as static budgets or flexible budgets? c. What are the budget implications for Britney Logan?

Step-by-Step Solution

Answer

Britney ends December with a cash balance of $3,500. The budget is static, reflecting fixed assumptions. Britney should monitor spending to cope with unexpected changes.

Step 1: Determine Initial Cash Balance

Britney starts with an initial cash balance at the beginning of September which is $7,000.

Step 2: Identify Monthly Cash Inflows

Every month, Britney earns $900 from her part-time job.

Step 3: Identify Monthly Cash Outflows

Britney spends money on various items: $350 on rent, $200 on food, and $250 on entertainment each month. Additionally, in September, she spends $100 on football tickets, $3,800 on tuition, and $500 on an apartment deposit (to be returned in December).

Step 4: Calculate Net Cash Flow for Each Month

Subtract total expenses from total inflows for each month: - **September**: Initial balance $7,000, Income $900, Expenses $5,200 (tuition, deposit, tickets, rent, food, entertainment). Net flow = $7,900 - $5,200 = $2,700 ending balance. - **October**: Balance $2,700, Income $900, Expenses $800 (rent, food, entertainment). Net flow = $3,600 - $800 = $2,800 ending balance. - **November**: Balance $2,800, Income $900, Expenses $800 (same as October). Net flow = $3,700 - $800 = $2,900 ending balance. - **December**: Balance $2,900, Income $900, gained undisclosed deposit $500, Expenses $800. Net flow = $4,300 - $800 = $3,500 ending balance.

Step 5: Evaluate Type of Budget

Since the budgets are planned based on fixed expenses and incomes for each month without considering potential variations, they are static budgets.

Step 6: Consider Budget Implications

Britney needs to ensure she maintains expenses within limits to cover or provide contingency funds. If actual conditions vary significantly, adjustments to the budget will have to be considered.

Key Concepts

Financial Planning

Financial planning is an essential aspect of managing personal finances effectively. At its core, it involves creating a strategy that outlines expected incomes and expenses over a particular period. In Britney Logan's case, the financial planning process starts with setting a clear financial objective: to have enough funds by December 31 to cover the spring semester tuition, mirroring the fall tuition expenses.
Planning ahead allows Britney to identify her cash flows by considering both inflows, like her monthly part-time job earnings of $900, and outflows, such as rent, food, and other personal expenses.

Effective financial planning helps individuals to:

• Understand spending patterns and prioritize essential expenses
• Create realistic budgets to meet financial goals
• Manage resources effectively, ensuring enough cash flow throughout the year

This comprehensive view helps Britney track her financial health and make informed decisions that align with her financial goals.

Static vs. Flexible Budgets

In the world of budgeting, understanding the difference between static and flexible budgets is crucial. A static budget, like the one Britney prepared, is established at the beginning of the budgeting period and doesn't change, regardless of fluctuations in actual income or expenses. Britney assumed her expenses and income remain constant each month, so her budget is static.
Static budgets are useful for:

• Providing a stable framework to track planned vs. actual expenses
• Simple structuring since expenses and incomes are predefined
• Utilizing when expenses are predictable and less likely to vary

However, static budgets can fall short if actual conditions differ significantly, requiring careful monitoring and possible adjustments. On the other hand, flexible budgets can be a better option in scenarios where income or expenses may fluctuate, offering adjustments to better reflect real-time financial conditions.

Budget Management

Budget management is more than just tracking numbers; it's about actively steering financial decisions to align with the goals of the budget. For Britney, effective budget management means maintaining discipline in her spending habits and ensuring she sticks to the planned expenses to avoid any shortfalls by the end of December.
One must:

• Regularly monitor expenditures to ensure they match the planned budget
• Adapt financial strategies if unexpected expenses occur, considering reallocation of resources
• Evaluate cash flow periodically to ensure future financial obligations, like tuition, can be met without financial strain

In Britney's scenario, managing her budget well involves making wise spending decisions and, if necessary, seeking ways to adjust the budget to accommodate any deviations, ensuring her financial goals are met.