Chpt2: Business Transaction Analysis and Financial Statement Effects

http://www.vancouversun.com/business/fp/money/Beyond+their+means/2035925/story.html

*Only the Connections and Reflection section is redone*

Summary

In this article, it displays a fictional middle class family of five who are struggling with their finances. The father works as a full time in the transportation workforce while the mother is a part time administrator and together they bring in about $53,000. They have 3 children who range from the ages of two to eight, each with their own extra curricular sports and other expenses. Simply said, they are in debt and do not know where to start. With the help of financial planner Caroline Nalbantoglu, the family begins to cut costs from the many expenses present. Examples of such cost cuts mentioned was in terms of dining out, selling the family yacht that is almost never used, and enrolling their children in only one sport or activity instead of two or three. Just by cutting back on these expenses, they will be able to repay their debt in 13 years. Further measures of retaining more cash would be to work one more day per week for both mother and father which would also increase their CPP and Old Age Security funds. This enables them a better retirement and once their children are adults and have jobs, they can then choose to purchase or move into a smaller home. While the strategy of spending less works with this family, it may not work with others and it is often best to keep an eye out on financial management.


Connection

The connections I was able to make between the article and chapter two of the textbook is that the article is offering ways for individuals to lessen the amount of debt they have. That is in essence, the same as the basic accounting equation. It is always a good idea to keep the assets, which in this case is the amount of cash, in balance with the liabilities (any debt) and owner's equity. It appears that the financing activities, the operating expenses and the investing activities are not in balance, a factor contributing to the build up of debt. Debt is when the expenses exceed the income earned. Most likely the income earned comes from an individual’s job, which is revenue. To lower the amount that is owed, there are two main ways to do so; either increase the amount of income coming in or to decrease the number of expenses, with the easier one being the latter. The higher the net worth, the more money and less time it takes for the loan to be paid off. As seen in the article, there may supposedly be operating costs that actually have no use within the family on an ongoing, everyday basis. For example, going out to eat. Food is no different when cooked at home or in a restaurant. By simply cutting down on this cost, the dining out expense lowers. In addition to removing certain expenses, one can liquefy their assets. Pertaining to this family, they can sell their family yacht off for a decent amount of income which in return increases the net worth. Again, this gives the parents the ability to pay off debt faster. If cuts to expenses are continued to be made, the income statement will have a net income rather than a net loss.

Reflection

Although the family that is mentioned in this article are fictionous, this situation is not uncommon where financial problems accumulate to the point of massive debt. For example, the issues Wall Street went through a couple of months ago. People who worked in the businesses are smart individuals but they made the decision to borrow money to purchase assets that they wanted but could not quite afford. Indeed it started out with small loans but when there were bigger and better assets that could be purchased; they borrowed more money to buy them. The family in the article started out with small amounts of debt, but slowly accumulated due to financing activities that their children participated in. When the article mentioned that the yacht was purchased with their house as collateral, I found that that was particularly dangerous. If they are already struggling to pay off bills, it’s highly unlikely that they will find money to pay for the yacht, resulting in their house being taken away.

Each day we see people struggling to keep their finances out of debt and it seems to be that it's just a way of life during these days. I think that people are not looking around carefully to see what can be done to lessen debt and quite frankly, some of the ways to save money are not difficult. For example, simply stop going out to dinner once a month and that could possibly save you $360, depending on the restaurant. With three hundred and sixty dollars saved in one year, that can add up to thousands of dollars that could have been used towards more important events. Personally, my close friend and I host a yard sale each summer where we sell items that we have no need for anymore and any revenue we make we put towards other needs.