Cash spent on household activities…………… (48,750) — The Stadlers are middle-class family living comfortably single-family home suburb Vancouver and

Home renovations…………………….………… (4,825)

New car…………………….……………………. (16,750)

Savings…………………….……………………. (500)

……………………. ……………………. ……… (22,075)

Increase in cash during the year……………………. (2,800)

Cash at the beginning of the year………………… 3,290

Cash at the end of the year……………………. $ 490

Required:

Prepare a report analyzing the Stadler’s cash flow statement. How do you think the Stadlers are doing? Do you have any suggestions about any changes they could make? What other information would help you analyze the situation more thoroughly?

SOLUTION

To the Stadler Family:

Thank you for approaching me concerning the financial situation of your family. This report will assess your current situation and provide suggestions for improvement.

If you look at your cash from operations, there is a negative balance of $3,575 which is a bit of a cause for concern. This means that you spend more cash in your day to day activities than cash you get from your jobs. Typically, this is an area you want to be positive. Positive cash flow from operations means your living within your means, saving some money for non-day-to-day purposes. Negative cash from operations means you need to get cash from other sources to make ends meet.

Turning to your financing activities, you had an overall cash inflow of $22,850. This came from loans from the bank, borrowings from parents, and a second mortgage taken out. You are relying heavily on borrowing to survive. Unfortunately, there a limits to borrowing. At some point borrowers will not lend to you (you will be too risky), the cost of borrowing will increase (as your debt load increases lenders will want to charge a higher interest rate to compensate for the increased risk), and ultimately you will be unable to pay for the cost of your borrowing.

Finally, your investing activities had a net cash outflow of $22,075 and this amount is almost equivalent to the cash inflow from financing activities. Your investing activities included the purchase of a car (which I assume is what the bank loan was for), renovations made to your home, and $500 put to savings.

As a whole, you saw your cash balance decline $2,800 leaving you with only $490 cash on hand. This is not a lot. If you lose your job you have absolutely no reserve. You have ongoing obligations that include your mortgage payments, interest payments on your bank loan, and payments on the second mortgage. You need to take drastic steps to right your family’s financial situation. First, you need a budget. In building the budget you need to examine your expenditure to find places to cut. Perhaps you should eat out less or go out less often. Experts say you should be saving 10 % of your paycheque, which you are not doing. You want to make sure you have a plan to cover your short-term obligations as this can create a lot of anxiety if you cannot cover your current liabilities (those coming due in less than one year – mortgage payments, bank loan, etc.). You should look to reducing your debt load by channelling cash savings that your find to the most costly loans. You should definitely not plan a vacation, home renovations, or major purchases for the next little while.

Thank you for the opportunity to prepare this report. It was not intended as the time to press the panic button, but simply a reminder of the need to always live within your means and ensure unnecessary anxiety concerning finances creep up in your family’s life. Please call me for further suggestions or questions.