9 Preparing a budget A cash flow budget uses the same format as a cash flow statement It is prepared on a monthly basis and it reflects budgeted income and expenses In addition to the cash flow statement, Dan and Lucy made a list of budget assumptions, listed for you here Dans income will increase by 5 , effective January 1 His bonus is generally 10 of his income in the previous year, and he receives it in January Lucys raise will be 3 , effective January 1 Interest and dividend income will conservatively be the same in 2017 as it was in 2016 and will be received on a monthly basis Mortgage payments will be the same in 2017 as they were in 2016 Federal income taxes are estimated at 20 , state income taxes at 6 , and social security taxes at 7 65 of wages, including Dans bonus Property insurance and property taxes are paid every six months, in June and December The amount is expected to be the same in 2017 as it was in 2016 Lucy will contribute $60 per week for the employee portion of their medical insurance Auto insurance is paid at the end of each calendar quarter and should not be more than it was in 2016 Dan and Lucy would like to purchase a new car in the next few years and will put $500 a month away specifically for that purpose Dan and Lucy dont expect the amount of variable expenses to change in 2017 except that they would like to double their charitable contributions Gift purchases are made mostly around the holidays, so Dan and Lucy are planning to pay half of the gift expense in December and half in January when the credit card bill comes in Water and sewer is billed quarterly, in January, April, July, and October The cost of heat should be spread over six months from November to April All other variable expenses can be spread evenly every month at 2016 amounts Use the information from their cash flow statement (listed in the first column of the following annual budget) and their budget assumptions to fill in the missing amounts for the first six months of Dan and Lucys monthly budget for 2017 ( Note Be sure to fill in every blank space with a value Round each answer to the nearest dollar ) Annual Budget Cash Flow Statement 2017 Name Dan and Lucy McDermott 2016 Jan Feb Mar INCOME Dans salary 57,000 4,988 4,988 4,988 Lucys salary 51,300 4,403 4,403 4,403 Dans Bonus 5,000 0 0 0 Interest and dividends 150 13 13 13 Total Income $113,450 $9,404 $9,404 EXPENDITURES Fixed Expenses Mortgage 14,112 1,176 1,176 1,176 Dans federal income taxes 12,400 998 998 Dans state income taxes 3,720 299 299 Dans social security taxes 4,743 382 382 Lucys federal income taxes 10,260 881 881 881 Lucys state income taxes 3,078 264 264 264 Lucys social security taxes 3,924 337 337 337 Property taxes 4,500 0 0 0 Property insurance 1,200 0 0 0 Medical insurance 2,400 240 240 240 Automobile insurance and registration 700 0 0 Savings for auto purchase 500 500 500 Total Fixed Expenses $61,037 $5,077 Variable Expenses Food 1,356 113 113 113 Entertainment 3,000 250 250 250 Dining out 4,700 392 392 392 Electric 350 29 29 29 Water and sewer 800 0 0 Heat 1,250 208 208 208 Cable TV 3,000 250 250250 250 Telephone 600 50 50 50 Cell phone 900 75 75 75 Gifts 2,000 Personal care 600 50 50 50 Medical expenses 3,700 308 308 308 Vehicle gas and maintenance 2,530 211 211 211 Charitable contributions 1,500 250 250 250 Vacation Total Variable Expenses $26,286 $2,186 $2,186 Total Expenses $87,323 $7,263 $7,438 SURPLUS (DEFICIT) $26,127 $2,141 $1,966 Dan and Lucy have an emergency fund of $40,000 They would like to start saving for retirement, but they have not signed up for their companies 401(k) plans Neither company matches 401(k) contributions What do you suggest for Dan and Lucy based on their goals and the budget that they have put together The $40,000 that the McDermotts have saved for an emergency is (less than,more than, the same as) three months of expenses They have not, however, taken advantage of the employer 401(k) plans that are available to them If an employer does not match contributions, it is (still, not) advantageous to contribute to a company sponsored retirement savings plan because the contributions to the plan are invested with (after fax, pretax, the company's) earnings If the McDermotts invest part of their surplus in their 401(k) plans, they will save the designated amount plus another (40 , 35 , 20 , 33 65 ) of that amount because of the tax savings

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9. Preparing a budget A cash-flow budget uses the same format as a cash-flow statement. It is prepared on a monthly basis and it reflects

9. Preparing a budget

A cash-flow budget uses the same format as a cash-flow statement. It is prepared on a monthly basis and it reflects budgeted income and expenses.

In addition to the cash-flow statement, Dan and Lucy made a list of budget assumptions, listed for you here:

	Dans income will increase by 5%, effective January 1. His bonus is generally 10% of his income in the previous year, and he receives it in January.
	Lucys raise will be 3%, effective January 1.
	Interest and dividend income will conservatively be the same in 2017 as it was in 2016 and will be received on a monthly basis.
	Mortgage payments will be the same in 2017 as they were in 2016.
	Federal income taxes are estimated at 20%, state income taxes at 6%, and social security taxes at 7.65% of wages, including Dans bonus.
	Property insurance and property taxes are paid every six months, in June and December. The amount is expected to be the same in 2017 as it was in 2016.
	Lucy will contribute $60 per week for the employee portion of their medical insurance.
	Auto insurance is paid at the end of each calendar quarter and should not be more than it was in 2016.
	Dan and Lucy would like to purchase a new car in the next few years and will put $500 a month away specifically for that purpose.
	Dan and Lucy dont expect the amount of variable expenses to change in 2017 except that they would like to double their charitable contributions.
	Gift purchases are made mostly around the holidays, so Dan and Lucy are planning to pay half of the gift expense in December and half in January when the credit card bill comes in.
	Water and sewer is billed quarterly, in January, April, July, and October. The cost of heat should be spread over six months from November to April.
	All other variable expenses can be spread evenly every month at 2016 amounts.

Use the information from their cash-flow statement (listed in the first column of the following annual budget) and their budget assumptions to fill in the missing amounts for the first six months of Dan and Lucys monthly budget for 2017. (Note: Be sure to fill in every blank space with a value. Round each answer to the nearest dollar.)

Annual Budget	Cash-Flow Statement	2017
Name: Dan and Lucy McDermott	Cash-Flow Statement	2017
	2016	Jan.	Feb.	Mar.
INCOME
Dans salary	57,000	4,988	4,988	4,988
Lucys salary	51,300	4,403	4,403	4,403
Dans Bonus	5,000	0	0	0
Interest and dividends	150	13	13	13
Total Income	$113,450		$9,404	$9,404
EXPENDITURES
Fixed Expenses
Mortgage	14,112	1,176	1,176	1,176
Dans federal income taxes	12,400		998	998
Dans state income taxes	3,720		299	299
Dans social security taxes	4,743		382	382
Lucys federal income taxes	10,260	881	881	881
Lucys state income taxes	3,078	264	264	264
Lucys social security taxes	3,924	337	337	337
Property taxes	4,500	0	0	0
Property insurance	1,200	0	0	0
Medical insurance	2,400	240	240	240
Automobile insurance and registration	700	0	0
Savings for auto purchase		500	500	500
Total Fixed Expenses	$61,037		$5,077
Variable Expenses
Food	1,356	113	113	113
Entertainment	3,000	250	250	250
Dining out	4,700	392	392	392
Electric	350	29	29	29
Water and sewer	800		0	0
Heat	1,250	208	208	208
Cable TV	3,000	250	250250	250
Telephone	600	50	50	50
Cell phone	900	75	75	75
Gifts	2,000
Personal care	600	50	50	50
Medical expenses	3,700	308	308	308
Vehicle gas and maintenance	2,530	211	211	211
Charitable contributions	1,500	250	250	250
Vacation
Total Variable Expenses	$26,286		$2,186	$2,186
Total Expenses	$87,323		$7,263	$7,438
SURPLUS (DEFICIT)	$26,127		$2,141	$1,966

Dan and Lucy have an emergency fund of $40,000. They would like to start saving for retirement, but they have not signed up for their companies 401(k) plans. Neither company matches 401(k) contributions.

What do you suggest for Dan and Lucy based on their goals and the budget that they have put together?

The $40,000 that the McDermotts have saved for an emergency is ____ (less than,more than, the same as) three months of expenses. They have not, however, taken advantage of the employer 401(k) plans that are available to them. If an employer does not match contributions, it is ____ (still, not) advantageous to contribute to a company-sponsored retirement savings plan because the contributions to the plan are invested with ____(after-fax, pretax, the company's) earnings. If the McDermotts invest part of their surplus in their 401(k) plans, they will save the designated amount plus another ____(40%, 35%, 20%, 33.65%) of that amount because of the tax savings.