FinancialManagement in Organizations
1.Discuss the role of financial management in public serviceorganizations.
Financialmanagement in public service organizations is mainly concerned withcontrolling and planning financial resources within a given setting. In theory every organization should specify objectives and goals itwants to pursues, quantify the benefit pursued and then use theavailable means to maximize benefits. The role of financialmanagement in public service organization can be divided into threedistinct duties liquidity, management and profitability (Sharma,2010).
Thefinancial manager will have to keep assets intact, for assets areresources which enable a firm to conduct its business. Assetmanagement entails keeping all the resources and assets of theorganization intact so that it is possible to conduct businessoperations smoothly. This includes but not limited to management oflong-term and short-term financial resources which are closelyassociated with expansion and development of the organization(Sharma,2010).Here the role of financial management includes putting funds to workwithin the organization, and to control their productivity andidentifying and selecting viable sources through which funds may beobtained
Inthis area the role of financial management is to match the inflow andoutflow of cash in and out of the organization, ascertaining thesource from which money can be raised and the time when thesefinancial resources are required .It also encompasses maintainingaccounts with financial institutions to ensure the firm liquiditylevel is apt (Sharma, 2010).
Thisentails cost control, pricing, and forecasting expected returns frombusiness activities in organization that engage in delivery ofservice. Even though the sole duty of a public organization is todeliver service, and not to maximize profit, profit levels arepredicted from time to time in a bid to strengthen the firm andensure that the organization does not operate at a loss.
2.Is it possible for the federal debt to increase in a year when thefederal government has a surplus? How?
Federaldebt encompasses the total amount that the United States governmentowes to both domestic and foreign creditors. A creditor in thisrespect includes wealthy individuals, firms, companies, organizationsand governments. Federal government can have a surplus when therevenues collected surpass its expenditures. In a case when there isa surplus, it means money collected mainly inform of taxes is morethan money used in various government operations within and withoutthe US. In theory, a surplus is used to pay debt owed to creditorsand as such the total federal debt decreases (Sharma, 2010).Nonetheless, in some scenarios federal debt can increase even whenthere is a surplus. Normally, whenever there is a deficit federalgovernment can seek Congress authorization to borrow money from trustfunds such as social security and Medicare. Federal debt canincrease in a financial year with a surplus when the social securitycollects more money that it pays, and the law requires any surplus tobe used to but treasury bonds from the federal government that isrunning in deficit. When deficit from federal government operationsare less than the surplus of social security, that government canclaim to have a surplus because they will not be obligated to sellextra bonds to the public and foreigners. In actual sense the amountof intergovernmental debt that include both social security and othergovernment accounts will increase, but because its surplus is morethan federal government deficit, it can be said that there is surplusin the year when federal debt is has increased (Brigham&Ehrhardt, 2008).
3.Wimpy, a character in Popeye cartoons, offers to “gladly pay youTuesday for a hamburger today.” Why might Burger King find this tobe an unattractive offer?
BurgerKing might find this as an attractive offer because the value ofmoney keeps on changing (Time value of money). This is a principlebased on the idea that money available now (today) is worth much morethat a similar amount available in the future, due to its prospectivecapacity to yield returns. The fundamental finance principle behindthis notion is that the sooner a person receives money the betterbecause it can earn interest. Money deposited into a savings accountearns interest, and therefore money available today is worth morethan the same in the future. In addition you can invest that moneytoday and will yield dividend or interest. Also inflation mightsignificantly lower the purchasing power of a given amount in thefuture (Sharma, 2010).
4.What are some reasons that capital asset acquisition decisionsreceive particular attention?
Capitalacquisition decisions are vital in any organization because they havelong-term implications. This is because they are connected to astuteallocation of capital. It is of utmost importance that current fundsare used to finance investment projects that are going to result intoa stream of cash inflow in future and over a long period of time(Sharma, 2010). Capital budgeting decisions are therefore given a lotof importance and weight since a firm’s future is inexplicablylinked to the profitability and yield streaming from asset acquired.Capital asset acquisition decision determines the risk and returnstied to a given investment project (Brigham& Ehrhardt, 2008).Different proposals on asset acquisition are ranked on the basis ofprinciples such as risk sensitivity, urgency, profitability andliquidity level.
5.What are the limitations of the internal rate of return method andthe problems with the payback method?
Oneof the limitation internal rate of return as an investment decisiondevice is that it cannot be applied to rate projects that aremutually exclusive. It is limited to rate whether it would beprofitable to invest in a single project (Sharma, 2010).Additionally, internal rate of return is pegged on the assumptionthat there is reinvestment of the interim cash stream in projectswith equal rates of return. In this regard, IRR overstates the yearlyequivalent rate of return for a given project whose provisional cashflows are reinvested at a rate below that of the calculate IRR. Thispresents a major limitation, particularly when rating projects thathave high internal rate of return, given that in many cases anotherproject is not available in the short-term that can yield the samerate of return as the project in question (Sharma, 2010). In caseswhere the IRR is higher than the true reinvestment rate theshort-term cash flow, IRR will substantially overstate the yearlyequivalent yield from the project. This formula assumes that a firmhas an additional project, with similarly attractive prospects whereinterim cash flow can be invested. Also, it does not consider thecost of capital and as such can not be used to rate projects ofdifferent durations.
Paybackperiod as a technique of analysis has grave limitations in its use.First it overlooks the time value of money. For instance projectsthat have similar payback in spite of the fact that they havedifferent payback periods are viewed as equally attractive. Thismethod also overlooks the cash flows that result after the paybackperiod, as such disregarding the profitability of the investment(Sharma, 2010). In such a scenario a given project may be valuablecompared to another based on cash flow but payback method fails totake that into account.
6.Do capital budgets have an impact on operating budgets? Explain youranswer thoroughly.
Normallyoperating budget envelops duration of one year, it usually leaves outcapital budgeting, which typically has a longer time period.Operating budgets illustrates expenses as they have an effect onincome statement. On the other hand, capital budget encompassescapital expenses, which are recorded as long –term assets on thecompany’s balance sheet (Sharma, 2010).. Nonetheless, CapitalBudget affects the Operating Budget in several ways debt servicingpayment requires capital principal and interest. Operating budgetreflects the interest portion of these payments. It also reflects allthe upkeep, maintenance costs, renovation, and utility expensesrequired on the purchased asset. In additional, when projects arefunded through the sale of general obligation bonds, the ensuingappropriation of the general fund revenue for the transfer of capitalfund is reflected in the operating budget (Sharma, 2010). Forexample, when a new facility is opened, costs associated withacquisition of new staff, utility expense, support staffs,maintenance are reflected in the operating budget. All costassociated with the asset over its expected economic life includingpurchases, disposal and maintenance are covered under operatingbudget.
7.What are the problems with the objective evidence and costconventions, and how can they be overcome?
Objectivityevidence calls upon accountants to prepare accounts based on factualand objective information. This it to ensure that there is a standardway in which accountants draw up a set of accounts for a firm(Sharma, 2010). The main problem that is many aspects relating todifferent accounting procedures arise totally complicating the goalof a universally applicable procedure. For instance, the durationthat a motor vehicle, whose cost of $300,000 shall be in servicedepends on the what objective means to an accountant, for example,one might say duration of service shall be 5 years while anothermight say 10 years. When these two calculate depreciation usingstraight line method, the first accountant will get $30,000/5=$6000,while for the other one it shall be $30,000/10=3000 yearly, and bothare correct and objective. It is therefore very difficult for anissue such as depreciation to define the boundary of objectivity(Brigham& Ehrhardt, 2008).
Thecost conventions are pegged on the conception that only costs paid toacquire a particular asset are pertinent and only such costs shouldbe reflected in the accounts of a firm. Though cost convections aregeared towards ensuring subjectivity does not play any role in thepreparation of statement of accounts, when it comes to attaching theapt value to an asset the cost concept always becomes problematic toapply. For example, when a firm acquires a fixed asset, it isreflected in the balance sheet at it historical cost lessdepreciation up to the date in question (Brigham& Ehrhardt,2008). In this case the problem of value emanates since everyaccountant accords a different value to the asset based on personalbias.
8.Why would public service organizations need to measure income?
Justlike private organization, public service organization mustcontinuously find ways to improve service delivered to customers,derive ways to become more accountable, lower the costs of operation,respond to customers need and remain responsive to the needs of theshareholders. The purpose of these institutions is to offer servicesto the public at a considerable price. As such performance cannot bemeasured by evaluating financial statement of the organization. Evenso, measuring income enables the organization to prepare budgets andallocate funds to different activities appropriately. Measuringincome also enables public organization to establish whether they areoperating at a loss and enable authorities to impose the appropriatetax. Since they are not profit oriented, measuring income is one ofthe ways through which the general performance of the organizationcan be established (Sharma, 2010). Public organizations find itimportant to measure their income for two main reasons. First, itenables them to prepare a budget and second to examine theirproductivity and contribution to the welfare of the civilians.
9.Is the information on the balance sheet, activity statement, and cashflow statement independent of one another or connected? Explain.
Theinformation in the balance sheet, cash flow statement and activitystatement has a strong link and connection to each other. Theinformation in the statement of cash flow is obtained from thechanges in the company’s balance sheet accounts during the businesscycle. On the other hand adjustments in the balance sheet accountsdrive the amount in the statement of cash flows (Sharma, 2010).Though each account is independent they are all intertwined. Thechanges in owners’ equity, assets and liabilities are the sameamounts recorded on the statement of cash flow these alterations arealso applied to establish the cash flow amounts. For examplealterations in retained earnings are broken up into its dividend partand its net income part. In the statement of cash flow net income islisted on top and then alteration made to establish the amount ofcash flow from the operating activities. In actual fact theliabilities and even asset listed in this section are the same thatare recorded on the profit making activity of the firm. For example,in the accounts receivable asset is debited in the circumstance whenthe level of sales is made on credit (Sharma, 2010). The inventoryasset account is credited in the event when listing cost of goodssold expense. In short cash flow statement assumes the subjectivityof the activity statement and balance sheet.
10.Towhat extent do not-for-profit organizations have the ability tochoose among the following:
a.using depreciation,b. ignoring depreciation,c.maintaining building and equipment on the balance sheet at theiroriginal cost,d. showing such assets at their market value,ore. completely charging such assets such as expenses in theyear acquired?
Notfor profit organization are established to serve a particular purposeand fulfill a certain goal, but not necessarily making profits. Depreciation is the staged provision of the cost of an asset allthrough its economic life. In the United States, financial standardsof accounting oblige not-for-profit organization to make outdepreciation in their statement of accounts. As such theseorganizations are required to consider the effects of depreciation ontheir statement of activities and balance sheet (Brigham&Ehrhardt, 2008). In not –for –profit organization depreciation isconsidered as an expense just like in profit making firms but thishas no effect on the cash flow because it is a non-cash transaction.
Thereforeassets such as buildings and equipments are maintained at the marketvalue since depreciation does not affect cash flow. Nonetheless, inthe statement of activities the key sections are expenses andrevenues. Particulars such as depreciation and salaries areclassified as expenses. Fixed assets are shown at their market valueand rarely by their original value, for the same reason thatdepreciation does not affect cash flow in any way (Brigham&Ehrhardt, 2008).
Not-for-profitalso recognizes a portion of assets such as motor vehicle andbuildings at the year of acquisition as equivalent to a yearlydepreciation expense. This gets rid of a circumstance wherenot-for-profit organization may show a surplus in the year of theacquisition of an asset. Recording a surplus may drive away donorfunds.
11.Do you think that a not-for-profit organization’s board can releasethe restrictions on money in a strike fund and use it for Generaloperations? Does it matter if the strike fund is held by a steelworkers’ union to pay benefits to its members during a strike,versus a fund used by a not-for-profit as a safety reserve in caseits workers go on strike?
Therationale of maintaining money in the strike fund and it usage oughtto be well declared in the strike fund section of the organizationsbylaws. Normally, the bylaws vary from one organization to anotherdepending on the decision of the board of the not-for-profitorganization. Ceteris paribus, this money cannot be used for thegeneral operation of the organization because it is meant to coverbenefits to members of the union during a strike. This money canonly be used for the function for which they were meant to serve. Ifthis money is used for another purpose it might be considered asfraud. Funds held by a steel worker union do not have restrictionsand the board can release restrictions so that such money is used forgeneral operation. Nonetheless, the management committee must pass adecision to designate the funds for another course. The burden on thenot-for –profit organization is the source of their funds-donor,who more often than not declare the purpose in which they wantorganization serve. For the steel worker union such restriction isnonexistent and the board or management committee has powers torelease restriction on money (Brigham& Ehrhardt, 2008).
Brigham,E. F., & Ehrhardt, M. C. (2008). Financialmanagement: Theory & practice.Mason, Ohio: Thomson Business and Economics.
Sharma,A.(2010). FinancialManagement & International Finance.Available at http://www.scribd.com/doc/33446773/Financial-Management