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153 Chapter 3 Solutions Manual

153 Chapter 3 Solutions Manual - Chapter 3 Issues of...

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Chapter 3 Issues of Budgeting and Control Questions for Review and Discussion 1. Capital budgets are closely tied to operating budgets in that governments and other not-for-profits must include current year capital expenditures in their operating budgets. In addition, if they issue debt to finance capital projects, they generally must service it out of operating funds. Further, once they complete the projects, they must maintain and repair them out of operating funds. 2. A flexible budget may be more important to business-type than to government-type activities because business-type activities are driven by the market and can be expected to vary more widely with changes in customer demand. The level of government-type activities, by contrast, is often established by the budget. 3. The main virtue of an object classification budget is that it facilitates control, specifying in detail how every dollar will be spent. However, by focusing on and controlling individual expenditures, it may ignore the relationship between costs and organizational objectives. It may thereby discourage effective planning and evaluation. Performance budgets require the specification of costs and outcomes and therefore encourage managers to consider the benefits or sacrifices that will result from a change in spending. In short, in performance budgeting the emphasis is on what the entity accomplishes rather than on how it accomplishes it. 4. Only a cash-basis budget, not an accrual basis budget, permits a government to properly plan its cash receipts and disbursements. Governments must pay for goods and services in cash when their bills come due. The timing of payments is not necessarily concurrent with the economic impact of the related activities. Similarly they must establish the amount and timing of their tax collections so as to be sure that they have sufficient cash on hand to meet their cash requirements. 5. “Favorable” budget variances are not necessarily indicative of effective governmental management. The goal of a government is neither to maximize revenues nor to minimize expenditures. An excess of actual over budgeted revenues may be evidence that taxes were higher than necessary. An excess of budgeted over actual expenditures may denote that the quantity or quality of the services that the government provided were less than anticipated. 6. Allotments are periodic allocations of funds to departments or agencies, usually made by the chief executive, to assure that an entire year’s appropriation is not 3-1
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dissipated early in the period. They provide an added measure of control over expenditures. 7. A government’s year-end results, reported in accordance with generally accepted accounting principles, may not be comparable with its legally adopted budget owing to differences in: basis of accounting (e.g., cash versus modified accrual); timing of specific revenues and expenditures (e.g., whether goods or services are recognized as expenditures when ordered rather than when received); perspective (e.g., program versus line-item), and
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