Analysis Applied to Budgeting, Essay Example

Marketable Securities

Debt Securities – These are Bonds which are ordinarily issued by Corporations, Municipalities and the US Government. These types of bonds contain two important characteristics, namely: the maturity date which defines where the obligation will be paid in full and the upper bound the delineation of the cast to be received.

Equity Securities – This relates to an entities ownership of common stocks. They contain the same characteristics as debt securities in the maturity date and common bound.

Trading Securities – Here the GAAP[1] treatment follows economic valuation. The market value being determined on the Balance Sheet date.  The increases in book value will be recorded on the Income Statement and Decreases shown as unrealised holding losses on market securities.

Available for sale securities – Here the GAAP treatment becomes more complex. It treats both holding gains and losses as equity or Balance Sheet adjustments, as opposed to that of Income Statement adjustments.

Held to maturity securities – Here GAAP states they are held to economic market value, assuming events are based upon normal progressions.  GAAP treats the valuation as amortised cost and uses the historical cost figure as the anticipated rate of return at the time of purchase of the security.

GAAPS treatment of marketable securities spans from duplication of economic values (trading securities), to that of historical cost valuations (held-to-maturity) and available for sales securities that tends to fall in the middle of these extremes.  Quick Acid Test ratios are often employed in order to measure the company’s abilities to repay short term debts. (Smith, R. 2004)

Theory of Budget Execution

The different stages of the budget process may be defined as follows:-

Authorization Stage – This is where the budget has been approved by the Government department who has been authorized to spend the money.  In most countries unspent funds from the previous year cannot be carried forward and as such there is normally a mad rush towards the end of the financial year to spend any unallocated funds.

The Commitment Stage– This is the stage where a future obligation to pay for a liability has been incurred.  Essentially the commitment is where a purchase order has been raised and a contract for procurement of the goods or services has been signed and it becomes a legally binding contract. The precise existence of a commitment does not guarantee that the goods or services will be delivered on time and there are varying shades of grey in the interpretation of this. This is particularly true in developing and third world administrations.

Verification Stage – This is where the goods have been fully or partially delivered in accordance with the contract.  Normally ministerial responsibility is to ensure that the supply of goods has been made in line with the contract details. This is often important because of the treatment of accruals.

Payment Auithorization Stage – In general terms all conditions have been satisfied and the customer’s bill is authorized for payment.

Payment Stage – All of the cash transactions get recorded as completed in the books of accounts and an electronic transfer of funds or a check is raised for payment

Accounting Stage – All of the Accounting transactions are finalised in the books and reconciliations are completed.

References

Smith, R. &. (2004). Public Budgeting in America, 5th Ed. Indianna University (orig): Prentice Hall.

[1] Generally Accepted Accounting Principles (GAAP)