Finance Test 1

Situations in which individuals not part of a transaction are affected by the transaction. 

A situation in which as a result of producing a good or service, someone is negatively affected by the production process, but the producer does not pay the cost of that effect.

A theoretical description of the amount of enjoyment an individual receives from certain actions (consumption, saving, etc.)

The growth of an investment through earning interest on interest.

1. Market Failures (monopolies, public goods, externalities and intrinsically gov't outputs)
2. Public Safety
3. Macroeconomic stability
4. Redistribution of Income

non-rival and non-exclusive

A.  TAXATION
B.    SUBSIDIES

C.    REGULATION TO RESTRICT OR MANDATE PRODUCTION

D.    PUBLIC PROVISION OF A PRIVATE GOOD

E.    PUBLIC FINANCING OF PRIVATE PROVISION

Also Social insurance: unemployment compensation, retirement insurance, medical insurance (medicare and Medicaid), disability insurance, and health insurance market.

THE PRINCIPAL OF DIMINISHING MARGINAL UTILITY STATES THAT THE MORE ONE HAD OF A PARTICULAR GOOD OR WEALTH, THE LESS ONE ENJOYS THE LAST OR NEXT INCREMENT.  UNDER THIS PRINCIPAL THE OVERALL UTILITY OF THE COMMUNITY OR COUNTRY WOULD BE INCREASED IF THOSE WHO HAD THE MOST WEALTH WERE TAXED AND THE PROCEEDS WOULD GO TO THOSE WHO HAD LITTLE OR NOTHING BECAUSE THE UTILITY OF THE RECIPIENTS WOULD BE MUCH GREATER THAN THE LOSS OF UTILITY OF THE LOSERS.

AUDIT REVIEW TELLS MANAGERS, EXECUTIVES AND LEGISLATORS IF THE PROGRAM PURPOSES ARE BEING MET, AND IF THE SPENDING OR OBLIGATING IS WITHIN BUDGET LIMITS.

for all goods or services that have value, having more is always preferred to having less

an indefinite measure of the satisfaction (sense of well-being) one derives from the ownership or use of a good or service

the fact that individuals and organizations are restricted in their ability to increase their sense of well being because of budget limitations

a graphic description of an individual’s willingness to trade off the purchase of one good for another

the percentage change in the demand for a particular good or service for a given percentage change in the price of good or service. E = (dQ/Q)/dP/P

a measure of the quantity of production in a society relative to the maximum production. Social efficiency is maximized if production is maximized.

the choice a society must make between maximizing total output and the distribution of income among the citizens

1. Organizational: Classifies spending by organizational unit. Assigns responsibility and accountability to a management chain.

2. Object Class: line item budget
3. Activity or Task-based: Focus on specific tasks to be performed, e.g. miles of road built, number of students taught, number of criminals captured….
4. Function, purpose, or program: outcome based, broad purpose
5. Performance Budgeting

1.    Define objectives

2.    Estimate the benefits from the project

3.    Estimate project costs

4.    Identify the proper discount rate and calculate present value

5.    Establish decision criteria

1. Liability settlements
2. What if questions/surveys
3. Revealed Preference
4. Average Value of life insurance
5. Present value of future earnings
6. Premium pay for risky jobs

2 promises = pay face value + periodic interest (coupon payments)
bond value = present value of face value + present value of interest payments

it converts the stream of future costs and benefits into their value today.

payment received at the end of a period

1. purchases
2. transfer of payments
3. capital investments

Current or operating budget: includes purchases and transfer payments

Capital budget: usually a separate budget for long-term investments

1. Executive preparation (formulation)
2. legislative consideration (approval)
3. Execution
4. audit and evaluation

1. PREVENTIVE CONTROLS – block actions that would violate standards

(training, rotation of duties, separation of responsibilities, separate accounting from operations --> increases accountability)

2. FEED FORWARD CONTROLS – perform diagnostic or therapeutic actions in the spending process.

3. FEEDBACK CONTROLS – start corrections into the budget cycle for the future

the condition in a society in which no one can be made better off unless someone is made worse off.

1. Planning - Identifying the objective and determining the appropriate actions for accomplishing that objective
2. Organizing - Bringing together the resources required to accomplish the objective and combining them in the proper combination and the proper sequence
3. Controlling - conducting measurement and taking corrective action

Corporate - goal is efficient allocation of resources, single objective and revenues are tied to production.
public - goal is also efficient allocation of resources, multiple objectives and revenues are not tied to production

1. Individuals are the best judges of their own well-being
2. The welfare of the community depends on the welfare of the individuals in the community
3. To judge the impact of a social action on the welfare of the community requires an assessment of whether any individuals are better off or worse off

the condition in a society in which no one can be made better off unless someone is made worse off.

Corporate

1.    Legal requirements

2.    Investor requirements
public

1.    Legal requirements

2.    Citizens and lenders need to know

1. Statement of Assets, Liabilities and Net Worth (Balance Sheet)

2. Income statement (Statement of revenue and expense)

3. Statement of sources and uses of funds

It is a financial plan
It identifies sources and uses of funds

It shows spending priorities

Moral hazard means that people with insurance may take greater risks than they would do without it because they know they are protected, so the insurer may get more claims than it bargained for.

people who know they have a higher risk of claiming than the average of the group will buy the insurance, whereas those who have a below-average risk may decide it is too expensive to be worth buying.

Financial plans that describe the source and amount of funds available and the uses of those funds.

Use by one person does not prevent concurrent full use by others.