Tiwanaku Stelae and Maya Stelae Research Paper I have written a draft paper like 4 pages, please modify it to 8 pages. There are many comments in the draft paper, please modify the paper based on the comments. Fourth Edition
FINANCIAL MANAGEMENT FOR PUBLIC,
HEALTH, AND NOT-FOR-PROFIT
S
ORGANIZATIONS
M
I
Steven A. Finkler,
Ph.D., CPA
T
Professor Emeritus of Public
and
Health
Administration,
H
Accounting, and Financial Management
,
The Robert F. Wagner Graduate School of Public Service
New York University
A
D
Robert M. Purtell,
Ph.D.
Assistant Professor of FinanceA& Director of the MPA Program
Nelson A. Rockefeller College
Mof Public Affairs and Policy
University at Albany, State University of New York
2
Thad D. Calabrese,
Ph.D.
0
Assistant Professor of Public and Nonprofit Financial Management
0 School of Public Service
The Robert F. Wagner Graduate
New York
8 University
T
Daniel L. Smith, Ph.D.
S
ISBN 1-323-02300-3
Assistant Professor of Public Budgeting and Financial Management
The Robert F. Wagner Graduate School of Public Service
New York University
Boston Columbus Indianapolis New York San Francisco Upper Saddle River
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Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
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2
0
Library of Congress Cataloging-in-Publication Data
0
Finkler, Steven A.
8
Financial management for public, health, and not-for-profit organizations / Steven A. Finkler.—4th ed.
p. cm.
T
Includes index.
ISBN-13: 978-0-13-280566-7 (alk. paper) S
ISBN-10: 0-13-280566-9 (alk. paper)
1. Finance, Public—United States. 2. Finance, Public—United States—Accounting. 3. Health facilities—
United States—Business management. 4. Nonprofit organizations—Finance. I. Title.
HJ257.2.F555 2012
658.15—dc23
2012008739
10 9 8 7 6 5 4 3 2 1
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
ISBN-10:
0-13-280566-9
ISBN-13: 978-0-13-280566-7
BRIEF CONTENTS
Preface
xvii
Case Examples
xxiii
About the Authors
PART I
xxiv
Introduction: Setting the Stage
Chapter 1
PART II
Planning
1
Introduction to Financial Management
1
25
Chapter 2
Chapter 3
Planning for Success: Budgeting 25
S
Additional Budgeting Concepts 76
Chapter 4
Chapter 5
Chapter 6
Understanding Costs 117
Capital Budgeting 162 I
Long-Term Financing 204T
M
H
,
PART III Implementation and Controlling Results
Chapter 7
Chapter 8
Managing Short-Term Resources and Obligations
Accountability and Control 258
A
D
PART IV Case Studies 299
A Studies
Chapter 9 Financial Management Case
M
PART V
225
Reporting Results
225
299
313
Chapter 10 Taking Stock of Where You Are: The Balance Sheet 313
2
Chapter 11 Reporting the Results of Operations: The Activity and
0
Cash Flow Statements 356
0 for Not-for-Profit and
Chapter 12 Unique Aspects of Accounting
Health Care Organizations8 406
Chapter 13 Unique Aspects of Accounting for State and Local
Governments––Part I: TheT
Recording Process 440
S
Chapter 14 Unique Aspects of Accounting for State and Local
Governments––Part II: Reporting Financial Results 464
PART VI Financial Analysis 507
Chapter 15 Financial Statement Analysis 507
Chapter 16 Financial Condition Analysis 563
Glossary
ISBN 1-323-02300-3
Index
619
638
iii
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
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ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
CONTENTS
Preface
xvii
Case Examples
xxiii
About the Authors
PART I
xxiv
Introduction: Setting the Stage
1
Chapter 1 INTRODUCTION TO FINANCIAL MANAGEMENT
1
Introduction 1
What Is Financial Management? 2
Public Sector Resource Flows 3
S
Governments 3
M
THE FEDERAL GOVERNMENT 3
STATE AND LOCAL GOVERNMENTS 7 I
The Health Care Services Industry T9
The Not-for-Profit Sector 10
H
The International NGO Sector 14,
Why Public, Health Care, and Not-for-Profit in One Book? 15
Why Should Public Service Organizations Worry about Financial
A
Management? 15
D a Profit? 16
Should Public Service Organizations Earn
Corporate Income Taxes 17
A
Ongoing Case Study 17
M
The Setting 17
Summary 18 • Key Terms from This Chapter 19
for Discussion 19 • Suggested Readings
20
2
•
Questions
Appendix 1-A: Fund-Raising 21 • Key
0 Terms from
This Appendix 23 • Fund-Raising Readings 23
0
8
PART II Planning 25
T
Chapter 2 PLANNING FOR SUCCESS: BUDGETING
S
Introduction 25
25
Mission 26
Strategic Plan 27
Long-Range Plan 27
Budgets 29
Special Purpose Budget 30
ISBN 1-323-02300-3
CASE STUDY: Special Purpose Budget
LESSONS FROM THE CASE 35
31
The Master Budget 36
THE OPERATING BUDGET 36
THE FINANCIAL BUDGET 42
v
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
vi
Contents
The Budget Process 46
THE BUDGET CYCLE 46
BUDGET PRESENTATION 50
A BUDGET TIMELINE 50
Political Realities in the Budget Process 52
Behavioral Aspects of the Budget Process 52
Budgets and Motivation 53
Incentives 54
Unrealistic Expectations 55
CASE STUDY: Developing a Government Budget 56
Summary 65 • Key Terms from This Chapter 66 • Questions
for Discussion 67 • Problems 67 • Case Study: Denison
Specialty Hospital—Part I 73 • Suggested Readings 74
S
M
Introduction 76
I
Line-Item and Responsibility Center Budgets
T Decentralization 78
Centralization Versus
H Budgets 80
Program and Functional
Program Budgets
, 80
Chapter 3 ADDITIONAL BUDGETING CONCEPTS
76
77
Functional Budgets 81
Budgeting Techniques 82
A
Flexible Budgeting 82
D
Performance Budgeting 84
EXAMPLE 85 A
RETURN ON INVESTMENT
M (ROI) ANALYSIS
85
Zero-Based Budgeting 87
Forecasting 88
2 THE BENEFIT OF HISTORICAL DATA 88
FORECASTING WITHOUT
FORECASTS BASED
0 ON HISTORICAL DATA 89
Using Budgeting Techniques 91
0
Additional Governmental Budgeting Issues 91
8
Tying Managers’ Hands 92
T 93
Budget Reserves
CommunicatingSwith the Public 93
Summary 94 • Key Terms from This Chapter 94 •
Questions for Discussion 95 • Problems 96 •
Case Study: Denison Specialty Hospital—Part II 102 •
Suggested Readings 104
Appendix 3-A: A Performance Budget Example 105
Appendix 3-B: Forecasting Using Historical Data 109 •
Key Terms from This Appendix 116
Chapter 4 UNDERSTANDING COSTS
117
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Introduction 117
Basic Concepts and Definitions 118
Contents
vii
Cost Behavior 122
Fixed Versus Variable Costs 122
Cost Graphs and the Relevant Range 124
The Impact of Volume on Cost per Unit of Activity 125
Outsourcing and Marginal Cost Analysis 126
Break-Even Analysis 128
Break-Even Analysis Example 129
Break-Even with Multiple Products 130
Additional Break-Even Applications 132
SOLVING FOR FIXED COST, PRICE, AND VARIABLE COST
BREAK-EVEN AND FIXED REVENUES 134
MARGIN OF SAFETY 134
133
S Analysis 135
Managerial Implications of Break-Even
Break-Even Analysis Cautions 135M
Cost Measurement 136
I
Cost Allocation 136
T
SELECTING THE BASE FOR OVERHEAD RATES 137
ALLOCATION FROM SUPPORT CENTERS TOH
MISSION CENTERS 137
DIRECT DISTRIBUTION 139
,
THE STEP-DOWN METHOD 140
OTHER ALLOCATION APPROACHES 143
ALLOCATING COSTS TO UNITS OF SERVICEA 143
Activity-Based Costing and Activity-Based Management 143
D
The Theory of Constraints 148 A
Summary 149 • Key Terms from This
MChapter
REFLECTIONS ON ABC
146
150 •
Questions for Discussion 151 • Problems 151 •
Suggested Readings 158
Appendix 4-A: Additional Break-Even Analysis
Issues 159
2
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Introduction 162
8
Why Do We Need A Separate Capital Budget? 163
T Practice 164
Definition of Capital Assets: Theory and
S Attention? 165
Why Do Capital Assets Warrant Special
ISBN 1-323-02300-3
Chapter 5 CAPITAL BUDGETING
162
The Time Value of Money 166
Compounding and Discounting 167
Present Value Versus Future Value 169
Time Value of Money Calculations 169
Using Computer Spreadsheets for TVM Computations 170
Annuities 173
Cash Flow Versus Revenue and Expense 175
Capital Asset Investment Analysis 176
Net Present Cost 176
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
viii
Contents
Annualized Cost 178
Net Present Value 180
Internal Rate of Return 182
LIMITATIONS OF IRR
184
Selecting an Appropriate Discount Rate 185
INFLATION 186
UNCERTAINTY 186
Cost-Benefit Analysis 186
DETERMINING PROJECT GOALS 187
ESTIMATING PROJECT BENEFITS 187
ESTIMATING PROJECT COSTS 188
DISCOUNTING COST AND BENEFIT FLOWS 188
COMPLETING THE DECISION ANALYSIS 188
S of Capital Budgeting 189
Other Techniques
Summary 190 • M
Key Terms from This Chapter 190 •
Questions for Discussion 192 • Exercises (TVM) 192 •
I
Problems and Questions
193 • Suggested Readings 195
Appendix 5-A: Using
T a Financial Calculator for Time Value of
Money Calculations 197
H
Appendix 5-B: Using Computer Spreadsheets for Time Value of
Money Calculations—Examples
200
,
A
Chapter 6 LONG-TERM FINANCING
204
Introduction 204D
Equity Financing A
204
Retained Earnings 205
M
Issuance of Stock 205
Taxation 206
Contributions 2206
CAPITAL CAMPAIGNS
0
207
Long-Term Debt 207
0
Long-Term Notes 208
8
Mortgages 208
Bonds 209 T
WHY ARE BONDS
SUSED? 210
GOVERNMENT-ISSUED BONDS 211
COUPON AND ZERO COUPON BONDS 212
TERM VERSUS SERIAL BONDS 212
CALL PROVISIONS 213
CALCULATING BOND PAYMENTS AND VALUES 214
CALCULATING THE INTEREST RATE FOR A SERIAL BOND—NIC AND TIC
216
Capital Leases 217
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
ADVANTAGES OF LEASING 219
DISADVANTAGES OF LEASING 220
Summary 221 • Key Terms from This Chapter 221 •
Questions for Discussion 223 • Exercises (TVM) 223 •
Problems and Questions 223 • Suggested Readings 224
Contents
PART III Implementation and Controlling Results
ix
225
Chapter 7 MANAGING SHORT-TERM RESOURCES AND
OBLIGATIONS 225
Introduction 225
Working Capital Management 226
Short-Term Resources 227
Cash 227
SHORT-TERM CASH INVESTMENT 228
CASH BUDGETS 229
CONCENTRATION BANKING 230
MAINTAINING SECURITY OVER CASH 231
Marketable Securities 231
S
INVESTING OBJECTIVES 232
SUITABLE SHORT-TERM INVESTMENTS 232
M
UNSUITABLE SHORT-TERM INVESTMENTS 235
Liquidity Management 238
Accounts Receivable 238
EARLY DATA COLLECTION 239
CREDIT POLICIES 239
ONGOING DATA COLLECTION 240
THE BILLING PROCESS 240
AGING OF RECEIVABLES 241
LOCKBOXES 242
ELECTRONIC PAYMENT 242
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Inventory 242
PERIODIC VERSUS PERPETUAL INVENTORY 243
M
ECONOMIC ORDER QUANTITY 244
JUST-IN-TIME INVENTORY
244
2
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8
TChapter 249 • Questions
Summary 248 • Key Terms from This
for Discussion 250 • Problems 251 • Case Study: The Case of the
S
Missing Check 252 • Suggested Readings 253
Short-Term Obligations 245
Accounts Payable 246
Payroll Payable 246
Short-Term Debt 247
Taxes Payable 248
Appendix 7-A: Economic Order Quantity
This Appendix 256
Appendix 7-B: Credit Terms 257
254
ISBN 1-323-02300-3
Chapter 8 ACCOUNTABILITY AND CONTROL
•
Key Terms from
258
Introduction 258
Management Control Systems 259
Measures of Performance 260
The Balanced Scorecard 262
BALANCED SCORECARD ELEMENTS 263
BALANCED SCORECARDS AND PUBLIC SERVICE ORGANIZATIONS 263
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
x
Contents
BALANCED SCORECARD BENEFITS 264
IMPLEMENTING BALANCED SCORECARDS 264
Triple Bottom Line Performance 264
Controlling Quality 265
Cost of Quality Report 265
Total Quality Management 265
Six Sigma 266
Quality Control Charts 266
Variance Analysis 267
Understanding Why Variances Happened 267
Variance Analysis Mechanics 268
THE TOTAL VARIANCE 268
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DEPARTMENT VARIANCES
270
LINE-ITEM VARIANCES
270
M
Flexible Budget Variance Analysis 271
I
THE VOLUME VARIANCE 272
THE PRICE, OR RT
ATE, VARIANCE 272
THE QUANTITY, OR USE, VARIANCE 272
H
CALCULATING THE VOLUME, PRICE, AND QUANTITY VARIANCES 273
Determination ,of the Causes of Variances 277
Aggregation Problems 277
Exception Reporting
278
A
Fixed and Variable
D Costs 278
Investigation and Control of Variances 279
A
Revenue Variances 280
EXAMPLE 281M
Performance Measures 283
Ethics 283
2
A Code of Ethics
0 283
COMPETENCE 284
CONFIDENTIALITY0 284
INTEGRITY 2858
OBJECTIVITY 285
T
The GFOA Code 285
S
Gray Areas 286
Safeguarding Resources 286
Elements of a Control System 287
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
AUDIT TRAIL 287
RELIABLE PERSONNEL 288
SEPARATION OF FUNCTIONS 288
PROPER AUTHORIZATION 289
ADEQUATE DOCUMENTATION 289
PROPER PROCEDURES 290
PHYSICAL SAFEGUARDS 290
BONDING, VACATIONS, AND ROTATION OF DUTIES 290
PERFORMANCE AUDITS 290
COST-EFFECTIVENESS ANALYSIS 291
Contents
xi
The Sarbanes-Oxley Act 291
The Form 990 293
Consequences of Ethical Violations 294
Summary 294 • Key Terms from This Chapter 294
Questions for Discussion 296 • Problems 296 •
Suggested Readings 298
PART IV
Case Studies
•
299
Chapter 9 FINANCIAL MANAGEMENT CASE STUDIES
299
Introduction 299
CASE STUDY: Mead Meals on Wheels 299
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CASE STUDY: Taos Museum of Southwestern Arts and Crafts
PART V
M Ski Area
CASE STUDY: The Glory Mountain State
CASE STUDY: The DMV 306
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CASE STUDY: The Stratton Township Park 308
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CASE STUDY: New City Band 311
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Reporting Results
301
303
313
ISBN 1-323-02300-3
A ARE:
Chapter 10 TAKING STOCK OF WHERE YOU
THE BALANCE SHEET 313 D
Introduction 313
A
The Framework for Financial Accounting 314
M
The Fundamental Equation of Accounting 315
Assets 317
2
Liabilities 319
0
Owners’ Equity 320
Generally Accepted Accounting Principles
321
0
The Entity Concept 322
8
Monetary Denominator 322
T
Objective Evidence and the Cost Convention 323
S
Conservatism 324
The Going Concern Concept 325
The Principle of Materiality 325
The Accrual Concept 326
International Financial Reporting Standards 327
Fiscal Years 327
Balance Sheet Elements 328
Assets: A Closer Look 329
Cash 329
Marketable Securities 329
Accounts Receivable 330
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
xii
Contents
Inventory 331
Prepaid Expenses 331
Fixed Assets 331
Sinking Fund 333
Recording Asset Transactions 333
Liabilities: A Closer Look 334
Accounts Payable and Wages Payable 334
Long-Term Debt 334
LEASES 334
SECURED AND UNSECURED LONG-TERM LOANS 335
BONDS PAYABLE 336
Recording Liabilities 336
Net Assets or FundSBalance: A Closer Look 336
MInformation 337
Recording Financial
Using Computers
I to Record Financial Transactions 337
The General Journal
T and Journal Entries 338
Debits and Credits 339
H
Recording Transactions 339
,
The General Ledger and Ledger Entries 342
Generating a Balance Sheet 343
A and Ledgers 343
Subsidiary Journals
Summary 345 • D
Key Terms from This Chapter 346 • Questions
for Discussion 348 • Problems 348 • Suggested Readings 349
ARecording Process: Debits and Credits 350
Appendix 10-A: The
Appendix 10-B: Using
M Dollar Signs and Underlines in Accounting 353
Chapter 11 REPORTING THE
2 RESULTS OF OPERATIONS: THE ACTIVITY
AND CASH FLOW STATEMENTS 356
0
Introduction 356
0
The Activity Statement
357
8 Events 358
Recording Financial
The Activity Statement:
A More Detailed Examination 360
T
MULTIYEAR PRESENTATION 361
S
REPORTING IN THOUSANDS
361
REPORTING BY NATURE, SOURCE, AND ORGANIZATIONAL UNIT 361
ADMINISTRATIVE AND GENERAL EXPENSES 362
BAD DEBT EXPENSE 363
DEPRECIATION EXPENSE 365
INVENTORY USED EXPENSE 366
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The Dangers of Estimates 367
Deferred Revenue 368
Earnings per Share 369
Opportunity for Financial Analysis 369
The Statement of Cash Flows 370
Derivation of the Cash Flow Statement 371
Contents
xiii
An Example 372
CASH FROM OPERATING ACTIVITIES 372
CASH FROM INVESTING ACTIVITIES 377
CASH FROM FINANCING ACTIVITIES 378
DISCUSSION 378
Interrelationships among Financial Statements 379
Notes to Financial Statements 379
Recording and Reporting Financial Information 379
Summarizing Financial Information 383
The Operating Statement 383
The Cash Flow Statement and the Direct Method 385
The Balance Sheet 387
Financial Statement Headings 388
S
Chart of Accounts 388
M
Starting from Scratch 389
I
Summary 391 • Key Terms from This Chapter 391 •
Questions for Discussion 392 • Problems
392 •
T
Suggested Readings 393
H
Appendix 11-A: Sources of Revenue for Governments 394 •
Key Terms from This Appendix 396 ,
Appen…
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