Fund Accounting - Assignment Example

Finance and Accounting Affiliation Q1 According to Internal Revenue Service (IRS) for the lease, agreement to be considered a capital lease the following list of criteria should be used. 1. It should indicate the lease transfers of ownership of the property to the lessee at the end of the lease term. The lease transfer is normally stipulated on the contract of which the two parties must observe to the very end of the contract (Hoopes, Mescall, & Pittman, 2012). A lease can be explained as a contract that stipulates details of rental agreements on the property that is on lease. Lease term is one of the agreement that must be addressed by the contract. A good example is when apartment is leased one is expect to know the duration of lease. After the duration of lease has elapsed the lease transfer ownership to lease. 2. The lease should have a bargain purchase option. The purchase option is not monopolized by either party. This is for the reasons of accounting. Consequently, the price stated should be sufficiently or reasonably below than of expected fair market value so that the inception of the lease of an individual can exercise the option with assurances. The two parties must engage each other in ensuring that the purchase that they have settle on is fair to the either side (Hoopes et al., 2012). 3. The lease term should be always be equivalent to either 75% or more of the estimated economic life of the leased property. The economic life is the one of the aspects that is checked thoroughly for the benefit of the person who is leasing the property. It gives him an assurance that he will not incur losses due to the low economic life of the property that is leased. The economic life in the hands of one or more user should be given consideration during the rolling out of the lease to another person. This is the most critical aspect to be given priority during leasing as it determines the profitability of the lease. Most of the leases that had an inappropriate economic life ended up costing those taking on the lease (El Ghoul, Guedhami, & Pittman, 2011). 4. Another aspect that should be put to consideration is the present time value of minimum rentals then and any guaranteed residual value of the leased property should be equivalent to 90% or more of the fair value of the property. The fair value is the most central and critical aspect when it comes to capital leases. It has distinctive aspect that separates operating lease from the capital lease. It therefore calls for keen evaluation of the fair value of the property. By fair value of the property, it means the cash value of the property. Another aspect on the fair value that needs a proper evaluation is the discount rate. The discount rate that is used to determine the present value of rentals should be derived from the lessee’s incremental borrowing rate. This incremental borrowing rate is the cost of the lessee following the borrowing of the very similar sum and for similar term (El Ghoul et al., 2011). Q2. Describe a strategic process that you would employ to evaluate complex projects that require both efficiency and effectiveness as performance requirements A better strategy is very significant for a complex project. It is needed when dealing with complex projects to ensure continuity of service without coming to closure. There are two main measures that ensure the project; however, much complex or simple it may be, it remains in service. The two measure are the effectiveness and efficiency (Sundqvist, Backlund, & Chronéer, 2014). Effectiveness on one-hand measures how much ones target were reached and by how far. Before commencement of the business or the project, one has to set the targets. The extent of achieving on the targets is the target measures (Patanakul & Milosevic, 2009). There are indicators that are used in determining the effectiveness of the projects. These indicators are very central and critical since they are like a road map of identifying how less or more the project is doing in comparison with the prescribed performance at the start of the project. The prescribed performances are found in the objectives of the project. If a project is underperforming then the objectives have not been met and more energy should be added with the aim of improving on the coverage of the business (Patanakul & Milosevic, 2009). Several indicators of measuring the effectiveness that is being achieved by a business are available. The indicators are the one that are used as the road map in navigating the assessment of performance in of a project. These indicators are used to determine how much one has achieved on the preset targets of the project. The indicators relate to the actual expected values (Sundqvist et al., 2014). The following are the indicators that are used to measure the by how far the target of a complex project have been achieved. The project overrun is the first indicator that should be used in measurement of the effectiveness of the project (Anantadjaya & Mulawarman, 2010). The overrun of the project is the cost that had to be incurred in the excess of that originally was estimated or budgeted for the project. In case the project has a higher overrun then it can be concluded that the project is not effective and an evaluation need to be done so that it operate within the prescribed budgeted money. Another indicator to be considered is the savings on the budget of complex project. With any significant or insignificant saving the project is said to be very effective. When there is no saving then the project will be said to have a cost overrun hence not effective (Boyette & Fang, 2012). The two work together and they are always inverse of each other. The effectiveness of the project should be having a plan and preset targets. Effectiveness of project cannot be measure without targets that are preset. On the other hand, there is the efficiency of the project that needs to be monitored. Efficiency according to Sherman (2011) is defined as the measure of how well the resources used to produce the products in the project. The resources include human, money machines, and time. The efficiency will compare the input against the outputs that is the product to determine if the project is efficient. The indicators that are used to measure the efficiency of a project include the financial ratios, which look on the profitability of the project and the turnover of the project. The non-monetary efficiency has been developed as new strategy of determining of determining the efficiency of the project. Such indicators include work hours per unit produced. Work hour per unit produced has two components that is input that is measured against output of the project. Others are the prospect close per rate, calls per rate, and visits per prospects (Patanakul & Milosevic, 2009). Q5 Many tax-exempt health care organizations are required to use fund accounting. 1. What advantages does fund accounting provide to maintain compliance to GAAP? Fund accounting is among the basic principles of governmental GAAP. This is because of the diversity of health care organization together with numerous legal and other constraints like fiscal accountability (Ellwood, 2008). Fund accounting makes it possible to achieve in overcoming such constraints. Another advantage is overcoming the hardship of recording all the operations since most of governmental healthcare organizations have same fund accounting unlike the private one (Lin, Riccardi, & Wang, 2012). In the in government operation. 2. What is an endowment? Endowment is the fund that has donor-imposed restrictions that is placed upon the first principle placed upon it (Masyita, 2009). Normally the principal and the income endowment have to be expended as stated by the donor. In most cases, the funds have many restrictions to a specific time that the donor has specified on the endowment fund (Sherman, 2011). There is little or no freedom in the spending of the endowment funds unless the period that the donor has stipulated has elapsed. For example, a donor may give donation for a thirty-year endowment that the fund is used for to buy medical supply for that particular period. Then when the period elapses, the principal can also be restricted to a particular use like extending one of the wards. These restrictions are the one that constitute the endowment. When every restriction is observed in the entire time specified, it can be reversed then thereafter (Masyita, 2009). Q6 A hospital CFO is gathering information to forecast the investment needs of the organization. He has to have adequate funding available to replace worn out patient care equipment over the next several years. The current forecast suggests that the hospital has to pay out $526,000 annually for the next five years from the investment portfolio to meet the expected capital budgets. If the CFO estimates that he can receive an annual yield of 8% on his portfolio, what lump sum amount must he invest today to create the five-year payout? (Please show all calculations) Expanses: $526,000 annually for the next five for investment Yields (income): annual yield of 8%. What lump sum amount must he invest today to create the five-year payout? For 100% of the investment for one year needs $526,000 For 100% of investment for five years needs $2630000 With 8% annual yield, the investment reduces to 92% 92 * 2630000 = 2419600 100 The CFO needs a lump sum amount of $ 2419600 to invest today to realize the success of the project. References Anantadjaya, S. P. D., & Mulawarman, S. (2010). Influencing factors on project overrun : Is it intrapreneurship? In proceeding, 2nd International Conference on Entrepreneurship (pp. 1–20). Boyette, N., & Fang, H. (2012). Budget allocation optimization in a complex multi-project environment. In Proceedings of 2012 IEEE International Conference on Service Operations and Logistics, and Informatics, SOLI 2012 (pp. 456–461). doi:10.1109/SOLI.2012.6273580 El Ghoul, S., Guedhami, O., & Pittman, J. (2011). The role of IRS monitoring in equity pricing in public firms. Contemporary Accounting Research, 28, 643–674. doi:10.1111/j.1911-3846.2011.01065.x Ellwood, S. (2008). Accounting for public hospitals: A case study of modified GAAP. Abacus, 44, 399–422. doi:10.1111/j.1467-6281.2008.00269.x Hoopes, J. L., Mescall, D., & Pittman, J. A. (2012). Do IRS audits deter corporate tax avoidance? Accounting Review, 87, 1603–1639. doi:10.2308/accr-50187 Lin, S., Riccardi, W., & Wang, C. (2012). Does accounting quality change following a switch from U.S. GAAP to IFRS? Evidence from Germany. Journal of Accounting and Public Policy, 31, 641–657. doi:10.1016/j.jaccpubpol.2012.10.006 Masyita, D. (2009). A Model of Portfolio Investment Management of The Islamic Endowment Funds Using System Dynamics Methodology. Http://Pustaka.Unpad.Ac.Id/Archives/1233/. Patanakul, P., & Milosevic, D. (2009). The effectiveness in managing a group of multiple projects: Factors of influence and measurement criteria. International Journal of Project Management, 27, 216–233. doi:10.1016/j.ijproman.2008.03.001 Sherman, E. H., & American Management Association. (2011). Finance and accounting for nonfinancial managers. New York: American Management Association Sundqvist, E., Backlund, F., & Chronéer, D. (2014). What is Project Efficiency and Effectiveness? Procedia - Social and Behavioral Sciences, 119, 278–287. doi:10.1016/j.sbspro.2014.03.032 Read More