"Accounting for Governmental Funds" simulation

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Accounting for Governmental Funds" Simulation

Introduction

The concept of capital budgeting in the government owned companies have emerged in the last few decades. These days capital budgeting has become highly significant due to the increasing problems and financial crisis all over the world. The government plays various roles in the capital budgets. The roles are improvement in the financial position and infrastructure ultimately leading to overall economic development (Jacobs, 2008). It is highly crucial to differentiate between current and capital expenditure so that there is effective management and increase in overall net worth.

Determination of Debt Capacity

First of all, it is necessary to understand debt capacity before knowing the procedure of debt capacity determination by government entities. Debt capacity is the total amount of loan or debt a firm can repay in a specified time period without putting its financial position at risk. The community's wealth, growth & development and the local government's ability to generate funds from state or local economy reflects upon the debt capacity of local government.

The capacity is determined with the amount currently available and on the basis of restrictions & laws. The most important thing is meeting the short term and long term financial plans of the state or the city. The main indicators which determine the debt capacity of a city are property value, income and total population. Simply by using these figures debt capacity can be determined which is an indicator of debt divided with the ability of debt repayment (McCartan, 1995). Oasis debt divided by Oasis total population will give per capita debt. This figure can be compared with past data or with other cities.

Effect of Refunding

Refunding means adding a new debt to the existing capacity for repayment of principal and interest amount as when they become due or for the repayment at an earlier date. Refunding provides various advantages such as revision in the payment schedule, decrease in the rates of interest and extending the maturity time. The major problem is that the time of debt is increased only by providing short term budgetary savings which results in ...