The State of Our Government – Part 4

by Blogger on March 26, 2010 · 4 comments

In the first article of this series I made mention of the need for Government to be run more like a business.  I’m going to expand that discussion here.  I meant to get to this sooner, but I kind of went out in the weeds over the Health Care debacle.

In order for what I’m about to say to make sense to those without financial backgrounds, a brief lesson in financial accounting is necessary.  This is the stuff you’d learn in Basic Financial Accounting 101 in college.  If you already have this background, you can skip down to the more detailed discussion.

There are two (2) basic financial statements:  The Balance Sheet and the Income Statement, also known as the Profit & Loss or P&L.  We’ll discuss the Balance Sheet first.

Balance Sheet

In creating a balance sheet, there is one simple equation:  Assets = Liabilities + Equity.

Assets are typically broken down into Cash, Receivables (short and long term), physical items such as inventory and property, and investments.  These aren’t all, but they’ll work for this discussion.

Liabilities can generally be considered as Debt (short and long term) in one form or another.

Equity is what’s left over when you subtract Liabilities from Assets.

Using your home as an example, is it’s worth $200,000 (Asset Value) and you owe $100,000 (Liability), you have $100,000 in Equity.

Income Statement

The Income Statement’s equation is simply Revenue – Expenses = Profit.

The Balance Sheet and Income Statements are generally used to determine a company’s or individual’s financial health.  Almost every time you complete a credit application, you’re required to provide this information in terms of your monthly income and expenses, plus list what your assets are, and how much, if anything, you owe on them.  Some of this information is used to determine your FICO Score, but that’s another topic.

There are a number of ratios used to determine a firm’s performance and financial situation.  The ones we’re most concerned with are:

  • Current Ratio:  Current Assets divided by Current Liabilities (provides information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm)
  • Debt Ratio:  Total Debt divided by Total Assets (provides an indication of the long-term solvency of the firm)
  • Debt-to-Equity Ratio:  Total Debt divided by Total Equity (provides an indication of the long-term solvency of the firm)
  • Return on Equity:  Net Income divided by Shareholder Equity (i.e.,  the bottom line measure for the shareholders, measuring the profits earned for each dollar invested in the firm’s stock)

We’ll apply these to our nation’s current financial statements later, so you can see how we’re doing.  When interpreting the Financials, remember, YOU are the shareholder… the investor in the business.  You buy company stock every time you pay a tax on anything to the Federal Government.  Congress is the Board of Directors.  The Cabinet and President are the Corporate Officers.  The Board makes policy and the Officers carry out the policy (ignoring for the moment the President’s Veto power).

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, Financial Statements , Government Accounting , national Debt , Taxes

{ 4 comments… read them below or add one

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TracyQuast June 16, 2017 at 4:26 pm

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B April 14, 2010 at 5:56 pm

C,

Change your text; “We also need to reevaluate our tax structure to make it more equitable for all Americans. Everybody pays… period. I’m not saying get rid of the progressive income tax… I’m saying reevaluate it and make it more fair.”

to read
‘I’m saying reevaluate it and make it more equitable’. . . fair is an arbitrary state of the weather.

That’s my input for the night. . .

You’re on target. ..

b

Blogger March 30, 2010 at 5:49 am

LOL… depending on how you look at it (or who you talk to), you’ll get different answers on how we got to where we are today. I think it goes back to Teddy Roosevelt, with Woodrow Wilson, FDR and LBJ as major influences. Though not as Progressive as the others, LBJ put the U.S. on MasterCard when he escalated the Vietnam War, and we’ve never recovered. How to fix it will be an ongoing discussion here.

I agree we need to get back to being a manufacturing power, but I don’t really think it will ever happen. I’m not so sure the military needs to be scaled back as much as it needs to become more streamlined and efficient. This would have to start in the Pentagon and a good hard look at our Procurement processes.

Cliff March 29, 2010 at 5:50 pm

i couldn’t agree more — i’m fairly sure you and i have different opinions on how it got this way (i feel it started back way farther than last year) or how to fix it, but we need to focus on this now as a country.

i also think americans need to start making more things and less buying things from other countries – also scale back our military (i don’t feel i’m in danger of getting invaded on anytime soon) & many many other things

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