Reference no: EM133985900

Question

Some economists and policy experts have argued that there is a private sector investment bias and that investment from the U.S. Federal Government is unnecessarily handicapped due to its accounting procedures.

1. Describe in a brief paragraph the differences between the accounting procedures used in the private sector's income statement and the U.S. Federal Government's income statement.

2. Suppose a private company invests $100 million into a factory to increase their productive capacity and improve its competitiveness. The useful life of the factory is 20 years. Suppose that the company's revenues were $600 million and its non-investment expenses were $250 million in the year the investment was made . Calculate the company's surplus/deficit for the year using the "cash-basis" accounting method. (You must provide the calculations for full credit)

3. Now calculate the company's surplus/deficit for the year given the information in part (B), but now use the "accrual" accounting method instead. (You must provide the calculations for full credit)

4. Now given the differences in the surplus/deficit calculated in parts (B) and (C), why have some policy experts argued that there is a private sector investment bias and investment by the government is handicapped?

5. Discuss the reasons for and against using capital budgeting (accrual accounting) for the U.S. Federal Government's budget.