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ASSIGNMENT SOLUTIONS GUIDE (2014-2015)

E.P.A.-5
Financial Administration
Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in
the Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Auhtors for the help
and Guidance of the student to get an idea of how he/she can answer the Questions of the Assignments. We do
not claim 100% Accuracy of these sample Answers as these are based on the knowledge and cabability of Private
Teacher/Tutor. Sample answers may be seen as the Guide/Help Book for the reference to prepare the answers of
the Question given in the assignment. As these solutions and answers are prepared by the private teacher/tutor so
the chances of error or mistake cannot be denied. Any Omission or Error is highly regretted though every care
has been taken while preparing these Sample Answers/Solutions. Please consult your own Teacher/Tutor before
you prepare a Particular Answer & for uptodate and exact information, data and solution. Student should must
read and refer the official study material provided by the university.

SECTION - I

Answer the following questions in about 500 words each.

Q. 1. Describe the components of financial administration.

Ans. It can be explained as the activities which further help in the availability of money and resources to
the different branches of an organisation so that the objectives laid down are well carried out. Irrespective of
the department in the government sector money is available to one and all. This can be railways, roads,
health, agriculture and many more.
As per L.D. White, fiscal management comprises of operations which are meant to have funds available
to the officials and to see that the funds are used most appropriately. And according to G.S. Lall the
Financial Management relates with the aspects of financial management of the state.
The public and private finance are two different concepts. In case of public finance there is an
adjustment of income made to expenditure and in case of private finance there is adjustment of expenditure
to income. There is popular control in former case and corporate control in the latter case. Public finance
holds elastic resources and limited resources are held by private finance. Public finance has a tendency
towards deficiency and private finance has only tendency towards balanced budgets.
The finance department and its subordinate agencies work for the
(a) Collection, Preservation and disbursement of public funds.
(b) Coordinates between public revenue and its expenditure.
(c) The credit operations are managed.

(d) The financial affairs of the government are controlled.

The financial department looks after financial management and not only financial administration. It
deals with the economic decision-taking part of the government.
The scope of FA can be summarised as preparing of estimates, appropriation of funds, control on
expenditure, accounting of funds, auditing, reporting and finally revieving.
There are some core areas which are concerned with financial administration. These are:

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1. Financial Planning: It is a misnomer that budgeting is only planning. But is true sence it includes
whole range of government policy and the relationships which it contains because of planning with the
different policies.
2. Budgeting: It is the most important part of financial administration or in other words focus the
nodel point. It consists of principles and practices required for making a neat budgetary system.
3. Resource Mobilisation: This part deals with taxes which are collection or imposition of taxes. Other
than these taxes evasion and having growth in parallel economy are the main features.
4. Investment Decisions: A great amount of investments are alone in the public sector because of
which it becomes imperative that the knowledge of investments is must for the financial administrative
officers.
5. Expenditure Control: In every country one faces the problem of resources deficiency and that too
in todays time with so much of recessions in the countries. Therefore, it is must that the expenditure done
is with a great control to save the economy of the country.
6. Accounting, Reporting and Auditing: C & AG and Audit department of our country sees to this
aspect of finance.
Composition of Financial Administration: The three elements of public finance are: (a) Public
Revenue, (b) Public Expenditure, (c) Public Debt. Any system in order to run needs manpower, a structure
set to run the working atmosphere and a set system with a procedure. The financial administration can be
identified with the elements as below:

(a) Human Element: These can be the tax payers, fee remitters, suppliers employees, politicians or
enterprises, customers and common people.
(b) Work and Structures: The legislatives and the members of financial committees, the cabinet, the
finance department, the administrative department, the executive department and the audit department, forms
the structure of FA.
(c) Systems and Procedures: This comprises of a planning system, a budgeting system and procedure
and auditing system.
There exists a sub-system which consist of the goals as defined by financial administration and at the
same time the values, rules, thought etc. contained in the culture of financial administration and interrelated
as described in the figure below:
Goals

Culture

People

d
k an
Wor cture
Stru

System and
Procedures

Technology

Q. 2. Discuss the types of classification of budget.

Ans. For any period of time, mostly a year, budget is formed which is in a form of statement which
consists the future of revenues and spendings by the government. Every government has some plans for the
year to come and it is the budget which helps to fulfil these plans. It is the budget which entails the various

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1. Plans, schemes, programmes etc. for the year to come.


2. Means for various sources, which can be tax or non-tax revenues.
3. Contains the actual accounting of the previous year too.
4. Keep account of statistical data of various work performed by different agencies.
To have a dignified budget it is very important to have a proper classification of budgets. These are:
1. Object-wise clsssification.
2. As per functions.
3. Classification on the basis of economy.
Object-wise Classification: A systematic classification of budget on the basis of sections according
to units, departments, divisions and expenditure can be as follows(a) Salary (b) Wages (c) Travelling
allowance (d) Office expenses (e) Machinery and equipment (g) Works (g) Grants-in-aid (h) Other charges
(i) Suspense account.
Therefore, with this kind of classification helps various functions and objectives to be attained.
There are some merits and demerits attached to this kind of classification.
Merits: 1. This type of classification is very much helpful in improving the accountability procedure
and to have good control on the system. It helps to have a control on the system.

2. The funds are allocated more appropriately with this kind of system adopted.

3. This kind of classification helps cutoff on special heads such as travelling allowance, other areas
etc.

Demerits: 1. It is a normal norm that whatever amount is alloted to a particular object needs to be
fully spent. There can be sometimes waste and extra spendings due to this.
2. All the spendings are as per the laid down rules and procedures. This often leads to a cumbersome
procedural intricasies.
3. The information available is not usually apt. Some important information may be neglected.
4. It is very difficult to find the deplication, expenditure and redundancy in activities.
5. There are some programmes, policies and projects which gets postponed year after year even if
they have needs to be prioritised.
SECTION - II

Answer the following questions in about 250 words each.

Q. 3. Distinguish zero based budgeting from traditional budgeting.

Ans. In a laymans view the zero base budgeting is a complementary method which is linked with the
plan which is existing. It helps in reviewing the process. It helps in finding out the alternative and other
better methods in order to utilise the resources which are meagre and effectively helps in attaining the best.
For this identification of objectives are very crucial. It works on cost benefit process. It also aims of all
finding and further eliminating of those programmes which are no more required.
Thus, it is an operating, planning and budgeting process which makes every manager to justify the
whole budget as well as the objectives and how and why of the money to be spent.
Zero Base Budgeting and Traditional Budgeting: A Comparison

In this kind of budgeting system all expenditures made are analysed from the very basic or zero base
and which leads to the current expenditure level explanation. These estimates form the basis to which the

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people working in management team can add data which correspond to price changes, planned addition,
or deletions etc.
Traditional budgeting is not a very effective way or tool for shifting resources from priority area low
to high. In case of zero base budgeting one reaches, at a decision and corner on old and new activities.
But traditional budgeting is based on the accounting system and expenditures are monitored. In case of
traditional budgeting the emphasis is on:
(a) The last years expenditure which got extrapolated into the next year.
(b) Some factors are considered as increase in prices of raw material, wages etc.
(c) In case of new projects and programmes the expenditure level is more.
Therefore, it is the zero base budgeting system which helps in having a new approach towards thinking
process where managers are liable to justify the activities going on and as to why the funds are required
by them. It also helps the management to calculate the claims on resources which are very little.
Q. 4. Highlight the role of deficit financing in promoting economic development.
Ans. The term deficit financing refers to financing the deliberate excess of expenditure over income
by printing of currency notes or by borrowings. This also refers to financing a planned deficit under the
purview of the government domestically or with reference to balance of payment deficit.

In the Western context, Deficit finaning is a term referred to the financing of a gap created consciously
between public revenue and expenditure. This gap is filled up by borrowings by the government.
In India, this term is used in a totally different context. In India, it covers borrowing from the RBI,
withdrawal of accumulated cash reserves and issue of new currency.
The concept of deficit financing comes when there is a budgetary deficit i.e. that is when the total
expenditure exceeds the total receipts.
Role of Deficit Financing as an aid to Financing Economic Development

We can look at three situations in which deficit financing is resorted to with totally different objectives
and outcomes. They are:
(i) Deficit Financing During War: This is a perfect situations for government to spend more than
their receipts. Government then resorts to creating new money by either printing notes or borrout
from the apex bank. This always result in inflation as the demand of consumption goods is more
than its supply.
(ii) Deficit Financing During Depression: Deficit financing during time of depression ensures, that
there is no stagnation in the production process. This can be effectively achieved by the government
resorting to construction of public works which acts as a stimulant in boosting the purchasing power
and thereby increasing demand.
(iii) Deficit Financing and Economic Development: Deficit financing for development sees that
financing investment, employment and output in the economy ensures that there is allround economic
growth.
Q. 5. In India independence of audit has been ensured by the Constitution in several ways
Discuss.
Ans. The Auditing system has evolved over a long period of time. In the olden days the main objectives of audit were:

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(a) audit against budget provisions


(b) audit against sanctions
(c) audit of accounts and appropriations
(d) expenditure audit
(e) propriety audit.
All this changed in the Post-war era when the outlook of the government changed in terms of giving
more importance to developmental activities and improving the standard of living of people in general. The
auditing system underwent sea change after Indias independence. The amounts of money allocated for
developmental activities were so huge that an independent authority was essential to look into to see that the
money allocated and spent was actually in the same direction. As time went by, auditing became more and
more professional in nature and therefore more responsible.
India believes in giving complete freedom to audit and this has the approval of the Constitution in many
ways. It says that the State Governments as well as Union Government have a common auditor. The
Constitution gives the Parliament exclusive power to make laws on this subject. The Comptroller and Auditor
General of India plays a key role in Union-State relations with the amount of power and responsibility he
enjoys both sides. The Constitution ensures that the CAG enjoy independence by prescribing that his
appointment is by the President of India by warrant and not only that once retired, resigned or removed. The
CAG cannot hold office in the Union or any State Government. The pay, pension and allowances of the
CAG are charged on the Consolidatated Fund of India.

Q. 6. Describe the various methods of state control over municipal finance.

Ans. The Municipal bodies key feature is that they are under total control by their respective state
governments. These state governments excercise legislative, judicial, administrative and financial controls
over these local bodies which are monitored from time to time. Control over finance by states governments
is one of the most important aspects of state control. The control over finances by the state government can
be divided into the following ways:
(i) Exercise of Control on Taxation: For all governments, tax forms a major part of their revenue.
Therefore, all issues regarding any change in taxation policies have to be done with the consent of
the state governments. The final say on taxation rests with the state government after taking into
consideration public interest at large. It also has the power to direct a local body to impose octroi
duty on a specific item and also has powers to allow any extra taxes on already existing government
taxes.
(ii) Exercising Control on Expenditure and Fund of Local Bodies: To fix an accountability on the
expenditures of the municipal bodies, the state government acts not only as a watch dog, but also
enforcing them to follow the rules and regulation within the given framework. This ensures that the
local bodies understand clearly their cap on expenditures and work within the sanctioned amounts.
The same holds to the Municipal fund, which can be applied, has to be within the requisite Act of
state government.
(iii) Exercising Control over Budget: In cases of most municipal bodies, state government enjoys
absolute control over its budgets. The format in which the budget is executed is also laid down. In
few states the municipalities only need to take approval from the state government only if they are
indebted to them. There has to be state approval in case of using funds allocated for one purpose is
actually diverted to another cause.

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(iv) Exercising Control over Loans: The urban governments are entitled to take loans under the
regulations of the Local Authorities Loans Act, 1914. The Government looks into each activity
taken up by the municipal body and decides as to if that particular scheme required borrowing from
the state government. It sets rules regarding the time given for repayment, the mode of repayment
etc.
(v) Exercising Control over Grants: The Governments enjoy high degree of control over grants to the
local bodies. This ensures that grants given are actually allocated are used effectively and efficienty
and are not diverted or misappropriated. The State Government has the power to reduce or even
suspend any grant if it feels that is being underutilised or not meeting any prerequisite conditions.
(vi) Exercising Control over Accounts and Audit: Control over accounts and audit of local bodies by
state governments acts as a deterrent to misappropriation of funds. The state government lays down
the format in which the accounts have to be maintained and any deviation from these requires prior
permission. Regular audits are conducted so that the accounts reflect the actual state of affairs and
public money is put to good use.
SECTION - III
Answer the following questions in about 100 words each.

Q. 7. Write a note on principles of budgeting.

Ans. The system of the formation of budget exists from time immemorial. No system can run without
having the proper allocation of money to the various sections. The budgetary system existing todays owes
its makeover from the British Raj. The system of formation of the budget has passed through three stages.
These are incremental budgeting, performance budgeting and zero-base budgeting respectively.
Principles of Budgeting are: 1. The foremost aspect followed is to have the annual budget formed
every year. It is also seen that the funds should be used in the same year otherwise they cannot be carry
forward to the next year.
2. The budgets by the government are on cash basis.

3. A common budget should be made. Railways and other public enterprises needs to have a separate
budget.
4. It is seen that no net budget is formed, but should be gross.
5. It should be close not the guess work.

6. Whatever estimates are formed should be corresponding to the accounting heads.


Q. 8. Explain the concept of rural development.

Ans. The word rural relates to basically occupations like farming, cattle rearing, fish farming etc. It
also relates to areas where people are more interdependent in their day-to-day living, unlike urban areas and
there is a sense of community living.
After independence, the concept of development basically concentrated in urban area thereby totally
neglecting the majority of the population. This resulted in a wide gap between the rich and the poor and
unequal distribution of wealth.
Over a period of time, it was clear, that in order to progress as a country, we should give as much
importance to rural areas as we concentrate on urban areas. A lot of schemes were brought in to bridge the
gap between rural and urban areas, but were met with little success. Therefore, there is a requirement to take
concrete and effective steps in this direction. Any programme on rural development should definitely include

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projects to increase agricultural productivity, employment generation, change in expenditure patterns of


health, education etc. Some of the developmental programmes in this direction are community development
programme, Jawahar Rozgar Yojana, Rajiv Aawas Yojana, NREGA etc.

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