Performance Assessment Through Financial Analysis - Eleven Barangays Case

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PERFORMANCE ASSESSMENT THROUGH FINANCIAL ANALYSIS OF LOCAL GOVERNMENT’S FINANCIAL STATEMENTS: A CASE FOR ELEVEN BARANGAYS IN ILIGAN CITY

ABSTRACT

This study was conducted in order to evaluate the financial administration of local governments in Iligan City.

CHAPTER 1

INTRODUCTION

Along with the constant allocation of the government with substantial budget towards its local government units which will be used to the benefit of the general public is the need for these units to provide, in return, financial statements that will give the government pertinent information about the financial position, performance, and changes in equity which will be essential to a wide range of users in making economic decisions. In a technical sense, financial statements summarize the accounting process and provide a tabulation of account titles and amounts of money. Financial statements actually help communicate what financial decisions have been made and how they affect the bottom line. For example, the general public may be interested in the outcomes produced by the local governments on the economy, environment and the local community in terms of public infrastructures, health, education, agriculture, security or other privileges needed by a civilized society. The government, on the other hand, may require the preparation of these financial statements to determine the accuracy of taxes declared in the tax returns by taxpayers or to keep track of the economic progress through the analysis of these statements from different sectors of the government. Accordingly, the need to have financial analysis is very relevant in this matter since it will verify the correctness of the figures presented on the financial statements. Needless to say, a good financial performance system of the government is a significant measure to the success and growth of our country’s economy.

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Properly comparing a statement of financial position with the corresponding profit and loss account to determine strengths and weakness of an entity describes financial statement analysis. Financial analysis determines an organization’s health and stability. The data gives you an intuitive understanding of how an organization manages its wealth. Stockholders can find out how management employs resources and whether or not these resources have been properly used for. Governments and regulatory authorities use financial statements to determine the legality of a company’s fiscal decisions and whether the firm is following correct accounting procedures. Finally, government agencies, such as the Internal Revenue Service, use financial statement analysis to decide the correct taxation for the company.

Numerous studies have been conducted in an attempt to ascertain financial performance by local government units. In this study, the researchers aim to evaluate, monitor and compare the financial performance of 11 barangays in Iligan City over the last four years (2010-2013) based on measurable financial indicators of good governance in order to contribute towards ascertaining good financial governance system in the LGU for public accountability and service delivery improvement.

To date, no literature had been published about financial analysis of local government in Iligan City. The results of the study will, therefore, benefit the city government of Iligan in identifying certain barangays that need improvement and on taking appropriate courses of actions in the financial administration sector. This enhancement shall not be limited only to the sample barangays but shall rather extend up to the scope of the entire local government of Iligan City.

1.1 STATEMENT OF THE PROBLEM

The primary objective of this study is to evaluate, monitor and compare the financial performance of 11 barangays in Iligan City over the last four years (2010-2013) based on measurable financial indicators of good governance in order to contribute towards ascertaining good financial governance system in the LGU for public accountability and service delivery improvement.

To achieve this primary objective, the specific aims of the research are the following:

  1. To analyze and conduct comparative assessments of the different barangays based on the financial performance indicators.
  2. To determine what constitutes best practices for budgeting, accounting and other finance-related areas in local financial management of the barangays.
  3. To perform a financial statement analysis using different financial indicators and ratios with the help of:
  1. Revenue Indicators
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a.1 Local Revenues Per Capita

a.2 IRA Dependency Ratio

  1. Expenditures Indicators

b.1 Expenditures Per Capita

b.2 Personal Services Ceiling

  1. Liquidity Indicators

c.1 Current Ratio

c.2 Quick Ratio

  1. Asset Turnover Indicators

d.1 Asset Turnover

d.2 Fixed Asset Turnover

  1. Profitability Indicators

e.1 Return on Assets Ratio

1.2 SIGNIFICANCE OF THE STUDY

As local affairs can best be regulated by the people in the locality rather than by central authority, the grant of local autonomy to local units is considered extremely necessary for a more efficient local government system.

Local governments constitute the foundation of the entire structure of the government. The acts of the local government units affect the ordinary citizen more directly than those of the national government. This is primarily because the average citizen has more and closer contacts with the local governments and their agencies than with the national or provincial government, and is more concerned with the local affairs than with those of the national or provincial in scope. In addition, local governments are essential in each country because they are expected to be at the frontline of emergency measures in the aftermath of disasters to ensure general welfare of its constituents, according to the Local Government Code of 1991. Thus, it is of vital importance that the monetary budget by the national government towards each local government should be properly accounted for because this allotment is crucial save in the case of undue incidents.

The results of this study will serve as an informative tool to the local government of Iligan City in gauging the selected barangay’s financial statements and budgets for a given period of time. It will benefit the local government of Iligan in identifying certain barangays that need improvement and on taking appropriate courses of actions in the financial administration sector. Moreover, this research will also function as a supplementary guide to other researchers in gathering data that are related to these topics.

This enhancement shall not be limited only to the sample barangays but shall rather extend up to the scope of the entire local government of Iligan City.

1.3 SCOPE AND LIMITATIONS OF THE STUDY

This study will focus only on financial analysis of the financial statements of eleven barangays in Iligan City. The determining factor in concluding the best three performing barangays will be the different financial indicators and ratios. The data to be used in this study are only those audited financial statements for years 2010 to 2013 that are provided by the city government of Iligan and the survey questionnaires prepared by the researchers which are deemed necessary in pointing out the best practices applied by the best three performing barangays.

This study will be limited to the extent of some barangays located only within the vicinity of Iligan City. In determining the sample population, the forty-four barangays of Iligan City shall undergo random sampling. This is done to minimize the time needed for the study because time will be one of the major constraints in conducting this research.