Chapter 10, Problem 21EP

a.

To determine

Identify the financial performance measures that can be calculated for City A.

Explanation of Solution

Government Accounting Standards Board (GASB): Government accounting standards board (GASB) is an independent board that establishes reporting standards for the local and state government, and also for government not-for-profit organizations that has to adhere to the generally accepted accounting principles (GAAP).

The following ratios can be calculated:

• Business-type activities self-sufficiency.
• Revenue dispersion.
• Inter-period equity.
• Quick ratio.
• Debt to assets.
• Capital asset condition.
• Current ratio.
• Unrestricted net position.
• Change in net position.

b.

To determine

Ascertain the various ratios for City A for 2020.

Explanation of Solution

Government-wide financial statements: These are the financial statements that report the government’s net position and changes in net position. These statements report the governmental activities, business-type activities, and the activities related to proprietary funds and fiduciary funds. These statements are prepared based on the accrual accounting. The two government-wide financial statements are Statement of Net Position and Statement of Activities.

• Compute the unrestricted net position:

For Governmental activities:

$\begin{array}{c}·\text{Unrestricted net position = }\frac{\text{Unrestricted net position}}{\text{Total revenue}}\\ \text{=}\frac{\$4,597}{20,302+3,860+1,886+495}\\ \text{=17\%}\end{array}$

For Business type activities:

$\begin{array}{c}·\text{Unrestricted net position = }\frac{\text{Unrestricted net position}}{\text{Total revenue}}\\ \text{=}\frac{\$3,546}{5,218+7}\\ \text{=68\%}\end{array}$

The unrestricted net position is 17% for governmental activities and 68% for business type activities.

• Compute the Capital asset condition:

For Governmental activities:

$\begin{array}{c}\text{Capital asset condition = }\frac{\text{Accumulated depreciation}}{\text{Average cost of depreciable capital assets}}\\ \text{=}\frac{\$15,039}{\left(37,183+37,600\right)/2}\\ \text{=40\%}\end{array}$

For Business type activities:

$\begin{array}{c}\text{Capital asset condition = }\frac{\text{Accumulated depreciation}}{\text{Average cost of depreciable capital assets}}\\ \text{=}\frac{\$5,782}{\left(37,183+37,600\right)/2}\\ \text{=36\%}\end{array}$

The capital asset condition is 40% for governmental activities and 36% for business type activities.

• Compute the Debt to assets ratio:

For Governmental activities:

$\begin{array}{c}·\text{Debt to assets = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ \text{=}\frac{\$19,266}{\$34,040}\\ \text{=57\%}\end{array}$

For Business type activities:

$\begin{array}{c}·\text{Debt to assets = }\frac{\text{Total liabilities}}{\text{Total assets}}\\ \text{=}\frac{\$7,167}{\$14,740}\\ \text{=49\%}\end{array}$

The debt to assets is 57% for governmental activities and 49% for business type activities.

• Compute the current ratio:

For Governmental activities:

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\$9,299}{\$3,366}\\ \text{=2}\text{.76 times}\end{array}$

For Business type activities:

$\begin{array}{c}\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}\\ \text{=}\frac{\$3,966}{\$667}\\ \text{=5}\text{.95 times}\end{array}$

The current ratio is 2.76 times for governmental activities and 5.95 times for business type activities.

• Compute the quick ratio:

For Governmental activities:

$\begin{array}{c}\text{Quick assets = }\frac{\text{Unrestricted cash and cash equivalents}}{\text{Current liabilities}}\\ \text{=}\frac{\$9,299-\$253-\$26}{\$3,366}\\ \text{=2}\text{.68 times}\end{array}$

For Business type activities:

$\begin{array}{c}\text{Quick assets = }\frac{\text{Unrestricted cash and cash equivalents}}{\text{Current liabilities}}\\ \text{=}\frac{\$3,966-\$8-\$58}{\$667}\\ \text{=5}\text{.85 times}\end{array}$

The quick ratio is 2.68 times for governmental activities and 5.85 times for business type activities.

• Compute the change in net position:

For Governmental activities and Business type activities:

$\begin{array}{c}\text{Change in net position = Net position current year}-\text{Net position previous year}\\ \text{= \$22,347}-\$17,447\\ \text{=\$4,900}\end{array}$

The change in net position is $4,900.

• Compute the interperiod equity:

For Governmental activities and Business type activities:

$\begin{array}{c}\text{Interperiod equity = }\frac{\text{Net revenues}}{\text{Total expenses}}\\ \text{=}\frac{20,302+3,860+1,886+495-100}{23,973}\\ \text{=1}\text{.10 times}\end{array}$

The interperiod equity is 1.10 times.

• Compute the BTA self-sufficiency:

For Governmental activities and Business type activities:

$\begin{array}{c}\text{BTA self-sufficiency = }\frac{\text{BTA service charge revenues}}{\text{BTA Total expenses}}\\ \text{=}\frac{\$5,218}{\$2,895}\\ \text{=1}\text{.80 times}\end{array}$

The BTA self-sufficiency is 1.80 times.

• Compute the revenue dispersion:

For Governmental activities:

$\begin{array}{c}\text{Revenue dispersion = }\frac{\text{Charges for services}}{\text{Total revenue}}\\ \text{=}\frac{3,860+1,886+495+2,190+716}{20,302+3,860+1,886+495-100}\\ \text{=34}\text{.6\%}\end{array}$

The revenue dispersion is 34.6%.

• Compute the bonded debt per capita:

For Governmental activities:

$\begin{array}{c}\text{Bonded debt per capita = }\frac{\text{General bonded debt}}{\text{Population}}\\ \text{=}\frac{15,900,000}{30,420}\\ \text{=\$522}\text{.68}\end{array}$

The bonded debt per capita is $522.68.

• Compute the available legal debt limit:

For Governmental activities:

$\begin{array}{c}\text{Available legal debt limit = }\frac{\text{General bonded debt}}{\text{Legal debt limit}}\\ \text{=}\frac{\$15,900,000}{\$20,000,000}\\ \text{=79}\text{.5\%}\end{array}$

The available legal debt limit is 79.5%.

• Compute the property taxes per capita:

For Governmental activities:

$\begin{array}{c}\text{Property taxes per capita = }\frac{\text{Property tax levy}}{\text{Population}}\\ \text{=}\frac{17,296,000}{30,420}\\ \text{=\$568}\text{.57}\end{array}$

The property taxes t per capita is $522.68.

c.

To determine

Assess the overall financial condition on the City A.

Explanation of Solution

The overall financial condition of City A, is very strong. Most of the ratios indicate a positive performance, however a few things need to be taken care of.