Chapter 14: Analysis of Financial Statements and Financial Condition
Multiple Choice
1.What is the major purpose of the statement of net position from a financial analysis perspective?
a.to describe the major sources of revenue and types of expense
b.to show the inflows and outflows of cash during the reporting period
c.to show whether the entity was efficient and effective in delivering services
d.to provides information about the entity's liquidity and financial flexibility
Answer:d
2.What information could a financial analyst potentially obtain by reviewing the statement of activities?
a.whether the resources obtained during the year were sufficient to cover the cost of providing services
b.whether services provided were sufficient for the government’s constituencies
c.the current financial condition of a government
d.the current status of a government’s assets and liabilities
Answer:a
3.Why do financial analysts prepare common size financial statements?
a.it is easier to work with financial statements when they are all in the same format
b.they help the analyst identify changes over time in the proportion that each item of expense bears to the entity's total expenses
c.they are a necessary first step in allowing the analyst to develop per capita information
d.they show the dollar amount of change from one year to another for each item of expense, both for the entity studied and the reference group.
Answer:b
4.Which of the following factors is the most important consideration about the organizations that comprise a reference group for financial analysis purposes?
a.they should have approximately the same administrative structure as the entity studied
b.they should be located in the same section of the country as the entity studied
c.they should perform the same functions and be about the same size as the entity studied
d.they should have approximately the same fiscal year as the entity studied
Answer:c
5.What can an analyst learn from the liquidity indicators?
a.the amount of cash than an entity can obtain from liquidating its capital assets
b.the amount of cash needed to liquidate its long-term debt
c.the amount that an entity is likely to realize from selling all of its assets
d.the ability of an entity to meet its short-term obligations
Answer:d
6.Which of the following items should be excluded from the assets or liabilities when computing the quick ratio?
a.inventories
b.amount of long-term debt due in the following year
c.accounts payable
d.cash equivalents
Answer:a
7.If a government derives a large portion of its tax revenues from economy-sensitive taxes, the size of which of the following ratios would be of most concern to a financial analyst?
a.ratio of real property taxes receivable to real property tax revenues
b.ratio of total available fund balance to total revenues
c.ratio of program expenses to total expenses
d.portion of real property taxes collected in the year of the tax levy
Answer:b
8.To compute a government's debt burden, which of the following is the most appropriate denominator?
a.current liabilities
b.accounts receivable
c.full value of taxable real property
d.pension benefits paid in the preceding year
Answer:c
9.What can a financial analyst learn from computing a hospital's debt service coverage?
a.the number of times the debt service is covered by the hospital's earnings
b.the excess of the total net assets over the hospital's outstanding long-term debt
c.the number of times the debt service is covered by the hospital's current assets
d.the ratio of the outstanding long-term debt to the current year's debt service
Answer:a
10.The Government Finance Officers Association recommends general-purpose government’s have a financial policy to maintain the General Fund’s unrestricted fund balance at:
a.ten percent of expected annual General Fund expenditures.
b.45 days of expected governmental fund expenditures
c.no less than two months of regular General Fund revenues or expenditures.
d.no less than two months of total annual governmental fund revenues
Answer:c
11.What can a financial analyst learn from a hospital's number of days' revenue in receivables?
a.the hospital's accounts receivable collection efficiency
b.the average length of stay of patients in the hospital
c.the average daily occupancy rate of the hospital's beds
d.the proportion of hospital beds occupied by patients covered by self-pay patients
Answer:a
12. and 13.
This statement of facts is presented for problems 12 and 13: A hospital's trial balance shows the following captions: (1) cash equivalents; (2) prepaid insurance on buildings;(3) inventory of medicines; (4) short-term investments; (5) accumulated depreciation on buildings; (6) current portion of long-term debt; and (7) accounts receivable.
12.Which of these seven accounts do not enter into the calculation of the current ratio?
a.only (5)
b.only (6)
c.only (7)
d.(5) and (7)
Answer:a
13.Which of these seven accounts do not enter into the calculation of the quick ratio?
a.(3), (5), and (6)
b.(2), (5), and (7)
c.(2), (3), and (5)
d.(3), (5), and (7)
Answer:c
14.You are calculating the quick ratio for the General Fund. The General Fund balance sheet contains the following captions: (1) cash; (2) cash equivalents; (3) taxes receivable; (4) inventory; (5) prepaid items; and (6) due from other funds. Which of these accounts will enter into the calculation?
a.(1) and (2)
b.(1), (2), and (3)
c.(1), (2), (3), and (6)
d.all six
Answer:a
15.The following information comes from a hospital's financial statements: Net patient accounts receivable - $3.5 million; Gross patient service revenues - $15 million; Contractual adjustments - $3 million; and Charity care - $1 million. What is the hospital's number of days' revenue in patient accounts receivable (rounded to nearest whole day)?
a.85
b.106
c.116
d.1147
Answer:c
16.Which of the following ratios is a good measure of the liquidity of a city's resources?
a.cash and investments divided by current liabilities
b.fund balance as a percentage of revenues
c.debt service expenditures as a percentage of revenues
d.sales taxes as a percentage of total taxes
Answer:a
17.The most important reason for being concerned with a municipality's available fund balance as a percentage of its revenues and certain transfers in is that the ratio provides a good measure of:
a.the liquidity of its resources
b.the volatility of its revenue structure
c.its ability to weather future revenue shortfalls
d.its efficiency and effectiveness
Answer:c
18.To obtain a frame of reference for assessing financial trends of a particular city, you decide to compare them with financial trends of other municipalities. Which approach will provide the most appropriate reference group for this purpose?
a.a statistical sample of all municipalities (cities, counties, villages, etc.) in the country
b.a statistical sample of all municipalities (cities, counties, villages, etc.) in the same state
c.a random sample of municipal governments, other than cities, in the same state
d.a sample of cities of roughly similar population size and that perform similar functions in the same state
Answer:d
19.You are assessing the financial condition of a county. Its financial statements have captions for "transfers in" and "transfers out," both containing significant amounts. What consideration should you give to these transfers in assessing financial condition?
a.do not consider them in your analysis, because transfers in will equal transfers out
b.see if transfers in equal transfers out. Then, check the balance sheet to see if the captions "due to" and "due from" also are equal. If so, no further review is needed
c.see if the transfers are recurring, rather than one-shots. If they are recurring, no further inquiry is needed
d.only transfers in should be considered
Answer:c
20.A tobacco company agrees to pay a state $1 billion a year over the next ten years to settle the state's claim that the tobacco had harmed the health of its citizens. The state "sells" the future revenue stream to a consortium of banks for the present value of the $10 million, and deposits the cash in its General Fund. How should the financial condition analyst view this financial arrangement?
a.the analyst should ignore it, provided the state has classified the revenues as an extraordinary item in its operating statement
b.the analyst should ignore it because the present value of the future revenue stream is equivalent to the revenue stream itself
c.the analyst should assess the impact of the revenue as a "one-shot" item that balanced the current year's budget, but thatmight leave a gap in future year budgets
d.the analyst should assess the impact of arrangement on the auditor's report, the notes to the financial statements, and Management's Discussion and Analysis.
Answer:c
21.A village's legal debt limit is $20 million. Its outstanding general obligation debt is $9 million. The full value of its real property is $520 million, which includes $40 million of property that is exempt from taxation. What is the village's debt burden?
a.1.7%
b.1.9%
c.3.8%
d.4.2%
Answer:b
22. and 23.
This statement of facts is presented for problems 22 and 23: The following data comes from Olde Towne Hospital's financial statements. Total revenues were $20 million. Total expenses were $18 million, consisting of patient care expenses - $13 million; administrative expenses - $2 million; depreciation - $2 million; and interest on long-term debt - $1 million. Principal payments on long-term debt were $1.5 million.
22.What is Olde Towne's debt service coverage?
a.0.8 times
b.1.6 times
c.2.0 times
d.2.7 times
Answer:c
23.What is Olde Towne's interest coverage?
a.2.0 times
b.3.0 times
c.4.0 times
d.5.0 times
Answer:b
24.At December 31, 2013, Yorktown's pension fund had net assets available for benefits of $12 million. Its actuarial accrued liability at that time was $16 million. For the year ended December 31, 2013, its pension fund had paid $3 million in pension benefits. Yorktown's salaries for the year were $18 million. What was Yorktown's funded ratio?
a.67%
b.75%
c.89%
d.400%
Answer:b
25.A not-for-profit entity had revenues, gains, and other support of $18 million; program expenses of $12 million; and administrative and fund raising expenses of $4 million. What was the entity's program services ratio?
a.11%
b.67%
c.75%
d.300%
Answer:c
Problems
26.(Assessment of a hospital's accounts receivable collection efficiency)
Assess PlainsRegionalHospital's accounts receivable collection efficiency based on the following set of facts:
a.Days' revenue in patient accounts receivable at December 31, 2012, for Plains Regional Hospital - 76 days
b.Extracts from Plains Regional Hospital's calendar year 2013 financial statements:
Net patient accounts receivable, $16.4 million
Net patient service revenue, $75 million
c.Days' revenue in patient accounts receivable at December 31, 2013 for hospitals of comparable size - 65 days
Answer:
Computation of number of days' revenue in Plains Regional's patient accounts receivable at December 31, 2013:
Patient service revenue of $75 million / 365 = $205,479 revenues per day
Net patient accounts receivable ($16.4 million) / revenues per day ($205,479) = 80 days
Assessment: Plains Regional Hospital's number of days' revenue in patient receivables at December 31, 2013, was 80. This is worse by 4 days over 2012 and worse by 15 days compared with hospitals of comparable size. Therefore, PlainsRegionalHospital needs to devote more effort to speeding up the collection of its patient receivables.
27.(Computation of a governmental entity's debt and debt service burdens)
The following data is extracted from the general and debt service columns of the Town of Gold Hill's governmental funds statement of revenues, expenditures, and changes in fund balances for the year ended December 31, 2013. (Interfund transfers were eliminated in aggregating data.)
Total revenues$210.5 million
Expenditures:
Public safety 45.3 million
Public health 22.3 million
Economic assistance 80.4 million
All other expenditures 50.7 million
Debt principal 6.2 million
Interest on debt 4.8 million
Total expenditures 209.7 million Excess of revenues over expenditures $ .8 million
The governmental activities column of the Town of Gold Hill's statement of net assets shows general obligation bonds payable of $96,900,000. The statistical tables in the Town's comprehensive annual financial report shows that its population is 230,600 and that the full value of its taxable real property for 2013 is $6,737,000,000.
Required:
a.Compute the Town of Gold Hill's debt service burden.
b.Compute the Town of Gold Hill's debt burden, using per capita debt and debt as a percentage of the full value of taxable real property.
c.Assess these burdens in light of the following data for a reference group of municipalities within the same state as the Town of Gold Hill: debt service burden - 4.6%; debt per capita - $370; debt as a percent of full value of taxable real property - 1.02%.
Answer:
a.Debt service burden = Debt service / Revenues = $ 11.0 million / $210.5 million = 5.2%
b.Debt burden:
Per capita burden = $96,900,000 (debt) / 230,600 (population) = $420 per capita
Debt as percent of full value of taxable property = $96,900,000 (debt) / $6,737,000,000 = 1.44%
c.Assessment: The Town of Gold Hill's debt service burden of 5.2% is greater than the reference group. Gold Hill's debt burden, using both measures, is also greater than the reference group. To get a better assessment of this burden, it would be useful to see how rapidly Gold Hill is amortizing its debt principal.
28.(Financial statement analysis of a governmental enterprise hospital)
Following is a trial balance (with 000 omitted for simplification) showing the accounts of Beta Hospital at December 31, 2013. Using the information from the trial balance, analyze Beta's financial statements by answering the following questions. Show all calculations.
a.What is the current ratio?
b.What is the number of days of revenue in net patient accounts receivable?
c.How much is the excess of revenues over expenses?
d.What is the earnings margin?
e.What is the long-term debt-to-equity ratio at year-end?
f.What is the interest coverage (times interest earned)?
DebitsCredits
Cash$5,000
Patient accounts receivable8,000
Allowance for bad debts$1,000
Food and medicines inventory2,000
Buildings.40,000
Accumulated depreciation, buildings8,000
Equipment20,000
Accumulated depreciation, equipment10,000
Land5,000
Accounts payable6,000
Accrued interest payable200
Current portion of bonds payable1,500
Long-term bonds payable34,000
Net assets, January 1, 2008 17,300
Patient service revenues (net)36,000
Patient care expense20,000
Dietary expense2,000
General and administrative expense6,000
Bad debts expense1,000
Depreciation., buildings and equipment4,000
Interest expense 1,000______
Totals$114,000$114,000
Answer (Problem 28)
a.Current assets (Cash [$5,000] + Patient accounts receivable [$8,000] - Allowance for bad debts [$1,000] + Food and medicines inventory [$2,000]) = $14,000;
Current liabilities (Accounts payable [$6,000] + Accrued interest payable [$200] +Current portion of bonds payable [$1,500]) = $7,700;
Current ratio: Current assets / Current liabilities = 14,000 / 7,700 = 1.82
b. Net patient accounts receivable / Net patient service revenues / day = $ 7,000 / (36,000 / 365) = 7,000 / (98.63) = 71 days
c.Net patient service revenue =$36,000
Expenses
Patient care expense$20,000
Dietary2,000
General and administrative6,000
Bad debts1,000
Depreciation4,000
Interest 1,000
34,000
Excess of revenues over expenses$ 2,000
d.Earnings margin =
Excess of revenues over expenses / Revenues, gains, other support
= $ 2,000 / $36,000 = 5.55%
e.Long-term bonds payable = $34,000;
Year-end total net assets =
Net assets at beginning of year ($17,300) + Excess of revenues over expenses for the year ($2,000) = $19,300;
Long-term debt to equity ratio =
Long-term debt / Total net assets = $34,000 / $19,300 = 176%
f.Times interest earned =
(Excess of revenues over expenses + Interest expense) / Interest expense
= $3,000 / $1,000 = 3 times
29.(Analyzing and assessing the implications of a government's account balances)
Following is a pre-closing trial balance of a village's General Fund at December 31, 2013. The amount shown as Fund balance (unassigned) has not changed since the year started. The amount shown as appropriations includes the amounts appropriated for transfers. Property tax invoices are mailed out on January 10 and are due to be paid on February 10. Property owners that have not paid their taxes are classified as delinquent on March 10.
DebitsCredits
Cash$4,000
Property taxes receivable, delinquent22,000
Allowance for uncollectible property
taxes, delinquent$5,000
Salaries payable6,000
Due to Water Enterprise Fund3,000
Accounts payable16,000
Fund balance (unassigned)3,000
Property tax revenues250,000
Sales tax revenues40,000
Expenditures - salaries220,000
Expenditures - other than
personal services23,000
Expenditures - utilities14,000
Transfer to Debt Service Fund30,000
Transfer to Water Enterprise Fund10,000
Estimated revenues (total)297,000
Appropriations (total)300,000
Budgetary fund balance 3,000______
Totals$ 623,000$623,000
Required:
Based on the information contained in the foregoing trial balance, answer the following questions.
a.When the budget was adopted, what budgetary results did the village anticipate? (Assume the budgetary amounts shown in the trial balance represent the budget as originally adopted by the village.)
b.What were the results of operations for the year? Did the fund balance increase or decrease as a result of the year's activities, and by how much? How much will the amount of the unassigned fund balance be after the books are closed?
c.Based on your analysis of the data, what appears to be the major cause (or causes) of the difference between the anticipated and the actual operating results?
d.Discuss possible reasons for the transfers to the Debt Service Fund and the Water Enterprise Fund.
e.Discuss several possible reasons for the amount shown as Due to Water Enterprise Fund.
f.Assess the financial condition of the village based on the information given in the problem. Include a discussion of the village's current and quick ratios in developing your conclusion.
Answer (Problem 29)
a.The village anticipated that expenditures would exceed revenues and other financing uses by $3,000, so as to reduce its fund balance to zero.
b.Actual revenues ($290,000) were less than actual expenditures and other financing uses($297,000) by $7,000. As a result the unassigned fund balance will decrease by $7,000, leaving a negative fund balance of $4,000.
c.The major cause for the difference between anticipated and actual results lies in the revenue shortfall. Actual revenues of $290,000 were $7,000 less than anticipated. There is insufficient data to determine whether the shortfall occurred in property taxes or salestaxes. It is possible, for example, that part of the shortfall occurred because estimated uncollectible property taxes are greater than anticipated. There may also be a shortfall in collecting sales taxes. Although the village reduced its problem by cutting back somewhat on its expenditures, the cutback was insufficient to avoid a greater deficit for the year than originally planned
d.The transfer to the Debt Service Fund is probably a routine transfer to pay debt service expenditures. The operating transfer to the Water Enterprise Fund is probably a subsidy to the Fund to help meet its expenses or cash needs.