Deck 10: Analysis of Governmental Financial Performance

Question 1

Cash solvency is the government's long-run ability to pay all the costs of doing business,such as expenditures in the annual budget and those that appear only in the years in which they must be paid.

Answer 1

False
Explanation: The definition provided is that of long-run solvency, not cash solvency. Cash solvency is the government's ability to generate enough cash over a 30- or 60-day period to pay its bills.

Question 2

Budget solvency is the government's ability to provide services at the level and quality that are required for the health,safety,and welfare of the community and that its citizens desire.

Answer 2

False
Explanation: The definition provided is that of service-level solvency, not budget solvency. Budget solvency is a government's ability to generate enough revenue over its normal budgetary period to meet its expenditures and not incur deficits.

Question 3

Environmental factors facing a government have little impact on a city's fiscal policy.

Answer 3

False
Explanation: Environmental factors determine the kinds and levels of services needed, the government's capacity to provide those services, the legal and fiscal constraints under which the government operates, the kinds of major disruptions to which the government is susceptible, and the political culture of the government. A city's fiscal policy must consider these factors and be flexible enough to adapt to adverse turns in these environmental factors.

Question 4

Failure to achieve interperiod equity may negatively impact a government's financial condition.

Question 5

Internal managers and credit analysts evaluate financial condition of a government in the same way.

Question 6

The key cause of municipal financial crises is the failure of management to raise taxes quickly enough in response to adverse environmental factors.

Question 7

Political culture,one of the environmental factors affecting financial condition,includes such factors as form of government and the entity's economic,political,and social history.

Question 8

The term that is closely related to the concept of liquidity is

A)Financial condition.
B)Interperiod equity.
C)Financial position.
D)Economic condition.

Question 9

Financial statements are more relevant in evaluating a city's current financial condition because they focus on historical transactions rather than other information in the comprehensive annual financial report.

Question 10

The term that is defined as determining whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided is

A)Financial position.
B)Interperiod equity.
C)Financial condition.
D)Economic condition.

Question 11

Which of the following trends is most likely to be a signal of impending fiscal stress?

A)An increasing ratio of own source revenues to total revenues.
B)A decreasing ratio of total revenues to total expenditures.
C)A decreasing ratio of debt service expenditures to operating revenues.
D)A decreasing ratio of operating expenditures to total revenues.

Question 12

The financial condition of a government is easily determined by calculating the financial ratios discussed in Chapter 10.

Question 13

There is more emphasis on compliance with generally accepted accounting principles today than there was in 1975 around the time of New York City's default on several billions of short-term debt.

Question 14

An effective system of monitoring financial condition may permit management to identify unfavorable financial trends in sufficient time to take preventive action to avoid financial distress.

Question 15

Which of the following is not a typical reason why people evaluate a government's financial condition?

A)Prevent financial crises from developing.
B)Hold management accountable for the use of tax revenues.
C)Determine if the government can continue to offer the current level of services.
D)Determine whether residents will receive dividends.

Question 16

Financial position refers to liquidity while financial condition is a much broader concept that includes not only financial position but consideration of long-term solvency.

Question 17

Management practices and legislative policies are very relevant in the evaluation of a government's financial performance.

Question 18

The management discussion and analysis (MD&A)is designed to provide substantial information in "plain English" so financial statement users can assess the financial health of the government.

Question 19

Fiscal capacity is the government's ongoing ability and willingness to supply the capital and human resources needed to meet its commitments to provide services.

Question 20

Which of the following financial concepts has been defined by the GASB as "the probability that a government will meet both its financial obligations to creditors,consumers,employees,taxpayers,suppliers,constituents,and others as they become due and its service obligation to constituents,both currently and in the future?"

A)Financial condition.
B)Financial position.
C)Financial leverage.
D)Liquidity.

Question 21

Distinguish and describe key financial performance concepts,such as financial position,financial condition,and economic condition.

Question 22

All of the following are appropriate benchmarks for a state or local government to use as a basis for comparing performance except

A)A government's own operating results and financial position from prior years.
B)International City/County Management Association's Financial Trend Monitoring System results for governments of similar types and size.
C)Federal agencies' financial information for a comparable time period.
D)Socioeconomic and demographic trends of governments of similar types and size available from U.S.Census Bureau.

Question 23

Explain the importance of evaluating governmental financial performance.

Question 24

A financial capability ratio that measures the degree to which the annual budget is loaded with disbursements to pay off long-term debt is:

A)Revenue dispersion.
B)Debt service load.
C)Financing margin-bonded debt per capita.
D)Financing margin-legal debt limit.

Question 25

A term that describes a government's ongoing ability and willingness to raise revenues,incur debt,and meet its financial obligations as they become due is

A)Financial condition.
B)Fiscal capacity.
C)Economic condition.
D)Financial position.

Question 26

Match the following financial ratios that are based on comprehensive annual financial report (CAFR)governmental funds information with the explanation for that ratio.

Question 27

A recognizable signal of fiscal stress is

A)Total revenues from own sources increasing as a percent of total revenues for all sources.
B)Increasing population.
C)Declining property values.
D)An increasing ratio of total revenues to total expenditures.

Question 28

A measure of whether the government lived within its means in the measurement year,or was required to use prior year resources to fund a portion of current year costs,or shifted the funding of some current year costs to future periods,is

A)Business-type activities revenues/business-type activities expenses.
B)Unrestricted net assets/total revenues.
C)Total revenues/total expenditures.
D)Total net assets (governmental activities and business-type activities)less total net assets at the beginning of the year.

Question 29

Political culture,such as attitudes towards taxes,is an example in the ICMA's Financial Trend Monitoring Systems of:

A)Environmental factors.
B)Organizational factors.
C)Financial factors.
D)Management practices and legislative policies.

Question 30

One of the most important reasons to evaluate the financial performance of a government is to

A)Determine if property taxes and other revenue sources should be increased.
B)Assign responsibility for success or failure of the government to certain parties.
C)Determine whether the government is accomplishing its mission.
D)Have an early warning of impending financial difficulty for a diverse set of decision makers.

Question 31

The following are key terms in Chapter 10 that relate to analysis of governmental financial performance:
A.Benchmarking
B.Budgetary solvency
C.Cash solvency
D.Economic condition
E.Financial condition
F.Financial position
G.Fiscal capacity
H.Long-run solvency
I.Service capacity
J.Service-level solvency
For each of the following definitions,indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition

Question 32

A measure of the adequacy of the amount of the government's total unrestricted net assets or deficit at the measurement date is

A)Unrestricted net assets/total revenues.
B)Business-type activities revenues/business-type activities expenses.
C)Total net assets (governmental activities and business-type activities)less total net assets at the beginning of the year.
D)Total revenues/total expenses.

Question 33

Which of the following statements about credit analysts' models is true?

A)Credit analysts focus on debt and finances,and not demographics and management strategies.
B)Credit analysts have access to the same set of information that internal managers use.
C)Credit analysts are concerned with assessing a government's ability to pay interest and principal on debt when due.
D)Credit analysts rarely use comprehensive annual financial reports.

Question 34

For which of the following is a low or decreasing value of the item associated with a stronger financial condition of a governmental entity?

A)Unfunded pension liability.
B)Property values.
C)Home ownership.
D)Employment rate.

Question 35

Identify the following factors that affect financial condition as environmental factors (E)or financial factors (F).

Question 36

After financial ratios are calculated,the results should be compared to any of the following except

A)The same indicator from prior years.
B)Budgeted information for the government for the upcoming year.
C)A comparative benchmark value,such as those from Moody's Medians.
D)Any credit market or other red flag indicators.

Question 37

A measure of the extent to which the government's business-type activities depend on subsidies from taxpayer or other general revenues rather than having the full cost of the activities' operations funded by charges to the users of the service is

A)Unrestricted net assets/total revenues.
B)Business-type activities revenues/business-type activities expenses.
C)Total net assets (governmental activities and business-type activities)less total net assets at the beginning of the year.
D)Total revenues/total expenses.

Question 38

Which ratio or concept describes the extent to which the government has lived within its means for the year?

A)Debt to assets.
B)Interperiod equity.
C)Current ratio.
D)Revenue dispersion

Question 39

Which of the following ratios would be most helpful in assessing the liquidity of a governmental entity?

A)Net tax-supported long-term debt/population.
B)Own source revenues/total revenues.
C)Debt service expenditures/total expenditures.
D)Unreserved fund balance/operating revenues.

Question 40

Which of the following ratios would be considered favorable if it was low?

A)Total revenues to population.
B)Debt service to total revenues.
C)Capital outlay from operating funds to operating expenditures.
D)Cash and short-term investments to current liabilities.

Question 41

How do the objectives of evaluating financial condition differ between internal managers and credit analysts? How are their objectives similar?

Question 42

"Financial statements are virtually useless in evaluating a city's financial condition." Do you agree with this statement? Why or why not?

Question 43

How do credit analysts assist decision makers in evaluating the creditworthiness of a state or local government?

Question 44

Describe how financial performance is related to the operating performance of a governmental entity.

Question 45

Describe some ratios that can be calculated using the basic financial statements that will help a decision maker assess the financial position of the government.

Question 46

"Benchmarking is a simple method for comparing one government to another." Do you agree or disagree with this statement? Explain.

Question 47

Explain the relationships among environmental factors,organizational factors,and financial factors in determining governmental financial condition.

Question 48

Discuss how despite significant improvements in the quality of governmental financial reporting over the years there are still serious,high profile public sector financial crises.How does the quality of financial reporting affect the ability to evaluate financial condition?