Question 1

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

Accepted Answer

A decreasing ratio of total revenues to total expenditures indicates that a government is spending more than it is taking in, which could lead to fiscal stress. The other answer choices indicate positive financial trends.

Question 2

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.

Accepted Answer

Service capacity, not fiscal capacity, is the term that best matches the definition provided.

Question 3

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.

Accepted Answer

Monitoring effectively will contribute to a government's ability to identify potential problem areas and take action in order to avoid financial crises.

Question 4

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.

Accepted Answer

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 5

A tax watchdog group is an example of an intermediary that represents citizen interests.

Accepted Answer

There are several types of intermediaries that try to represent citizen interests including the media, watchdog groups (e.g., tax watchdogs) and special interest groups.

Question 6

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

Accepted Answer

Interperiod equity is the term used to describe the concept of ensuring that current taxpayers are paying their fair share for current services and that future taxpayers are not unfairly burdened with costs for services provided in the past. This concept is closely related to the idea of a government's financial sustainability over the long term. Financial position refers to the government's overall financial health, while financial condition is a more specific measure of its ability to meet its obligations. Economic condition refers to the broader economic environment in which the government operates, and is not specifically related to its own financial situation.

Question 7

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

Accepted Answer

Governments do not typically offer dividends to residents, so evaluating their financial condition would not be done for this reason. A, B, and C are all common reasons for evaluating a government's financial condition.

Question 8

Service-level solvency is the government's ability to meet its current budget by expending no more resources than were appropriated.

Accepted Answer

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

Question 9

Cash solvency is the government's long-run ability to pay all the costs of doing business.

Accepted Answer

Cash solvency represents the government's ability to generate enough cash to cover obligations due in 60 to 90-days.

Question 10

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

Accepted Answer

Internal managers are primarily concerned with ensuring that the government has the capacity to sustain services to the community. Creditors and bond investors (and their analysts) are mainly interested in assessing the ability of the government to make its principal and interest payments on debt when due. These differences can be expected to result in a different approach taken by each party in evaluating the financial condition of the government.

Question 11

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?"

Accepted Answer

The definition given is for financial condition, as defined by the GASB. Financial position refers to the government's resources and obligations at a specific point in time. Financial leverage refers to the use of debt to finance operations or investments. Liquidity refers to the ability to meet short-term obligations with available resources.

Question 12

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

Accepted Answer

As discussed in Chapter 10, financial condition is a somewhat elusive concept. Most experts agree that assessing financial condition involves assessment of nonfinancial "environmental" information as well as financial information, and requires considerable judgment.

Question 13

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

Accepted Answer

The practices of management and decisions made by lawmakers are critical factors in evaluating the financial position, financial condition, and interperiod equity of a governmental entity. In particular, the inability of management or the governing body to change fiscal policy in light of adverse environmental factors will most likely lead to financial crisis.

Question 14

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

Accepted Answer

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 15

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

Accepted Answer

Much useful information is provided in a comprehensive annual financial report outside the financial statements; however, the financial statements (both government-wide and fund) and notes to the financial statements are essential in calculating the ratios described in Chapter 10.

Question 16

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

Accepted Answer

The primary cause of municipal financial crises is the failure of management to revise fiscal policies appropriately in response to adverse environmental factors.

Question 17

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.

Accepted Answer

These factors about the entity and its history reveal underlying community philosophies regarding the willingness to support higher taxes, issuances of long-term debt, and increased social services.

Question 18

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

Accepted Answer

Liquidity is a measure of a company's ability to meet its short-term obligations. Financial position refers to the overall financial health of a company, which includes liquidity as well as solvency, profitability, and other factors. Therefore, financial position is closely related to the concept of liquidity.

Question 19

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

Accepted Answer

Interperiod equity and financial condition are related concepts in that they both take a long-term view of the organization and its ability to meet the demands of stakeholders.

Question 20

The term financial position is closely related to the term liquidity while financial condition is much broader in scope,including not only financial position but also consideration of long-term solvency.

Accepted Answer

Financial position as defined by GASB focuses on assets and liabilities that require cash or are normally converted to cash in the near future; thus, it is closely related to the concept of liquidity. As defined on page 417, financial condition is a much broader concept.

Quiz 10: Analysis of Governmental Financial Performance