Question 1

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)?

Accepted Answer

The hospital's number of days' revenue in patient accounts receivable is calculated as follows:Days in accounts receivable = (Net patient accounts receivable / Gross patient service revenues) * 365 days= ($3.5 million / $15 million) * 365 days= 0.233 * 365 days= 85 days (rounded to the nearest whole day)

Question 2

To compute a government's debt burden,which of the following is the most appropriate denominator?

Accepted Answer

The most appropriate denominator to compute a government's debt burden is the full value of taxable real property (C). This measure provides a broad base reflecting the government's ability to generate revenue through property taxes to service its debt, offering a relevant context for assessing the debt burden in relation to the government's potential revenue sources.

Question 3

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?

Accepted Answer

The analyst should view the revenue from the tobacco settlement as a "one-shot" item because it provides a significant influx of cash in the short term but does not represent a sustainable source of revenue for future budgets. This could potentially leave a gap in future budgets once the funds are depleted.

Question 4

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?

Accepted Answer

Transfers in and out should be considered in the context of their recurrence. Recurring transfers indicate a more stable and predictable financial situation, whereas one-time transfers may not reflect the ongoing financial condition.

Question 5

The Government Finance Officers Association recommends general-purpose government's have a financial policy to maintain the General Fund's unrestricted fund balance at:

Accepted Answer

Option C states that the government's financial policy should maintain the General Fund's unrestricted fund balance at no less than two months of regular General Fund revenues or expenditures. This option is the most conservative among the choices provided, as it requires a higher level of unrestricted fund balance. It also provides a cushion for unforeseen emergencies, revenue shortfalls or expenditure increases, giving the government greater financial stability and flexibility.

Question 6

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?

Accepted Answer

Cash and cash equivalents are the only accounts that enter into the calculation of the quick ratio.

Question 7

Which of the following items should be excluded from the assets or liabilities when computing the quick ratio?

Accepted Answer

The quick ratio (also known as acid-test ratio) is used to determine a company's ability to meet short-term obligations with liquid assets. Liquid assets are considered to be assets that can be easily converted into cash, such as cash equivalents and marketable securities. Inventories are not considered liquid assets since they may take time to be converted into cash. Therefore, inventories should be excluded from the assets when computing the quick ratio. The other options (B, C, and D) are all considered to be part of the quick ratio calculation as they represent either current liabilities or liquid assets.

Question 8

Why do financial analysts prepare common size financial statements?

Accepted Answer

Common size financial statements help the analyst identify changes over time in the proportion that each item of expense bears to the entity's total expenses, allowing for better analysis of trends and potential areas of improvement.

Question 9

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?

Accepted Answer

The ratio of total available fund balance to total revenues would be of most concern because it indicates the government's financial flexibility and ability to withstand economic fluctuations that affect tax revenues.

Question 10

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.
-Which of these seven accounts do not enter into the calculation of the current ratio?

Accepted Answer

The current ratio is calculated as Current Assets / Current Liabilities. Accumulated depreciation on buildings (5) is neither a current asset nor a current liability, so it does not enter into the calculation of the current ratio.

Question 11

What can a financial analyst learn from a hospital's number of days' revenue in receivables?

Accepted Answer

The number of days' revenue in receivables indicates how long it takes for a hospital to collect payments from its patients or insurance companies. This metric is used to measure the hospital's accounts receivable collection efficiency. A lower number of days' revenue in receivables signifies that the hospital is efficiently collecting payments, while a higher number indicates that the hospital faces collection issues.

Question 12

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:

Accepted Answer

The available fund balance as a percentage of revenues and certain transfers in is a key indicator of a municipality's financial health, specifically its ability to manage through periods of reduced income without drastic measures. This ratio shows how much financial cushion the municipality has, which is crucial for weathering future revenue shortfalls.

Question 13

What can a financial analyst learn from computing a hospital's debt service coverage?

Accepted Answer

Computing a hospital's debt service coverage ratio involves comparing its earnings with the amount of debt it has to service. By doing this, a financial analyst can learn how many times over the hospital can cover its debt service obligations. This is an important measure of the hospital's ability to generate income and pay off its debts.

Question 14

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?

Accepted Answer

Choosing cities that are of roughly similar population size and that perform similar functions in the same state will provide a more comparable reference group. This ensures that the financial trends being compared are similar in terms of population and function, which will result in a more relevant comparison. A statistical sample of all municipalities in the country or state may not be as relevant as the trends may differ greatly due to varying factors such as economic development, demographics, and political climate. Similarly, using a random sample of municipal governments, other than cities, in the same state may not be directly comparable to the city being assessed.

Question 15

Which of the following ratios is a good measure of the liquidity of a city's resources?

Accepted Answer

The ratio of cash and investments divided by current liabilities is a good measure of liquidity as it indicates how easily the city can meet its short-term obligations. A high ratio indicates that the city has a strong liquidity position and can easily pay off its debts and obligations. Therefore, A is the best choice. B, C, and D are not good measures of liquidity. Fund balance as a percentage of revenues is a measure of the city's financial stability, debt service expenditures as a percentage of revenues reflect the city's debt burden, and sales taxes as a percentage of total taxes indicate the city's reliance on sales tax revenue.

Question 16

Which of the following factors is the most important consideration about the organizations that comprise a reference group for financial analysis purposes?

Accepted Answer

The most important consideration for selecting organizations for a reference group in financial analysis is that they should perform the same functions and be about the same size as the entity being studied. This ensures that the financial ratios and metrics calculated from the reference group are relevant and comparable to those of the entity being studied. Administrative structure, location, and fiscal year can also be important considerations, but they are less critical than similarity in functions and size.

Question 17

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.
-Which of these seven accounts do not enter into the calculation of the quick ratio?

Accepted Answer

The quick ratio is calculated by subtracting inventories (3) from current assets and then dividing by current liabilities. Prepaid insurance (2) and accumulated depreciation on buildings (5) are also excluded from this calculation because they are not liquid assets.

Question 18

What can an analyst learn from the liquidity indicators?

Accepted Answer

Liquidity indicators provide information on an entity's ability to meet its short-term obligations. This includes the amount of cash and other liquid assets that can be used to pay off its current liabilities. Examples of liquidity indicators include the current ratio, quick ratio, and cash ratio. While the other choices involve liquidation or selling of assets, they are not necessarily related to an entity's ability to meet its short-term obligations.

Question 19

What is the major purpose of the statement of net position from a financial analysis perspective?

Accepted Answer

The major purpose of the statement of net position is to provide information about the entity's liquidity and financial flexibility. This includes information about assets, liabilities, and net position, which can help a financial analyst determine the entity's ability to meet its financial obligations and its overall financial health. Choices A, B, and C may be important considerations in financial analysis, but they are not the primary purpose of the statement of net position.

Question 20

What information could a financial analyst potentially obtain by reviewing the statement of activities?

Accepted Answer

The statement of activities shows the revenues and expenses incurred by a government entity during a specific period. By reviewing this statement, a financial analyst can determine whether the resources obtained, i.e. revenues generated, during the year were sufficient to cover the cost of providing services, i.e. expenses incurred. This helps in assessing the financial health of the government entity. The other options are not directly related to the statement of activities.

Quiz 14: Analysis of Financial Statements and Financial Condition