Following is a pre-closing trial balance of a village's General Fund at December 31, 2019. 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. 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 quick ratio, number of days' cash on hand, and budgetary cushion in developing your conclusion.

Question

Following is a pre-closing trial balance of a village's General Fund at December 31, 2019. 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.  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 quick ratio, number of days' cash on hand, and budgetary cushion in developing your conclusion.

Quizplus · Accepted Answer

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 sales taxes. 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.
e. The amount due to Water Enterprise Fund could be (1) an unpaid utilities bill, (2) an unpaid subsidy (transfer), or (3) even a short-term borrowing from that Fund.
f. The village faces a serious liquidity problem. In fact, it is possible that it has already started to delay paying its current liabilities because of a lack of cash. A major factor causing the lack of liquidity is the large amount of delinquent property taxes.
(1) The village has only $4,000 cash to pay current liabilities of $25,000 (salaries payable of $6,000, accounts payable of $16,000 and Due to Water Enterprise Fund of $3,000). Its quick ratio is therefore only 0.16, which is extremely low.
(2) The village has only 5 days' cash on hand, which is extraordinarily low. (The number of days' cash on hand is cash ($4,000) / (total expenditures + transfers out / 365) or $220,000 + $23,000 + $14,000 + $30,000 + $10,000 = $297,000 / 365 = $814; then $4,000 / $814 = 5 days. The village has not deferred recognition of its property tax revenues, so it is possible that it will collect the delinquencies in 60 days. Nevertheless, the village may have to delay paying its bills or resort to short term borrowings pending the inflow of the next year's tax collections.
(3) The village has a negative budgetary cushion; as previously noted, the year-end fund balance is negative $4,000.

Following Is a Pre-Closing Trial Balance of a Village's General