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.

Accepted Answer

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.

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 3

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 4

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 5

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 6

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 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.

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 8

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

Accepted Answer

Liquidity refers to the ability of an organization to meet its short-term financial obligations as they become due. Financial position, also known as the balance sheet, shows the organization's assets, liabilities, and equity at a specific point in time and is closely related to the concept of liquidity as it includes current assets and current liabilities, which are used to assess an organization's ability to meet short-term obligations. Financial condition and economic condition are more broad terms that encompass a variety of financial and economic factors, while interperiod equity refers to the government's responsibility to ensure that current taxpayers do not disproportionately benefit from government services at the expense of future taxpayers.

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.

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 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

Accepted Answer

Interperiod equity is the term used to determine whether current revenues are enough to cover current-year services and whether future taxpayers will be burdened with the costs of services provided in the past. It is essentially an evaluation of whether resources are being allocated fairly between current and future generations. Financial position pertains to the current status and liquidity of an entity, while financial condition is an assessment of an entity's ability to meet its financial obligations in the long run. Economic condition refers to the state of the broader economy.

Question 11

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 the local government is spending more than it is earning, which can lead to fiscal stress. The other trends suggest the local government is generating more revenue or decreasing expenditures, which would help alleviate fiscal stress.

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

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.

Accepted Answer

Today financial statements prepared in accordance with generally accepted accounting principles are considered an essential component of accountability for public funds. Compliance with GAAP was the exception rather than the norm in the mid 1970s.

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.

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 15

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

Accepted Answer

Dividends are not typically a consideration in evaluating a government's financial condition. The other options are common reasons for evaluating a government's financial condition. Preventing financial crises, holding management accountable for tax revenue use, and determining if the government can maintain services are all important for ensuring the financial sustainability of the government and the well-being of its residents.

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.

Accepted Answer

Financial position is generally thought to be a shorter-term concept, as is true with liquidity, while financial condition is a broader, long-range concept similar to solvency. The ICMA summarizes financial condition as a local government's ability to finance its services on a continuing basis.

Question 17

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 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.

Accepted Answer

The MD&A, required in the GASB financial reporting model, provides narrative information as well as charts and graphs to provide explanation and context for the financial statements and information that follow.

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.

Accepted Answer

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

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?"

Accepted Answer

The financial concept 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" is financial condition.

Quiz 10: Analysis of Governmental Financial Performance