Chapter 14: Analysis of Financial Statements and Financial Condition
Multiple Choice
1. What is the major purpose of the statement of net position from a financial analysis
perspective?
a. to describe the major sources of revenue and types of expense
b. to show the inflows and outflows of cash during the reporting period
c. to show whether the entity was efficient and effective in delivering services
d. to provides information about the entity’s liquidity and financial flexibility
2. What information could a financial analyst potentially obtain by reviewing the statement of
activities?
a. whether the resources obtained during the year were sufficient to cover the cost of
providing services
b. whether services provided were sufficient for the government’s constituencies
c. the current financial condition of a government
d. the current status of a government’s assets and liabilities
3. Why do financial analysts prepare common size financial statements?
a. it is easier to work with financial statements when they are all in the same format
b. they help the analyst identify changes over time in the proportion that each item of
expense bears to the entity’s total expenses
c. they are a necessary first step in allowing the analyst to develop per capita information
d. they show the dollar amount of change from one year to another for each item of
expense, both for the entity studied and the reference group.
4. Which of the following factors is the most important consideration about the organizations
that comprise a reference group for financial analysis purposes?
a. they should have approximately the same administrative structure as the entity studied
b. they should be located in the same section of the country as the entity studied
c. they should perform the same functions and be about the same size as the entity studied
d. they should have approximately the same fiscal year as the entity studied
5. What can an analyst learn from the liquidity indicators?
a. the amount of cash than an entity can obtain from liquidating its capital assets
b. the amount of cash needed to liquidate its long-term debt
c. the amount that an entity is likely to realize from selling all of its assets
d. the ability of an entity to meet its short-term obligations
6. Which of the following items should be excluded from the assets or liabilities when
computing the quick ratio?
a. inventories
b. amount of long-term debt due in the following year
c. accounts payable
d. cash equivalents
7. 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?
a. ratio of real property taxes receivable to real property tax revenues
b. ratio of total available fund balance to total revenues
c. ratio of program expenses to total expenses
d. portion of real property taxes collected in the year of the tax levy
8. To compute a government’s debt burden, which of the following is the most appropriate
denominator?
a. current liabilities
b. accounts receivable
c. full value of taxable real property
d. pension benefits paid in the preceding year
9. What can a financial analyst learn from computing a hospital’s debt service coverage?
a. the number of times the debt service is covered by the hospital’s earnings
b. the excess of the total net assets over the hospital’s outstanding long-term debt
c. the number of times the debt service is covered by the hospital’s current assets
d. the ratio of the outstanding long-term debt to the current year’s debt service
10. The Government Finance Officers Association recommends general-purpose government’s
have a financial policy to maintain the General Fund’s unrestricted fund balance at:
a. ten percent of expected annual General Fund expenditures.
b. 45 days of expected governmental fund expenditures
c. no less than two months of regular General Fund revenues or expenditures.
d. no less than two months of total annual governmental fund revenues
11. What can a financial analyst learn from a hospital’s number of days’ revenue in
receivables?
a. the hospital’s accounts receivable collection efficiency
b. the average length of stay of patients in the hospital
c. the average daily occupancy rate of the hospital’s beds
d. the proportion of hospital beds occupied by patients covered by self-pay patients
12. and 13.
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.
12. Which of these seven accounts do not enter into the calculation of the current ratio?
a. only (5)
b. only (6)
c. only (7)
d. (5) and (7)
13. Which of these seven accounts do not enter into the calculation of the quick ratio?
a. (3), (5), and (6)
b. (2), (5), and (7)
c. (2), (3), and (5)
d. (3), (5), and (7)
14. 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?
a. (1) and (2)
b. (1), (2), and (3)
c. (1), (2), (3), and (6)
d. all six
15. 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)?
a. 85
b. 106
c. 116
d. 1147
16. Which of the following ratios is a good measure of the liquidity of a city’s resources?
a. cash and investments divided by current liabilities
b. fund balance as a percentage of revenues
c. debt service expenditures as a percentage of revenues
d. sales taxes as a percentage of total taxes
17. 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:
a. the liquidity of its resources
b. the volatility of its revenue structure
c. its ability to weather future revenue shortfalls
d. its efficiency and effectiveness
18. 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?
a. a statistical sample of all municipalities (cities, counties, villages, etc.) in the country
b. a statistical sample of all municipalities (cities, counties, villages, etc.) in the same
state
c. a random sample of municipal governments, other than cities, in the same state
d. a sample of cities of roughly similar population size and that perform similar functions
in the same state
19. 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?
a. do not consider them in your analysis, because transfers in will equal transfers out
b. see if transfers in equal transfers out. Then, check the balance sheet to see if the
captions “due to” and “due from” also are equal. If so, no further review is needed
c. see if the transfers are recurring, rather than one-shots. If they are recurring, no further
inquiry is needed
d. only transfers in should be considered
20. 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?
a. the analyst should ignore it, provided the state has classified the revenues as an
extraordinary item in its operating statement
b. the analyst should ignore it because the present value of the future revenue stream is
equivalent to the revenue stream itself
c. the analyst should assess the impact of the revenue as a “one-shot” item that balanced
the current year’s budget, but that might leave a gap in future year budgets
d. the analyst should assess the impact of arrangement on the auditor’s report, the notes to
the financial statements, and Management’s Discussion and Analysis.
21. A village’s legal debt limit is $20 million. Its outstanding general obligation debt is $9
million. The full value of its real property is $520 million, which includes $40 million of
property that is exempt from taxation. What is the village’s debt burden?
a. 1.7%
b. 1.9%
c. 3.8%
d. 4.2%
22. and 23.
This statement of facts is presented for problems 22 and 23: The following data comes from Olde
Towne Hospital’s financial statements. Total revenues were $20 million. Total expenses were $18
million, consisting of patient care expenses – $13 million; administrative expenses – $2 million;
depreciation – $2 million; and interest on long-term debt – $1 million. Principal payments on long-
term debt were $1.5 million.
22. What is Olde Towne’s debt service coverage?
a. 0.8 times
b. 1.6 times
c. 2.0 times
d. 2.7 times
23. What is Olde Towne’s interest coverage?
a. 2.0 times
b. 3.0 times
c. 4.0 times
d. 5.0 times
24. At December 31, 2013, Yorktown’s pension fund had net assets available for benefits of
$12 million. Its actuarial accrued liability at that time was $16 million. For the year ended
December 31, 2013, its pension fund had paid $3 million in pension benefits. Yorktown’s
salaries for the year were $18 million. What was Yorktown’s funded ratio?
a. 67%
b. 75%
c. 89%
d. 400%
25. A not-for-profit entity had revenues, gains, and other support of $18 million; program
expenses of $12 million; and administrative and fund raising expenses of $4 million. What
was the entity’s program services ratio?
a. 11%
b. 67%
c. 75%
d. 300%
Problems
26. (Assessment of a hospital’s accounts receivable collection efficiency)
Assess Plains Regional Hospital’s accounts receivable collection efficiency based
on the following set of facts:
a. Days’ revenue in patient accounts receivable at December 31, 2012, for
Plains Regional Hospital – 76 days
b. Extracts from Plains Regional Hospital’s calendar year 2013 financial
statements:
Net patient accounts receivable, $16.4 million
Net patient service revenue, $75 million
c. Days’ revenue in patient accounts receivable at December 31, 2013 for
hospitals of comparable size – 65 days
27. (Computation of a governmental entity’s debt and debt service burdens)
The following data is extracted from the general and debt service columns of the
Town of Gold Hill’s governmental funds statement of revenues, expenditures, and
changes in fund balances for the year ended December 31, 2013. (Interfund
transfers were eliminated in aggregating data.)
Total revenues $210.5 million
Expenditures:
Public safety 45.3 million
Public health 22.3 million
Economic assistance 80.4 million
All other expenditures 50.7 million
Debt principal 6.2 million
Interest on debt 4.8 million
Total expenditures 209.7 million
Excess of revenues over expenditures $ .8 million
The governmental activities column of the Town of Gold Hill’s statement of net assets shows
general obligation bonds payable of $96,900,000. The statistical tables in the Town’s
comprehensive annual financial report shows that its population is 230,600 and that the full value
of its taxable real property for 2013 is $6,737,000,000.
Required:
a. Compute the Town of Gold Hill’s debt service burden.
b. Compute the Town of Gold Hill’s debt burden, using per capita debt and
debt as a percentage of the full value of taxable real property.
c. Assess these burdens in light of the following data for a reference group of
municipalities within the same state as the Town of Gold Hill: debt service
burden – 4.6%; debt per capita – $370; debt as a percent of full value of
taxable real property – 1.02%.
28. (Financial statement analysis of a governmental enterprise hospital)
Following is a trial balance (with 000 omitted for simplification) showing the
accounts of Beta Hospital at December 31, 2013. Using the information from the
trial balance, analyze Beta’s financial statements by answering the following
questions. Show all calculations.
a. What is the current ratio?
b. What is the number of days of revenue in net patient accounts receivable?
c. How much is the excess of revenues over expenses?
d. What is the earnings margin?
e. What is the long-term debt-to-equity ratio at year-end?
f. What is the interest coverage (times interest earned)?
Debits Credits
Cash $5,000
Patient accounts receivable 8,000
Allowance for bad debts $1,000
Food and medicines inventory 2,000
Buildings. 40,000
Accumulated depreciation, buildings 8,000
Equipment 20,000
Accumulated depreciation, equipment 10,000
Land 5,000
Accounts payable 6,000
Accrued interest payable 200
Current portion of bonds payable 1,500
Long-term bonds payable 34,000
Net assets, January 1, 2008 17,300
Patient service revenues (net) 36,000
Patient care expense 20,000
Dietary expense 2,000
General and administrative expense 6,000
Bad debts expense 1,000
Depreciation., buildings and equipment 4,000
Interest expense 1,000 _______
Totals $114,000 $114,000
29. (Analyzing and assessing the implications of a government’s account balances)
Following is a pre-closing trial balance of a village’s General Fund at December
31, 2013. 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.
Debits Credits
Cash $4,000
Property taxes receivable, delinquent 22,000
Allowance for uncollectible property
taxes, delinquent $5,000
Salaries payable 6,000
Due to Water Enterprise Fund 3,000
Accounts payable 16,000
Fund balance (unassigned) 3,000
Property tax revenues 250,000
Sales tax revenues 40,000
Expenditures – salaries 220,000
Expenditures – other than
personal services 23,000
Expenditures – utilities 14,000
Transfer to Debt Service Fund 30,000
Transfer to Water Enterprise Fund 10,000
Estimated revenues (total) 297,000
Appropriations (total) 300,000
Budgetary fund balance 3,000 ______
Totals $ 623,000 $623,000
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
30.(Analyzing a governmental entity’s financial statements)
The following data comes from the 2013 financial statements of the Village of Matthews.
Although presented in summarized format, the balance sheet debits and credits are equal and the
operating statement information is complete.
General Fund – Balance Sheet Elements
Cash $1,200,000
Short-term investments 405,000
Property taxes receivable – delinquent 282,000
Due from other funds 58,000
Accounts payable and other accrued liabilities 900,000
Assigned fund balance 90,000
Unassigned fund balance 935,000
General Fund – Operating Statement Elements
Revenues, including property taxes of $6,125,000 $8,350,000
Expenditures (total) 7,510,000
Transfer to Debt Service Fund 400,000
Excess of revenues and other sources over expenditures
and other uses 440,000
Debt Service Fund – Balance Sheet Elements
Cash and cash equivalents 230,000
Restricted fund balance 230,000
Debt Service Fund – Operating Statement Elements
Debt service expenditures:
Principal 100,000
Interest 200,000
Operating transfer from General Fund 400,000
Excess of revenues and other sources over
expenditures and other uses 100,000
Required: Calculate the following ratios for the Village of Matthews:
a. Current ratio – General Fund
b. Quick ratio – General Fund
c. Property tax receivable delinquency rate
d. Budgetary cushion for the General Fund (Assume all assigned fund
balance is available.)
e. Debt service burden
f. Excess of revenues and other sources over expenditures and other uses, as
a percentage of revenues – Combined, General Fund and Debt Service
Fund (Hint: The transfers out and in cancel each other. Therefore, use the
revenues for the denominator.)
