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Chapter 10 Analysis of Governmental Financial Performance     True / False Questions   1

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Chapter 10

Analysis of Governmental Financial Performance

 

 

True / False Questions

 

1.         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. 

 

True    False

 

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

 

True    False

 

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

 

True    False

 

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

 

True    False

 

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

 

True    False

 

6.         The term financial position is closely related to the term liquidity. 

 

True    False

 

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

 

True    False

 

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

 

True    False

 

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

 

True    False

 

10.       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 its citizens. 

 

True    False

 

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

 

True    False

 

12.       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. 

 

True    False

 

13.       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. 

 

True    False

 

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

 

True    False

 

15.       Population demographics have an impact on financial factors such as revenue per capita.

 

True    False

 

16.       A large intergovernmental revenues ratio can be viewed as a positive sign concerning a government’s financial condition.

 

True    False

 

17.       One measure of interperiod equity is whether net revenues are exceeding a government’s total expenses.

 

True    False

 

18.       To provide a meaningful interpretation of a financial ratio a benchmark is needed.

 

True    False

 

19.       Use of trend data is an acceptable method of benchmarking for governments.

 

True    False

 

20.       A revenues to expenditures ratio of over 0.90 is considered acceptable.

 

True    False

 

21.       Electronic Municipal Market Access (EMMA) is a source of all state and local government comprehensive annual financial reports (CAFRs).

 

True    False

 

22.       Electronic Municipal Market Access (EMMA) is an electronic database of government financial reports provided by the Securities and Exchange Commission.

 

True    False

 

23.       FitchRatings, Thomson Municipal Market, and Standard & Poor’s are the three major agencies that provide credit ratings for state and local government debt.

 

True    False

 

24.       Factors common to the bond rating agencies’ risk assessment are the economy and a government’s debts.

 

True    False

 

 

 

Multiple Choice Questions

 

25.       Which of the following is not a typical reason for evaluating a government’s financial condition? 

 

A.        Prevent financial crises from developing.

B.        Hold management accountable for the use of tax revenues.

C.        Determine if the government can continue to offer the current level of services.

D.        Determine whether residents will receive dividends.

 

 

26.       Which of the following terms is defined as determining whether current-year revenues are sufficient to pay for current-year services and whether future taxpayers will be required to assume the burdens of services previously provided?  

 

A.        Financial position.

B.        Interperiod equity.

C.        Financial condition.

D.        Economic condition.

 

 

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

 

A.        Financial condition.

B.        Interperiod equity.

C.        Financial position.

D.        Economic condition.

 

 

28.       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"? 

 

A.        Financial condition.

B.        Financial position.

C.        Financial leverage.

D.        Liquidity.

 

 

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

 

A.        An increasing ratio of own source revenues to total revenues.

B.        A decreasing ratio of total revenues to total expenditures.

C.        A decreasing ratio of debt service expenditures to operating revenues.

D.        A decreasing ratio of operating expenditures to total revenues.

 

 

30.       Which of the following ratios would be most helpful in assessing the operating position of a governmental entity? 

 

A.        Net tax-supported long-term debt/population.

B.        Own source revenues/total revenues.

C.        Debt service expenditures/total expenditures.

D.        General fund balance/operating revenues.

 

 

31.       All of the following are appropriate benchmarks for a state or local government to use as a basis for comparing performance except 

 

A.        A government's own operating results and financial position from prior years.

B.        International City/County Management Association's Financial Trend Monitoring System results for governments of similar types and size.

C.        Federal agencies' financial information for a comparable time period.

D.        Socioeconomic and demographic trends of governments of similar types and size available from U.S. Census Bureau.

 

 

32.       After financial ratios are calculated, the results should be compared to any of the following except:

 

A.        The same indicator from prior years.

B.        Budgeted information for the government for the upcoming year.

C.        Comparable government ratios calculated from the Government Finance Officers Association’s Financial Indicators Database.

D.        Credit analyst measures or other red flag indicators.

 

 

33.       Which of the following ratios would be considered favorable if it was low? 

 

A.        Total revenues to population.

B.        Debt service to total revenues.

C.        Capital outlay from operating funds to operating expenditures.

D.        Cash and short-term investments to current liabilities.

 

 

34.       A recognizable signal of fiscal stress is: 

 

A.        Total revenues from own sources increasing as a percent of total revenues for all sources.

B.        Increasing population.

C.        Declining property values.

D.        An increasing ratio of total revenues to total expenditures.

 

 

35.       Which of the following is a measure of the extent to which the government's business-type activities are self-supporting? 

 

A.        Unrestricted net position/total revenues.

B.        Business-type activities revenues/business-type activities expenses.

C.        Total net position (governmental activities and business-type activities) less total net position at the beginning of the year.

D.        Total revenues/total expenses.

 

 

36.       A measure of whether the government lived within its means in the measurement year, was required to use prior year resources to fund a portion of current year costs, or shifted the funding of some current year costs to future periods, is:

 

A.        Business-type activities revenues/business-type activities expenses.

B.        Unrestricted net position/total revenues.

C.        Total revenues/total expenditures.

D.        Total net position (governmental activities and business-type activities) less total net position at the beginning of the year.

 

 

37.       A measure of the adequacy of the amount of the government's total unrestricted net position or deficit at the measurement date is:

 

A.        Unrestricted net position/total revenues.

B.        Business-type activities revenues/business-type activities expenses.

C.        Total net position (governmental activities and business-type activities) less total net position at the beginning of the year.

D.        Total revenues/total expenses.

 

 

38.       Which of the following is one of the most important reasons for evaluating a government’s financial performance? 

 

 

A.        Determine if property taxes and other revenue sources should be increased.

B.        Assign responsibility for success or failure of the government to certain parties.

C.        Determine whether the government is accomplishing its mission.

D.        Have an early warning of impending financial difficulty for a diverse set of decision makers.

 

 

39.       Which of the following terms best describes a government's ongoing ability and willingness to meet its financial obligations and service commitments as they come due? 

 

A.        Financial condition.

B.        Fiscal capacity.

C.        Economic condition.

D.        Financial position.

 

 

40.       Political culture, such as attitudes towards taxes, is an example in the ICMA's Financial Trend Monitoring Systems of: 

 

A.        Environmental factors.

B.        Organizational factors.

C.        Financial factors.

D.        Management practices and legislative policies.

 

 

41.       Which of the following statements about credit analysts' models is true? 

 

A.        Credit analysts focus primarily on demographic statistics and management’s long-term investment strategies.

B.        Credit analysts have access to the same set of information that internal managers use.

C.        Credit analysts are concerned with assessing a government's ability to pay interest and principal on debt when due.

D.        Credit analysts rarely use comprehensive annual financial reports.

 

 

42.       For which of the following is a low or decreasing value of the item associated with a stronger financial condition of a governmental entity? 

 

A.        Unfunded pension liability.

B.        Property values.

C.        Home ownership.

D.        Employment rate.

 

 

43.       Which ratio or concept describes the extent to which the government has lived within its means for the year? 

 

A.        Debt to assets.

B.        Interperiod equity.

C.        Current ratio.

D.        Revenue dispersion.

 

 

44.       Which of the following financial capability indicators is a measure of a government’s capacity to issue bonded debt?

 

A.        Revenue dispersion.

B.        Property taxes per capita.

C.        Bonded debt per capita.

D.        Available legal debt limit.

 

 

45.       Which of the following governments would have publicly accessible information available through the Electronic Municipal Market Access (EMMA)?

 

A.        A city that had issued revenue bonds.

B.        A county that has entered into a capital lease.

C.        All state and local governments over 25,000 in population.

D.        Those state and local governments who have issued debt subject to Securities and Exchange Commission (SEC) oversight.

 

 

46.       An investor could find all but one of the following pieces of information through the Electronic Municipal Market Access (EMMA).  Which of the following is not available on EMMA?

           

A.        Credit rating for the debt issuance.

B.        Comprehensive Annual Financial Report.

C.        Interest rate and size of the debt issuance.

D.        Credit report on the government issuing the debt.

 

 

47.       The three major rating agencies for governments have each developed quantitative tools for assessing credit risk.  Which of the following general factors is used by all three rating agencies in assessing credit risk?

 

A.        Economy.

B.        Budgetary flexibility.

C.        Revenue dispersion.

D.        Geographic location.

 

 

Short Answer Questions

 

48.       Identify the following factors that affect financial condition as environmental factors (E) or financial factors (F).

 

 

   

 

 

 

49.       Match the following financial ratios that are based on comprehensive annual financial report (CAFR) information with the explanation for that ratio. Answers can only be used once.

 

Ratio	Explanation for Ratio
1. General fund balances/Operating revenues	a. An indicator of interperiod equity.
2. (Cash + short-term investments)/Current liabilities	b. An indicator of the government’s commitment to replacement of capital assets.
3. General obligation long-term debt/Assessed valuation	c. An indicator of the government’s reliance on revenues it does not directly control.
4. Capital outlay from operating funds/Operating expenditures	d. A measure of the degree to which government assets have been funded with debt.
5. General bonded debt/Legal debt limit	e. An indicator of the government’s ability to pay its 60 to 90-day obligations.
6. Accumulated depreciation/Average cost of depreciable assets	f.  A measure of the government’s capacity to issue debt.
7. Net revenues/Total expenses	g. A measure of capital asset useful service life.
8. Non-tax revenues/Total revenues	h. A measure of the government’s liquidity.
9. Total liabilities/Total assets	i. An indicator of taxpayer debt burden.
10. Current assets/Current liabilities	j. An indicator of the government’s ability to withstand financial emergencies.

 

 

 

 

   

 

 

 

 

 

 

50.       The following are key terms in Chapter 10 that relate to analysis of governmental financial performance:

A. Benchmarking

B. Budgetary solvency

C. Cash solvency

D. Economic condition

E. Financial condition

F. Financial position

G. Fiscal capacity

H. Long-run solvency

I. Service capacity

J. Service-level solvency

 

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

 

   

 

 

 

 

 Essay Questions

 

51.       Explain the importance of evaluating governmental financial performance.

 

 

52.       Distinguish and describe key financial performance concepts, such as financial position, financial condition, and economic condition.

 

 

53.       Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition.

 

 

 

54.       Describe how financial performance is related to the operating performance of a government entity.

 

 

55.       Discuss how despite significant improvements in the quality of government financial reporting over the years there are still serious, high profile public sector financial crises. How does the quality of financial reporting affect the ability to evaluate financial condition?

 

 

56.       How do the objectives of evaluating financial condition differ between internal managers and credit analysts? How are their objectives similar?

 

 

57.       "Financial statements are virtually useless in evaluating a city's financial condition." Do you agree with this statement? Why or why not?

 

 

58.       How do credit analysts assist decision makers in evaluating the credit worthiness of a state or local government?

 

 

59.       "Benchmarking is a simple method for comparing one government to another." Do you agree or disagree with this statement? Explain.

 

 

60.       Describe some ratios that can be calculated using the basic financial statements that will help a decision maker assess the financial position of the government.