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The financial position
The city of Smithville net fund balance as at 31 December 2011was $131,700 calculated from the unrestricted net assets. Unrestricted net assets measures the adequacy amount of the government’s total unrestricted net assets during a given measurement date. It is given by unrestricted net assets divided by total revenue. It can therefore be calculated as follows:
Governmental activities: 4,597 = 0.17%
20,302+3,860+1,886+49
Business-type activities: 3,546 = 0.67%
5,218+7
These values differ from each other because the government takes capital outlays as expenditures (Wilson, 201). However, the cost of the assets is allocated over their useful life as a depreciation expense. $655,000 was the government value obtained by subtracting the depreciation which was $595,000 from the capital outlays of $1,250,000.
The second ratio used to measure the financial position of the city of Smithville is the capital asset condition. It measures the extend in which the government‘s total depreciable capital assets wear out on average. Government and business activities capital assets can therefore be calculated by dividing the accumulated depreciation by the average cost of depreciable capital assets.
Governmental activities: 15,039 = 0.40
(37,183+37,600)/2
City of Smithville financial statements
Business-type activities: 3,681 = 0.22
(17,775+14,455)/2
Capital assets transactions suffered a loss because the cash proceeds reported as other finance sources did not affect the net assets of government activities (Kattelus, 97). The loss suffered reduced the government’s net assets without a substantial effect on the government funds. Book value which shows the actual net effect of the sold assets was estimated at $563,000.
Another measure of financial position is the debt to asset ratio. This ratio measures the degree upon which the government total assets have been financed by debts during certain period of time. It is calculated by dividing the total liabilities and the total assets for both the government and business type activities as follows:
Governmental activities: 19,266 = 0.57
34,040
Business-type activities: 7,167 = 0.49
14,740
The government obtained proceeds from the sale of bonds estimated at $3,030,000 but this increased the long-term liabilities. When accrued liabilities decreased, the governments fund was greater than the expenses and therefore a profit of $24,000 was recorded. However, any revenue which does not provide current financial resources is not regarded as a fund which amounts to $298,000.This lead to a change in the government’s real assets to $2,484,300.
The current ratio shows the government ability to fund all short-term liabilities and expenditures during a certain financial period. Here, the current assets are divided by the current liabilities. Both government and business type activities from the information given was calculated as follows:
Governmental activities: 9,299 = 2.76
3,366
Business-type activities: 3,966 = 5.95
667
In both cases the current ratio was greater than one implying that the government was in a position to pay its debts without straining to meet its obligations (Wilson, 232).
Quick ratio is a financial position measurement tool used to measure the governments or business liquidity on a restricted amount of money that can be held by a government or a business. It is calculated from the unrestricted cash or cash equivalents being divided by the current liabilities.
Governmental activities: 9,299-253-26 = 2.68
3,366
Business-type activities: 3,966-8-58 = 5.85
667
During that period the government and the business both had some cash at hand to cater for the running of their activities with the business having much money. This is shown by the greater value than one in the ratio.
Financial performance
The financial performance of a business or a government can be measured through focusing on the overall financial condition of a business or the government activities (Kattelus, 205). This can be done through the change in net assets. It is obtained by subtracting the total beginning net assets from the total ending net assets. In the above case the change in net assets was:
22,347 – 17,447═ 4900.
This shows that the financial performance of the government was positive and good. Therefore, the government or the business was making a profit from its activities.
Another measure of financial performance is the interperiod equity. It is a measure of whether the government or a business is capable of financing its own activities during the entire financial period. To obtain the interperiod equity the net revenue is divided by total expenses.Net revenue is obtained by adding the internal transfers and other items as shown below:
Governmental activities: 20,302+3,860+1,886+495-100 = 1.10
23,973
This therefore implies that the revenue collected by the government exceeded the expenses by 1.10 times and therefore the performance was profitable.
BTA self sufficiency is a measure of how the government activities are funded during the current year service charge revenues unlike the prior year resources and subsidies from other sources.BTA is obtained by dividing the service charge revenues by BTA total expenses as shown below:
City of Smithville financial statements
5,218 ═ 1.80
2,895
This shows that the government was in a position to fund its activities 1.80 times than the preceding year because the performance of the government was good.
Financial condition
Revenue dispersion is the measure which exposes the potential financial difficult flexibility on revenue sources beyond the direct influence of the government. It is calculated by dividing the non tax revenue sources by the total revenue without special item as below:
Bonded debt per capita shows the government’s bonded debt burden on its tax payers. It is calculated by dividing the general bonded debt by the total.
Governmental activities:
15,900,000= $636
25,000
This shows that each person in the city of Smithville paid $636 as revenue.
The following adjustments have to be made when calculating the financial position of the city of Smithville. Word expenses should be entered as expenditures in the statement title in a new trend of recording the government’s statement of activities (Kattelus, 207). Other changes to be effected include, a comprehensive analysis of other Governmental Funds column to determine whether the three funds are major funds to be shown in a separate column of the general fund. The government fund should be put to the right of other Governmental Funds column. Debt proceeds and Transfers should be indicated in the Other Financing Sources after the expenditures (Wilson, 236). Debt service should indicate the expenditure for principal and interests but separated from the General Government function. The capital outlay should be shown after the functional expenditures and separated from the functions of the government. Finally, the beginning and ending fund balances should include the net change fund balance. After analyzing the details, the city of Smithville financial position was good as the revenue collected is sufficient for the government to support its deficit.
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