Financial Condition Analysis

1. Cash solvency refers to the ability of the government to generate enough cash in the short term to meet its current liabili- ties. Calculate the current ratio for the governmental activities and total primary government. Explain what these ratios suggest about the condition of Ponderosa’s cash solvency. Most of the city’s cash is invested in financial instru- ments. What policies are in place to moni- tor these investments? 2. Long-run solvency refers to the ability of a government to generate revenues sufficient to meet all regular operating costs aswell as unusual costs that occur in specific years. These unusual costs might include payments for capital asset replacement and acquisition and pension obligations. Consider how the following questions help assess the long-run solvency of Ponderosa: a. For governmental activities and total primary government presented on the statement of net assets and the state- ment of activities: Calculate debt to total assets ratio, debt to net assets ratio, return on net assets, and times- interest-earned. Do these ratios raise any red flags? b. Examine the statement of revenues, expenditures, and changes in fund bal- ances—governmental funds to do the following: • Calculate the common size ratios by revenue sources and the revenue per capita for the government funds. Identify the major revenue sources for Ponderosa. How do these compare with those of the other cities refer- enced in the background section? • Calculate and interpret the common size ratios for expenditures. Find the expenditures per capita for the major expenditure items in the governmental funds. How do these compare with those of the other cities referenced in the background section? c. Examine the statement of activities to determine which government function generates the most program revenue. Which government function is most subsidized by taxes and other general revenues? 3. Budgetary solvency refers to whether a city can generate enough revenues to meet its expenditure obligations and not incur deficits over the normal budgetary period. Review the budgetary comparison schedule for general fund. What do you observe? Comment on the budget solvency of Ponderosa. 4. Consider the financial health of the busi- ness activities or enterprise funds. a. Calculate and interpret the following ratios for the combined enterprise funds: • Liquidity ratios (FY 2006 and 2007): current and quick ratios; • Profitability (FY 2006 and 2007): total margin and return on net assets; and • Leverage (FY 2006 and 2007): debt ratio, debt to net assets, and times-interest-earned ratio. b. What is your assessment of the business activities of the City of Ponderosa? How material are the business activities relative to the primary government activities? In what ways might the business activities be important to the governmental activities of Ponderosa? 5. Considering your analysis in the preced- ing questions, what are the major strengths and vulnerabilities in the overall financial condition of the City of Ponderosa?