Question 1 - Assume that you are a loan officer of a bank. A local church is seeking a $4 million, 20-year loan to construct a new classroom building. Church officers submit a comprehensive financial report that was audited by a reputable CPA firm. In summary form (the actual statement showed details), the church's statement of revenues and expenditures indicated the following (in millions):
Revenues from dues and contributions $1.8
Revenues from other sources 0.2
Total revenues $2.0
Less: total expenditures 2.0
Excess of revenues over expenditures $0.0
The church prepared its financial statements on a near-cash basis, accounting for all capital asset acquisitions as expenditures when acquired.
The church's balance sheet reported assets, mainly cash and investments (at market value), of $0.2 million. In addition, a note to the financial statements indicated that equipment is approximately $3 million. The church has no outstanding debt.
1. Is there any information in the financial statements that would make you reluctant to approve the loan? If so, indicate and explain.
2. Is there any other financial information of the type likely to be reported in a conventional annual report that you would like to review prior to making a loan decision? If so, indicate and explain.
3. Is there any other information, of any type, that you would like to review prior to making a loan decision? If so, indicate and explain.
4. Comment on the inherent limitations of the financial statements of this church, or any comparable not-for-profit organization, as a basis for making loan decisions.
Questions 2 - 1. A school district receives a grant from the federal government to support programs directed at special needs students. The grant is a matching grant in which each dollar spent by the school district on teacher salaries for special needs education will be matched up to $1 million by the federal government. The federal government agrees that it will advance monies to the school district so that the school district will be able to pay a portion each month of teachers' salaries from federal funds. The grant's contractual terms stipulate that the school district must not commingle the federal monies that it has been advanced with other monies of the school district. The school district also is required to file quarterly and annual reports showing the amounts that the school district has spent on special needs education and the resultant amount that is either a receivable from or payable to the federal government.
As a new comptroller, you must decide which funds should be used to account for the federal grant and the school district match. After some research, you believe that the school district has some options as to the governmental funds that it will use for financial reporting purposes. What are the options? In which funds would you report the transactions associated with the federal grant and school district match? Should they be accounted for in the same fund? What factors influenced your decision?
2. GASB Statement No. 34 has been widely criticized for mandating the preparation and presentation of government-wide statements. Mainly, the critics contend that the benefits of the statements are not commensurate with the costs of preparing them. They argue that the statements provide little information that is "decision-useful." Do you agree? For what types of decisions are statement users most likely to use the government-wide statements? If you have difficulty identifying such decisions, then is the GASB requirement defensible?
Question 3 - The following is an excerpt (with dates changed) from Against the Grain, a series of recommendations by the State Comptroller of Texas on how to "save" $4.5 billion and thereby balance the state's budget:
Require an Annual August Remittance of One-Half of August's Sales Tax Collections by Monthly Taxpayers. The Legislature should require sales taxpayers to remit half of August's collections during that month.
Background - Currently, sales tax payments are remitted either monthly, quarterly, or annually. They also may be prepaid either on a quarterly or on a monthly basis.
Monthly taxpayers, including those who collect taxes on their own purchase or use of taxable items, are required by law to remit to the state all tax collections-less any applicable discounts-by the twentieth day of the month following the end of each calendar month. The state's fiscal year ends on August 31.
Recommendation - The Legislature should require all monthly taxpayers to remit one-half of each August's sales tax collections during that month.
Specifically, sales taxes collected between August 1 and August 15 would be due with their regular August 20th payment. Monthly taxpayers would remit tax in the usual manner during all other months.
This is not a prepayment plan, but a speeding up of the remittance of actual taxes collected and owed to the state. This would impose an additional burden and would reduce taxpayer cash flow, but should be considered as preferable to a tax increase.
Implications - An annual payment by monthly filers of taxes actually collected during the first 15 days of August would increase August's collections and decrease September's collections. Although the initial imposition of this proposal might temporarily inconvenience some taxpayers, the prompt payment to the state of some of its sales tax revenues-collected, but not yet remitted-will enhance the revenue stream at a critical time each fiscal year. During the first year of implementation, all months would have normal collection patterns except August, which would be larger than usual, thereby producing a fiscal gain.
Each following year would see smaller than normal (current) collections in September and larger collections in August. These differences would essentially offset each other. It is important to stress that failure to speed up collections each year after implementation would cause a fiscal loss. The gain to the general fund in the year of implementation would be $215 million.
Fiscal Year Gain to the General Revenue Fund
2016 $215,113,000
2017 $ 0
2018 $ 0
2019 $ 0
2020 $ 0
1a. On what basis does the state probably prepare its appropriation budget? Explain.
1b. Do you believe the state will be better off, in economic substance, as a result of the proposed change?
2. According to the comptroller (last paragraph), the change would have no impact on revenues in future fiscal years as long as collections are also pushed forward in those years. Do you agree? If so, is there any reason not to adopt the proposal?
Question 4 -
A. Compare the Balance Sheet of Colgate-Palmolive with the Balance Sheet of the City of Dallas Governmental-Type Funds for 2012.
B. Compare the Income statement of Colgate-Palmolive with the City of Dallas Statements of Revenue, Expenditures and Changes in Fund Balances for 2012.
Note: This is a descriptive financial analysis; no data analysis is required. This question requires us to compare a governmental fund balance sheet and Statements of revenue, expenditures and changes in fund balance with the business equivalents in the for-profit sector.