A LOOK AT THE FINANCIAL STATEMENTS

1. A LOOK AT THE FINANCIAL STATEMENTS FINANCIAL STATEMENTS – HOW THEY RELATE TO EACH OTHER AND FINANCIAL STATEMENT ANALYSIS Edward B. Peacock, CPA 214 356 0116 eddie@ebpeacockcpa.com

2. Edward B. Peacock, CPA Topics • Levels of Financial Statements • Example Statements (see handouts) • Government-wide statements • Fund level statements • Statistical Section • Financial Analysis – process of drawing meaning from financial statements • Identifying Available Resources • GAAP basis • Budgetary basis • General fund • Proprietary funds • Ratio Analysis

3. Edward B. Peacock, CPA Levels of Financial Statements • Government-wide financial statements • Measurement focus – economic resources • Basis of accounting - accrual basis • Statement of Net Assets – p11 - reports what the government owns and owes at the end of the fiscal year • Two columns - governmental activities and business-type activities – side by side comparison • Statement of Activities - p12-13 – reports financial results during a fiscal year

4. Edward B. Peacock, CPA Levels of Financial Statements • Fund level financial statements, p14-24 • Governmental funds, p14-15 • Modified accrual basis • Current assets and current liabilities • Reconciliations of modified accrual to full accrual basis, p16, p19 • Proprietary funds, W&S, Golf • Full accrual basis • Current assets and current liabilities are identified in the fund level SNA, p11, p20

5. Edward B. Peacock, CPA Levels of Financial Statements • Statistical Section • Typically presents information for the most recent 10 years • Usually is not audited • Contains tables of trends – help you understand how your gov’t’s finances have changed over time • Financial • Revenue capacity • Debt capacity • Demographic and economic information • Operating information

6. Edward B. Peacock, CPA Identifying Available Resources • Government-wide Statements • Restricted versus unrestricted net assets, p11 • Fund level statements • Governmental funds • Fund balance, p14 • Proprietary funds • Unrestricted net assets, p11, p21 • Working capital (current assets less current liabilities) • Frequently used in rate analysis • Cash basis, p23

7. Edward B. Peacock, CPA Restricted and Unrestricted Net Assets • Capital assets net of related debt, p11 • Cannot readily be sold and converted into cash • Restricted net assets • External restrictions on how resources may be used • Unrestricted net assets • Resources that don’t fall into the first two categories • Not necessarily liquid

8. Edward B. Peacock, CPA Fund Level Resources • Governmental Funds, p14 • Nonspendable – not a liquid resource • Restricted – externally restricted for a specific purpose • Special revenue funds • Capital projects funds • Debt service funds • Committed – appropriated by governing body • Assigned fund balance – can be unassigned • Unassigned – can be used as beginning resource in the budget

9. Edward B. Peacock, CPA Fund Level Resources • Proprietary Funds, p20-21 • Unrestricted Net Assets • Not necessarily liquid • Working capital • Roughly equivalent to fund balance (current assets less current liabilities) • Could be used as a beginning resource in the budget • Frequently used by rate analysts • Cash basis, p23-24 • Separate unrestricted cash from restricted in the cash flow statement

10. Edward B. Peacock, CPA General Fund - Unassigned Fund Balance Measures

11. Edward B. Peacock, CPA Working Capital - Proprietary Funds • A short term measure of the funds’ ability to meet the obligations that will come due over the next year • Current assets less current liabilities • A more stringent approach – compare only the most liquid assets, generally unrestricted cash and cash equivalents to current liabilities

12. Edward B. Peacock, CPA Proprietary Funds – Working Capital

13. Edward B. Peacock, CPA Proprietary Funds Expenditures – Budgetary Basis

14. Edward B. Peacock, CPA Proprietary Funds – Working Capital Measures

15. Edward B. Peacock, CPA Proprietary Funds – Unrestricted Cash

16. Edward B. Peacock, CPA Ratio Analysis • The act of converting the numbers in the FS into a form which specific decisions can be based • Are created by dividing one number into another • Financial story is not told with a single ratio, but with an accumulation of ratios and other information • If presented ratio information, be careful to ask how it was calculated • Always specify the components of the ratios used in your analyses

17. Edward B. Peacock, CPA Ratio Analysis • To give meaningful financial ratios, always place your ratios in context, i.e., • Compare to PY – improving, declining, holding steady? • Compare to other similar governments – higher, lower, roughly the same? • Is there a commonly accepted benchmark?

18. Edward B. Peacock, CPA Types of Ratios • Common-Size Ratios • $ Dollar Change • % Percentage Change • Short Term Focus – Liquidity • Current Ratio • Quick Ratio • Long Term Focus – Solvency • Debt to Assets Ratio • Debt to Net Assets • Coverage Ratios • Interest Coverage • Debt Service Coverage

19. Edward B. Peacock, CPA Common-Size Ratios • Serve two valuable purposes • Provide quick overview of finances • How they’ve changed since prior year • Can be applied to any kind of FS information • Percentage change – shows magnitude of change • Percentage distribution – shows portion of the total represented by individual elements

20. Edward B. Peacock, CPA Dollar Amount and Percentage Change

21. Edward B. Peacock, CPA Percentage Distribution

22. Edward B. Peacock, CPA Liquidity Ratios • Concerned with the ability to pay immediate obligations • Current ratio • Current assets / current liabilities • Quick ratio • Cash and cash equivalents / current liabilities

23. Edward B. Peacock, CPA Current and Quick Ratios

24. Edward B. Peacock, CPA Solvency Ratios • Leverage ratios • Measure the degree to which assets are financed through borrowing or other LT obligations • Debt to assets ratio • (total liabilities – deferred outflows) / (total assets – deferred inflows) • Debt to net assets (position) ratio • (total liabilities – deferred outflows) / total net position

25. Edward B. Peacock, CPA Debt to Assets/ Net Assets Ratios

26. Edward B. Peacock, CPA Coverage Ratios • Compare available resources with resource needs • Interest coverage • Cash flow from operations + interest expense / interest expense • Debt service coverage • Cash flow from operations + debt service / debt service

27. Edward B. Peacock, CPA Coverage Ratios

28. Edward B. Peacock, CPA Summary Analysis

29. Edward B. Peacock, CPA Questions? Eddie Peacock Edward B. Peacock, CPA 214 356 0116 eddie@ebpeacockcpa.com http://www.EBPeacockCPA.com