Financial Condition Analysis including the Case Study

Review the attached documents on Financial Condition Analysis including the Case Study discussion regarding the City of Lucille.

Conduct a Financial Condition Analysis on the City of Jackson, MS – include all four dimensions – cash solvency, budgetary solvency, long-run solvency, and service solvency.

You should use the 2017 CAFR for the City of Jackson as a starting point and include data from the period of 2013 to 2017. You may need to access additional CAFRs.

For full credit, you must show your calculations in an Excel spreadsheet. The FCA report should be in a Word document.

Attached Document mentioned above…

  • What
    • Thorough analysis of the financial health of an organization
    • Different than financial statement analysis
      • Importance of outside data in the analysis
        • Socioeconomic
        • Organizational factors
  • Why – Purpose
    • Identify factors that impact financial condition and provide recommendations to improve financial condition
  • When conducted
    • As needed – part of planning / evaluation process
    • Not regular report
  • Who
    • Financial Staff, consultants, auditors
  • What is Financial Condition Analysis (FCA)?
  • How
    • Determine Scope of Analysis
      • Cash solvency
      • Budget solvency
      • Long-run solvency
      • Service solvency
    • Determine availability of measures and data
    • Specification and testing of impact by socioeconomic/organizational factors
    • Comparison to trends and peers
  • Measurement Validity
    • Measure must assess a specified element of financial condition
  • Measurement Reliability
    • Elements used in formulating measure should be consistent and objective
  • Measurement Affordability
    • Measure and supporting data should be affordable to obtain
  • Definition
    • Ability to generate sufficient cash to pay for current liabilities (due in less than 12 months)
  • Two measures
    • Cash Ratio
      • (Cash + Cash Equivalents +Marketable Securities) / Current Liabilities
    • Quick Ratio
      • (Cash + Cash Equivalents +Marketable Securities + Receivables) / Current Liabilities
  • Ratios
    • Higher ratio means more ability to pay bills with existing assets
    • Ratio < 1.00 – insufficient to pay obligations – need for funds
    • Too high of ratio – excess idle funds – service questions
    • Is a ‘snap shot’ ratio – does not consider future operations
  • Definition
    • Ability to collect sufficient revenues to pay for expenditures
  • Two measures
    • Operating Ratio
      • Total Revenues / Total Expenditures
    • Own-Source Ratio
      • Revenues of Own Sources / Total Revenues
  • Ratios
    • Operating Ratio < 1.00 implies deficits that need to be funded somehow
    • Own-Source Ratio excludes intergovernmental transfers
    • Own Source funds are considered more stable / controllable
    • Is a ‘backward looking’ ratio – what has happened over period of time
    • Can be used on projected revenues & expenditures
  • Definition
    • Ability to pay long-term obligations (due beyond 12 months)
  • Two measures
    • Net Asset Ratio
      • Total Net Assets / Total Assets
    • Long-Term Debt Ratio
      • Total Long-Term Debt/ Total Assets (or Total Revenues)
  • Ratios
    • Higher ratio (i.e., Highly Leveraged) implies more future revenues used to service debt
    • Very low ratio implies possible service concerns
    • Service Solvency
  • Definition
    • Ability to financially support desired level of services
  • Two measures
    • Net Asset Per Capita
      • Total Net Assets / Population
    • Long-Term Debt Ratio
      • Total Long-Term Debt/ Population
  • Ratios
    • Higher net asset per capital ratio implies greater ability to provide services
    • Higher long-term debt ration implies less ability to provide services
    • Socioeconomic/Organizational Factor Criteria

Financial Condition Measure Criteria

Cash Solvency

Budgetary Solvency

Long-Run Solvency

Financial Condition Measure Criteria:

  • Measurement Validity
  • Measurement Reliability
  • Measurement Affordability

Plus:

  • Theoretical Justification
    • Reasonable expectation of cause-effect relationship
  • Measurement Controllability
    • Sensitive to policies or managerial operations or other human actions of the organization
    • Note
    • This analysis is focused on identifying/supporting policies/strategies
    • This analysis does not necessarily identify/quantify potential ‘shocks’ to the system outside of the organization’s control.
  • Socioeconomic/Organizational Factors
  • Analysis: Warning Signs

Point in Time:

  • Calculate Ratios
  • Compare to Pre-established Targets
  • Compare to selected Peers
  • Compare to aspirational Peers
  • Identify sources of differences

Trend:

  • Calculate Ratios for several points in time (quarters, years, etc.)
  • Identify Trends – positive, negative, stable/stagnant
  • Identify Fluctuations
  • Compare to Pre-established Targets
  • Compare to selected Peers
  • Compare to aspirational Peers
  • Identify sources of differences
  • Analysis: Specify Factor Relationships
  • Purpose of Financial Conditions Analysis
    • Determine factors that impact financial condition
    • Must satisfy factor criteria
      • Measurement Validity
      • Measurement Reliability
      • Measurement Affordability
      • Theoretical Justification
      • Measurement Controllability
    • Measure potential relationship
      • Measures of Association – Correlation Coefficient
        • Direction of association can be positive or negative
        • Correlation Coefficient s
          • 1.00 – perfect positive correlation
          • 0.00 – no correlation
          • -1.00 – perfect negative correlation
  • Convert Relationships to form useful for analysis
    • Examples:
      • Revenue or Expense item per capita
      • Revenue or Expense item per business
      • Revenue or Expense item per household
      • Note – Wang only deals with impact of single socioeconomic factor at a time.When looking at more than one factor jointly, statistics get more complicated – regression analysis, etc.Wang does not address these joint factors.
  • Purpose – Make recommendations to improve financial condition
  • Steps:
    • Present rationale for the analysis
    • Describe existing financial condition
    • Discuss process of analysis
    • Present key findings regarding Socioeconomic/organizational factors that impact financial condition
    • Discuss policy/management options to improve financial condition in short-term or long-term
      • cost / benefit analysis of each option
      • Case Study Comments
    • Process
    • Surprises

Identify Relationships

Analysis: Specify Relationships (2)

FCA Report Writing

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