CONTINUING PROBLEM

Accompanying this text, on its website, is a Comprehensive Annual Financial Report (CAFR) of the city of Austin, Texas. A CAFR includes an entitys year-end financial statements; it is not the same as its budget. Austins CAFR forms the basis of the continuing problems of these chapters. Download the CAFR, either from the website of the text or directly from that of the City of Austin (https://assets.austintexas.gov/financeonline/downloads/cafr/cafr2011.pdf) to your computer and practice navigating through it. Alternatively, with the consent of your instructor, you may obtain the CAFR of a different city, town, or county with a population of 100,000 or more.

A CAFR can generally be accessed from the citys website or by writing to the governmental entitys controller or finance director. Most institutions will provide the reports at no charge.

This continuing problem, unlike those in other chapters of the text, requires no written responses.

CONTINUING PROBLEM Accompanying this text, on its website, is a Comprehensive Annual Financial Report (CAFR) of the city of Austin, Texas. A CAFR includes an entity's year-end financial statements; it is not the same as its budget. Austin's CAFR forms the basis of the \"continuing problems\" of these chapters. Download the CAFR, either from the website of the text or directly from that of the City of Austin (https://assets.austintexas.gov/financeonline/downloads/cafr/cafr2011.pdf) to your computer and practice navigating through it. Alternatively, with the consent of your instructor, you may obtain the CAFR of a different city, town, or county with a population of 100,000 or more. A CAFR can generally be accessed from the city's website or by writing to the governmental entity's controller or finance director. Most institutions will provide the reports at no charge. This continuing problem, unlike those in other chapters of the text, requires no written responses. PROBLEMS P. 1-1 Budgeting practices that satisfy cash requirements may not promote interperiod equity. The Burnet County Road Authority was established as a separate government to maintain county highways. The road authority was granted statutory power to impose property taxes on county residents to cover its costs but it is required to balance its budget, which must be prepared on a cash basis. In its first year of operations, it engaged in the following transactions, all of which were consistent with its legally adopted cash-based budget: 1. Purchased $10 million of equipment, all of which had an anticipated useful life of 10 years. To finance the acquisition the authority issued $10 million in 10-year term bonds (i.e., bonds that mature in 10 years) 2. Incurred wages, salaries, and other operating costs, all paid in cash, of $6 million 3. Paid interest of $0.5 million on the bonds 4. Purchased $0.9 million of additional equipment, paying for it in cash; this equipment had a useful life of only three years a. The authority's governing board levies property taxes at rates that will be just sufficient to balance the authority's budget. What amount of tax revenue will it be required to collect? b. Assume that in the authority's second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue will it be required to collect? c. Make the same assumption as to the tenth year, when it will have to repay the bonds. What amount of tax revenue will it be required to collect? d. Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend? P. 1-2 Financial statements of a government or not-for-profit organization may not provide sufficient information on which to make a loan decision. 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. P. 1-3 The dual objectives of assessing interperiod equity and ensuring budgetary compliance may necessitate different accounting practices. A city engages in the transactions that follow. For each transaction indicate the amount of revenue or expenditure that it should report in 2014. Assume first that the main objective of the financial statements is to enable users to assess budgetary compliance. Then calculate the amounts, assuming that the main objective is to assess interperiod equity. The city prepares its budget on a \"modified\" cash basis (that is, it expands the definition of cash to include short-term marketable securities), and its fiscal year ends on December 31. 1. Employees earned $128,000 in salaries and wages for the last five days in December 2014. They were paid on January 8, 2015. 2. A consulting actuary calculated that per an accepted actuarial cost method, the city should contribute $225,000 to its firefighters' pension fund for benefits earned in 2014. However, the city contributed only $170,000, the amount budgeted at the start of the year. 3. The city acquired three police cars for $35,000 cash each. The vehicles are expected to last for three years. 4. On December 1, 2014, the city invested $99,000 in short-term commercial paper (promissory notes). The notes matured on January 1, 2015. The city received $100,000. The $1,000 difference between the two amounts represents the city's return (interest) on the investment. 5. On January 2, 2014, the city acquired a new $10 million office building, financing it with 25-year serial bonds. The bonds are to be repaid evenly over the period they are outstandingthat is, $400,000 per year. The useful life of the building is 25 years. 6. On January 3, 2014, the city acquired another $10 million office building, financing this facility with 25-year term bonds. These bonds will be repaid entirely when they mature on January 1, 2039. The useful life of this building is also 25 years. 7. City restaurants are required to pay a $1,200 annual license fee, the proceeds of which the city uses to fund its restaurant inspection program. The license covers the period July 1 through June 30. In 2014 the city collected $120,000 in fees for the license period beginning July 1, 2014. 8. The city borrowed $300,000 in November 2014 to cover a temporary shortage of cash. It expects to repay the loan in February 2015