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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 high- ways. The road authority was granied staiutory 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.c., 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 ievies 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 pur- chases no new equipment. What amount of tax revenue will it be required to collect? 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? c. d. Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend? P I-2 Assume that you are a loan officer of a bank. A local church is seeking a S4 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 state- ment of revenues and expenditures indicated the foilowing (in millions): Revenues from dues and contributions Revenues from other sources Total revenues Less: tota! expenditures Excess of revenues over expenditures $1.8 0.2 $2.0 2.0 S0.0 The church prepared its financial statements on a near-cash basis, accounting for all capital asset acquisi- tions 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 financiai statements indicated that equipment is approximately $3 miion. The church has no outstanding debt. i. is there any information in the financial staiements thai would make you reluciant to approve the loan? 2. Is there any other financial information of the type likely to be 3. Is there any other information, of any type, that you would tike to review prior to making a loun 4. Comment on the inherent timitations of the financial statements of this church, or any comparable If so, indicate and explain. that you would like to review prior to making a loan decision? If so, indicate and explain. decision? If so, indicate and explain. not-for-profit organization, as a basis for making loan decisions. reported in a conventional annual report repay the loan in February 2018. Do comventionat financiat shutements satigsy the objectives of Jnancial reporting? The financial statements that follow were adapted from those of the University of Arizona. Both the statement of changes in fund balances and the notes to the statements have been omitted. Moreover, the statements show only the combined hotals" columns, whereas the actual statements are multicolumned, indicating the various restrictions placed on the university's resources. Also, a few of the line items have been aggregated, and the dates have been changed The University of Arizona Balance Sheet, as of June 30 (in millions) 2018 2017 Cash and investments Donated land Notes and accounts receivable (net of allowances for uncollectibles) Inventorics and supplies Physicai properties $ 145 s 145 945 1,148 Total assets $1,203 Liainiies and nei assels S 16 12 9 S 17 10 Accounts payable Accrued payroll Deferred revenue and deposits Funds held for others Capitalized lease obligations Bonds payable Total liabilities Net assets 241 243 S 319 S 829 The University of Arizona Statement of Revenues, Expenses, and Changes in Net Assets for Year Ending June 30 (in millions) 2018 2017 Operating revenues Tuiion and iees Grants and contracts Sales and services of educational departments Sales and services of auxiliary enterprises S i12 208 Siii 194 Total operating revennes L. Based on the information included in the financial statements, respond as best you can to the following questions. if you believe the data in the financial statements are inadequate to answer the questions, then tell what additional information you would like and where you would most likely find it. a. Were the accomplishments of the university greater or less in 2018 than in 20177 reatey . Did the university achieve its goals more efficiently in 2018 than 2017? 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 high- ways. The road authority was granied staiutory 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.c., 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 ievies 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 pur- chases no new equipment. What amount of tax revenue will it be required to collect? 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? c. d. Comment on the extent to which the authority's budgeting and taxing policies promote interperiod equity. What changes would you recommend? P I-2 Assume that you are a loan officer of a bank. A local church is seeking a S4 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 state- ment of revenues and expenditures indicated the foilowing (in millions): Revenues from dues and contributions Revenues from other sources Total revenues Less: tota! expenditures Excess of revenues over expenditures $1.8 0.2 $2.0 2.0 S0.0 The church prepared its financial statements on a near-cash basis, accounting for all capital asset acquisi- tions 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 financiai statements indicated that equipment is approximately $3 miion. The church has no outstanding debt. i. is there any information in the financial staiements thai would make you reluciant to approve the loan? 2. Is there any other financial information of the type likely to be 3. Is there any other information, of any type, that you would tike to review prior to making a loun 4. Comment on the inherent timitations of the financial statements of this church, or any comparable If so, indicate and explain. that you would like to review prior to making a loan decision? If so, indicate and explain. decision? If so, indicate and explain. not-for-profit organization, as a basis for making loan decisions. reported in a conventional annual report repay the loan in February 2018. Do comventionat financiat shutements satigsy the objectives of Jnancial reporting? The financial statements that follow were adapted from those of the University of Arizona. Both the statement of changes in fund balances and the notes to the statements have been omitted. Moreover, the statements show only the combined hotals" columns, whereas the actual statements are multicolumned, indicating the various restrictions placed on the university's resources. Also, a few of the line items have been aggregated, and the dates have been changed The University of Arizona Balance Sheet, as of June 30 (in millions) 2018 2017 Cash and investments Donated land Notes and accounts receivable (net of allowances for uncollectibles) Inventorics and supplies Physicai properties $ 145 s 145 945 1,148 Total assets $1,203 Liainiies and nei assels S 16 12 9 S 17 10 Accounts payable Accrued payroll Deferred revenue and deposits Funds held for others Capitalized lease obligations Bonds payable Total liabilities Net assets 241 243 S 319 S 829 The University of Arizona Statement of Revenues, Expenses, and Changes in Net Assets for Year Ending June 30 (in millions) 2018 2017 Operating revenues Tuiion and iees Grants and contracts Sales and services of educational departments Sales and services of auxiliary enterprises S i12 208 Siii 194 Total operating revennes L. Based on the information included in the financial statements, respond as best you can to the following questions. if you believe the data in the financial statements are inadequate to answer the questions, then tell what additional information you would like and where you would most likely find it. a. Were the accomplishments of the university greater or less in 2018 than in 20177 reatey . Did the university achieve its goals more efficiently in 2018 than 2017