www.efc.unc.edu Understanding Financial Documents Financial Training and Grant Writing Workshop for Mayors of Underserved Communities Stacey Isaac Berahzer October 11, 2012 Georgia College and University Macon, GA
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www.efc.unc.edu
Understanding Financial
Documents
Financial Training and Grant Writing Workshop for Mayors
of Underserved Communities
Stacey Isaac Berahzer
October 11, 2012
Georgia College and University
Macon, GA
Outline
• Fund Accounting
• Financial Reporting
• Getting Information from Financial Reports
2
FUND ACCOUNTING
3
Government Accounting
• GAAP – Generally Accepted Accounting
Principles
– establishes the rules & conventions that guide
the form and content of general-purpose
financial statements
• GASB – Governmental Accounting
Standards Board
– the primary standard-setting authority for
gov’t, excluding the federal gov’t
4
Fund Accounting
• An accounting system that is unique to state & local gov’t
• A government’s resources are segregated into categories, (i.e. “funds”) to identify both the source of funds and the use of funds
• State and local governments use three broad categories of funds: governmental funds, proprietary funds and fiduciary funds
• Normal/repeated transfers between funds is not recommended
5
Fund Accounting
FU
ND
S
Government
General
Special Revenue
Debt Service
Capital Projects
Permanent
Proprietary
Enterprise
Internal Service
Fiduciary …
6
Fund Accounting
FU
ND
S
Government
General
Special Revenue
Debt Service
Capital Projects
Permanent
Proprietary
Enterprise Example:
Water/Sewer
Internal Service
Fiduciary …
7
Fund Accounting
• Examples of Government Funds:
– General Fund – each gov’t has one account for all resources that are not required to be accounted for in other funds. Includes most major gov’t functions such as police, fire, sanitation etc.
– special revenue – established to account for resources that are legally restricted for specific purposes, e.g. lottery money for education
– capital projects – used when buying/building major capital facilities
8
Exercise – “Fun with Funds”
Activity Fund(s)
Police
An electric utility system
Construction of a new wastewater
plant
Public Transit
Municipal motor vehicle pool
(maintenance)
9
Which fund(s) should be used to account for the
following activities:
FINANCIAL REPORTING
15
Depreciation - Revisited
• Loss of use & value; or
• “The systematic & rational allocation of the
cost of tangible noncurrent operating
assets over the period benefited by the
use of the asset”
Source: Government and Not-for-Profit Accounting: Concepts and
Practices, By Michael H. Granof, Saleha B. Khumawalas
16
GASB 34
• Passed in 1999; should have been implemented by every local gov’t by FY 2004
• It states that gov’ts need to include depreciation in the financial statements, in order to: – Evaluate whether the government's current-year
revenues were sufficient to pay for current-year services
– See the cost of providing services to its citizenry
– Understand the extent to which the government has invested in capital assets…
Source: GASB 34 Preface and Summary, GASB
17
GASB 34
“Compliance with GASB 34 will be the single greatest element affecting daily lives for all Americans today.”
Source: web site advertisement for software provider
“GASB 34 is the "most significant
pronouncement in the history of financial reporting requirements for local governments in the United States." GASB 34 will have a major impact on the way that Municipalities manage all infrastructure assets.”
Source: web site for consulting services
“The inclusion of depreciation charges for which there is no actual cash expenditure-as a government expense distorts financial statements and reduces their values as a management tool.
Source: APWA Policy Statement adopted by APWA Board of Directors on 12/2/00
18
Software provider and Consulting Services say …
American Public Works Association says …
Capitalizable Asset
• Two years or more of useful life and has
materiality (e.g. cost $500 or more; or cost
$10,000 or more)
19
Financial Planning and Reporting Tools
• Annual reports
• Financial Statements
• Accounting reports
• CIPs
• Cash flow plans
• Annual budgets
• Performance measures
20
Planning Tools - Examples
• 10 Year Needs
• 5 Year Capital Improvement Plan
• 8 year Financial Plan
• 1 Year Budget
21
Budgeting
• Budget - An instrument to implement and
manage public policy by obtaining and
appropriating the necessary resources for
service delivery
• Budget Process – activities that
encompass the development,
implementation, and evaluation of the
budget for the provision of services
22
Budgeting Tools
• Inflationary Adjustment – converting
current dollars into constant (real) dollars
based on a selected index
• Consumer Price Index – an indicator that
measures the change in prices paid for a
fixed basket of goods and services with
constant quantity and quality as purchased
by average urban consumers
23
GFOA
• Government Finance Officers Association
• Offers awards in several categories for proper finance documents
• Mission – “to enhance and promote the professional management of governments for the public benefit by identifying and developing financial policies and best practices and promoting their use through education, training, facilitation of member networking, and leadership”
24
GETTING INFORMATION FROM
FINANCIAL REPORTS
25
Financial Ratios/Benchmarks
• Operating Ratio
• Operating Ratio including Depreciation &
Amortization
• Quick Ratio
• Days Cash on Hand
• Debt Service Coverage Ratio
• Debt-to-Equity Ratio
26
Operating Ratio
A measure of self sufficiency.
The revenue you get from daily
operations, divided by
the expenditures or expenses you make to
keep operations running (see next slides)
Natural Benchmark: > 1.0
Quick Ratio
A measure of short-term liquidity: ability to
pay your current bills
Accepted Benchmark: > 2
Days Cash on Hand
A measure of the ability of the utility to
weather a significant temporary reduction in
revenue to continue paying for daily
operations
Benchmark? At the very least, enough to last a billing
cycle or when you expect a substantial inflow of cash
Debt Service Coverage Ratio
A measure of the ability to pay debt service with operating
revenue:
Operating revenue left over after daily operation expenditures,
divided by
debt service
Natural Benchmark: > 1
Exercise – Reading Financial
Statements
• See Handout
31
Will post materials to:
http://efc.unc.edu/training.html
Stacey Isaac Berahzer
770-509-3887
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