Appendix 7: Answers to Reinforcement Quizzes
Answers to Reinforcement Quiz ñ Section II
1. Which of these statements about financial ratio analysis is NOT true?
a. Ratios should be compared with those of similar entities.
b. Ratios should be traced over time within an entity.
c. Only one ratio is needed to assess an entityís financial condition.
d. Common-size financial statements provide useful data for analysis.
Answer: (c). This statement is not true because analysis of an entityís
financial condition requires consideration of many factors, including
ability to pay short-term obligations, ability to weather economic
downturns, ability to pay long-term obligations, and economic and
demographic trends.
2. The technique that allows you to graphically represent a business process
a. regression analysis.
b. flowcharting.
c. future value.
d. efficiency ratio.
Answer: (b). Flowcharting allows you to represent a process in
graphical form.
3. In assessing the financial condition of a general purpose local
government, what does the ratio of ìtotal unassigned fund balanceî to
ìtotal revenues and transfers inî indicate?
a. nothing that is useful
b. the ability of an entity to meet future revenue shortfalls
c. the ability of an entity to pay its short-term obligations
d. the ability of an entity to pay its long-term obligations
Answer: (b). The size of the unassigned fund balance, relative to total
revenues and transfers in, provides an indicator of the budgetary
cushion. The greater the ratio, the greater the ability is to weather
economic problems, like revenue shortfalls. A large unreserved fund
balance may also help pay short-term obligations, but only if the
assets are highly liquid.
4. Which of the following statements is NOT an appropriate denominator for
calculating the debt burden of a city or county?
a. full value of taxable real property
b. personal income
c. population
d. value of government-owned property
Online version, for personal use only AGA Study Guide 3, 2016 Edition

Appendix 7: Answers to Reinforcement Quizzes
Answer: (d). Governments do not pay taxes on government-owned
property, so that property is not part of the denominator for calculating
debt burden. The other three items are all used in calculating debt
5. We usually consider the time value of money when:
a. calculating depreciation costs.
b. hiring new employees.
c. making capital investments.
d. purchasing supplies.
Answer: (c). We consider the time value of money when we are about
to make a large commitment of funds that will benefit future years.
Most commonly, this involves making capital investments.
6. How is a financial ratio calculated?
a. by multiplying one data element by another
b. by dividing one data element by another
c. by adding one data element to another
d. by subtracting one data element from another
Answer: (b). A ratio is the relationship of one data element to another.
Therefore, to develop a ratio, one data element needs to be divided by
7. Which of the following data elements must be used in calculating the
average receivables collection period?
a. cost of goods sold
b. merchandise inventory
c. cash
d. revenues
Answer: (d). To calculate the average receivables collection period,
you first need to know either the revenues per day or the accounts
receivable turnover, both of which require knowing the total revenues
for the year. None of the other three items cited in the question are
relevant to the calculation.
8. Which statement about payback analysis is false?
a. It asks how long it will take to recover the amount invested.
b. It considers the time value of money.
c. It is a simple straightforward technique.
d. It is often used in combination with other analytical techniques.
Online version, for personal use only AGA Study Guide 3, 2016 Edition

Appendix 7: Answers to Reinforcement Quizzes
Answer: (b). Payback analysis is a simple analytical technique that
asks how many years it will take to recover the costs of an investment.
It does not consider the cost of money because recovery in the fourth
year is treated the same as recovery in the first year. For that reason,
it is often used in tandem with other techniques.
9. Debt service coverage shows the number of times an entityís debt service
is covered by:
its net assets (assets minus liabilities).
b. its working capital (current assets minus current liabilities).
its net revenues (gross revenues minus operating and maintenance
d. its outstanding long-term debt (debt issued minus debt repaid).
Answer: (c). Debt service coverage is the number of times an entityís
debt service is ìcoveredî by the annual revenues that are available to
pay debt service.
10.What are the three factors that must be considered in calculating net
present value?
the amount we wish to have available at a future time;
the interest rate; and
the number of time periods in which the interest rate will compound.
11.Which of the following ratios ...

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AGA CGFM Study Guide 3: Governmental Financial Management and Control