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City of Douglas
Author(s):
Anthony, Robert N.
Functional Area(s):
   Financial Accounting
Setting(s):
   Nonprofit
Difficulty Level: Intermediate
Pages: 7
Teaching Note: Available. 
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First Page and the Assignment Questions:

Claire Dexter had been appointed by the Mayor of Douglas to a three-year term on the city’s finance committee. The finance committee acted as an adviser to city officials and as a “watchdog” on behalf of the city’s citizens. Under certain circumstances it could propose city budgets, and it had to approve large proposed capital expenditures. Its views were given considerable weight by city officials.

Ms. Dexter was senior vice president of the region’s largest bank, with extensive experience in analyzing corporate financial statements. As preparation for her committee work, she asked the city controller for financial statements. The controller gave her a 109-page book, titled “Comprehensive Annual Financial Report, City of Douglas, Fiscal Year Ended June 30, 1987.” The financial statements had been examined by a national public accounting firm, and had stated that they “present fairly the financial position and results of operations...in conformity with generally accepted accounting principles.”

Ms. Dexter searched through the book for an operating (or income) statement, which was in her opinion the most important financial statement for any organization. She did not find one. The closest to it appeared to be an exhibit with the title, “Combined Statement of Revenues, Expenditures, and Changes in Fund Balances: All Governmental Fund Types.” She decided to recast this statement, as closely as possible, to the form and content of a business operating statement.

She particularly wanted to determine whether Douglas operated at a surplus or a deficit. Specifically, she believed that the financial goal of a municipality should be that the revenues applicable to a given year are approximately equal to the expenses of that year. She also wanted figures for the various city programs so that spending on them could be compared with amounts for previous years and with amounts spent by other municipalities.

BACKGROUND

Exhibit 1 is adapted from the statement referred to above. Ms. Dexter had her secretary modify the actual statement in two ways. First, the numbers on the report were carried out to the last dollar, which she modified by rounding them to thousands of dollars. Second, there was a column on the statement headed “Totals (Memorandum only),” which contained the totals of the amounts in each row. It seemed to her that these totals were “adding apples and oranges,” and she eliminated them.

Assignment

  1. Do you agree with Ms. Dexter’s decision to eliminate the Debt Service Fund, the Capital Project Fund, and the Special Assessments Fund from the operating statement?
  2. Should the amounts for the General and Special Revenue Funds be combined?
  3. Should the amount reported as pensions in Exhibit 1 be increased? If so, how should the revised amount be calculated?
  4. Should depreciation be recognized, or is the “principal retirement” of Debt Service an adequate substitute? If you favor depreciation, how would you respond to the controller’s remark about the unfairness of charging depreciation on assets that were acquired with grants?
  5. In your opinion, did the revenues properly associated with the operating activities of 1987 exceed the expenses properly attributable to 1987? That is, did Douglas operate “in the black” or “in the red”?
  6. In general, would you prefer an operating statement along the lines of Exhibit 2 to the corresponding report in Exhibit 1, or would you prefer some other alternative?
  7. As a member of the finance committee, would you recommend that the preparation of an operating statement similar to that in Exhibit 2, even though it would not be in accordance with GAAP for municipalities?