# Application Assessing Financial Condition

## The regular evaluation of an organization’s finances goes a long way toward establishing trust with stakeholders, such as taxpayers, board members, clients, patrons, and funding agencies. Just as financial planning and budgeting are integral parts of an organization’s success, financial audits and evaluations are vital parts of the functioning of an organization. Evaluating the financial condition of an organization involves determining whether it has the revenue from taxes, fees, and other sources to meet its needs as well as if its assets exceed its liabilities.

In this Assignment, you evaluate the financial condition of a hypothetical town by considering trends and what they could mean. Review this week’s Learning Resources. Think about how public organizations can use data from audits and assessments to increase their effectiveness.

Consider the following:

Centerville is a hypothetical town that provides the context for this Assignment. What follows is a table that presents five years of data.

Use the five-year-trend data in the table to evaluate whether Centerville’s (C) revenue and expenditures are balanced. In summarizing Centerville’s financial situation over a five-year period, the table includes five factors: amount of revenue that the city is gaining per household, the percentage of total revenue contributed by sales tax, how much the city is spending per household, and the percentage of the city’s households that are exempt from paying sales tax.

Note that the city is generating less revenue per household as compared to expenditures per household in Years 2 through 5 and with the exception of Year 5, it is spending more per year than the prior year for services per household. Look at sales tax in the city, which is a main source of revenue. (Note: Convert the decimals in the “Sales tax as a percentage of total revenue” row. Remember that you multiply the decimal figure by 100 to derive the percentage. Multiplying .928 by 100 equals 92.8%, .926 by 100 equals 92.6%, .925 by 100 equals 92.5%, .923 by 100 equals 92.5%.)

What is happening to sales tax as a percentage of revenue? Look at the percentage of the city’s households that are exempt from paying sales tax row. What is happening to the percentage of sales-tax-exempt households over the five-year period?

 FACTOR YEAR 1 2 3 4 5 Revenue per household \$321 \$318 \$329 \$329 \$328 Sales tax as a percent of total revenue .938 .936 .935 .935 .933 Expenditures per household \$321 \$321 \$333 \$334 \$334 Low-income, sales-tax-exempt households as a percent of population .139 .139 .142 .155 .156

The city is spending more per household and driving less revenue per household. The Centerville tax base is shrinking because more of its citizens are exempt from paying sales tax. What are possible reasons for an increase in the number of citizens who are exempt from paying sales tax? Is the city losing jobs? Is the city’s population increasingly older and retired?

Analyzing a revenue structure will help in the identity of the following types of problems.

The Assignment:

Write a memo to the city leadership that summarizes the sources of revenue and takes account of the following:

• Deterioration of revenue base
• Internal procedures or legislative/board policies that may adversely affect revenue yields
• Over-dependence on obsolete or external revenue sources
• User fees that do not cover the cost of services
• Changes in tax burden
• Lack of cost controls and poor revenue estimating practices
• Inefficiency in the collection and administration of revenues

Suggest that the leadership explores the following possible reasons for the lack of balance between revenues and expenditures.

• Excessive growth of overall expenditures as compared to revenue growth or growth in wealth (personal and business income)
• Undesirable increases in fixed costs
• Ineffective budgetary controls
• A decline in personnel productivity
• Excessive growth in programs, which creates future expenditures

Community needs and resources encompass economic and demographic characteristics, including population, employment, personal income property value, and business activity. Examine the city’s demographics and economics characteristics in order to identify the following:

• A decline in the tax or revenue base
• A need to shift public or customer service priorities
• A need to shift policies because of a loss of competitive position

Support your Assignment with specific references to all resources used in its preparation. Be sure to follow APA guidelines when citing your sources.

• Mikesell, J. L. (2014). Fiscal administration: Analysis and applications for the public sector (9th ed.). Boston, MA: Wadsworth.
• Chapter 5, “Budget Methods and Practices” (pp. 178–218)
• Chapter 8, “Taxation: Criteria for Evaluating Revenue Options” (pp. 343–384)
• Aikins, S. K. (2011). An examination of government internal audits’ role in improving financial performance. Public Finance & Management11(4), 306–337.