Chapter 17, Problem 22EP

a-(1).

To determine

Compute the percentage of individual income taxes and withholdings to the total revenues of the federal government for the year ended September 30, 2016.

Explanation of Solution

Financial capability: This is the ratio that measures the ability of the government in managing the payment of financial charges from the revenue, or the burden of the government’s debt or the burden of property tax over its tax payers.

Compute the percentage of individual income taxes and withholdings to the total revenues of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\begin{array}{l}\text{Percentage of individual income taxes }\\ \text{and withholdings to the total revenues}\end{array}\}\text{ = }\frac{\text{Individual income taxes}}{\text{Total revenues}}\text{×100}\\ \text{=}\frac{\text{\$2,603}\text{.2 billions}}{\text{\$3,345}\text{.3 billions}}\text{×100}\\ \text{=77}\text{.8\%}\end{array}$

a-(2).

To determine

Compute the debt service ratio of the federal government for the year ended September 30, 2016.

Explanation of Solution

Debt service ratio: This ratio measures the percentage of revenue available for the payment of principal and interest of debt.

Compute the debt service ratio of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\text{Debt service ratio = }\frac{\text{Principal and interest payments of debt}}{\text{Total revenue}}\text{ ×100}\\ \text{=}\frac{\text{\$7,343}\text{.3 billions+\$262}\text{.7 billions}}{\text{\$3,345}\text{.3 billions}}\text{×100}\\ \text{=227}\text{.36\%}\end{array}$

b-(1).

To determine

Compute the inter-period equity of the federal government for the year ended September 30, 2016.

Explanation of Solution

Financial performance: This is the ratio that measures the financial condition of the government, or the way in which the services and activities are financed during the period.

Compute the inter-period equity of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\text{Inter-period equity = }\frac{\text{Total revenues}}{\text{Total expenses}}\text{ ×100}\\ \text{=}\frac{\text{\$3,345}\text{.3 billions}}{\text{\$4,404}\text{.4 billions}}\text{×100}\\ \text{=75}\text{.95\%}\end{array}$

c-(1).

To determine

Compute the non-dedicated collections funds to total revenue ratio of the federal government for the year ended September 30, 2016.

Explanation of Solution

Financial position: Financial position refers to the capability of government to pay the short-term liabilities which are due.

Compute the non-dedicated collections funds to total revenue ratio of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\begin{array}{l}\text{Non-dedicated collections }\\ \text{funds to total revenue ratio}\end{array}\}\text{ = }\frac{\text{Non-dedicated collections funds}}{\text{Total revenues}}\\ \text{=}\frac{\text{\$}\left(\text{22,666}\text{.7}\right)\text{billions}}{\text{\$3,345}\text{.3 billions}}\\ \text{= –6}\text{.775:1}\end{array}$

c-(2).

To determine

Compute the quick ratio of the federal government for the year ended September 30, 2016.

Explanation of Solution

Quick ratio: The financial ratio which evaluates the ability of government to pay off the instant debt obligations is referred to as quick ratio.

Compute the quick ratio of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\text{Quick ratio = }\frac{\text{Quick assets}}{\text{Current liabilities}}\\ \text{=}\frac{\text{\$464}\text{.6 billions}}{\text{\$62}\text{.4 billions}}\\ \text{= 7}\text{.445:1}\end{array}$

Note: Cash (unrestricted) is considered as quick assets, and accounts payable as current liabilities.

c-(3).

To determine

Compute the capital asset condition of the federal government for the year ended September 30, 2016.

Explanation of Solution

Capital asset condition: This ratio gauges the amount of depreciable assets that are able to complete the useful life in the current period.

Compute the capital asset condition of the federal government for the year ended September 30, 2016.

$\begin{array}{c}\text{Capital asset condition = }\frac{\text{Accumulated depreciation}}{\text{Average cost of depreciable capital assets}}\\ \text{=}\frac{\text{\$1,174}\text{.6 billions}}{\text{\$1,965}\text{.8 billions}}\\ \text{=0}\text{.5975 or 59}\text{.75\%}\end{array}$

d.

To determine

Evaluate the financial condition of the federal government for the year 2016, based on the ratios computed in the previous requirements.

Explanation of Solution

Financial condition: This ratio measures the ability of the government to pay both the current and future financial obligations of taxpayers, employees, consumers, and creditors.

Comments: Based on the ratios computed in the previous requirements, the overall financial condition of the federal government is poor. The revenues of the government are mostly from the taxpayers. The debt service ratio is very high which indicates that it has low expenditure flexibility with much higher percentage (227.4%) than the warning sign of 20%. Inter-period equity is very low which indicates that 76% of the total costs are covered by current revenues. The net position is negative which indicate that there are nil funds with the government.