The financial officer for Ponderosa is now preparing the management discussion and analysis (MD&A) to go with the basic financial statements (BFS) that follow. She has asked you to put together some information that will aid in that preparation. Use the background material, the financial statements, and notes to the financial statements to answer the following problems to provide information to aid the financial officer in writing the MD&A:1. Cash solvency refers to the ability of the government to generate enough cash in the short term to meet its current liabilities. Calculate the current ratio for the governmental activities and total primary government. Explain what these ratios suggest about the condition of Ponderosa’s cash solvency. Most of the city’s cash is invested in financial instruments. What policies are in place to monitor theseinvestments?2. Long-run solvency refers to the ability of a government to generate revenues sufficient to meet all regular operating costs as well as unusual costs that occur in specific years. These unusual costs might include payments for capital asset replacement and acquisition and pension obligations. Consider how the following questions help assess the long-run solvency of Ponderosa:a. For governmental activities and total primary government presented on the statement of net position and the statement of activities, calculate debt to totalassets ratio, debt to net position ratio, return on net position, and times-interest-earned. Do these ratios raise any red flags?b. Examine the statement of revenues, expenditures, and changes in fund balances—governmental funds to do the following:• Calculate the common size ratios by revenue sources and the revenue per capita forthe government funds. Identify the major revenue sources for Ponderosa. How dothese compare with those of the other cities referenced in the background section?• Calculate and interpret the common size ratios for expenditures. Find theexpenditures per capita for the major expenditure items in the governmental funds.How do these compare with those of the other cities referenced in the backgroundsection?c. Examine the statement of activities to determine which government functiongenerates the most program revenue. Which government function is mostsubsidized by taxes and other general revenues?3. Budgetary solvency refers to whether a city can generate enough revenues to meet itsexpenditure obligations and not incur deficits over the normal budgetary period.Review the budgetary comparison schedule for general fund. What do you observe?Comment on the budget solvency of Ponderosa.4. Consider the financial health of the business activities or enterprise funds.a. Calculate and interpret the following ratios for the combined enterprise funds:• Liquidity ratios (FY 2023 and 2024): current and quick ratios;• Profitability (FY 2023 and 2024): total margin and return on net position; and• Leverage (FY 2023 and 2024): debt ratio, debt to net position, and times- interest-earned ratio.b. What is your assessment of the business activities of the City of Ponderosa? Howmaterial are the business activities relative to the primary government activities? Inwhat ways might the business activities be important to the governmental activitiesof Ponderosa?5. Considering your analysis in the preceding questions, what are the major strengthsand vulnerabilities in the overall financial condition of the City of Ponderosa?
