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INTRODUCTION
Financial reports of municipal governments are legendary for their complexity and length. Annual financial reports of major municipalities sometimes are in excess of 100 pages. Academics and accounting practitioners have struggled for years attempting to discover an approach to make these statements more user friendly. However, so long as accounting by fund type is followed for municipal operations, there is almost no way of materially shortening the length of the annual financial report.
The purpose of this article is to suggest the use of a technique widely and productively utilized in the private sector of our economy as an approach to providing summary information regarding a municipality's operations and financial condition. The technique being proposed is that of ratio analysis.
Specifically, the author is proposing the development of a series of financial ratios for use by municipalities to provide users with some easily understood broad indicators of municipal operating results and financial condition.
The author of this article has taught both governmental accounting and financial statement analysis at the college level for the past 20 years. It seems inconsistent that for profit-oriented business firms there are, and have been for decades, widely accepted and widely publicized financial ratios. Dozens of such ratios exist and some, like the "current" ratio or the "inventory turnover" ratio and "debt to equity" ratio are so well known they are virtual institutions. Yet, for some unknown reason, in the arena of municipal accounting the development of similar financial ratios has simply not taken place. Why such development has not taken place is a matter of conjecture and not really significant so far as this article is concerned.
The fact that an accepted group of financial ratios for municipalities (or state, counties, etc.) does not exist creates a serious obstacle when someone attempts to perform an analysis of the financial statements of a municipality. When a person analyzes the financial statements of a business corporation one important step, of many, is the calculation of numerous financial ratios. Typically these ratios are grouped into various categories such as 1) short-term liquidity, 2) long-term solvency, 3) return on investment, 4) asset utilization, 5) operating performance,(1) and 6) funds flow. Then the analyst can examine how these ratios have changed over a...