Introduction
Calculating financial ratios can provide valuable information about the organization’s financial health. Furthermore, the financial ratios can be used to provide recommendations for addressing the organizations’ weak points. In the case of the city of Atlanta, the Comprehensive Annual Financial Report (CAFR) defines separate financial statements for governmental and business-type activities. It is important to consider that financial statements for governmental activities include governmental funds and internal funds, while business-type activities include enterprise funds. Thus, the report defines different types of activities to ease the reader’s understanding of revenues from different activities.
Discussion
Therefore, comparing the data for the debt-paying ability ratio across governmental activities, business-type activities, and total demonstrates that the city of Atlanta is capable of quickly generating cash for the organization’s needs. The ratio demonstrates that in both business-type and governmental activities, the city of Atlanta’s total current assets ($1,230,502, $2,545,569, and $3,776,071) significantly exceed total current liabilities ($389,936, $998,089, and $1,388,025) (Bottoms, 2020). Furthermore, the acid test ratio illustrates how much time it takes for the organization to convert assets into cash. In this case, the ratio shows that the city of Atlanta can fulfill its short-term liabilities and, therefore, can be considered financially secure.
Next, the debt to equity ratio identifies if the organization has overburdened debts. The calculations defined that total liabilities for governmental activities (2,914,067) exceed total assets (2,438,107), creating a negative shareholders’ equity (Bottoms, 2020). Generally, total assets should match or exceed total liabilities, meaning that the standard for the ratio varies from 1 to 2. However, cities often take debt for projects that lack funding, and an increase in debt may point to the city’s growth. Moreover, unlike privately-owned organizations, cities are not subjected to fear of default. Therefore, the city of Atlanta’s total debt to equity ratio (1.38) demonstrates that there should be no concerns about debt in governmental activities.
Recommendation
The calculations identified that the city’s total liabilities for governmental activities exceed total assets, causing a negative debt to equity ratio. Increasing the amount of total assets can lead the ratio to normal values. Furthermore, the financial statement for the city of Atlanta identified a lack of unreserved funds that could be used to pay the debt for governmental activities. Thus, the recommendation, in this case, focuses on increasing the total assets. Therefore, the city of Atlanta can improve the debt to equity ratio for governmental activities through additional short-term investments, such as bonds and stocks.
Reference
Bottoms, K. L. (2020). The city of Atlanta, Georgia: Comprehensive annual financial report. Web.