A City Has Three Related Entities $\underline{\text{ Situations: }}$ 1 the First Entity Is the City School District

question 36

Essay

A city has three related entities. Its finance and accounting staff is trying to determine which, if any, of those entities must be included in the city reporting entity. Also, for the entities that are included the staff must determine whether they are to be blended or discretely presented. Explain how each of the related entities should be treated and why.

$\underline{\text{ Situations: }}$
1. The first entity is the city school district. The district has a separately elected board and is legally separate from the city. The school board can establish its own budget except that its property tax levy must be approved by the city council. The city does not guarantee the debt of the schools or have any other authority over the school district.

2. The second entity is the municipal gas utility. The city appoints the seven members of the utility governing board and can remove them at will. The city must approve the budget and the rate structure of the utility. The utility cannot issue bonded debt without the city council's prior approval. The city is entitled to, and regularly receives, the operating surpluses of the utility.

3. The third entity is the City Library Commission. According to the commission's charter, the commission board consists of the city mayor, the city finance director, and the superintendent of the city schools, and two other members of city council besides the mayor. City council consists of the mayor and four other council members. The library commission budget must be approved by the city council, and all long-term debt issued by the Library Commission is to be repaid by the city.

Differentiate between various forms of credit agreements.

Comprehend the importance of maturity matching in financing.

Grasp why self-liquidating loans are preferred by banks.

Know the effects of not taking prompt payment discounts on borrowing rates.

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Definitions:

Operating Income

Earnings before interest and taxes (EBIT), calculated by subtracting operating expenses from gross profit.

Operating Cycle

The average time period between purchasing goods for inventory and receiving cash from selling those goods.

Accounts Receivables

Sums due to a company from its customers for products or services rendered but not yet compensated for.

Investing Activity

Operations concerning the buying and selling of long-term assets and other financial investments that do not qualify as cash equivalents.