What general problems must be addressed in doing ratio analy

What general problems must be addressed in doing ratio analysis for government financial condition analysis? Do traditional solvency ratios adequately address financial condition analysis concerns? Provide your responses supported by text and other references

Solution

ratio analysis for government financial condition analysis
Once historical trend information is gathered and analyzed, financial managerscan begin to drill down and investigate areas of concern. As a part of this step,it is often helpful to begin combining the environmental and financial datainto key indicators or ratios. Using various ratios can provide a more refinedpicture of financial position and results of operations. They can also serve asthe basis for benchmarking and intergovernmental comparisons that may helpestablish goals for fiscal health. However, just like trend data, the ratios youselect should be appropriate for the scope and complexity of your government,easy to calculate and update, and simple to explain.Financial ratios provide snapshots of financial activity and results ofoperations. Appendix A includes some ratios and measures that OSC believesare helpful in analyzing such issues as fund balance, cash position, reservelevels, or fixed costs. There are many others you can create on your own.

There are some important limitations of financial ratios that analysts should be conscious of:

In general, ratio analysis conducted in a mechanical, unthinking manner is dangerous. On the other hand, if used intelligently, ratio analysis can provide insightful information.