Airport Finance and Budgets

Question 1

What is financial accounting?

Answer 1

Financial Accounting deals with the assigning of asset values and expenses for future periods that ultimately form an airport’s operating budget.

Question 2

How is an operating budget defined?

Answer 2

The Operating Budget is a forecast of funding sources (or revenues) and expenses for typically a year or less.

Question 3

What are the three most common financial documents?

Answer 3

Balance Sheet
Income Statement
Statement of Cash Flow

Question 4

The statement that shows the revenues of the company, minus expenses to arrive at the “bottom line” is:

Answer 4

Income Statement

Question 5

What is a Balance Sheet

Answer 5

A statement that accounts for both the items owned by the company (Assets) and the items owed to others by the company (Liabilities)

Question 6

What is the highest ongoing priority of an Airport Executive?

Answer 6

To provide a safe and secure

airport environment.

Question 7

How does an airport plan for, acquire, and use financial resources to maximize contributions to its safe, secure, and high quality service operation?

Answer 7

The airport director establishes an airport finance program.

Question 8

Why should an airport director use Financial Ratios?

Answer 8

• Detection of trends
• Evaluation of relative business performance
• Decision making based on eval.

Question 9

What do financial ratios compare?

Answer 9

The airport’s sales, expenses, and other measures with other airports. They are also used as a historical trend indicator of fiscal activity over a number of years.

Question 10

There are three categories of ratios. What are they and explain how an airport director would use them?

Answer 10

Leverage Ratios: Measure ability to pay obligations

Effectiveness Ratios: Measure asset utilization effectiveness

Profitability Ratios: Measure success in generating profit

Question 11

Fixed Costs / Gross Margin =

Answer 11

Break-Even Point

Question 12

What is the purpose of airport finance?

Answer 12

Airport finance focuses on planning and managing long-term capital investments and improvements that will ensure a future safe, secure, high quality operation.

Question 13

An airport manager’s financial role must emphasize four areas. They are:

Answer 13

1. Oversee airport’s capital and investment planning assets
2. Through strategic planning, determine the most effective use of investment and capital opportunities.
3. Acquire and allocate funds through budgetary accounting
4. Work within the constraints of fiscal, political, social, and regulatory realities

Question 14

What does the Cash Flow statement show?

Answer 14

Cash at the beginning of a reporting period vs the end along with its sources and uses.

Question 15

What org develops the Generally Accepted Accounting Principles (GAAP)?

Answer 15

Federal Accounting Standards Advisory Board (FASAB)

Question 16

1. How often must all three financial statements be filed?

2. What else accompanies the financial statements?

Answer 16

1. Quarterly
2. Notes - Examples include pension plans, accounting practice changes, stock options, income taxes, etc.

Management Discussion and Analysis (MD& A) - Explanation of financial health, trends, and anomalies.

Question 17

To be considered an asset, the item must meet what three criteria?

Answer 17

1. Under org’s control (usually ownership)
2. Must have some value to the org.
3. Value must be measurable

Question 18

What two types of depreciation are there?

Answer 18

1. Straight Line - Asset value reduced evenly over the depreciation schedule so only a small residual remains at the end.
2. Accelerated - Used for tax purposes on items that lose greater value in early years.

Question 19

What is the cutoff for determining whether an asset or liability is considered short or long term?

Answer 19

1 year

Question 20

How should a Balance Sheet be analyzed?

Answer 20

• over time
• growth in cash, cash equivalents, and shareholder equity
• minimal debt growth
• accts receivable should grow in proportion to cash on hand
• current liabilities should not grow faster than current assets

Question 21

How should an Income Statement be analyzed?

Answer 21

• ensure one-time or unusual events are disregarded
• over multiple years
• dollar values converted to percentages for accurate comparisons between org’s.

Question 22

What is the difference between cash and accrual accounting methods?

Answer 22

Cash - Transaction recorded when payment received for goods or services provided.

Accrual - Transaction recorded when goods or services provided.

Question 23

What is the advantage of accrual accounting?

Answer 23

It keeps expenses and revenues in the same period resulting in a better picture of profit. For this reason, accrual accounting is used for income statements.

Question 24

1. What are the three categories of cash on a cash flow statement?
2. Considered aggregately, what do they show?

Answer 24

1. • Operating
     
     • Investing
     • Financing
2. Shows the effect of business activities or transactions on each category of cash flow

Question 25

What type of accounting method is used for Cash Flow Statements and why?

Answer 25

Cash, because revenues or expenses are not recorded until payment is received or cash disbursed

Question 26

How is a Cash Flow Statement analyzed?

Answer 26

• Compare the bottom line over successive periods for increases or decreases.
• Look at operating activities to ensure the health of the core business. Barring special events, the majority of cash flow should be here.

Question 27

Of the cash flow and income statements, which affords an org less opportunity for number manipulation?

Answer 27

Cash Flow

Question 28

What is the focus of airport finance?

Answer 28

Planning and managing the long-term capital investments and improvements of an airport

Question 29

Name the main four leverage ratios.

Answer 29

1. Current
2. Debt to Equity
3. Quick
4. P/E

Leverage current debt quickly please!

Question 30

1. Define Current Ratio

2. How is it used?

Answer 30

1. Current Ratio = Current Assets / Current Liabilities

2. Determines a business’s ability to meet near-term debt. Ratio should be above 1.0, preferably much above.

Question 31

1. Define Debt to Equity.

2. How is it used?

Answer 31

1. Debt to Equity = Total Liabilities / Shareholder Equity
2. Measures debt per dollar of shareholder equity. A ratio of 1.0 means lenders would be repaid all, but investors nothing. Higher than 1.0 means more money borrowed than investors have in equity.

Question 32

1. Define Quick Ratio.

2. How is it used?

Answer 32

1. Quick Ratio = Current Assets - Inventory / Current Liabilities
2. Determines if near-term liabilities can be met. Inventory removed to see if bills can be paid from existing cash and accts receivable.

Question 33

1. Define Price to Earnings (P/E) Ratio.

2. How is it used?

Answer 33

1. P/E Ratio = Current Stock Price / Earnings per Share
2. Determines whether the cost to purchase stock is acceptable relative to earnings. Increasing or decreasing P/E Ratio trends may indicate investor’s respective future earnings expectations.

Question 34

1. What type of ratio is Inventory Turnover?
2. Define it.
3. How is it used?

Answer 34

1. Effectiveness
2. Cost of Goods Sold (COGS) / Avg Inventory
3. Measures inventory turnover per period. Often used by FBOs as related to fuel sales

Question 35

What are the three common profitability ratios?

Answer 35

1. Profit Margin
2. Return on Assets
3. Break-Even Point

Question 36

1. Define Profit Margin.

2. How is it used?

Answer 36

1. Profit Margin = Net Income / Revenue x 100
2. Determines percentage of each dollar of sales available for retained earnings or shareholder dividends. Expect large variations between companies, industries, and seasonally.

Question 37

1. Define Return on Assets.

2. How is it used?

Answer 37

1. Return on Assets (ROA) = Net Income / Total Assets

2. Shows Mgmt’s success in turning resources into profits. The higher the ROA, the better.

Question 38

1. Define Break-Even Point.

2. How is it used?

Answer 38

1. Break-Even Point = Sum of Fixed Costs / Gross Margin
2. Used to analyze when a growing Co. will reach profitability, or when declining sales will lead to unprofitability. Besides when, can also be used to improve profitability.

Question 39

1. Where are a business’s transactions initially recorded?

2. From there, where are those entries next posted and what additional record does it contain?

Answer 39

1. General Journal, or “Book of Original Entry” as it is occasionally known.
2. • General Ledger
     
     • Each Account

Question 40

What is Double Entry Accounting?

Answer 40

Accounting method where each transaction is entered as a debit in the Journal’s left column, and a credit in the right. Debits and credits must always be equally created.

Question 41

Provide at least three examples of journal entry adjustments?

Answer 41

1. Depreciation
2. Prepaid Insurance
3. Mortgage Interest
4. Bad Debt

Question 42

What are assets and how are they divided?

Answer 42

An asset is a thing that the company owns, such as land, buildings, and equipment. Further classified as:

• Short Term (Current - can be converted to cash)
• Long Term (Non-Current - not expected to be converted to cash)
• Intangibles (trademarks/copyrights)

Question 43

What are liabilities?

Answer 43

Money that is owed to others such as bank loans, rent, accounts payable, payroll, taxes and obligations to provide goods and services to customers at a future time.

Question 44

What is depreciation? What types of depreciation are there?

Answer 44

Depreciation is a method of reducing the value of property as it wears out. The two types are:

• Straight Line
• Accelerated

Question 45

___________ and ___________ are used to support the airport ____________ process known as budgeting.

Answer 45

Taxes / fees / allocation

Question 46

Concisely define budget.

Answer 46

A budget is a financial plan delineating how an org is to be operated over the short term ( < 1 year).

Question 47

By law, normally municipalities are required to have a __________ budget with no carry over of __________ .

Answer 47

balanced / deficits

Question 48

A budget is a fundamental tool of ____________ ____________.

Answer 48

managerial accounting

Question 49

1. An airport must establish rates and charges that help meet its operational and ___________ ___________ needs. This coincides with the sponsor assurance requirement to be as __________ ___________ as possible.
2. Is the first requirement of the previous question easily met by most airports?

Answer 49

1. break-even / self-sustaining

2. No, especially not by GA Airports.

Question 50

In public finance, what two categories of budgets are established?

Answer 50

Operating and Capital Budgets

Question 51

What is an operating budget’s focus and objective?

Answer 51

Focus - expenses and revenues necessitated by normal and ongoing operations. Note: Non-operating expenses such as interest or debt (bonds, loans, etc.) payments are not included.

Objective - provide an accurate estimate of the revenues and expenses of the airport for a future period, normally one year.

Question 52

What four tasks must be addressed in formulating an operating budget?

Answer 52

1. Operational need
2. Resource acquisition
3. Resource distribution
4. Effectiveness and efficiency of resource expenditures

Question 53

What is the final phase of the budget process?

Answer 53

Audit ensuring honesty and waste deterrence.

Question 54

An operating budget sheet, also known as a _______ ________, records an airport’s ________ and _________ over a specific period.

Answer 54

variance report / revenues / expenses

Question 55

Budget variance analysis compares ___________revenues and expenses against those originally ____________.

Answer 55

actual / budgeted

Question 56

Take a stab at naming the eight types of budgeting.

Answer 56

1. Traditional (Incremental)
2. Capital
3. Lump Sum
4. Activity-based Budgeting (ABB)
5. Program Plan Budgeting
6. Zero-based Budgeting / Target-base Budgeting
7. Revenue / Cost-centered Budgeting
8. Line-item Budgeting

Question 57

1. Describe Traditional (Incremental) Budgeting.

2. Characteristics?

Answer 57

1. Reflects a percentage increase or decrease based on projected overall revenues and expenses. Historically used by airports.
2. Characteristics
   - corresponds to a municipalities’ general fund budget allocation
   - minimal tracking of funds necessary
   - lacks detail to exercise managerial control
   - no analysis of whether gov’t function operating efficiently
   - often results in year end spending spree to ensure same or more
   - no reward for a manager’s budgetary efficiency

Question 58

1. Describe Capital Budgeting.

2. Characteristics?

Answer 58

1. Reflects an annual or longer financial plan for implementing capital projects, major equipment purchases, or future activities.
2. Characteristics
   - associated with national planning processes such as Capital Improvement or Master Planning
   - master plans use AIP and PFC funds
   - debate exists over what should qualify as a capital expense, though normally includes acquiring major equipment or building airport infrastructure along with associated debt service, depreciation, and coverage of any revenue bond
   - while governing agencies may classify capital items differently, a useful life of more than 12 months is a typical min std.

Question 59

1. Describe Lump Sum Budgeting.

2. Characteristics?

Answer 59

1. Lump Sum of funds Issued with requirements of how operating expenses to be allocated.
2. Characteristically only relevant to GA airports.

Question 60

1. Describe Activity-Based Budgeting (ABB).

2. Characteristics?

Answer 60

1. Also known as full time equivalent employee (FTE) budgets. Costs presented as ratio of the number of full time employee positions to the required work in a budget category.
2. Characteristics
   - similar to lump sum in that issued wo specific expense categories, yet specific to an activity
   - focuses on activities required over a short term that will change with an airport’s needs and priorities

Question 61

1. Describe Program Plan Budgeting.

2. Characteristics?

Answer 61

1. Also known as Responsibility Center Budgeting. Combines planning and program budgeting by shifting emphasis from accounting to economics of cost benefit analysis.
2. Characteristics
   - often preferred by gov’t since strategy for managerial accounting better reflects public sector social and economic policies
   - requires planning for objective accomplishment, timeline est., and budgeting for the necessary resources.
   - a PPB is long range, centered on an organizational or functional area, and assumes limited resources

Question 62

1. Describe Zero-Based (ZBB) & Target-Base Budgeting (TBB).

2. Characteristics?

Answer 62

1. ZBB requires each departmental or program budget be developed from scratch. TBB modifies ZBB to allow more flexibility in what can be funded or cut.
2. Characteristics
   - ZBB combines planning and budgeting, thus forcing a re-examination of goals, operational and capital needs annually, and then justification of all.
   - ZBB potentially inflexible as it takes decision making away from operating mgr when proposing budget or service cuts
   - TBB developed as a mod to ZBB. Allows more flexibly to the operational mgr by setting a budget ceiling based on projected revenue. Mgr then responsible for managing budget to stay within limit.
   - both ZBB and TBB are time consuming and require valid and reliable eval techniques.
   -

Question 63

1. Describe Revenue/Cost Centered Budgeting.

2. Characteristics?

Answer 63

1. Based on cost accounting, requires a clear delineation of costs for a particular portion of the airport and a related cost allocation system or budget.
2. Characteristics
   - becoming more popular at airports since trend of moving away from residual to compensatory approach with airlines
   - correlates costs to responsible user with rates and fees charged accordingly

Question 64

1. Describe Line-Item Budgeting.

2. Characteristics?

Answer 64

1. Most detailed form of budgeting in that various common tasks or cost elements are identified and listed on an expense chart of accounts. Revenues and expenses are then further broken down into functional cost centers.
2. Characteristics
   - most elaborate budget to establish
   - allows for in-depth analysis of variances and efficiencies
   - utilizes a numbering and listing system to code costs and revs.
   - system drawback is the customary cutting of a single line item from a budget to satisfy financial or political goals.