Annually, cities and towns must have an audit conducted by an independent, third party. Part of the auditor’s job is to produce an annual audited financial statement. The statement helps the public (and elected officials) see how taxes and fees collected relate to the services provided by the city. Even though the statements are intended to make it clear how taxes and fees paid by residents relate to the services they receive in return, understanding the financials is not an easy task.
Audit - formal opinion of an city’s financial records and practices by an independent, certified public accountant with the objective of assessing the accuracy and reliability of the organization’s financial statements.
Component Unit – legally separate organizations, often governmental, for which the elected officials of the city are financially accountable.
Comprehensive Annual Financial Report (CAFR) – A government’s official annual financial report, containing the basic financial statements, introductory material, and additional statements and schedules with financial, economic and demographic information.
Contingent Liability – potential future liabilities based on conditions that were unresolved as of the date of the financial statements, such as a pending court case, disputed claims and unfilled purchase orders.
Debt Service – the payment of interest and principal on amounts borrowed.
Encumbrances – amounts committed to pay for goods and services a city contracted for but did not receive prior to the end of the year.
Fund balance – amount remaining in a fund after subtracting assets from liabilities.
Generally Accepted Accounting Principles (GAAP) – standards that govern how state and local governments account for and report their finances externally.
General Revenues – revenues that do not qualify as program revenues. These are typically taxes and unrestricted aid.
Independent Auditor’s Report – a letter accompanying the financial statements that presents the auditor’s opinion whether the statements are presented fairly in conformity with Generally Accepted Accounting Principles.
Management’s Discussion and Analysis (MD&A) – an overview and analysis, prepared by a the city’s finance officer, of the information in the financial statements.
Notes to the Financial Statements – provides additional information essential to present fairly the finances of the city.
Statement of Activities – reports the city’s expenses and revenues, as well as other changes in its net assets during the year.
Statement of Net Assets – reports what a city owns or controls (assets), what it owes (liabilities), and what is left over after assets have been used to satisfy liabilities (net assets).
Summary of Significant Accounting Policies – found in the "Notes to the Financial Statements" and is usually the first note. The Summary explains the general accounting methods and assumptions employed by a city, especially those instances in which a city has a choice between two or more approaches.