United States
                    Environmental Protection
                    Agency
Municipal Environmental Research  ^
Laboratory
Cincinnati OH 45268
                    Research and Development
EPA-600/S2-83-069  Sept. 1983
&EBA          Project  Summary
                    Development  and Application  of
                    a  Water Supply  Financial
                    Reporting  System:  Volumes  I
                    and  II

                    Victor C. Fender, James I. Gillean, and William L Britton, Jr.
                     This two-volume report describes the
                    development of a computerized finan-
                    cial reporting system (FRS) for the
                    Kenton County, Kentucky, Water Dis-
                    trict No.  1 (KCWD). The system was
                    designed and implemented after a
                    computer-based  cost analysis system
                    (CAS) had proved to be advantageous
                    and had  demonstrated the value of
                    automated data  processing. Together
                    the two systems will help the utility
                    control costs and manage a rapidly
                    expanding system more effectively and
                    efficiently. The objectives of the FRS
                    were (1) to provide computer programs
                    that produce a general ledger accounting
                    system and financial reports, (2) to
                    function as a modular system that can
                    be used either independently or with the
                    CAS, and (3) to verify its satisfactory
                    operation through practical applications
                    at KCWD.
                     The computer programming was
                    accomplished by use of American
                    Standard COBOL operating in an IBM
                    370 environment. * This combination of
                    software and hardware was chosen
                    because of its widespread use.
                     The FRS  was able to satisfy the
                    KCWD reporting requirements  with
                    information furnished monthly. The
                    system has met the basic requirements
                    and is considered a proven system
                    because it has produced monthly and
                    annual reports parallel with the old
                    manual  system, and it has  provided
                    financial data for rate adjustments and a
                    bond issue.
                    •Mention of trade names or commercial products
                     does not constitute endorsement or recommenda-
                     tion for use.
  This Project Summary was developed
by EPA's Municipal Environmental
Research Laboratory, Cincinnati, OH,
to announce key findings of the research
project  that is fully documented in a
separate report of the same title (see
Project  Report ordering information at
back).

Introduction

  The Kenton County, Kentucky, Water
District  No. 1 (KCWD) has developed a
computer-based financial reporting
system (FRS) that is compatible with their
automated cost analysis system (CAS).
Together the two systems will help the
utility to control costs and manage a
rapidly expanding system more effectively
and efficiently.
  The CAS was developed first as a
management tool  for cost control. The
system  consists of a group of computer
programs that use financial and opera-
tional information to identify expenses to
cost  centers.  After the CAS proved
advantageous  and demonstrated the
value of computerized data processing,
KCWD  took steps to develop an auto-
mated FRS that would be compatible.
  This two-volume report discusses the
background conditions and results of the
project in Volume I and provides complete
documentation  (including diagrams and
program listings) in Volume II.

Background

  The Safe Drinking Water Act of 1974
(PL 93-523) necessitated a fundamental
reexamination of the way  in which
drinking water is supplied tothe American

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public. A primary feature of the Act is that
the economics and cost of water supply
and delivery must be considered before
regulations are promulgated. In 1974, a
cost study of selected water  utilities was
undertaken to collect data from at least
one  Class A water utility (revenues
greater than $500,000 per year) in each of
the 10 EPA Regions. The purpose of the
study was to collect data in such a
manner that  the resulting  information
could be easily compared among utilities
and provide an understanding of some of
the fundamental factors that affect the
cost of water  supply and utility manage-
ment.
  One conplusion resulting from the
investigation  was that although each of
the selected utilities kept financial
records (in some cases extensive ones),
the data among utilities  varied signifi-
cantly.  Another conclusion was that
many of the records were kept primarily
for accounting purposes  and had little
relation to the  short- and long-term
operational needs of the utility manager.
After  carefully analyzing  the data flow
and the  information  transfers of a
number of large and small  utilities, the
investigators  developed a technique  for
data collection and analysis that would
fulfill  both managerial and accounting
needs. The technique was  based on a
matrix concept and was tested by means
of a  water  supply  simulation  model
developed by the Drinking Water Research
Division of EPA in Cincinnati.
  After the data collection and analysis
technique was proved both effective and
efficient in a hypothetical situation, it was
developed into the CAS and implemented
at the  KCWD, where it was further
refined and modified based on operational
experience.  Both  the system  and the
KCWD experience are described in a two-
volume report entitled Development and
Application  of a  Water Supply Cost
Analysis  System (James I.  Gillean,
William L Britton, Jr., John  H. Brim, Rex
D. Osborn, and Robert M. Clark, July
1980, EPA-600/2-80-012a and EPA-
600/2-80-012b,  U.S. Environmental
Protection Agency, Cincinnati, OH 45268).
  The CAS implemented at the  KCWD
was  functional  on a computer and
provided timely cost accounting data. At
the time of implementation, the  KCWD
had a manual financial reporting system,
and their expanding service area was
creating a heavy burden of record main-
tenance. The CAS made the advantages
of automation obvious, and therefore
KCWD took steps to develop an FRS. The
FRS  was  to provide KCWD's routine
financial reports and was to be designed
to use the same source data as the CAS.
Figure  1 illustrates the combined CAS
and  the manual  financial  reporting
system  used by KCWD before develop-
ment of the automated FRS.

Objectives of the Financial
Reporting System

  The following objectives were estab-
lished for the FRS:
  1.  Development of a standardized,
     automated FRS that will provide a
     general ledger accounting system
     and financial accounting  reports.
     The FRS is to be compatible with
     the existing CAS and to interface
     with it. Together the FRS  and the
     CAS  are to form a  complete,
     automated  financial accounting
     system with broad  application to
     the water supply industry.
  2.  Development of the  CAS  and the
     FRS as modular systems  so that
     utilities can  use either one inde-
     pendently or together  as a total
     financial accounting system.
  3.  Verification of the satisfactory
     operation of the FRS as an inde-
     pendent subsystem through prac-
     tical applications at KCWD.


Description of the Kent on
County Utility

  The KCWD was the first water district
established in the State of Kentucky and
originally developed its water supply
system by purchasing the Dixie Highway
Water Company system in  1926. Before
that  date, treated water was  being pur-
chased from the City of Covington, Ken-
tucky, and delivered by the KCWD to its
customers.
  In  1954, the KCWD built a  new water
intake on the left bank of the Licking River
approximately 4  3/4 miles upstream
from the Ohio River. A treatment plant
was also  built at Grant  and   Howard
Avenues in Taylor Mill, Kentucky. The
treatment plant presently contains eight
mixed-media filters and  has  a  rated
capacity of 12.0 mgd. After being treated,
the raw water flows into a clearwell with
a capacity of approximately 1 mil  gal. The
treated water is pumped into the distribu-
tion  system  by two primary pumping
stations—one at the treatment plant and
one  at Dudley Pike. The distribution
system contains approximately 160 miles
of pipe and consists of three pressure
levels. The first pressure level (a  5.0 mgd
storage tank) is filled directly from the
treatment  facility or by the pumping
capacity at the treatment plant.  The
second  pressure level  (which  provides
water to the largest service area) is sup-
plied  by gravity from three elevated
storage  tanks or by the capacity of the
main  booster pump  station at Dudley
Pike. The third  pressure level is fed by
gravity from two elevated storage tanks in
the Northern Kentucky Industrial Foun-
dation Park and the City of Florence, or by
the two booster stations on Turkey Foot
Road at Lafayette Avenue.
  In July  1977,  the KCWD acquired
operating control, and about 1 1/2 years
later, it merged with the City of Covington,
Kentucky, Water Utility to form the KCWD
system. In  addition to the Covington
utility service area, the  KCWD provides
water to about  15,600 customers of the
northwestern portion of Kenton County,
Kentucky,  in a 40-square-mile retail
service area (Figure 2). Treated water is
supplied to 12 townships, an industrial
park, and unincorporated areas of Kenton
County  lying within the service area. In
addition, water  is supplied to the City of
Florence and to  the International Airport.
The map in Figure 2 shows the  KCWD
service (excluding Covington) and the
locations and relative sizes of the three
original pressure zones.
  As with  most government accounting
systems, the KCWD system is operated on
a  fund basis (defined as a group of
accounts, including assets, liabilities, and
balance accounts, that are isolated to
comply with a  specific objective or to
specify a special purpose of the activities
associated with the accounts). The funds
established by the KCWD are categorized
as  general, operating and maintenance,
bond, depreciation, and plant funds.
  The general fund consists of the
accounts that are general in nature and
not applicable to the other specific funds.
At  KCWD, revenues are initially recorded
within  the  general fund and  then  are
transferred to other  individual funds as
needed to provide for the  expenses or
appropriations  required of the other
specific funds. The operating and main-
tenance fund consists of only those ac-
counts that reflect  the operating and
maintenance activities of the utility. The
bond, depreciation, and plant funds, like
the operating and maintenance fund,
consist of groups of accounts that identify
activities   associated with the  funds.
Other funds may be established as the
need arises to isolate a certain account-
ing activity.
  The KCWD chart of accounts, like those
of many other water supply utilities, was
originally  developed by  the  National

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 I Budget Data
 I Depreciation Data
 I Revenue Producing Water Data\
  Total Costs Incurred for Period
	 *1

h-
Sources of
Cost Data
(Monthly)


Cost At
Syi
(Autt
»
'counting
'tern
imated)


Cost 1
Accounting\
Reports \
IjJ^SS!
Expenditures Incurred for
Period (i.e.. Purchases for
Inventory, Plant & Equipment
Prepaid Expenses)

Liability Transactions
(i.e.. Moneys Received from
and Repayment to Debt
Obligations)

Revenue Transactions
(i.e.. Billings to and
Collection from Water
Customers and Others)





Sources of Data
on Expenditures

Sources of Data
on Liabilities —
Payments and
Receipts

Sources of Data
on Revenue —
Billings and
Collections




1
^ Gener
Ace

al Ledger
ounting
1*. (Manual)
1



»



»

Payroll I
Records [

Inventory
Records
^ _^~~

General
Ledger

Sales and
Accounts
Receivable
Records
and Reports
L ^x — '


Trial
Balance
^jX**1^^^

 Figure 1.    Financial accounting system used by KCWD before development of the financial reporting system.
Association  of  Regulatory Utility  Com-
missioners (NARUC). According to them,
the KCWD  is a  Class A water utility
(having annual operating revenues  of
$500,000 or more) and therefore uses
the chart of accounts for Class A utilities.
For further  description or information
concerning the NARUC/KCWD chart  of
accounts, refer to the National Associa-
tion of Regulatory Utility Commissioners -
Uniform  System of Accounts for Water
Utilities (National Association of Regula-
tory Utility Commissioners, Washington,
DC, 1977).
  As  transactions occur each  month,
various source documents are routinely
prepared to record information concerning
the transaction. On these source docu-
ments are  coded  with  the account
numbers, cost center numbers, amounts,
and any other descriptive data important
in identifying the transactions. Since the
source document  is the authority from
which the accounting entry  originates,
recording of complete  accounting infor-
mation is imperative.
  From the originating documents,
accounting  entries are summed  each
month by account number and  then
recorded  into the general and subsidiary
ledgers within each applicable fund. After
all  entries  have been posted to the
general ledger, a total is calculated by
account, and the accounts in each fund
are balanced. At this point, a  preliminary
trial balance is prepared until the end of
the fiscal year. Thus each year, after year-
end adjustments and closing entries have
been recorded in the general ledger, the
accounting books are  closed and a trial
balance,  statement  of revenue and
expenditures, and  balance  sheet are
manually prepared.

Accounting  Considerations

  The function of accounting is to provide
quantitative financial information useful
for economic  decision making. The
products of an accounting operation are
financial  statements or reports. The
financial reports may vary because of the
way in which financial accounting infor-
mation is listed, classified, recorded,
summarized, or reported to  the person
who will make use of the information; but
they normally are produced in a standard,
generally accepted format. The financial
reports provide information  on current
and past  events and thus can  help
management evaluate earlier decisions
and provide a starting point for producing
future conditions or changes. In addition
to being useful for assessment of current
and future financial needs, the information
may be important for policy setting. In
essence, financial  reports are  normally
designed to provide a manager with some
of the information required for many of his
decisions (operational as well as financial)
about the use and stewardship of
resources.  Adequate financial reporting
is important because the utility has an
economic obligation and responsibility to
manage  its resources efficiently and
provide the services required by its
customers.
  All water utilities are concerned with
two basic  types of  financial reports:
external and internal. The external
financial reports are  necessary to meet
the requirements of various interested
parties within  the management or
regulatory area of the utility. Some users
of the external financial reports (such as
the State  Public Service Commissions)
are interested because they are charged
with the responsibility of protecting
customers who have a direct interest. In
the case of the KCWD, the  Kentucky

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                                                   •  Booster Station

                                                   *  Storage Facilities

                                                      Treatment Plant

                                                      River Intake

                                                  —  Major Pipelines
Figure 2.   Kenton County Water District No. 1 service area.
Public Service Commission uses the ex-
ternal financial reports of the utility  to
determine the reasonableness of the rate
of return  from their sale of water. An
example of an internal report is a trial
balance report; examples  of external
reports  are the balance sheet and the
statement of revenue and expenditures.
  As the KCWD manual financial reporting
system  was being adapted  to the com-
puterized system, careful attention was
given to the accounting practices so that
they would conform to the guidelines set
forth  by  Governmental Accounting,
Auditing, and Financial Reporting (Na-
tional Committee  on  Government Ac-
counting, Municipal  Finance Officers
Association of the  United States  and
Canada, Chicago, IL, 1978).

Internal Reports

  To produce internal financial reports,
transactions are entered into the com-
puter system from various source docu-
ments, creating a general ledger data file.
Figure 3 is a simplified flow schematic of
the FRS. The same six types of  source
documents  on which financial data were
recorded for the KCWD manual accounting
system are also used in the FRS. These
source documents  include the payroll
time card,   miscellaneous transaction
form, cashier's daily report, service
contract form, requisition from stock
form, and journal authorization form.
From the source documents, data are
keyed into the computer.
  To verify that source document data are
entered into the computer correctly, edit
reports for each type of source document
are produced. The payroll edit report lists
the date of the report, the employee social
security  number, the date of the pay
period, the account number to which his
labor was charged, the cost center  or
location in which his labor was charged,
the cost center or location in which the
work was performed, the total  cost  by
account, and balancing features of the
edit routine, including comments for
error conditions.

  Edit reports are produced from the
source data  by computer programs in a
similar process.  By  matching  the edit
reports with the  source documents, the
flow of data  can be examined. Since the
computer program does  as much  as
possible, every transaction is not appa-
rent but follows a similar logic to the
payroll edit report. For details, refer to the
computer program listings in Volume II of
the full report. These describe the action
of each specific data element.
  After all the source documents are
recorded and entered into the computer
system, edit listings and a trial balance
sheet are produced. The  trial balance
report is printed in account number order
within each fund. The report provides the
following information: account descrip-
tion (along with the account number), the
beginning amount within each account
as  of the beginning of the  accounting
period, the current amount charged to the
account during the current period, and
the ending amount (which is a total of the
beginning balance and  the current
amount). The beginning amount of the
trial balance is the ending amount of the
previous trial balance and  is produced
from  retained information. The current
amount is the summation of all expenses
from  the source data (edit reports) for
each account number. Thus, the audit
trial between the trial  balance and the
edit reports is the summation of individual
accounts. Assuming that the beginning
amount on the trial balance is accurate,
an out-of-the-balance condition on a new
trial balance would most likely be caused
by an error in the source data. Thus the
trial balance report and the edit reports
are used to detect errors before they are
processed by the accounting system. The
trial balance report may be run as many
times as necessary to produce valid data.
Once the data are determined to be valid
and each account is in balance by fund, a

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     Journal
   Authorization
      Form
    Requisition
    from Stock
      Form
   Miscellaneous
    Transaction
      Form
  Other Reports
   (i.e.. Cost
Analysis Reports)
and program listings) are  described in
Volume II of the full report.

Conclusions

  The FRS was able to satisfy the KCWD
financial reporting requirements with
information furnished monthly. The
system has met the basic requirements
and is considered  a  proven system
because it has:
  • Produced  parallel reports  with
    KCWD's manual  system,
  • Produced more  than 24 sets of
    monthly reports,
  • Produced reports for two annual
    closings,
  • Provided the financial data to the
    Kentucky Utility Regulatory Com-
    mission for rate adjustments,
  • Been examined and  accepted by
    interveners  at a rate adjustment,
    and
  • Provided the financial data for a
    major bond issue.
  The  full report was submitted in
fulfillment of Cooperative Agreement No.
CR806448-01  by Kenton County,  Ken-
tucky,  Water District  No.  1  under the
sponsorship of the U.S. Environmental
Protection Agency.
Figure 3.    Simplified flow schematic of the FRS.
final trial balance for the current period is
produced.

External Reports

  After the final trial balance is completed,
the combined fund balance sheet and the
statement  of revenue and expenditure
reports are produced. These reports are
generated from information contained in
the trial balance, plus data retained from
the previous processing. As in the trial
balance, these reports are developed by
  mbining data  in a predetermined way
   to produce the desired  specialized
   reports.

   Computer Programs

     All  of  the  computer  programs  are
   written in American Standard COBOL to
   operate in  the  IBM 370 environment.
   The computer language  and hardware
   were selected because of their widespread
   use.
     The computer operations and programs
   (including operating instructions, data
   format, file layout, program flowdiagrams.

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      Victor C. Fender is with the Kenton County, Kentucky. Water District, Ft. Mitchell,
       KY 41017; and James I. Gillean and William L Britton, Jr., are with ACT
       Systems. Inc., Winter Park, FL 32789
      Robert M. Clark is the EPA Project Officer (see below).
      The complete  report consists of  two volumes  entitled "Development and
       Application of a Water Supply Financial Reporting System":
          Volume I (Order No. PB 83-249 417; Cost: $ 10.00, subject to change)
          Volume II (Order No. PB 83-249 425; Cost: $20.50, subject to change)
      The above report will be available only from:
             National Technical Information Service
             5285 Port Royal Road
             Springfield, VA 22161
             Telephone: 703-487-4650
      The EPA Project Officer can be contacted at:
             Municipal Environmental Research Laboratory
             U.S. Environmental Protection Agency
             Cincinnati, OH 45268
United States
Environmental Protection
Agency
Center for Environmental Research
Information
Cincinnati OH 45268
Postage and
Fees Paid
Environmental
Protection
Agency
EPA 335
Official Business
Penalty for Private Use $300

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