chapter 16 imsm

CHAPTER 16ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS,

PART I

Chapter Outline

I. State and local government units produce two complete and distinct sets of financial statements which are presented together in a comprehensive annual financial report.A. User needs for governmental financial information are so diverse that the GASB

requires two sets of statements to be prepared. The fund-based statements are more for the citizens whereas the government-wide statements are more for investors, such as bondholders.

B. Fund-based financial statements are designed primarily to present information about the General Fund and other major activities. This approach stresses fiscal accountability over financial resources.a. For governmental funds, all current financial resources and claims to those financial

resources are presented using modified accrual accounting for timing purposes.b. For proprietary funds and fiduciary funds, all economic resources are reported using

accrual accounting for timing purposes. C. Government-wide financial statements (a statement of net assets and a statement of

activities) are designed to present an overview of the government as a whole and emphasizes operational accountability.a. In these statements, all economic resources are measured using accrual

accounting for timing purposes.b. The governmental funds and most of the internal service funds are combined and

reported as governmental activities.c. The enterprise funds and any remaining internal service funds are combined and

reported as business-type activities.d. Because the government does not have control over the use of the assets reported

in the fiduciary funds, they are excluded from the government-wide financial statements.

II. For internal purposes, governmental accounting records its individual activities within self-balancing sets of accounts known as funds.A. Governmental funds account for activities where service to the public is the main

emphasis.a. General fundb. Special revenue fundsc. Capital projects fundsd. Debt service fundse. Permanent funds

B. Proprietary funds account for activities of the government where a user charge is assessed.a. Enterprise fundsb. Internal service funds

C. Fiduciary funds account for assets held in a trustee capacity for external parties.a. Investment trust funds

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2009 Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e 16-1

b. Private-purpose trust funds

McGraw-Hill/ Irwin © The McGraw-Hill Companies, Inc., 2009 16-2 Solutions Manual

c. Pension trust fundsd. Agency funds

III. Governmental accounting has traditionally stressed establishing control over current financial resources to ensure appropriate usage of the public’s money.A. Budgetary entries are recorded for a number of the activities within the governmental

funds.a. The entry is recorded at the start of the year and is then reversed at the end of the

year.b. The initial and amended budget are reported along with actual figures for the period

as required supplemental information in the comprehensive annual financial report. As an alternative, this information can be shown as a separate statement within the fund-based financial statements.

B. Financial commitments (such as contracts and purchase orders) are recorded as encumbrances.a. These entries help avoid overspending of appropriated amounts.b. The encumbrances are removed from the records when the commitment becomes

a liability.

IV. In government-wide financial statements, acquiring a capital asset is reported as a capital asset and incurring an expense is reported as an expense. However, for the governmental funds, on the fund-based financial statements, the reduction of current financial resources that results from the purchase of a capital asset, incurrence of an expense, or payment of a long-term debt is reported as an expenditure. In this manner, the statements report the usage made of the money held by the government activity.A. On the fund-based statements, supplies and prepaid items can be reported by either

the consumption method or the purchases method.B. On the government-wide financial statements, the recording of the acquisition of

infrastructure items such as bridges and sidewalks is required.

V. Governments often have nonexchange transactions where revenues such as taxes are received without a corresponding earning process. To guide the recognition of such transactions, four separate categories have been identified.A. Derived tax revenues such as income taxes and sales taxes are recognized when the

underlying event occurs.B. Imposed nonexchange transactions such as property taxes, fines, and penalties are

recognized when the resources are required to be used or in the first period when use is permitted.

C. Government-mandated nonexchange transactions, usually a government grant to fulfill a legally required objective, are recognized when all eligibility requirements have been met.

D. Voluntary nonexchange transactions such as most grants and gifts are recognized when all eligibility requirements have been met.

VI. Governments often raise significant amounts of financial resources by issuing long-term bonds.A. In the government-wide financial statements, the debt is simply recorded.B. In the fund-based financial statements for the governmental funds, the inflow of

financial resources is reported as an “other financing source.” Payment of the debt is


shown as an expenditure. Long-term debts are not shown in the fund-based financial statements for the governmental funds.

Learning Objectives

Having completed Chapter Sixteen of the textbook, “Accounting for State and Local Governments (Part One),” students should be able to fulfill each of the following learning objectives:

1. Understand that two separate sets of financial statements must be created and reported by a state or local government unit.

2. Identify examples of the wide variety of users of government financial statements and discuss their specific information needs.

3. Explain the overall differences between government-wide financial statements and fund-based financial statements.

4. Identify the three major classifications of funds and each of the individual fund types within those classifications.

5. Describe the basic content of both government-wide financial statements and fund-based financial statements for the governmental funds.

6. Explain the structure and reason for budgetary entries and the subsequent reporting of that information.

7. Explain the structure and reason for recording encumbrances and the subsequent reporting of that information.

8. Describe the reporting of the acquisition of capital assets on both fund-based financial statements and government-wide financial statements.

9. Discuss the historical method of reporting infrastructure assets and the current reporting that is now required.

10. Identify the four types of nonexchange transactions and explain when each type of revenue should be recognized.

11. Describe the accounting that is utilized for the issuance of a long-term liability within both the fund-based financial statements and the government-wide financial statements.

12. Describe the types of transfers that can occur within a government and indicate the appropriate reporting for each type.

Answer to Discussion Question

Is it an Asset or a Liability?

Some students seem to believe that the unique features of government financial reporting are more arbitrary than substantive. To them, accounting is accounting and the specific type of reporting entity should not be an important consideration. For that reason, this discussion question is placed early in the coverage of governmental accounting to point out that these entities do not necessarily view transactions in the same manner as a for-profit business.

Examination of the construction of a high school is an excellent example of the essential accounting problems created by a government’s unique perspective. The decision to build this


facility virtually assures the government that it will incur significant cash outflows for years to come. Whereas a business constructs a building in hopes of generating cash inflows, government officials are aware that the maintenance, heating, etc. of the school will far outweigh any direct cash inflows. Hence, Mautz’s question – is it an asset or a liability—is not easy to answer. Governmental accounting now solves this issue in a very unique way. In the fund-based financial statements, construction costs are reported as an expenditure whereas, in the government-wide financial statements, the high school is reported as a capital asset. The reduction in current financial resources is reflected in one statement but the cost of construction is still shown as an asset in the other set of statements.

Prior to class discussion, students can be required to read Mautz’s entire article as additional background information. In class, students can be encouraged to discuss whether showing this high school in two such different ways is misleading or actually provides the information needed. Students should be asked their opinion as to the benefit of having two completely different sets of financial statements. A quality, in-depth discussion can certainly result from the article described here.

Answers to Questions

1. User needs are often complex and contradictory. Specific procedures in the governmental reporting process are an outgrowth of those needs. GASB Concepts Statement No.1, “Objectives of Financial Reporting,” has identified three primary user groups: citizenry, legislative and oversight bodies, and investors and creditors. The needs of these users are broad and no single set of financial statements and principles can satisfy all expectations. The satisfaction of diverse user needs is a constant focus of governmental accounting. This has lead to the dual-perspective model which leads to the production of two distinct types of financial statements.

2. Accountability and control have been a constant goal of governmental accounting. Governmental accounting provides the citizenry of a democracy with a method for evaluating the governmental actions of raising and allocating resources. Elected and appointed officials have authority over the public’s money. They should be held accountable for generating and using these resources wisely in meeting the public’s needs. Accounting shoud help citizens in evaluating these officials on their honesty, wisdom, and stewardship.

3. GASB Statement No.34 has refined the reporting of governmental activities by providing information about the government as a whole. Focusing on individual accountability for the various government activities does not necessarily meet all user needs. Government reporting still focuses on current financial resources in the fund-based finacial statements, but provides an additional focus on all assets and all liabilities in the government-wide financial statements, thus meeting broader user needs.

4. Two financial statements make up the government-wide financial statements: The Statement of Net Assets and The Statement of Activities. There are a number of fund-based financial statements. The two fundamental financial statements covered here in Chapter 16 were the Balance Sheet for the governmental funds and the Statement of Revenues, Expenditures, and Other Changes in Fund Balances for the governmental funds.


5. In fund-based accounting, governmental funds use the current resources measurement focus and the modified accrual basis for the timing of revenue and expense recognition. The current financial resources focus traditionally includes only assets such as cash, receivables, and investments that can be used for spending purposes and the liabilities to be paid out of these current assets. The modified accrual basis recognizes revenues when they become available and measurable and expenditures when they cause a reduction in current financial resources. Governments must disclose the length of time being used to determine availability.

Proprietary and Fiduciary funds generally use the economic resources measurement focus and the accrual basis for the timing of revenue and expense recognition. The economic resources measurement focus reports all assets (including capital and other noncurrent assets) as well as all liabilities (including long-term obligations).

6. Government-wide financial statements use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition similar to for-profit organizations.

7. Current financial resources are primarily cash, investments, and receivables. These items are expected to be used to meet the current period government spending needs. This category also normally includes inventories and prepaid expenses.

8. Liabilities are recognized under the current financial resources focus when a claim against current financial resources is created. In many cases, that means that payment will be made during the current period or within 60 days of the subsequent period. Disclosure is required for the number of days being applied.

9. Governmental Funds: Account for activities with a service orientationa. General Fundb. Special Revenue Fundc. Capital Projects Fundd. Debt Service Funde. Permanent Fund

Proprietary Funds: Account for functions that are financed (at least in part) by user charges.a. Enterprise Fundb. Internal Service Fund

Fiduciary Funds: Account for monies held by the government in a trustee capacity.a. Investment Trust Fundb. Private-Purpose Trust Fundc. Pension Trust Fundd. Agency Fund

10. The following fund types fall within the governmental funds classification:


a. The General Fund is used to account for ongoing activities such as public safety and sanitation. More specifically, the General Fund records any activities that do not fall under one of the other fund types.

b. Special Revenue Funds account for financial resources that have been restricted as to expenditure for a specified operating purpose. Money can come from sources such as grants, taxes, and gifts.

c. Capital Projects Funds account for monies (and their eventual expenditure) to be used in acquiring or constructing government facilities or other capital assets.

d. Debt Service Funds account for the accumulation of resources that will be used to pay the principal and interest of long-term debts incurred by the service activities.

e. Permanent Funds account for assets contributed to the government by an external donor with the stipulation that the principal cannot be spent but any income can be used within the government, often for a designated purpose.

11. The following fund types fall within the proprietary funds classification:a. An Enterprise Fund accounts for any governmental activity that is financed in whole or

in part by outside user charges, such as a subway system.b. An Internal Service Fund is used to record any activity that provides service to other

departments or agencies within the government on a cost-reimbursement basis. A motor pool, a centralized computer operation, or a print shop can be accounted for as Internal Service Funds if a user fee is charged and they only exist to serve the other functions of government.

12. Fiduciary Funds: Account for monies held by the government in a trustee capacity.a. Investment Trust Fund. Accounts for the outside portion of investment pools where the

reporting government has accepted funds from other governments resulting in a larger investment and hopefully a higher return.

b. Private-Purpose Trust Fund. Accounts for money held in a trustee capacity, for example, money confiscated from illegal operations.

c. Pension Trust Fund. Accounts for the employee retirement system.d. Agency Fund. Accounts for resources held by the government as an agent for

individuals, private organizations, or other government units.

13. In government-wide financial statements, financial figures are shown as either governmental activities or business-type activities. All governmental funds and most internal service funds appear in the governmental acitivities. All of the enterprise funds and any remaining internal service funds are lumped into the business-type activities. Fiduciary funds are not shown in the government-wide financial statements.

14. In fund-based financial statements, for the governmental funds, a separate column must be shown for (a) the General Fund, (b) any other fund that qualifies as major, and (c) all other funds accumulated as a whole in a single column.

15. The physical recording of a budget is viewed as a method of expressing public policy and financial intent, providing a financial plan for the period. The budget establishes spending limitations, which enhances financial planning and control. The adoption of the budget for each activity anticipates the inflow of financing resources and sets approved expenditure levels. Subsequently, comparisons can be drawn between actual and budgeted figures at any time during the fiscal period, thus evaluating performance.


16. Comparisons between the original budget, the final budget, and actual figures must be reported in the required supplemental information presented after the notes to the financial information in the comprehensive annual financial report. Alternatively, the information can be presented as a separate statement within the government’s fund-based financial statements.

17. An encumbrance is the recording of a purchase commitment (such as a contract or a purchase order). The encumbrance entry is recorded at the time the commitment is made prior to incurring a liability. This recording supports the spending control emphasis of the fund-based financial statements. Reviewing the Expenditures account and the Encumbrances balance provides the total amount of current financial resources spent and committed. Thus, the chance of an over-commitment of resources is decreased. The encumbrance is removed when this commitment becomes a legal liability. Until then, no transaction has taken place so encumbrances are not included in government-wide financial statements.

18. Encumbrances (commitments) that remain outstanding at the end of a fiscal period are reported within the Equity section as a reserved fund balance. No liability is reported; instead, the need to hold financial resources to satisfy the eventual cost of the commitment is disclosed.

19. Expenditures include outflows or reductions of net current financial resources from the acquisition of goods or services (or the payment of a long-term liability). Modified accrual accounting recognizes these expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available. Fund-based accounting for the governmental funds records expenditures instead of expenses and capital assets.

20. Modified accrual accounting recognizes expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available. Governments must disclose the length of time (often 60 days) used to determine availability.

21. Within the governmental funds, fund-based financial statements focus on expenditures rather than expenses. Expenditures and transfers should be recorded when the liability is incurred. Therefore, the entire cost of capital assets is treated as an expenditure as the liability is incurred.

Government-wide financial statements record capital assets in a manner similar to for-profit organizations. Buildings, machines, and other capital assets are capitalized and expensed over their useful lives.

22. Traditionally, the purchase method has been used for prepaid expenses and supplies. The cost is recorded immediately as an expenditure when the liability is incurred or the money is paid.

Another method is the consumption method, which is similar to for-profit organization. Supplies and prepayments are recorded as assets when acquired. As they are then


consumed, they are recorded as expenditures matching them with the appropriate fiscal period.

On fund-based financial statements for the governmental funds, either method can be selected.

23. The four classifications of nonexchange revenues that a state or local government can recognize are: a. Derived tax revenues. A tax assessment is imposed because an underlying exchange

takes place. For example, revenues are recognized for a sales tax when a sale occurs and the tax is imposed.

b. Imposed nonexchange revenues. An assessment is imposed but no underlying transaction takes place. Examples include property taxes and fines or penalties that are levied. Revenues are recognized in the period when resources are required to be used or the first period that use is permitted.

c. Government-mandated nonexchange transactions. Monies are provided from one government to another to help pay for legally required programs or actions. Examples include grants from the federal government to a city that must only be used for a mandated legal requirement such as an improvement in the school system. Revenues are recognized when all eligibility requirements have been met.

d. Voluntary nonexchange transactions. Monies conveyed willingly to a state or local government by an individual, another government, or an organization usually for a specific purpose but without legally mandated requirements. Revenues are recognized when all eligibility requirements have been met. An example would be money donated to the city for the beautification of the local parks.

24. A receivable is not recorded for property taxes until the demand for money represents an enforceable legal claim, which is normally specified by state law. Many governments encourage the early payment of property taxes (by sending out bills early or by giving some type of a cash discount). Thus, cash can actually be reported before the government even records the initial receivable.

The revenue from the property tax should be reported net of estimated uncollectible tax in the period in which it is supposed to be used or the first period in which it can be used. For example, property taxes assessed to finance the government's costs in 2008 should be reported as revenue in 2008.

Because the receivable and the revenue recognition are split, it is possible to record the receivable (or cash, if collected early) before the revenue. In that case, a Deferred Revenue account is established.

25. No revenues are recognized in either set of financial statements because the proceeds of bonds must be paid back. In fund-based financial statements, Cash is increased along with an “Other Financing Sources” figure. For example, if the bonds were issued for a construction project, this entry is recorded in the Capital Project Fund. Payments of both interest and debt are then recorded when they become due, becoming a claim on current financial resources. An Expenditure account is recognized for the debt and related interest and is usually shown in the Debt Service Fund.


In government-wide financial statements, the cash and debt are both increased and payment of debt would be similar to for-profit financial statements.

26. A special assessment is an improvement made to property by the government, which is paid for in part or in whole by the owners of the property being benefited. Adding curbing and sidewalks to a local street is an example of a special assessment if the residents of that street are required to pay a portion of the cost. Typically, the government places a lien on the property to insure payment.

The accounting for special assessment projects depends on the liability being incurred by the government. If the government is in no way liable for the work done and any debt incurred, an Agency Fund is used to account for the monetary inflows and outflows. The government is simply serving as a conduit to get the project completed and the debt paid.

If the government is responsible (even secondarily responsible) for the cost of the project, a more elaborate method of accounting is necessary. In the government-wide financial statements the debt and the infrastructure asset are recorded as in for-profit accounting. The taxes are assessed, reported as revenues, collected, and used to pay the debt.

The infrastructure asset and long-term debt are not recorded in the fund-based financial statements. Instead, the expenditures for the work are recorded in a Capital Projects Fund while cash collected from citizens is recorded as revenue.

27. In fund-based financial statements, interfund transactions are recorded in both funds simultaneously at the time of authorization. For example, monetary transfers from the General Fund to another fund such as the Debt Service Fund would be recorded in both funds.

The recipient records this transfer as an “Other Financing Source” and the party making the transfer records an “Other Financing Use.”

If the transfer is being made to a proprietary fund, it is often shown in the statement of revenues, expenses, and other changes in net assets as a “capital contribution” or as a “transfer in.”

28. Intra-activity transactions occur totally within the governmental activities or totally within the business-type activities so that no net effect is created. Therefore, these transfers are not reported on government-wide financial statements.

Interactivity transactions occur between a governmental activity and a business-type activity so that they affect the balances in each. Consequently, they are reported in both columns on the government-wide financial statements but are then offset in the total column.

29. An internal exchange transaction is a transfer within the government that is recorded as if the transaction had actually occurred with an outside party. Such transactions occur between one of the government’s activities and an internal service or enterprise fund and are normally to pay for work or services being rendered. These exchanges are reported as revenues and as either expenditures or expenses. An example would be a payment from a


police department to the city’s motor pool for vehicle maintenance. This exchange would be included by both departments in the fund-based financial statements as if it were a transaction with an outside party. On government-wide financial statements, any such transactions between a government activity and a related internal service fund would be considered an intra-activity transaction because both fund types are classified as government activities and, therefore, there would be no impact on overall figures.


Answers to Problems

1. B

2. A

3. D

4. D

5. A

6. C

7. D

8. A

9. D

10. C

11. B

12. C

13. B

14. B

15. C

16. A

17. C

18. C

19. B

20. A

21. C

22. D


23. C

24. D

25. A

26. B

27. D

28. C

29. Beginning of Year-Recording of budgetGENERAL FUNDEstimated Revenues Control........................................ 1,000,000Estimated Other Financing Sources—Bond Proceeds 400,000

Appropriations Control............................................ 900,000Appropriations-Other Financing Uses—Operating

Transfers Out....................................................... 300,000(Budgetary) Fund Balance....................................... 200,000

End of Year-Removal of budgetGENERAL FUND

Appropriations Control............................................ 900,000Appropriations-Other Financing Uses—Operating

Transfers Out....................................................... 300,000(Budgetary) Fund Balance....................................... 200,000

Estimated Revenues Control.............................. 1,000,000Estimated Other Financing Sources—Bond Proceeds 400,000

30. GOVERNMENT-WIDE FINANCIAL STATEMENTSGOVERNMENT ACTIVITIESComputer 89,400

Vouchers (or Accounts) Payable 89,400

Vouchers (or Accounts) Payable 89,400Cash 89,400

In the end, the capital assets have gone up by the cost of the computer and cash has been reduced by the same amount.

FUND-BASED FINANCIAL STATEMENTS


GENERAL FUNDEncumbrances Control 88,000

Fund Balance—Reserved for Encumbrances 88,000

Fund Balance—Reserved for Encumbrances 88,000Encumbrances Control 88,000

Expenditures Control 89,400Vouchers Payable 89,400

Vouchers Payable 89,400Cash 89,400

On the statement of revenues, expenditures, and other changes in fund balance, an expenditure of $89,400 will be shown. Cash will also decrease by that amount.

31. GOVERNMENT-WIDE FINANCIAL STATEMENTSGOVERNMENT ACTIVITIES (Intra-activity transfer from the General Fund to the Capital Projects Fund is not reported)Issuance of BondsCash 1,800,000

Bonds Payable 1,800,000

Completion of ConstructionBuildings 1,890,000

Cash 1,890,000

On the statement of net assets, for the governmental activities, the Buildings account goes up by $1,890,000, the Bonds Payable go up by $1.8 million, and cash goes down by $90,000.


To Record TransferGENERAL FUNDOther Financing Uses—Transfers Out 90,000

Cash 90,000

CAPITAL PROJECTS FUNDCash 90,000

Other Financing Sources—Transfers In 90,000

Sale of Bonds Cash 1,800,000


Other Financing Sources—Bond Proceeds 1,800,000

Completion of ConstructionExpenditures 1,890,000

Cash 1,890,000

On the statement of revenues, expenditures, and other changes in fund balance, the General Fund will report an other financing uses – transfer out of $90,000. On its balance sheet, it will report $90,000 less cash. For the capital projects fund, there will be an expenditure of $1,890,000 and two other financing sources: $90,000 as a transfer-in and $1.8 million from bond proceeds.

32. FUND-BASED FINANCIAL STATEMENTSa. General Fund

Estimated Revenues ControlEstimated Other Financing Sources Control(Budgetary) Fund Balance

Appropriations Control

b. Capital Projects Fund (could also be recorded in the General Fund with a transfer to the Capital Projects Fund)

CashOther Financing Sources—Bond Proceeds

c. General FundEncumbrances

Fund Balance—Reserved for Encumbrances

d. General FundFund Balance—Reserved for Encumbrances

Encumbrances

Expenditures ControlVouchers Payable

e. General Fund Vouchers Payable

Cash

f. General FundOther Financing Uses—Transfers Out—Capital Projects

Due to Capital Projects Fund (Special Assessment)

Capital Projects Fund


Due from General FundOther Financing Sources—Transfers In—General Fund

g. General FundOther Financing Uses—Transfers Out—Motor Pool

Cash

Internal Service FundCash

Contributed Capital

h. General FundProperty Taxes Receivable

Revenues—Property TaxesAllowance for Uncollectible Taxes

i. The following entries are made on the assumption that the appropriate payment of the supplement is an eligibility requirement for the grant.

Special Revenue FundCash

Deferred Revenue

j. Expenditures—SalariesCash

Deferred Revenue Revenues—Grant

GOVERNMENT-WIDE FINANCIAL STATEMENTS

a. No entry

b. Governmental Activities Cash

Bonds Payable

c. No entry

d. Governmental Activities Equipment

Vouchers Payable e. Governmental Activities

Vouchers PayableCash


f. No entry (it is an intra-activity transfer within the governmental activities)

g. No entry (assuming the internal service fund is treated as a governmental activity so that this is an intra-activity transaction)

h. Governmental Activities Property Taxes Receivable

Revenues—Property TaxesAllowance for Uncollectible Taxes

i. Governmental Activities Cash

Deferred Revenues

j. Governmental Activities Expense—Public Safety

Cash

Deferred Revenue Revenue

33. FUND-BASED FINANCIAL STATEMENTS

a. General FundEncumbrances Control 94,000


b. General FundExpenditures (or Supplies) 1,200

Due to Internal Service Fund 1,200

c. Capital Projects FundCash 11,000,000

Other Financing Sources—Bonds Proceeds 11,000,000

d. General FundOther Financing Uses—Transfers Out—

Swimming Pool 140,000Cash 140,000

e. General FundFund Balance—Reserved for Encumbrances 94,000

Encumbrances Control 94,000


Expenditures 96,000Vouchers Payable 96,000

f. General FundOther Financing Uses—Transfers Out 32,000

Cash 32,000

Capital Projects FundCash 32,000


g. Special Revenue FundCash 30,000

Deferred Revenues 30,000

h. Special Revenue FundDeferred Revenues 5,000

Revenues 5,000

Expenditures 5,000Cash 5,000


a. No entry

b. No entry (Assuming print shop is a governmental activity.)

Governmental Activitiesc. Cash 11,000,000


Governmental Activitiesd. Transfers Out—Swimming Pool 140,000

Cash 140,000

Business Type ActivitiesCash 140,000

Transfers In—General Fund 140,000 e. Governmental Activities

Equipment—Trucks 96,000Vouchers or Accounts Payable 96,000

f. No entry – intra-activity transfer


g. Governmental Activities Cash 30,000


h. Governmental Activities Expense—Public Service 5,000

Cash 5,000

Deferred Revenues 5,000Revenues 5,000

34. FUND-BASED FINANCIAL STATEMENTS

a. Capital Projects Fund (could also be recorded in the General Fund followed by a transfer into the Capital Projects Fund)

Cash 900,000Other Financing Sources—Bonds Proceeds 900,000

b. Capital Projects Fund (this entry depends on whether encumbrances are being recorded in the government’s Capital Projects Fund.)

Encumbrances 1,100,000Fund Balance—Reserved For Encumbrances 1,100,000

c. General FundOther Financing Uses—Transfers Out 130,000

Cash 130,000

Debt Service FundCash 130,000


d. General FundFund Balance—Reserved for Encumbrances 11,800

Encumbrances 11,800

Expenditures Control—Machinery and Equipment 12,000Vouchers Payable 12,000

e. General FundInventory of Supplies 2,000

Cash 2,000

f. Special Revenue FundCash 90,000



g. General FundTaxes Receivable 600,000

Revenues – Property Taxes 576,000Allowance for Uncollectible Current Taxes 24,000


a. Governmental ActivitiesCash 900,000

Bonds Payable 900,000

b. No entry

c. No entry (this is an intra-activity transfer)

d. Governmental ActivitiesMachinery and Equipment 12,000

Vouchers or Accounts Payable 12,000

e. Governmental ActivitiesInventory of Supplies 2,000

Cash 2,000

f. Governmental ActivitiesCash 90,000


g. Governmental ActivitiesTaxes Receivable 600,000

Revenues – Property Taxes 576,000Allowance for Uncollectible Current Taxes 24,000


35. a. As the Appropriations account balance in the General Fund shows a total of $171,000, that amount of money has been authorized for expenditure during this fiscal period. Thus, only that total can be expended or committed. To date, a total of $119,000 has been spent or committed ($110,000 of expenditures and $9,000 in encumbrances). The remaining $52,000 is still available.

b. The governmental funds are all designed to monitor current financial resources and their inflows and outflows. Therefore, the Capital Projects Fund records expenditures made in relation to the acquisition and construction of fixed assets. Capital assets are recorded directly in government-wide financial statements.

c. The Appropriations balance represents the amount that government officials have authorized to be spent on a particular construction project.

d. To alert readers to the commitment that remains outstanding, a year-end reclassification is made to reduce the “Fund Balance—Unreserved, Undesignated” in order to report a “Fund Balance-Reserved for Encumbrances.”

e. The most likely explanation for the zero balance in the Fund Balance-Unreserved, Undesignated is that this capital project was begun during the current year, and thus, no closing entries have, as of yet, been made. In addition, many governments transfer in to the Capital Projects Fund the exact amount to be spent so that the inflows and outflows always agree and no fund balance is retained.

f. Two possible reasons can be put forth for the $150,000 Other Financing Sources balance. First, a bond may have been sold. Since the debt itself is not recorded in the fund-based financial statements, the governmental fund must record the receipt by means of an Other Financing Sources designation. Second, the $150,000 may have come from a transfer (most likely from the General Fund). An operating transfer is not considered revenue by the recipient and, therefore, the inflow of current financial resources is recorded as an Other Financing Source.

g. The Debt Service Fund is utilized to accumulate money to pay off the principal and interest of any long-term liability incurred by the governmental funds. The debt itself is maintained in the government-wide financial statements. Payment of the debt and interest is made from the Debt Service Fund and those payments are recorded as expenditures.


h. Special assessment projects are undertaken by a government to benefit particular properties with the owners bearing part (or all) of the cost. Curbing, as an example, or the installation of lights usually are special assessment projects. If the government has no responsibility for the costs, recording of all financial resources inflows and outflows is made in an Agency Fund. However, if the government does have some responsibility (if, for example, the government is secondarily liable for any debts incurred), the construction is recorded in a Capital Projects Fund. Thus, the receivable balance shown here would indicate that this project is being recorded in this manner. Collection of the receivable will be made from the citizens being benefited; the money will be used in paying for the construction.

i. This designation indicates that the government is reporting an asset that is not free to be spent for future expenditures. In the asset section, a $4,000 balance is being reported as the government’s Inventory of Supplies. That figure is being reported but is not available to be spent.

j. Budgetary entries are optional for Debt Service Funds but are rarely used. Expenditure levels (for principal and interest) are set contractually by the debt indenture. Thus, additional financial control is not obtained by the inclusion of budgetary amounts.

36. a. Estimated Revenues $232,000Appropriations 225,000

Budgetary Fund Balance $ 7,000

Since estimated revenues exceed the appropriations, a surplus is anticipated which is mirrored through a credit balance in the Budgetary Fund Balance account.

b. Initially, all of the school supplies are recorded in an asset account such as “Inventory of Supplies.” As the supplies are used, the cost is reclassified into an Expenditures account. On the balance sheet, a portion of the Fund Balance figure should be separated and reported as being reserved for Inventory of Supplies to show that this amount of assets is available to be spent.

c. When the balance sheet is produced, a Reserved Fund Balance amount will be reported to indicate that this amount of current financial resources must be held to pay off the commitment for the truck when it eventually becomes an actual liability.

d. FUND-BASED FINANCIAL STATEMENTSGeneral Fund


Fund Balance—Reserved for Encumbrances 111,000Encumbrances 111,000

Expenditures Control 120,000Vouchers Payable 120,000

e. General FundOther Financing Uses—Transfers Out 33,000

Cash 33,000

Debt Service FundCash 33,000


f. REVENUES:Government grant appropriately expended $ 24,000Property taxes to be received 190,000Business licenses and parking meters 14,000

Total revenues $228,000

g. EXPENDITURES:Salary for police officers $ 21,000Rent on equipment (assuming payments from

from current financial resources) 3,000City hall acquisition 1,044,000

Salary for ambulance drivers 24,000Supplies (60% of $16,000) 9,600Ambulance acquisition 120,000School bus acquisition 40,000

Total expenditures $1,261,600

h. FUND-BASED FINANCIAL STATEMENTSCapital Projects Fund(or this could have been recorded in General

Fund with the money then transferred to the Capital Projects Fund)

Cash 300,000Other Financing Sources 300,000


37. FUND-BASED FINANCIAL STATEMENTSa. General Fund

Estimated Revenues Control 834,000Appropriations Control 540,000Estimated Other Financing Uses— Operating Transfers 242,000Budgetary Fund Balance 52,000

b. Capital Projects Fund (encumbrances for these types of contracts are usually optional but are more likely to be made when budgetary entries are being used)

Encumbrances Control 8,000,000Fund Balance—Reserved for Encumbrances 8,000,000

c. Capital Projects FundCash 8,000,000

Other Financing Sources Control 8,000,000

d. Capital Projects FundFund Balance—Reserved for Encumbrances 8,000,000

Encumbrances Control 8,000,000

Expenditures Control 8,000,000Contracts Payable 8,000,000

Contracts Payable 8,000,000Cash 8,000,000

e. General FundOther Financing Uses Control 1,000,000

Cash 1,000,000

Debt Service FundCash 1,000,000Other Financing Resources 1,000,000

f. Debt Service FundExpenditures Control—Bonds 900,000Expenditures Control—Interest 100,000

Cash 1,000,000

g. General FundProperty Taxes Receivable 800,000

Revenues – Property Taxes 768,000Allowance for Uncollectible Taxes 32,000


h. Special Revenue FundCash 120,000

Revenues Control 120,000

i. Permanent FundInvestments 300,000

Contribution Revenue 300,000


a. No entry

b. No entry

c. Governmental Activities Cash 8,000,000


d. Governmental Activities Buildings 8,000,000

Cash 8,000,000

e. No entry

f. Governmental Activities Bonds Payable 900,000Interest Expense 100,000

Cash 1,000,000

g. Governmental ActivitesProprety Taxes Receivable 800,000

Revenues – Property Taxes 768,000Allowance for Uncollectible Taxes 32,000

h. This entry is made in the Governmental Activities unless the toll road is reported as an Enterprise Fund in which case it is recorded as a business-type activity.

Cash 120,000Revenues—Reserved for Highway Maintenance 120,000


37. (continued)

i. Government ActivitiesInvestments 300,000

Revenues—Donations 300,000

38.CITY OF JENNINGS

GENERAL FUNDStatement of Revenues, Expenditures, and Other Changes in Fund

Balance(Condensed)

Year Ending December 31, 2008

Revenues $ 740,000Expenditures (510,000)

Excess (deficiency) of revenues over expenditures $ 230,000 Other financing sources (uses):

Bond proceeds $300,000Transfers in 50,000Transfers out (470,000)

Total Other Financing Sources and Uses (120,000)Change in Fund Balance $110,000Fund Balance, Beginning 170,000Fund Balance, Ending $280,000


38. (continued)

CITY OF JENNINGSGENERAL FUND

Balance Sheet (condensed)December 31, 2008

AssetsCash $ 30,000Investments 410,000Taxes receivable 220,000Due from Capital Projects Fund 60,000

Total Assets $720,000

LiabilitiesAccounts payable $ 90,000Vouchers payable 180,000Contracts payable 90,000Due to Debt Service Fund 40,000Deferred revenues 40,000

Total Liabilities $440,000

Fund Balances

Unreserved, undesignated fund balance 280,000

Total Fund Balance 280,000

Total Liabilities and Fund Balances $720,000


39. The most difficult aspect of this problem is gathering the information for both the fund-based financial statements and the government-wide financial statements. One way to overcome this difficulty is to make the journal entries for the transactions that are described in the question.

Government-wide financial statements:

1Property Tax Receivable 80,000Cash 320,000

General Revenues—Property Taxes 400,000

2Salary Expense 100,000Rent Expense 70,000Equipment 50,000Land 30,000Maintenance Expense 20,000

Cash 270,000

Depreciation Expense 10,000Accumulated Depreciation—Equipment 10,000

3Building 200,000

Long-Term Liability 200,000

Neither depreciation nor interest is recognized here since this transaction took place on the last day of the year.

4Computers 8,000

Vouchers Payable 8,000

No depreciation is recognized since this transaction occurred on the last day of the year.

5Cash 3,000

Program Revenues—Student Fees 3,000


39. (continued)

Fund-based financial statements:

1Property Tax Receivable 80,000Cash 320,000

Revenues—Property Taxes 370,000Deferred Revenues 30,000

The $30,000 is not viewed as a revenue in 2008 because it will not be available within 60 days to pay claims against current financial resources.

2Expenditures—Salaries 100,000Expenditures—Rent 70,000Expenditures—Equipment 50,000Expenditures—Land 30,000Expenditures—Maintenance 20,000

Cash 270,000

3 No entry is made on the building acquisition since there was no impact on current financial resources.

4Expenditures—Computer 4,000


The second computer is not included here because payment will not be made within 60 days so there is no impact on current financial resources.

5Cash 3,000

Revenues—Student Fees 3,000


39. (continued)

Part aGOVERNMENT-WIDE FINANCIAL STATEMENTS

STATEMENT OF ACTIVITIESFor the Year Ended December 31, 2008

Governmental Activities

Direct Expenses Program Revenues (net expense)Governmental Activities:—School System $200,000 $3,000 $(197,000)

General Revenues: —Property Taxes 400,000 Change in Net Assets $ 203,000 Beginning Net Assets - 0- Ending Net Assets $ 203,000

STATEMENT OF NET ASSETSDecember 31, 2008

Governmental Activities

Assets—Cash $53,000—Property Tax Receivable 80,000—Computers 8,000—Building 200,000—Equipment $ 50,000

Less: Accumulated Depreciation (10,000) 40,000—Land 30,000


Liabilities—Vouchers Payable $ 8,000—Long-Term Liabilities 200,000 $208,000

Net Assets—Invested in capital assets, net of debt $ 78,000—Unrestricted 125,000 $203,000


39. (continued)

Part bFUND-BASED FINANCIAL STATEMENTS

STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE

For the Year Ended December 31, 2008

General FundRevenues—Property Taxes $370,000—Student Fees 3,000

Total Revenues $373,000

Expenditures—Salaries $100,000—Rent 70,000—Equipment 50,000—Land 30,000—Maintenance 20,000—Computer 4,000

Total Expenditures $274,000

Change in Fund Balance $ 99,000

Fund Balance—Beginning of Year - 0 -

Fund Balance—End of Year $ 99,000

BALANCE SHEETDecember 31, 2008

General FundAssets—Cash $ 53,000—Property Tax Receivable 80,000


Liabilities—Voucher Payable $ 4,000—Deferred Revenue 30,000

Total Liabilities $ 34,000Fund Balance—Unreserved $ 99,000


Total Liabilities and Fund Balance $133,000

40. One way to approach this problem is to make the journal entries for the transactions that are described as the basis for gathering the information needed for the financial statement to be produced.

In this problem, the journal entries are prepared based on producing fund-based financial statements for the General Fund.

a.Cash 700,000Property Taxes Receivable 100,000

Revenues—Property Taxes 750,000 Deferred Revenues 50,000

The $50,000 is not viewed as a revenue in 2008 because it will not be available within 60 days to pay claims against current financial resources.

b.Expenditures—Police Cars 200,000

Cash 200,000

If previously recorded, an encumbrance would also have to be removed. However, this entry would not affect the statement of revenues, expenditures, and other changes in fund balance.

No depreciation is recorded on the police cars because fund-based financial statements are being produced for the General Fund.

c.Other Financing Uses—Transfers Out 90,000

Cash 90,000

Because the statements being prepared here are only for the General Fund, the entry for the Debt Service Fund is not included.

d.Cash 200,000

Other Financing Sources—Bond Proceeds 200,000

No interest is accrued because it will not require the use of current financial resources.

e.Encumbrances 40,000



f.Expenditures—Salaries 40,000

Cash 30,000Salary Payable 10,000

g.Fund Balance—Reserved for Encumbrances 40,000

Encumbrances 40,000

Expenditures—Computer 41,000Vouchers Payable 41,000

h.Expenditures—Supplies 10,000

Cash 10,000

i.Supplies 2,000

Fund Balance—Reserved for Supplies 2,000



CITY OF LOST ANGELSTATEMENT OF REVENUES, EXPENDITURES AND OTHER CHANGES IN FUNDBALANCEFor the Year Ended December 31, 2008

General FundRevenues—Property Taxes $750,000

Total Revenues $750,000

Expenditures—Police cars $200,000—Salaries 40,000—Computer 41,000—Supplies 10,000

Total Expenditures $291,000

Excess of revenues over expenditures $459,000

Other Financing Sources (Uses)—Transfer to Debt Service Fund $(90,000)—Issued Long-Term Bond 200,000

Net Other Financing Sources $110,000

Change in Fund Balance $569,000

Fund Balance—Beginning of Year 180,000

Fund Balance—End of Year $749,000

41. One way to approach this problem is to make the journal entries for the transactions that are described as the basis for gathering the information for the financial statement to be produced.

Here the journal entries are prepared based on the need to create government-wide financial statements for the General Fund (a governmental activity).


a.Cash 700,000Property Taxes Receivable 100,000

Property Tax Revenue 800,000

b.Police Cars 200,000

Cash 200,000

Depreciation Expense 10,000Accumulated Depreciation 10,000

c.No entry is needed since there is no change in the total net assets of the governmental activities.

d.Cash 200,000

Bonds Payable 200,000

Interest Expense 10,000Interest Payable 10,000

e. No entry—this is only a commitment and not a transaction.

f.Salary Expense 40,000

Cash 30,000Salary Payable 10,000

g.Computer 41,000


Depreciation Expense 4,100Accumulated Depreciation 4,100

h.Supplies 10,000

Cash 10,000

i.Supplies Expense 8,000

Supplies 8,000This problem indicates that the General Fund held $180,000 in cash at the start of


the year

GOVERNMENT-WIDE FINANCIAL STATEMENTS CITY OF LOST ANGEL

STATEMENT OF NET ASSETSDecember 31, 2008 Governmental

ActivitiesAssets—Cash $840,000—Property Tax Receivable 100,000—Supplies 2,000—Computers $ 41,000

Less: Accumulated Depreciation (4,100 ) 36,900—Police Cars 200,000

Less: Accumulated Depreciation (10,000) 190,000

Total Assets $1,168,900

Liabilities—Vouchers Payable $41,000—Salary Payable 10,000—Interest Payable 10,000—Bonds Payable 200,000 261,000

Net Assets—Invested in capital assets, net of debt $226,900—Unrestricted 681,000 $907,900

The total net asset figure of $907,900 can be found by taking the opening balance of $180,000 and then adding the revenues for the period and subtracting the expenses.

42.A. True—The initial approval of spending was $380,000 and that amount

should be recorded immediately. The budgetary entry debits Estimated Revenues and credits Appropriations.

B. False—The budgetary information is normally presented as required supplemental information in the comprehensive annual financial report. However, it can also be shown as a separate statement within the fund-based financial statements. The government has that choice.

C. True—Prior to GASB 34, only the final budget and the actual figures for the period were reported. That was considered somewhat misleading


since the budget could be revised near the end of the year to establish agreement. GASB 34 required the original budget also to be disclosed.

D. False—A Budgetary Fund Balance account does have to be set up as part of the budget entry to indicate that a surplus (or deficit) is anticipated. However, an expected surplus requires a credit to the Budgetary Fund Balance rather than a debit.

E. False—Budgetary information only relates to fund-based financial statements and has no impact on the government-wide financial statements.

43. A. False—Revenue should be recognized when all eligibility requirements have been met. Here, the eligibility requirements, if any, could have been met during 2008. It is likely that the eligibility requirements have not been met but that is not necessarily the case.

B. False—If there are no eligibility requirements, the revenue should be recognized immediately in December 2008 when the award is made.

C. False—A grant is a government-mandated nonexchange transaction when the award was made to help the recipient government meet legal requirements. That is not specified here. However, if the state government had passed a law that all school children had to receive hot lunches and had then furnished this grant to help meet that requirement, it would have been a government-mandated nonexchange transaction.

D. True—The cash is recognized because it had been received but no revenue can be reported because all eligibility requirements have not yet been met. Thus, a deferred revenue should be established for the amount received.

E. False—Revenue recognition rules for nonexchange transactions were set up by GASB Statement No. 33.

44.a. Fund-based financial statements – the fund balance goes up by $6

million because of the inflow of current financial resources.

Government-wide financial statements – the net asset balance does not change. Both assets (cash) and liabilities (bonds payable) go up by the same $6 million amount.

b. Fund-based financial statements – the fund balance goes down by $149,000 because of the outflow of current financial resources.


Government-wide financial statements – the net asset balance does not change. One asset (truck) goes up while a second asset (cash) goes down.

c. Fund-based financial statements – the fund balance goes down for the General Fund by $17,000 because of the outflow of current financial resources.

Government-wide financial statements – the net asset balance does not change. This is an internal exchange transaction within the governmental activities so that no net change is created.

d. Fund-based financial statements – the fund balance is not affected because the resources will not be collected quickly enough to be available in the current period. An asset (receivable) is recognized along with a liability (deferred revenue) so that the size of the fund balance is not affected.

Government-wide financial statements – A $75,000 receivable is recognized so that the net asset balance goes up by that amount.

e. Fund-based financial statements – the fund balance is not affected. The money is not recognized as a revenue until all eligibility requirements have been met. Since that does not appear to be the case, the cash will go up along with a liability for the deferred revenue.

Government-wide financial statements – the net asset balance does not change. The accounting is the same as explained for the fund-based financial statements.

f. Fund-based financial statements – the fund balance should go up by $1 million. The sale took place in the current year and the resources will all be received within the 75 day period being used to define available resources.

Government-wide financial statements – the net asset balance goes up by $1 million because the sale was made in the current period.

g. Fund-based financial statements – the fund balance is not affected. Although an encumbrance may be recorded to avoid spending more than the appropriated amount, that has no impact on the fund balance.

Government-wide financial statements – a purchase order or other commitment has no impact on the net asset balance.


h. Fund-based financial statemetns – the fund balance goes down by $18,000 because the transfer has been approved and will remove current financial resources.

Government-wide financial statements – there is no impact on the net asset balance of the governmental activities because this is an intra-activity transfer from one Governmental Fund to another. There is no net effect.

45.

A. False—A transfer out will be shown by the governmental activities and a transfer in will be reported by the business-type activities. Those two figures will be netted together so that no overall impact is shown in the total column for the government. However, both figures do appear in their own separate columns.

B. True—Because only governmental activities are involved, the transfer creates no difference in the overall total. This is an intra-activity transfer.

C. True—The General Fund reports the resource outflow as an other financing use. The resources were reduced but it was not for an expenditure.

D. False—The General Fund will report the transfer out as an other financing use and the column for "all other funds" will show the transfer-in as an other financing source.

E. False—The General Fund does not report expenses in the fund-based financial statements but rather expenditures.


46. A. Correct change is $40,000 increase—According to the preliminary information, the Capital Projects Fund reported an increase in its fund balance for the year of $40,000. In arriving at those figures, a $10,000 revenue and the related expenditure were recorded in that fund for this sidewalk construction. Because the government had no obligation, these cash flows should actually have all been reported in the Agency Fund. The auditing firm should remove both the revenue of $ 10,000 and the expenditures of $10,000 from the Capital Projects Fund. Because they are of the same amount but have an opposite effect on current financial resources, this removal leaves the overall change in the fund balance at $40,000.

B. Correct change is $140,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. Here, a revenue of $10,000 was reported within the government-wide statements. However, because the city had no obligation, that revenue should have been in an Agency Fund. Removing this revenue (and the asset that was recorded at the same time) reduces the net asset increase for the city from $150,000 to $140,000.

47. Correct change is a $10,000 increase—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, this particular $20,000 should have been reported as a debt since it is due in 60 days rather than as an other financing source (which serves to increase the fund balance). Reclassifying the $20,000 to a debt leaves the overall increase in the fund balance for the period as only $10,000.

48. A. Correct change is a $66,000 increase—According to the preliminary information, the General Fund reported an increase in its fund balance during the year of $30,000. However, the $9,000 revenue and $45,000 in expenditures were erroneously recorded in that fund. Together, those transactions had caused the fund to go down by a net of $36,000. Removing them (to record them within an enterprise fund) will remove this $36,000 reduction from the General Fund and cause the increase in the fund balance to rise from $30,000 to $66,000.


B. Correct change is a $150,000 increase—According to the preliminary information, the overall change in the net assets of the city during the year (on the government-wide financial statements) was a $150,000 increase. An error has been made in that this display was reported in the governmental activities (General Fund) rather than the business-type activities (Enterprise Fund). That increases one column in the statement of assets (the business-type activities) and decreases the other (the governmental activities) by exactly the same amount. So, moving the transactions does not change the overall records for the government as a whole.

C. Correct change is a $54,000 increase—According to the preliminary information, the overall change in the net assets of the Enterprise Fund on the fund-based financial statements was a $60,000 increase. However, the art display was not included as it should have been. Adding in the $9,000 revenue and the $15,000 expense creates a $6,000 net reduction that drops the positive change from $60,000 to $54,000.

49. A. Correct change is a $42,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. The government, though, has recognized a revenue for the amount received in the current period. The amount received should have been $300,000 times 40% or $120,000. However, the discount reduces that figure by $12,000 to $108,000. That money cannot be spent until 2009 and, so, must be reported in 2008 as a deferred revenue and not as a revenue. Removing this revenue reduces the overall increase in net assets by $108,000 from $150,000 to $42,000.

B. Correct change is a $78,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. The government, though, had recognized a revenue for the amount of cash received. The amount received should have been $300,000 times 40% or $120,000. However, the discount reduces that figure by $12,000 to $108,000. That money cannot be spent until 2009 and, so, must be reported in 2008 as a deferred revenue and not as a revenue. Removing this $108,000 revenue reduces the overall change in net assets from an increase of $30,000 to a decrease of $78,000.


50. A. Correct change is a $42,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. However, as shown above in 49 (part A), $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2009). Incorrectly, the city recorded the $108,000 as a revenue. When removed, the increase in net assets drops from $150,000 to $42,000. Recognition (and the removal) of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other is a liability.

B. Correct change is a $78,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, as shown above, $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2009). The city incorrectly recorded the $108,000 as a revenue. When removed, the increase in net assets drops from an increase of $30,000 to a decrease of $78,000. Recognition of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other a liability.

51. A. Correct change is $290,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000. However, $320,000 was recognized here as a revenue although an eligibility requirement does remain (lowering air pollution by 25 percent). No revenue can be recognized until all eligibility requirements have been met. Changing the $320,000 from a revenue to a deferred revenue reduces the $30,000 increase in the fund balance to a $290,000 decrease.

B. Correct change is a $170,000 decrease—According to the preliminary information, the change in net assets of the city on government-wide financial statements was a $150,000 increase. However, $320,000 was recognized as a revenue although an eligibility requirement remains (lowering air pollution by 25 percent). No revenue can be recognized until that time. Changing $320,000 from a revenue to a deferred revenue reduces the $150,000 increase in the fund balance to a $170,000 decrease. Depreciation of the machine is being handled properly.

52. A. Correct change is a $150,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase. Changing a revenue from a general revenue to a program revenue does not affect the overall change in net assets.


B. Correct amount of net expenses is $90,000—According to the preliminary information, the parks reported net expenses of $100,000. The net expense figure is computed as direct expenses less any program revenues. The $10,000, though, should have been a program revenue. If this revenue had been appropriately included, net expenses would have only been $90,000 rather than $100,000.

Develop Your Skills

Research Case 1

No textbook is ever going to cover all of the many areas discussed within complex authoritative pronouncements. The subtle nuances of such rules can only be experienced and appreciated through the study of the actual document. The student needs to be aware of the extent of the official guidance that is available and gain confidence by working directly with these pronouncements. Here, an issue has been raised in connection with the handling of several unusual transactions. In real life, no better method of resolving such questions exists than to actually study the standard itself.

A review of the Contents of GASB 34 indicates that when working with government-wide financial statements "Reporting Contributions to Term and Permanent Endowments, Contributions to Permanent Fund Principal, Special and Extraordinary Items, and Transfers" is covered in paragraph 53. Apparently, additional information about "Special and Extraordinary Items" is to be found at paragraphs 55-56.

For fund-based financial statements, "Special and Extraordinary Items" are explained at paragraph 89.

Paragraph 55 then defines extraordinary items as "transactions or other events that are both unusual in nature and infrequent in occurrence." The paragraph directs the reader to APB Opinion No. 30 for further information on the exact nature of the terms "unusual in nature" and "infrequent in occurrence."

Paragraph 56 defines special items as "significant transactions or other events within the control of management that are either unusual in nature or infrequent in occurrence."

Paragraph 53 indicates that a number of balances, including special and extraordinary items, should be reported on the government-wide statement of activities "separately from, but in the same manner as, general revenues. That is, these sources of financing the net cost of the government's programs should be reported at the bottom of the statement of activities to arrive at the all-inclusive change in net assets for the period." Following that, in paragraph 54, an


illustration is presented of a statement of activities that shows the handling of special items (but not extraordinary items).

Paragraph 89 provides instruction on the handling of these two items within fund-based financial statements by first saying that the definitions are the same here as for government-wide financial statements. The placement of these items, though, "should be reported separately after 'other financing sources and uses."'

In this case, GASB 34 provides clear guidance as to the identity of these two accounts as well as their placement in the financial statements. In practice, accountants rarely refer to textbooks when official guidelines are available. Students, therefore, need to become comfortable with locating the source of authoritative information about a topic in order to become proficient at reading and understanding the material provided.

Research Case 2

Here, the accountants and officials of the City of Danmark are looking for assistance in classifying a revenue as either a program revenue (reported directly with a specific activity) or a general revenue (shown for the government as a whole).

1. A study of GASB 34 provides extensive assistance in this case in paragraph 48 by spelling out that "program revenues derive directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole; they reduce the cost of the function to be financed from the government's general revenues. The statement of activities should separately report three categories of program revenues: (a) charges for services, (b) program-specific operating grants and contributions, and (c) program-specific capital grants and contributions.”

2. Examples of program revenues are then given that include: Revenue collected for garbage collection. Building permits. A state grant for the sheriff’s department to participate in a drug

awareness program. Earnings on endowments if the money is restricted to a program

specifically identified in the endowment agreement


3. In contrast, general revenues are defined in the negative in paragraph 52: "all revenues are general revenues unless they are required to be reported as program revenues." Thus, if any revenue does not meet the specific definition of a program revenue, it is automatically labeled as a general revenue.

4. Taxes are included in this category as well as any other revenues of the government that do not meet the program revenue criteria.

Analysis Case 1

1) In an audit of a state or local government, the extent of the independent auditor's report is enlarged based on Government Auditing Standards (issued by the Comptroller General of the United States) from that of a for-profit company as it also mentions reports that are available about the government's internal control procedures as well as its compliance with laws and regulations. This information could be provided in the audit report or, as mentioned here, through separate reports.

2) A number of items are shown in order to reconcile the net changes in fund balances for the governmental funds and the changes in net assets. These typically include

--Internal service funds that are included within the Governmental Activities

--Recognition of expenses under accrual accounting that are not recognized under modified accrual accounting

--Recording capital assets as expenditures in the fund-based financialstatements

--Differences in the reporting of long-term debt issuance and payment

3) The largest sources of general revenues for many cities are property taxes and sales taxes. However, a wide variety of revenue sources are possible.

4) The amount of expenditures will vary widely based on the size of the government. Classifications usually include public safety, sanitation, and the like.

5) The General Fund should only shows current financial resources as its assets: cash and investments, various receivables, and amounts due from other funds. Although not financial resources, prepaid accounts and inventory are normally included

6) Most governments will indicate in the note to their financial statements that payables and receivables are viewed as available if collected within 60 days of the end of the year. Other lengths of time, though, can be used.


7) This question focuses on interperiod equity: Is the government spending more than it takes in so that future generations may have to suffer or is the government taking in more than it spends so future generations will have the benefit of an inherited surplus.

Analysis Case 2

Students need to continue updating their education throughout their careers. One method for doing this is to become familiar with the information available on the GASB website. This assignment directs the students to look at any Exposure Drafts (EDs) currently being studied by the GASB for the possibility of becoming an official statement. By looking at this site on a regular basis, an accountant can keep up with all issues being studied by the Board as well as the authoritative evolution of accounting pronouncements as new standards are produced.

At the time of this writing, five items are listed under the “Exposure Drafts” heading on the GASB website. Three are Exposure Drafts: Accounting and Financial Reporting for Intangible Assets, Pension Disclosures, and Elements of Financial Statements. One (titled Fund Balance Reporting and Governmental Fund Type Definitions) is a Invitation to Comment and another (titled Accounting and Financial Reporting for Derivatives) is a Preliminary Views document.

Students can download any of these documents and read them as a way to help them understand the evolutionary nature of financial accounting. For example, the Exposure Draft on Accounting and Financial Reporting for Intangible Assets is only 38 pages long and discusses six specific issues that students should be capable of reading and understanding:--the description and characteristics of intangible assets--the classification of intangible assets as capital assets--the capitalization of costs incurred in connection with intangible assets--the accounting for costs of internally generated computer software--the possibility of an intangible asset having an indefinite life--the retroactive treatment of intangible assets based on the accounting rules that are established.

To a student, such readings can seem tedious and difficult—at least initially. However, any person who is involved actively in the financial reporting of a state or local government is probably willing to expend much time and energy in order to be aware of possible financial reporting changes and their consequences. It is important to remember, though, that all of these documents may eventually be rejected outright, accepted, or may undergo either slight or radical revisions. A preliminary views document, an exposure draft, and a invitation to comment are both signs that an authoritative pronouncement is under serious consideration


but, over the decades, many proposals have gotten to each these levels without the Board's being able to reach sufficient consensus to establish an authoritative principle.

Communication Case 1

Most accountants and accounting students understand that the GASB sets official standards for the accounting and financial reporting to be carried out by state and local government organizations. However, probably only a very small portion of either of these groups truly knows what the established mission of the GASB actually is.

At the current time, the mission statement of the GASB is listed at the very top of the body’s home page (www.gasb.org).

"The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports."

Given the extensive (some would say "radical") changes created by the GASB in requiring both fund-based financial statements and government-wide financial statements, comparison of this impact with the above mission statement is an interesting exercise. Clearly, the Board must have felt that the changes made, especially the addition of government-wide financial statements, did meet the goal of reporting that results "in useful information for users of financial reports." The major purpose, it would seem, of adding this entirely new layer of reporting was to help provide information to users that would provide them with an completely new perspective of the state or city.

However, whether this particular requirement will be successful in guiding and educating "the public, including issuers, auditors, and users of those financial reports" is difficult to ascertain. The pronouncement itself does provide a wealth of information about the changes made by the GASB, the purpose as well as the justification. However, whether that information could be construed as helping to guide and educate the public and other users might be difficult to establish.

One interesting class exercise that can carried out with this mission statement is to ask the students just what they thought the GASB could do to meet this last part of their mission statement, the line that charges them to "guide and educate the public, including issuers, auditors, and users of those financial reports."



http://www.gasb.org/

Students do not always appreciate the amount of debate and compromise that the FASB and GASB must usually go through to arrive at an official accounting pronouncement. Because of their inexperience, students sometimes see the creation of accounting standards as a quest for the one true and correct path: One way of accounting is right for each situation and all other ways are necessarily wrong.

In practice, though, many possible "right" ways usually exist as potential solutions to any accounting problem. Because of the public debate created by many of these issues, the official bodies often receive numerous recommendations whenever any new standard is discussed and proposed. The Board has to study each of these and then arrive at the one approach that best fits in with the members' conceptual understanding of accounting and reporting. Furthermore, there are political ramifications to consider as the Board attempts to arrive at a final solution that pacifies the qualms of all the various interested parties.

However, the Board does help to explain its standards by presenting extensive background information. This assignment is designed to give students the opportunity of looking at some of the alternatives examined by the GASB prior to establishing its Statement No. 34. The paragraphs assigned here present a number of different approaches that were suggested by members of the public and considered by the GASB. In all cases, individuals who had some interest in government accounting felt that these alternatives were better solutions than the dual system of government-wide financial statements and fund-based financial statements mandated by GASB 34.

Many respondents preferred a single set of financial statements rather than the dual approach finally chosen. However, GASB found that there was no consensus that any one set of statements was preferable or provided the needed information by itself.

Others simply felt that no significant change was necessary in government accounting and that the system in use at that time (very similar to the current fund-based financial statements) was adequate. The GASB justifies its decision to move away from the previous model by stating (in paragraph 245) that "some of the information that today's users need surpasses the capabilities of the previous reporting model, particularly for governmental activities."

The suggestion was also made that the fund-based financial statements for governmental funds not be based on measuring and reporting current financial resources. Rather, each government would use the basis of accounting utilized for budgetary purposes (such as a cash system or a modified cash system). The logic of this argument was that these


fund-based financial statements are created to provide control and financial accountability which is established by the budgetary process and should, therefore, reconcile with the budget. GASB rejected this idea because the wide variety of possible budgetary methods would eliminate consistency and comparability.

Another solution put forth was to leave the current model as it is but make significant changes to it. Basically, GASB responded that one set of statements could simply not expand to suit the wide array of user needs that had arisen over the years.

Other suggestions encompassed trying to adapt the basis of accounting utilized for the governmental funds to be more useful to a wider array of financial statement users. In other words, significant changes were recommended for this portion of the fund-based financial statements. GASB indicated here that the Board felt that useful information was being provided by the previous model which focused on current financial resources and that such information should not be lost by the creation of a new model.


One of the truly significant additions to state and local government accounting resulting from GASB 34 was the Management’s Discussion and Analysis. This written report is meant to be a discussion of the financial information being reported by the government in a verbal rather than a purely quantitative fashion. Students often do not understand the range of information that can be uncovered within an MD&A by a careful reader. Here, the student can read the MD&A for an actual city. The information that is provided is quite extensive and can cover a wide range of subjects such as the following:

An explanation of fund-based financial statements. An explanation of government-wide financial statements. An explanation of governmental funds, proprietary funds, and fiduciary

funds. The purpose of the various funds such as the general fund and the debt

service fund. A comparison of the governmental activities and the business-type

activities. The method by which the government generates revenues. The diversity of expenditures made within the governmental funds. The bond rating for the government. A discussion of the budgetary process. Information about both capital assets and long-term liabilities.


The reporting of infrastructure assets that were acquired before the adoption of GASB 34.

Information about proprietary operations.

Excel Case 1

This type of spreadsheet would appear to be very helpful in budget planning because city officials could plug in various increase and decrease rates and see the impact on the fund balance over time. There are a number of different ways that a spreadsheet could be created to solve this particular problem. Here is one possible approach:

Create Column Headings: In Cell A4, enter label text "Year" In Cell B4, enter label text "Revenue Change" In Cell C4, enter label text "Revenues" In Cell D4, enter label text "Expenditures Change"In Cell E4, enter label text "Expenditures"In Cell F4, enter label text "Ending Fund Balance"In Cell G4, enter label text "Projected Change in Revenue"In Cell H4, enter label text "Projected Change in Expenditures"

Click and drag across Cells A4 to H4. Select Format, Cells, Alignment, and click the "Wrap Text" box. Click OK. If needed, place the cursor on the line between the Column Letters and drag the boundary on the right side of the column headings until the columns are the width you want.

In Cell A5, enter label text "2007" for first year. In Cell C5, enter Revenues of $1,400,000. In Cell E5, enter Expenditures of $1,480,000. In Cell F5, enter beginning Fund Balance of $400,000 In Cell G5, enter -2% for Projected Change in Revenue Per Year. In Cell H5, enter +3% for Projected Change in Expenditures Per Year.In Cell A6, enter label text "2008."

Perform Calculations:

In Cell B6, enter formula to calculate Revenue Change (Revenue times Projected Revenue Change): =+C5*$G$5. Note here that adding the $ symbol to Column and Row addresses creates an "absolute" reference which will remain static throughout the spreadsheet. In Cell C6, enter formula to adjust Revenues by Revenue Change: =+C5+B6 In Cell D6, enter formula to calculate Expenditures Change (Expenditures times Projected Expenditures Change): =+E5*$H$5 In Cell E6, enter formula to change Expenditures by Expenditures Change:


=+E5+D6 In Cell F6, enter formula to calculate the new ending Fund Balance (initial Fund Balance plus Revenue minus Expenditures): =+F5+C6-E6

Copy formulas to adjacent rows: Click and drag across Cells A6 through F6 and release. Place cursor on Fill Handle (small black box in lower right corner of selection box) and click and drag down through Row 8.

At that point, you should see that the city will have a negative fund balance of $277,539 at the end of 2010.

Simply, by changing cells G5 and H5, the impact of any different level of rate changes can be ascertained.

For example, if revenues decrease 5% and expenditures decrease 3% each year, changing those two cells will show that the fund balance will be a positive $14,937 at the end of 2011. Or, by assuming revenues increase by 4% and expenditures increase by 7%, the fund balance will be a negative $146,066 at the end of 2010. Any other combination of changes can be examined in the same way.


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