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18 - 1©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
An Introduction toAccounting for State and
Local Governmental Units
Chapter 18
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18 - 2©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 1
Learn about the historical
development of accounting
principles for state and local
governmental units.
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18 - 3©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
State and Local Governmental Units
With the exception of the federalgovernment, state and local
governmental units constitutethe largest single categoryof nonprofit organizations.
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18 - 4©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1951 – The Municipal Finance OfficersAssociation (MFOA) National Committee
on Governmental Accounting) issuedMunicipal Accounting and Auditing.
1968 – Governmental Accounting, Auditing,and Finance Reporting (GAAFR, or Blue Book,succeeded Municipal Accounting and Auditing.
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18 - 5©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1974 – The AICPA issued its industry auditguide, Audits of State and Local Governmental
Units, in which it noted that GAAFR’s accountingand reporting principles constituted GAAPexcept when modified by the audit guide.
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18 - 6©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1979 – The MFOA National Council onGovernmental Accounting issued
Governmental Accounting andFinancial Reporting Principles, Statement 1.
1980 – AICPA issued Statement of Position80-2 amending Audits of States and Local
Government Units to recognize the principlesof NCGA Statement 1 as GAAP.
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18 - 7©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
FinancialAccountingFoundation
GASBFASB
Historical Development
(1984)
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18 - 8©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Historical Development
1985 – Codification of Governmental Accountingand Financial Reporting Standards was issued.
It integrated all NCGA and AICPA and allsubsequent GASB pronouncements.
It is revised annually.
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18 - 9©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
GAAP Hierarchy for Stateand Local Governmental Entities
1. GASB Statements and Interpretations
2. GASB Technical Bulletins
3. Consensus positions of GASB’sEmerging Issues Task Force (EITF)
4. Implementation Guides
5. Other accounting literature
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18 - 10©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 2
Define fund accounting
and explain why it is used.
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18 - 11©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Fund Definition and Categories
A fund is a self-contained accounting entity.
It records its own assets, liabilities, revenues,expenditures, or expenses and fund balance.
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18 - 12©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Proprietary FundAccounting Model
CurrentAssets
+Noncurrent
Assets–
CurrentLiabilities
–NoncurrentLiabilities
=Net
Assets
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18 - 13©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Governmental FundAccounting Model
CurrentAssets
–Current
Liabilities=
FundBalance
Fund G Fund SRA = L + FB A = L + FB
General General Fund Long-Term Assets Debt
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18 - 14©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 3
Perform transaction analysis using
proprietary and governmental
accounting models.
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18 - 15©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
1. Incurred salary cost of $5,000.
2. Charges for services rendered, $2,500,were billed and collected immediately.
3. Borrowed $30,000 on a one-year, 6%note six months before year end.
4. Year-end accrual of interest on the note.
5. Borrowed $15,000 by issuing a three-year note.
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18 - 16©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
6. Purchased computer equipment costing $2,800 for cash.
7. Sold a truck for $1,000. It was originally purchasedthree years ago for $18,000, had an estimatedresidual value of $1,200, and is fully depreciated.
8. Computed depreciation on the computer equipmentfor the year, $875.
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18 - 17©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
Current assetsNoncurrent assetsCurrent liabilitiesNoncurrent liabilitiesNet assets
Current assets
Current liabilities
Fund Balance
No. 1
+5,000
–5,000
+5,000
–5,000
No. 2+2,500
+2,500
+2,500
+2,500
+30,000
+30,000
+30,000
+30,000
No. 3
+900
–900
+900
–900
No. 4Proprietary Fund
Government Fund
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18 - 18©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Models –Transaction Analysis
Current assetsNoncurrent assetsCurrent liabilitiesNoncurrent liabilitiesNet assets
Current assets
Current liabilities
Fund Balance
No. 5+15,000
+15,000
+15,000
–15,000
No. 6–2,800+2,800
–2,800
–2,800
+1,000–1,200
–200
+1,000
+1,000
No. 7
–875
–875
No. 8Proprietary Fund
Government Fund
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18 - 19©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 4
Recognize various fund categories,
as well as their measurement
focus and basis of accounting.
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18 - 20©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Proprietary Fund Types
Internal service funds
Enterprise funds
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18 - 21©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Governmental Fund Types
Specialrevenue funds
Permanentfunds
Capitalproject funds
Debtservice funds
Generalfund
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18 - 22©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Fiduciary (Trust and Agency)Fund Types
Pensiontrust funds
Investmenttrust funds
Private-purpose
trust funds
Agencyfunds
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18 - 23©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
1. Issued general obligation bonds, par value of$3,000,000, at 101 to finance constructionof a government office building.
2. Transferred the premium on the bonds tothe fund used to account for payment ofprincipal and interest on the bonds.
3. Incurred and paid construction costsof $12,500 on the building.
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18 - 24©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
4. Levied and collected sales taxes restrictedto use for economic development, $6,000.
5. Paid general government employees’salaries, $4,500. Another $500 of salariesaccrued but has not been paid.
6. Borrowed $7,500 on a six-month note tofinance general operating costsof the government.
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18 - 25©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Applying the Model UsingSpecific Funds
Current Current FundNo. Fund Assets Liabilities Balance1 Capital projects + 3,030,000 – 3,030,0002a Capital projects – 30,000 – 30,0002b Debt service + 30,000 + 30,0003 Capital projects – 12,500 – 12,5004 Special revenue + 6,000 + 6,0005 General – 4,500 + 500 – 5,0006 General + 7,500 + 7,500
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18 - 26©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Bases of Accounting
Accrual
ModifiedAccrual
Economic resourcesMeasuring focus
Measuring focus Flow of currentfinancial resources
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18 - 27©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
In June 1999, the GASB issuedGASB Statement No. 34,
“Basic Financial Statements andManagement’s Discussion and Analysis –
for State and Local Governments.”
The statement establishes standards forpreparing government-wide financial
statements and fund-level financial statements.
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18 - 28©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
Management’s discussion and analysisGovernment-wide financial statements
Statement of net assets (accrual basis)Statement of activities (accrual basis)
Fund financial statementsGovernmental funds
Statement of net assets (modified accrual basis)Statement of revenues, expenditures, and changes in fund balances (modified accrual basis)
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18 - 29©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Reporting
Fund financial statements (cont’d.)Proprietary funds
Statement of net assets (accrual basis)Statement of revenues, expenses, and changes in net assets (accrual basis)Statement of cash flows (accrual basis, direct method)
Fiduciary fundsStatement of net assets (accrual basis)Statement of changes in net assets (accrual basis)
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18 - 30©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 5
Review basic governmental
accounting principles.
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18 - 31©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Revenue Recognition
Revenue recognition within governmentalentities is determined by the nature of
the underlying transaction.
GASB Statement No. 33,“Accounting and Financial Reporting
for Nonexchange Transaction,”characterizes revenue transactions.
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18 - 32©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Government-mandatednonexchangetransactions
Voluntarynonexchangetransactions
Imposednonexchangetransactions
Derivedtax
revenues
Revenue Recognition
GASB Statement No. 33 established fourcategories of nonexchange transactions.
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18 - 33©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Expense and ExpenditureRecognition
Expenses reflect the cost of assetsor services used by an entity.
Expenditures typically reflect the useof governmental fund working capital.
Expenditures normally reflect the cost of goodsor services acquired during a period and the
maturing of general long-term debt principal.
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18 - 34©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Interfund Activity
Loans
Transfers
Reimbursements
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18 - 35©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Role of the Budget
2003 2004 2005 2006 2007
Capital Program
2003CapitalBudget
2003Operating
Budget
2003CurrentBudget
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18 - 36©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
The Financial Reporting Entity
GASB Statement No. 14, “The FinancialReporting Entity,” explains that the financial
reporting entity is made up of the primarygovernment and its component units.
Each state and general-purpose localgovernment is a primary government.
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18 - 37©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Primary Governments
Separately elected governing body
Legally separated
Fiscally independent
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18 - 38©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Component Units
These are legally separate organizationsfor which the primary government
is financially accountable.
BlendingDiscrete
Presentation
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18 - 39©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Learning Objective 6
Learn about the contents of
a governmental entity’s
comprehensive annual
financial report under
GASB 34.
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18 - 40©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Accountability
Operational accountability measures the extentof a government’s success at meeting operating
objectives efficiently and effectively and itsability to meet operating objectives in the future.
Fiscal accountability is the responsibility of agovernment to demonstrate compliance with
public decisions.
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18 - 41©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Prior to GASB 34
General purpose financial statementswere prepared using the appropriate
basis of accounting.
The combined balance sheet includedcolumns for each fund type.
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18 - 42©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Table of contents
Letter of transmittal
List of officers
Organizational chart
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18 - 43©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Management’s discussion and analysis
Auditor’s report
Government-wide financial statements
Fund financial statements
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18 - 44©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
CAFR Major Sections
Statistical tables
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18 - 45©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Section
Management’s discussion and analysis isrequired supplementary information (RSI)
that is presented before the financial statements.
The Board requires that MD&Aprecede the statements.
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18 - 46©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Financial Section
Governmental and proprietary fundsare consolidated and reported in a single
set of government-wide financial statements.
Statement ofnet assets
Statement ofnet assets
Statement ofactivities
Statement ofactivities
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18 - 47©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Statement of Net Assets
City of Davie Statement of Net AssetsDecember 31, 2003
Primary GovernmentGovernmental
ActivitiesBusinessActivities Total
Assets(Liabilities)Net Assets
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18 - 48©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Statement of Activities
Expenses Revenues Net FunctionsPrimaryGovernment
GovernmentalActivitiesFunction 1Function 2Business TypeActivitiesActivity 1
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18 - 49©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Fund Financial Statements
Governmental funds
Proprietary funds
Fiduciary funds
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18 - 50©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Generalfund
Each majorgovernmental
fund
Totalfunds
All nonmajorgovernmental
funds
Major Fund Reporting
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18 - 51©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Each majorenterprise
fund
All non-majorenterprise
funds
All internalservicefunds
Total
Major Fund Reporting
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18 - 52©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Conversion
Fund-basedstatement
Government-widestatements
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18 - 53©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Other Issues
Budgetary comparisons
Required supplemental information
Notes to the financial statements
Infrastructure
Combining and individual fund statements
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18 - 54©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
End of Chapter 18