Chapter 16 IMSM

7/16/2019 Chapter 16 IMSM

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CHAPTER 16ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS,

PART I

Chapter Outline

I. State and local government units produce two complete and distinct sets of financialstatements which are presented together in a comprehensive annual financial report.

A. User needs for governmental financial information are so diverse that the GASBrequires two sets of statements to be prepared. The fund-based statements are morefor the citizens whereas the government-wide statements are more for investors, suchas bondholders.

B. Fund-based financial statements are designed primarily to present information aboutthe General Fund and other major activities. This approach stresses fiscalaccountability 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 andemphasizes 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 reportedin the fiduciary funds, they are excluded from the government-wide financialstatements.

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 mainemphasis.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 isassessed.a. Enterprise fundsb. Internal service funds

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

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


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c. Pension trust fundsd. Agency funds

III. Governmental accounting has traditionally stressed establishing control over currentfinancial resources to ensure appropriate usage of the publics 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 thefund-based financial statements.

B. Financial commitments (such as contracts and purchase orders) are recorded asencumbrances.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 capitalasset and incurring an expense is reported as an expense. However, for the governmentalfunds, on the fund-based financial statements, the reduction of current financial resourcesthat results from the purchase of a capital asset, incurrence of an expense, or payment ofa long-term debt is reported as an expenditure. In this manner, the statements report theusage made of the money held by the government activity.

A. On the fund-based statements, supplies and prepaid items can be reported by eitherthe consumption method or the purchases method.

B. On the government-wide financial statements, the recording of the acquisition ofinfrastructure items such as bridges and sidewalks is required.

V. Governments often have nonexchange transactions where revenues such as taxes arereceived without a corresponding earning process. To guide the recognition of suchtransactions, four separate categories have been identified.

A. Derived tax revenues such as income taxes and sales taxes are recognized when theunderlying event occurs.

B. Imposed nonexchange transactions such as property taxes, fines, and penalties arerecognized when the resources are required to be used or in the first period when useis permitted.

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

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

VI. Governments often raise significant amounts of financial resources by issuing long-termbonds.

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

McGraw-Hill/ Irwin The McGraw-Hill Companies, Inc., 200916-2 Solutions Manual


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Learning Objectives

Having completed Chapter Sixteen of the textbook, Accounting for State and LocalGovernments (Part One), students should be able to fulfill each of the following learningobjectives:

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

2. Identify examples of the wide variety of users of government financial statements anddiscuss 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 withinthose classifications.

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

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

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

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

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

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

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

12. Describe the types of transfers that can occur within a government and indicate theappropriate 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 aremore arbitrary than substantive. To them, accounting is accounting and the specific type ofreporting 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 theseentities 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 essentialaccounting problems created by a governments unique perspective. The decision to build thisfacility virtually assures the government that it will incur significant cash outflows for years tocome. 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 faroutweigh any direct cash inflows. Hence, Mautzs question is it an asset or a liabilityis not



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easy to answer. Governmental accounting now solves this issue in a very unique way. In thefund-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 ofconstruction is still shown as an asset in the other set of statements.

Prior to class discussion, students can be required to read Mautzs entire article as additionalbackground information. In class, students can be encouraged to discuss whether showingthis high school in two such different ways is misleading or actually provides the informationneeded. Students should be asked their opinion as to the benefit of having two completelydifferent sets of financial statements. A quality, in-depth discussion can certainly result fromthe article described here.

Answers to Questions

1. User needs are often complex and contradictory. Specific procedures in the governmentalreporting 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 usersare broad and no single set of financial statements and principles can satisfy allexpectations. The satisfaction of diverse user needs is a constant focus of governmentalaccounting. This has lead to the dual-perspective model which leads to the production oftwo 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 forevaluating the governmental actions of raising and allocating resources. Elected andappointed officials have authority over the publics money. They should be heldaccountable for generating and using these resources wisely in meeting the publics 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 providinginformation about the government as a whole. Focusing on individual accountability forthe various government activities does not necessarily meet all user needs. Governmentreporting 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-widefinancial statements, thus meeting broader user needs.

4. Two financial statements make up the government-wide financial statements: TheStatement 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 ofRevenues, Expenditures, and Other Changes in Fund Balances for the governmentalfunds.

5. In fund-based accounting, governmental funds use the current resources measurementfocus 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 tobe paid out of these current assets. The modified accrual basis recognizes revenues when



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they become available and measurable and expenditures when they cause a reduction incurrent financial resources. Governments must disclose the length of time being used todetermine availability.

Proprietary and Fiduciary funds generally use the economic resources measurement focusand the accrual basis for the timing of revenue and expense recognition. The economic

resources measurement focus reports all assets (including capital and other noncurrentassets) as well as all liabilities (including long-term obligations).

6. Government-wide financial statements use the economic resources measurement focusand 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 itemsare expected to be used to meet the current period government spending needs. Thiscategory 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 bemade during the current period or within 60 days of the subsequent period. Disclosure isrequired 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 fallunder one of the other fund types.

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

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

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



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e. Permanent Funds account for assets contributed to the government by an externaldonor with the stipulation that the principal cannot be spent but any income can beused 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. Amotor pool, a centralized computer operation, or a print shop can be accounted for asInternal Service Funds if a user fee is charged and they only exist to serve the otherfunctions 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 largerinvestment 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 eithergovernmental activities or business-type activities. All governmental funds and mostinternal service funds appear in the governmental acitivities. All of the enterprise funds andany remaining internal service funds are lumped into the business-type activities. Fiduciaryfunds 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) allother 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 andfinancial intent, providing a financial plan for the period. The budget establishes spendinglimitations, which enhances financial planning and control. The adoption of the budget foreach activity anticipates the inflow of financing resources and sets approved expenditurelevels. Subsequently, comparisons can be drawn between actual and budgeted figures atany time during the fiscal period, thus evaluating performance.

16. Comparisons between the original budget, the final budget, and actual figures must bereported in the required supplemental information presented after the notes to the financialinformation in the comprehensive annual financial report. Alternatively, the informationcan be presented as a separate statement within the governments fund-based financialstatements.

17. An encumbrance is the recording of a purchase commitment (such as a contract or apurchase order). The encumbrance entry is recorded at the time the commitment is madeprior to incurring a liability. This recording supports the spending control emphasis of thefund-based financial statements. Reviewing the Expenditures account and theEncumbrances balance provides the total amount of current financial resources spent and



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committed. Thus, the chance of an over-commitment of resources is decreased. Theencumbrance is removed when this commitment becomes a legal liability. Until then, notransaction has taken place so encumbrances are not included in government-widefinancial 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 commitmentis disclosed.

19. Expenditures include outflows or reductions of net current financial resources from theacquisition of goods or services (or the payment of a long-term liability). Modified accrualaccounting recognizes these expenditures when a claim against the current financialresources is incurred that will be paid from resources that are available. Fund-basedaccounting for the governmental funds records expenditures instead of expenses andcapital 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 determineavailability.

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

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

22. Traditionally, the purchase method has been used for prepaid expenses and supplies. Thecost is recorded immediately as an expenditure when the liability is incurred or the moneyis 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 thenconsumed, they are recorded as expenditures matching them with the appropriate fiscalperiod.

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

23. The four classifications of nonexchange revenues that a state or local government canrecognize 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 occursand the tax is imposed.

b. Imposed nonexchange revenues. An assessment is imposed but no underlyingtransaction takes place. Examples include property taxes and fines or penalties that



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are levied. Revenues are recognized in the period when resources are required to beused or the first period that use is permitted.

c. Government-mandated nonexchange transactions. Monies are provided from onegovernment to another to help pay for legally required programs or actions. Examplesinclude grants from the federal government to a city that must only be used for amandated 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 aspecific purpose but without legally mandated requirements. Revenues are recognizedwhen all eligibility requirements have been met. An example would be money donatedto the city for the beautification of the local parks.

24. A receivable is not recorded for property taxes until the demand for money represents anenforceable legal claim, which is normally specified by state law. Many governmentsencourage the early payment of property taxes (by sending out bills early or by giving sometype of a cash discount). Thus, cash can actually be reported before the government evenrecords the initial receivable.

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

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

25. No revenues are recognized in either set of financial statements because the proceeds ofbonds 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 aconstruction project, this entry is recorded in the Capital Project Fund. Payments of bothinterest and debt are then recorded when they become due, becoming a claim on currentfinancial resources. An Expenditure account is recognized for the debt and relatedinterest and is usually shown in the Debt Service Fund.

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

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

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



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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 financialstatements 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 Fundwhile cash collected from citizens is recorded as revenue.

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

The recipient records this transfer as an Other Financing Source and the party makingthe 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 atransfer in.

28. Intra-activity transactions occur totally within the governmental activities or totally within thebusiness-type activities so that no net effect is created. Therefore, these transfers are notreported on government-wide financial statements.

Interactivity transactions occur between a governmental activity and a business-typeactivity so that they affect the balances in each. Consequently, they are reported in bothcolumns on the government-wide financial statements but are then offset in the totalcolumn.

29. An internal exchange transaction is a transfer within the government that is recorded as ifthe transaction had actually occurred with an outside party. Such transactions occurbetween one of the governments activities and an internal service or enterprise fund andare normally to pay for work or services being rendered. These exchanges are reported asrevenues and as either expenditures or expenses. An example would be a payment froma police department to the citys motor pool for vehicle maintenance. This exchange wouldbe included by both departments in the fund-based financial statements as if it were atransaction with an outside party. On government-wide financial statements, any suchtransactions between a government activity and a related internal service fund would beconsidered an intra-activity transaction because both fund types are classified asgovernment activities and, therefore, there would be no impact on overall figures.



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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



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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 SourcesBond Proceeds 400,000

Appropriations Control............................................. 900,000Appropriations-Other Financing UsesOperating

Transfers Out........................................................ 300,000

(Budgetary) Fund Balance........................................ 200,000

End of Year-Removal of budgetGENERAL FUND

Appropriations Control............................................. 900,000Appropriations-Other Financing UsesOperating

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

Estimated Revenues Control.............................. 1,000,000Estimated Other Financing SourcesBond 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 andcash has been reduced by the same amount.

FUND-BASED FINANCIAL STATEMENTSGENERAL FUNDEncumbrances Control 88,000

Fund BalanceReserved for Encumbrances 88,000



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Fund BalanceReserved 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 fundbalance, an expenditure of $89,400 will be shown. Cash will also decreaseby that amount.

31. GOVERNMENT-WIDE FINANCIAL STATEMENTSGOVERNMENT ACTIVITIES (Intra-activity transfer from the General Fund tothe Capital Projects Fund is not reported)Issuance of Bonds

Cash 1,800,000Bonds Payable 1,800,000

Completion of ConstructionBuildings 1,890,000

Cash 1,890,000

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

FUND-BASED FINANCIAL STATEMENTS

To Record TransferGENERAL FUNDOther Financing UsesTransfers Out 90,000

Cash 90,000

CAPITAL PROJECTS FUNDCash 90,000

Other Financing SourcesTransfers In 90,000

Sale of BondsCash 1,800,000

Other Financing SourcesBond Proceeds 1,800,000

Completion of ConstructionExpenditures 1,890,000

Cash 1,890,000



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On the statement of revenues, expenditures, and other changes in fundbalance, the General Fund will report an other financing uses transfer outof $90,000. On its balance sheet, it will report $90,000 less cash. For thecapital projects fund, there will be an expenditure of $1,890,000 and twoother financing sources: $90,000 as a transfer-in and $1.8 million frombond 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 witha transfer to the Capital Projects Fund)

CashOther Financing SourcesBond Proceeds

c. General FundEncumbrances

Fund BalanceReserved for Encumbrances

d. General FundFund BalanceReserved for Encumbrances

Encumbrances

Expenditures ControlVouchers Payable

e. General FundVouchers Payable

Cash

f. General FundOther Financing UsesTransfers OutCapital Projects

Due to Capital Projects Fund (Special Assessment)

Capital Projects FundDue from General Fund

Other Financing SourcesTransfers InGeneral Fund

g. General FundOther Financing UsesTransfers OutMotor Pool

Cash

Internal Service Fund



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CashContributed Capital

h. General FundPropertyTaxes Receivable

RevenuesProperty TaxesAllowance for Uncollectible Taxes

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

Special Revenue FundCash

Deferred Revenue

j. ExpendituresSalariesCash

Deferred RevenueRevenuesGrant

GOVERNMENT-WIDE FINANCIAL STATEMENTS

a. No entry

b. Governmental ActivitiesCash

Bonds Payable

c. No entry

d. Governmental ActivitiesEquipment

Vouchers Payablee. Governmental Activities

Vouchers PayableCash

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

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

h. Governmental ActivitiesPropertyTaxes Receivable

RevenuesProperty TaxesAllowance for Uncollectible Taxes



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i. Governmental ActivitiesCash

Deferred Revenues

j. Governmental ActivitiesExpensePublic Safety

Cash

Deferred RevenueRevenue

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 SourcesBonds Proceeds 11,000,000

d. General FundOther Financing UsesTransfers Out

Swimming Pool 140,000Cash 140,000

e. General FundFund BalanceReserved for Encumbrances 94,000

Encumbrances Control 94,000

Expenditures 96,000Vouchers Payable 96,000

f. General FundOther Financing UsesTransfers Out 32,000

Cash 32,000

Capital Projects FundCash 32,000


g. Special Revenue Fund



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Cash 30,000Deferred 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

Bonds Payable 11,000,000

Governmental Activitiesd. Transfers OutSwimming Pool 140,000

Cash 140,000

Business Type ActivitiesCash 140,000

Transfers InGeneral Fund 140,000

e. Governmental ActivitiesEquipmentTrucks 96,000

Vouchers or Accounts Payable 96,000

f. No entry intra-activity transfer

g. Governmental ActivitiesCash 30,000

Deferred Revenues 30,000

h. Governmental ActivitiesExpensePublic Service 5,000

Cash 5,000

Deferred Revenues 5,000Revenues 5,000

34. FUND-BASED FINANCIAL STATEMENTS



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

Cash 900,000Other Financing SourcesBonds Proceeds 900,000

b. Capital Projects Fund (this entry depends on whether encumbrances arebeing recorded in the governments Capital Projects Fund.)

Encumbrances 1,100,000Fund BalanceReserved For Encumbrances 1,100,000

c. General FundOther Financing UsesTransfers Out 130,000

Cash 130,000

Debt Service FundCash 130,000


d. General FundFund BalanceReserved for Encumbrances 11,800

Encumbrances 11,800

Expenditures ControlMachinery 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)



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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



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35. a. As the Appropriations account balance in the General Fund shows atotal of $171,000, that amount of money has been authorized forexpenditure during this fiscal period. Thus, only that total can beexpended or committed. To date, a total of $119,000 has been spent orcommitted ($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 financialresources and their inflows and outflows. Therefore, the CapitalProjects Fund records expenditures made in relation to the acquisitionand construction of fixed assets. Capital assets are recorded directlyin government-wide financial statements.

c. The Appropriations balance represents the amount that governmentofficials have authorized to be spent on a particular constructionproject.

d. To alert readers to the commitment that remains outstanding, a year-end reclassification is made to reduce the Fund BalanceUnreserved,Undesignated in order to report a Fund Balance-Reserved forEncumbrances.

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

f. Two possible reasons can be put forth for the $150,000 Other FinancingSources balance. First, a bond may have been sold. Since the debtitself is not recorded in the fund-based financial statements, thegovernmental fund must record the receipt by means of an OtherFinancing Sources designation. Second, the $150,000 may have comefrom a transfer (most likely from the General Fund). An operatingtransfer is not considered revenue by the recipient and, therefore, theinflow of current financial resources is recorded as an Other FinancingSource.

g. The Debt Service Fund is utilized to accumulate money to pay off theprincipal and interest of any long-term liability incurred by thegovernmental funds. The debt itself is maintained in the government-wide financial statements. Payment of the debt and interest is madefrom the Debt Service Fund and those payments are recorded asexpenditures.



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

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

j. Budgetary entries are optional for Debt Service Funds but are rarelyused. Expenditure levels (for principal and interest) are setcontractually by the debt indenture. Thus, additional financial control isnot 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 BudgetaryFund Balance account.

b. Initially, all of the school supplies are recorded in an asset accountsuch as Inventory of Supplies. As the supplies are used, the cost isreclassified into an Expenditures account. On the balance sheet, aportion of the Fund Balance figure should be separated and reported asbeing reserved for Inventory of Supplies to show that this amount ofassets is available to be spent.

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

d. FUND-BASED FINANCIAL STATEMENTSGeneral FundFund BalanceReserved for Encumbrances 111,000

Encumbrances 111,000



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Expenditures Control 120,000Vouchers Payable 120,000

e. General FundOther Financing UsesTransfers 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 GeneralFund

with the money then transferred to the Capital Projects Fund)Cash 300,000

Other Financing Sources 300,000



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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 areusually optional but are more likely to be made when budgetary entries arebeing used)

Encumbrances Control 8,000,000Fund BalanceReserved for Encumbrances 8,000,000

c. Capital Projects FundCash 8,000,000

Other Financing Sources Control 8,000,000

d. Capital Projects FundFund BalanceReserved 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 1,000,000Cash 1,000,000

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

f. Debt Service FundExpenditures ControlBonds 900,000Expenditures ControlInterest 100,000

Cash 1,000,000

g. General FundProperty Taxes Receivable 800,000

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



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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 ActivitiesCash 8,000,000

Bonds Payable 8,000,000

d. Governmental ActivitiesBuildings 8,000,000

Cash 8,000,000

e. No entry

f. Governmental ActivitiesBonds 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 isreported as an Enterprise Fund in which case it is recorded as abusiness-type activity.

Cash 120,000RevenuesReserved for Highway Maintenance 120,000



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37. (continued)

i. Government ActivitiesInvestments 300,000

RevenuesDonations 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 $ 230,000Other 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



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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 180,000

Contracts 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



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39. The most difficult aspect of this problem is gathering the information forboth the fund-based financial statements and the government-widefinancial 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 RevenuesProperty Taxes 400,000

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

Maintenance Expense 20,000Cash 270,000

Depreciation Expense 10,000Accumulated DepreciationEquipment 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 lastday of the year.

5Cash 3,000

Program RevenuesStudent Fees 3,000



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39. (continued)

Fund-based financial statements:

1Property Tax Receivable 80,000Cash 320,000

RevenuesProperty Taxes 370,000Deferred Revenues 30,000

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

2ExpendituresSalaries 100,000ExpendituresRent 70,000ExpendituresEquipment 50,000

ExpendituresLand 30,000ExpendituresMaintenance 20,000

Cash 270,000

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

4ExpendituresComputer 4,000


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

5Cash 3,000

RevenuesStudent Fees 3,000



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39. (continued)

Part aGOVERNMENT-WIDE FINANCIAL STATEMENTS

STATEMENT OF ACTIVITIESFor the Year Ended December 31, 2008

GovernmentalActivities

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

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

Ending Net Assets $ 203,000

STATEMENT OF NET ASSETSDecember 31, 2008

GovernmentalActivities

AssetsCash $53,000Property Tax Receivable 80,000Computers 8,000Building 200,000

Equipment $ 50,000Less: Accumulated Depreciation (10,000) 40,000Land 30,000


LiabilitiesVouchers Payable $ 8,000Long-Term Liabilities 200,000 $208,000

Net AssetsInvested in capital assets, net of debt $ 78,000Unrestricted 125,000 $203,000



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39. (continued)

Part bFUND-BASED FINANCIAL STATEMENTS

STATEMENT OF REVENUES, EXPENDITURESAND CHANGES IN FUND BALANCE

For the Year Ended December 31, 2008

General FundRevenuesProperty Taxes $370,000Student Fees 3,000

Total Revenues $373,000

ExpendituresSalaries $100,000

Rent 70,000Equipment 50,000Land 30,000Maintenance 20,000Computer 4,000

Total Expenditures $274,000

Change in Fund Balance $ 99,000

Fund BalanceBeginning of Year - 0 -

Fund BalanceEnd of Year $ 99,000

BALANCE SHEETDecember 31, 2008

General FundAssetsCash $ 53,000Property Tax Receivable 80,000


LiabilitiesVoucher Payable $ 4,000Deferred Revenue 30,000

Total Liabilities $ 34,000Fund BalanceUnreserved $ 99,000

Total Liabilities and Fund Balance $133,000



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

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

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

RevenuesProperty Taxes 750,000Deferred Revenues 50,000

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

b.

ExpendituresPolice Cars 200,000Cash 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-basedfinancial statements are being produced for the General Fund.

c.

Other Financing UsesTransfers Out 90,000Cash 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 SourcesBond Proceeds 200,000

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

e.Encumbrances 40,000


f.ExpendituresSalaries 40,000

Cash 30,000



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Salary Payable 10,000

g.Fund BalanceReserved forEncumbrances 40,000

Encumbrances 40,000

ExpendituresComputer 41,000Vouchers Payable 41,000

h.ExpendituresSupplies 10,000

Cash 10,000

i.Supplies 2,000

Fund BalanceReserved for Supplies 2,000



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FUND-BASED FINANCIAL STATEMENTS

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

General FundRevenuesProperty Taxes $750,000

Total Revenues $750,000

ExpendituresPolice cars $200,000Salaries 40,000Computer 41,000

Supplies 10,000Total 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 BalanceBeginning of Year 180,000

Fund BalanceEnd of Year $749,000

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

Here the journal entries are prepared based on the need to creategovernment-wide financial statements for the General Fund (agovernmental activity).

a.Cash 700,000



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Property Taxes Receivable 100,000Property 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 thegovernmental activities.

d.Cash 200,000

Bonds Payable 200,000

Interest Expense 10,000Interest Payable 10,000

e.No entrythis 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 STATEMENTSCITY OF LOST ANGEL



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STATEMENT OF NET ASSETSDecember 31, 2008 Governmental

ActivitiesAssetsCash $840,000Property Tax Receivable 100,000Supplies 2,000Computers $ 41,000

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

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

Total Assets $1,168,900

LiabilitiesVouchers Payable $41,000

Salary Payable 10,000Interest Payable 10,000Bonds Payable 200,000 261,000

Net AssetsInvested in capital assets, net of debt $226,900Unrestricted 681,000 $907,900

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

42.A. TrueThe initial approval of spending was $380,000 and that amount

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

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

C. TruePrior to GASB 34, only the final budget and the actual figures forthe period were reported. That was considered somewhat misleadingsince the budget could be revised near the end of the year to establishagreement. GASB 34 required the original budget also to be disclosed.

D. FalseA Budgetary Fund Balance account does have to be set up aspart of the budget entry to indicate that a surplus (or deficit) isanticipated. However, an expected surplus requires a credit to the



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Budgetary Fund Balance rather than a debit.

E. FalseBudgetary information only relates to fund-based financialstatements and has no impact on the government-wide financialstatements.

43. A. FalseRevenue should be recognized when all eligibility requirementshave been met. Here, the eligibility requirements, if any, could havebeen met during 2008. It is likely that the eligibility requirements havenot been met but that is not necessarily the case.

B. FalseIf there are no eligibility requirements, the revenue should berecognized immediately in December 2008 when the award is made.

C. FalseA grant is a government-mandated nonexchange transactionwhen the award was made to help the recipient government meet legalrequirements. That is not specified here. However, if the state

government had passed a law that all school children had to receive hotlunches and had then furnished this grant to help meet thatrequirement, it would have been a government-mandated nonexchangetransaction.

D. TrueThe cash is recognized because it had been received but norevenue can be reported because all eligibility requirements have notyet been met. Thus, a deferred revenue should be established for theamount received.

E. FalseRevenue 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 notchange. Both assets (cash) and liabilities (bonds payable) go up by thesame $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 notchange. One asset (truck) goes up while a second asset (cash) goesdown.

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



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Government-wide financial statements the net asset balance does notchange. This is an internal exchange transaction within thegovernmental activities so that no net change is created.

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

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

e. Fund-based financial statements the fund balance is not affected. Themoney is not recognized as a revenue until all eligibility requirementshave 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 notchange. The accounting is the same as explained for the fund-basedfinancial statements.

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

Government-wide financial statements the net asset balance goes upby $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 morethan the appropriated amount, that has no impact on the fund balance.

Government-wide financial statements a purchase order or othercommitment 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 removecurrent financial resources.

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



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45.

A. FalseA transfer out will be shown by the governmental activities and atransfer in will be reported by the business-type activities. Those twofigures will be netted together so that no overall impact is shown in thetotal column for the government. However, both figures do appear intheir own separate columns.

B. TrueBecause only governmental activities are involved, the transfercreates no difference in the overall total. This is an intra-activitytransfer.

C. TrueThe General Fund reports the resource outflow as an otherfinancing use. The resources were reduced but it was not for anexpenditure.

D. FalseThe General Fund will report the transfer out as an other

financing use and the column for "all other funds" will show thetransfer-in as an other financing source.

E. FalseThe General Fund does not report expenses in the fund-basedfinancial statements but rather expenditures.



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46. A. Correct change is $40,000 increaseAccording to the preliminaryinformation, the Capital Projects Fund reported an increase in its fundbalance for the year of $40,000. In arriving at those figures, a $10,000revenue and the related expenditure were recorded in that fund for thissidewalk construction. Because the government had no obligation,these cash flows should actually have all been reported in the AgencyFund. The auditing firm should remove both the revenue of $ 10,000 andthe expenditures of $10,000 from the Capital Projects Fund. Becausethey are of the same amount but have an opposite effect on currentfinancial resources, this removal leaves the overall change in the fundbalance at $40,000.

B. Correct change is $140,000 increaseAccording to the preliminaryinformation, the overall change in the net assets of the city on thegovernment-wide financial statements was a $150,000 increase. Here, arevenue of $10,000 was reported within the government-wide

statements. However, because the city had no obligation, that revenueshould have been in an Agency Fund. Removing this revenue (and theasset that was recorded at the same time) reduces the net assetincrease for the city from $150,000 to $140,000.

47. Correct change is a $10,000 increaseAccording to the preliminaryinformation, the General Fund reported an increase in its fund balance forthe year of $30,000. However, this particular $20,000 should have beenreported as a debt since it is due in 60 days rather than as an otherfinancing 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 increaseAccording to the preliminaryinformation, the General Fund reported an increase in its fund balanceduring the year of $30,000. However, the $9,000 revenue and $45,000 inexpenditures were erroneously recorded in that fund. Together, thosetransactions had caused the fund to go down by a net of $36,000.Removing them (to record them within an enterprise fund) will removethis $36,000 reduction from the General Fund and cause the increase inthe fund balance to rise from $30,000 to $66,000.



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

C. Correct change is a $54,000 increaseAccording to the preliminaryinformation, the overall change in the net assets of the Enterprise Fundon 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 $6,000net reduction that drops the positive change from $60,000 to $54,000.

49. A. Correct change is a $42,000 increaseAccording to the preliminaryinformation, the overall change in the net assets of the city on thegovernment-wide financial statements was a $150,000 increase. Thegovernment, though, has recognized a revenue for the amount receivedin the current period. The amount received should have been $300,000times 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 decreaseAccording to the preliminaryinformation, the General Fund reported an increase in its fund balancefor the year of $30,000. The government, though, had recognized arevenue for the amount of cash received. The amount received shouldhave been $300,000 times 40% or $120,000. However, the discountreduces that figure by $12,000 to $108,000. That money cannot be spentuntil 2009 and, so, must be reported in 2008 as a deferred revenue andnot as a revenue. Removing this $108,000 revenue reduces the overallchange in net assets from an increase of $30,000 to a decrease of$78,000.



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50. A. Correct change is a $42,000 increaseAccording to the preliminaryinformation, the overall change in the net assets of the city on thegovernment-wide financial statements was a $150,000 increase.However, as shown above in 49 (part A), $108,000 was received thatshould have been recorded as a deferred revenue until the period whenit can be used (2009). Incorrectly, the city recorded the $108,000 as arevenue. When removed, the increase in net assets drops from $150,000to $42,000. Recognition (and the removal) of the receivable and thedeferred revenue cause no change in net assets since one is an assetand the other is a liability.

B. Correct change is a $78,000 decreaseAccording to the preliminaryinformation, the General Fund reported an increase in its fund balancefor the year of $30,000. However, as shown above, $108,000 wasreceived that should have been recorded as a deferred revenue until theperiod when it can be used (2009). The city incorrectly recorded the

$108,000 as a revenue. When removed, the increase in net assets dropsfrom an increase of $30,000 to a decrease of $78,000. Recognition of thereceivable and the deferred revenue cause no change in net assetssince one is an asset and the other a liability.

51. A. Correct change is $290,000 decreaseAccording to the preliminaryinformation, the General Fund reported an increase in its fund balancefor the year of $30,000. However, $320,000 was recognized here as arevenue although an eligibility requirement does remain (lowering airpollution by 25 percent). No revenue can be recognized until alleligibility requirements have been met. Changing the $320,000 from a

revenue to a deferred revenue reduces the $30,000 increase in the fundbalance to a $290,000 decrease.

B. Correct change is a $170,000 decreaseAccording to the preliminaryinformation, the change in net assets of the city on government-widefinancial statements was a $150,000 increase. However, $320,000 wasrecognized as a revenue although an eligibility requirement remains(lowering air pollution by 25 percent). No revenue can be recognizeduntil that time. Changing $320,000 from a revenue to a deferred revenuereduces the $150,000 increase in the fund balance to a $170,000decrease. Depreciation of the machine is being handled properly.

52. A. Correct change is a $150,000 increaseAccording to the preliminaryinformation, the overall change in the net assets of the city on thegovernment-wide financial statements was a $150,000 increase.Changing a revenue from a general revenue to a program revenue doesnot affect the overall change in net assets.

B. Correct amount of net expenses is $90,000According to thepreliminary information, the parks reported net expenses of $100,000.



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The net expense figure is computed as direct expenses less anyprogram revenues. The $10,000, though, should have been a programrevenue. If this revenue had been appropriately included, net expenseswould 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 withincomplex authoritative pronouncements. The subtle nuances of such rules canonly 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 isavailable and gain confidence by working directly with these pronouncements.Here, an issue has been raised in connection with the handling of several unusualtransactions. 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 withgovernment-wide financial statements "Reporting Contributions to Term andPermanent Endowments, Contributions to Permanent Fund Principal, Special andExtraordinary Items, and Transfers" is covered in paragraph 53. Apparently,additional information about "Special and Extraordinary Items" is to be found atparagraphs 55-56.

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

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

Paragraph 56 defines special items as "significant transactions or other eventswithin the control of management that are eitherunusual in nature orinfrequentin occurrence."

Paragraph 53 indicates that a number of balances, including special andextraordinary items, should be reported on the government-wide statement ofactivities "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 bereported at the bottom of the statement of activities to arrive at the all-inclusivechange in net assets for the period." Following that, in paragraph 54, anillustration is presented of a statement of activities that shows the handling ofspecial items (but not extraordinary items).

Paragraph 89 provides instruction on the handling of these two items within



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fund-based financial statements by first saying that the definitions are the samehere 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 twoaccounts 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 ofauthoritative information about a topic in order to become proficient at readingand understanding the material provided.

Research Case 2

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

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

2. Examples of program revenues are then given that include:

Revenue collected for garbage collection. Building permits. A state grant for the sheriffs 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



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

4. Taxes are included in this category as well as any other revenues of thegovernment 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 independentauditor's report is enlarged based on Government Auditing Standards (issuedby the Comptroller General of the United States) from that of a for-profitcompany as it also mentions reports that are available about the government'sinternal control procedures as well as its compliance with laws and

regulations. This information could be provided in the audit report or, asmentioned here, through separate reports.

2) A number of items are shown in order to reconcile the net changes in fundbalances for the governmental funds and the changes in net assets. Thesetypically 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 financial

statements

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

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

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

5) The General Fund should only shows current financial resources as itsassets: cash and investments, various receivables, and amounts due fromother funds. Although not financial resources, prepaid accounts andinventory are normally included

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

7) This question focuses on interperiod equity: Is the government spendingmore than it takes in so that future generations may have to suffer or is the



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government taking in more than it spends so future generations will have thebenefit of an inherited surplus.

Analysis Case 2

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

At the time of this writing, five items are listed under the Exposure Draftsheading on the GASB website. Three are Exposure Drafts: Accounting andFinancial Reporting for Intangible Assets, Pension Disclosures, and Elements of

Financial Statements. One (titled Fund Balance Reporting and GovernmentalFund Type Definitions) is a Invitation to Comment and another (titled Accountingand Financial Reporting for Derivatives) is a Preliminary Views document.

Students can download any of these documents and read them as a way to helpthem understand the evolutionary nature of financial accounting. For example,the Exposure Draft on Accounting and Financial Reporting for Intangible Assetsis only 38 pages long and discusses six specific issues that students should becapable 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 thatare established.

To a student, such readings can seem tedious and difficultat least initially.However, any person who is involved actively in the financial reporting of a stateor local government is probably willing to expend much time and energy in orderto be aware of possible financial reporting changes and their consequences. It isimportant to remember, though, that all of these documents may eventually berejected outright, accepted, or may undergo either slight or radical revisions. Apreliminary views document, an exposure draft, and a invitation to comment areboth signs that an authoritative pronouncement is under serious considerationbut, over the decades, many proposals have gotten to each these levels withoutthe Board's being able to reach sufficient consensus to establish an authoritativeprinciple.

Communication Case 1



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Most accountants and accounting students understand that the GASB setsofficial standards for the accounting and financial reporting to be carried out bystate and local government organizations. However, probably only a very smallportion of either of these groups truly knows what the established mission of theGASB actually is.

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

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

Given the extensive (some would say "radical") changes created by the GASB inrequiring both fund-based financial statements and government-wide financial

statements, comparison of this impact with the above mission statement is aninteresting exercise. Clearly, the Board must have felt that the changes made,especially the addition of government-wide financial statements, did meet thegoal 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 reportingwas to help provide information to users that would provide them with ancompletely new perspective of the state or city.

However, whether this particular requirement will be successful in guiding andeducating "the public, including issuers, auditors, and users of those financialreports" 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 thejustification. However, whether that information could be construed as helping toguide and educate the public and other users might be difficult to establish.

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


Students do not always appreciate the amount of debate and compromise thatthe FASB and GASB must usually go through to arrive at an official accountingpronouncement. Because of their inexperience, students sometimes see thecreation 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 arenecessarily wrong.

http://www.gasb.org/http://www.gasb.org/


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In practice, though, many possible "right" ways usually exist as potentialsolutions to any accounting problem. Because of the public debate created bymany of these issues, the official bodies often receive numerousrecommendations whenever any new standard is discussed and proposed. TheBoard has to study each of these and then arrive at the one approach that bestfits in with the members' conceptual understanding of accounting and reporting.Furthermore, there are political ramifications to consider as the Board attemptsto arrive at a final solution that pacifies the qualms of all the various interestedparties.

However, the Board does help to explain its standards by presenting extensivebackground information. This assignment is designed to give students theopportunity of looking at some of the alternatives examined by the GASB prior toestablishing its Statement No. 34. The paragraphs assigned here present anumber of different approaches that were suggested by members of the publicand considered by the GASB. In all cases, individuals who had some interest ingovernment accounting felt that these alternatives were better solutions than the

dual system of government-wide financial statements and fund-based financialstatements mandated by GASB 34.

Many respondents preferred a single set of financial statements rather thanthe dual approach finally chosen. However, GASB found that there was noconsensus that any one set of statements was preferable or provided theneeded information by itself.

Others simply felt that no significant change was necessary in governmentaccounting and that the system in use at that time (very similar to thecurrent fund-based financial statements) was adequate. The GASB justifies

its decision to move away from the previous model by stating (inparagraph 245) that "some of the information that today's users needsurpasses the capabilities of the previous reporting model, particularly forgovernmental activities."

The suggestion was also made that the fund-based financial statements forgovernmental funds not be based on measuring and reporting currentfinancial resources. Rather, each government would use the basis ofaccounting utilized for budgetary purposes (such as a cash system or amodified cash system). The logic of this argument was that thesefund-based financial statements are created to provide control andfinancial accountability which is established by the budgetary process andshould, therefore, reconcile with the budget. GASB rejected this ideabecause the wide variety of possible budgetary methods would eliminateconsistency and comparability.

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



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Other suggestions encompassed trying to adapt the basis of accountingutilized for the governmental funds to be more useful to a wider array offinancial statement users. In other words, significant changes wererecommended for this portion of the fund-based financial statements.GASB indicated here that the Board felt that useful information was beingprovided by the previous model which focused on current financialresources and that such information should not be lost by the creation of anew model.


One of the truly significant additions to state and local governmentaccounting resulting from GASB 34 was the Managements Discussion andAnalysis. This written report is meant to be a discussion of the financialinformation being reported by the government in a verbal rather than a purelyquantita

Chapter 16 IMSM

Documents

governmental funds account

governmental activities

governmental accounting

fiduciary funds account

proprietary funds account

governmentwide statements

current financial resources

financial commitments