Solution Manual for Accounting for Governmental and Nonprofit Entities, 15th edition
Solution Manual for Accounting for Governmental and Nonprofit Entities, 15th edition provides expert-verified solutions to help you study smarter.
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Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-1
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
1-1 Distinguishing between general purpose and
special purpose governments
Justify/Explain 1-3 revised
1-2 Distinguishing GNP accounting and reporting
standards from business entities
Contrast New
1-3 Standards-setting bodies Contrast 1-4 revised
1-4 Determining whether a not-for-profit
organization is governmental
Identify/Explain New
1-5 Conceptual basis for reporting Evaluate/Explain Revised
1-6 Types of accountability Contrast Revised
1-7 Measurement focus and basis of accounting Explain New
1-8 Distinguishing bases of accounting Explain New
1-9 Comprehensive annual financial report Describe 1-7
1-10 Service efforts and accomplishments Explain New
Cases:
1-1 Internet Case—FASB Internet/Written
report
New
1-2 Internet Case—GASB Internet/Written
report
New
1-3 Internet Case—FASAB Internet/Written
report
Revised
1-4 Research Case—Government or NFP entity? Written report Revised
Exercises/Problems:
1-1 Examine the CAFR Examine Revised
1-2 Various Multiple Choice Items 1 is
new; several
other items
revised
1-3 Reporting characteristics of government-wide
and fund financial statements
Matching Same
1-1
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
1-1 Distinguishing between general purpose and
special purpose governments
Justify/Explain 1-3 revised
1-2 Distinguishing GNP accounting and reporting
standards from business entities
Contrast New
1-3 Standards-setting bodies Contrast 1-4 revised
1-4 Determining whether a not-for-profit
organization is governmental
Identify/Explain New
1-5 Conceptual basis for reporting Evaluate/Explain Revised
1-6 Types of accountability Contrast Revised
1-7 Measurement focus and basis of accounting Explain New
1-8 Distinguishing bases of accounting Explain New
1-9 Comprehensive annual financial report Describe 1-7
1-10 Service efforts and accomplishments Explain New
Cases:
1-1 Internet Case—FASB Internet/Written
report
New
1-2 Internet Case—GASB Internet/Written
report
New
1-3 Internet Case—FASAB Internet/Written
report
Revised
1-4 Research Case—Government or NFP entity? Written report Revised
Exercises/Problems:
1-1 Examine the CAFR Examine Revised
1-2 Various Multiple Choice Items 1 is
new; several
other items
revised
1-3 Reporting characteristics of government-wide
and fund financial statements
Matching Same
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-1
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
1-1 Distinguishing between general purpose and
special purpose governments
Justify/Explain 1-3 revised
1-2 Distinguishing GNP accounting and reporting
standards from business entities
Contrast New
1-3 Standards-setting bodies Contrast 1-4 revised
1-4 Determining whether a not-for-profit
organization is governmental
Identify/Explain New
1-5 Conceptual basis for reporting Evaluate/Explain Revised
1-6 Types of accountability Contrast Revised
1-7 Measurement focus and basis of accounting Explain New
1-8 Distinguishing bases of accounting Explain New
1-9 Comprehensive annual financial report Describe 1-7
1-10 Service efforts and accomplishments Explain New
Cases:
1-1 Internet Case—FASB Internet/Written
report
New
1-2 Internet Case—GASB Internet/Written
report
New
1-3 Internet Case—FASAB Internet/Written
report
Revised
1-4 Research Case—Government or NFP entity? Written report Revised
Exercises/Problems:
1-1 Examine the CAFR Examine Revised
1-2 Various Multiple Choice Items 1 is
new; several
other items
revised
1-3 Reporting characteristics of government-wide
and fund financial statements
Matching Same
1-1
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
1-1 Distinguishing between general purpose and
special purpose governments
Justify/Explain 1-3 revised
1-2 Distinguishing GNP accounting and reporting
standards from business entities
Contrast New
1-3 Standards-setting bodies Contrast 1-4 revised
1-4 Determining whether a not-for-profit
organization is governmental
Identify/Explain New
1-5 Conceptual basis for reporting Evaluate/Explain Revised
1-6 Types of accountability Contrast Revised
1-7 Measurement focus and basis of accounting Explain New
1-8 Distinguishing bases of accounting Explain New
1-9 Comprehensive annual financial report Describe 1-7
1-10 Service efforts and accomplishments Explain New
Cases:
1-1 Internet Case—FASB Internet/Written
report
New
1-2 Internet Case—GASB Internet/Written
report
New
1-3 Internet Case—FASAB Internet/Written
report
Revised
1-4 Research Case—Government or NFP entity? Written report Revised
Exercises/Problems:
1-1 Examine the CAFR Examine Revised
1-2 Various Multiple Choice Items 1 is
new; several
other items
revised
1-3 Reporting characteristics of government-wide
and fund financial statements
Matching Same
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-2
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
Answers to Questions
1-1. General purpose governments differ from special purpose governments primarily in terms
of the scope of their legal powers and the range of services provided. General purpose
governments typically have much more power over citizens and provide a much greater
range of services than do special purpose governments. Examples of general purpose
governments include states, counties, townships, cities, and villages. Special purpose
governments typically include such special districts as those for police and fire
protection, sanitation, and water, and organizations such as school districts and public
colleges and universities.
1-2. Disagree. As discussed in this chapter, government and not-for-profit organizations serve
different functions in society than do business organizations. Not surprising, then, the
objectives of financial reporting for these organizations, as shown in Illustration 1-2, are
quite different from the objectives of business reporting. The most striking difference is
the need for government and not-for-profit organizations to report on accountability, in
addition to financial performance. The different functions served and different reporting
objectives lead to different accounting and reporting practices.
1-3. Illustration 1-1 depicts the standard-setting jurisdiction of the FASB, GASB and FASAB.
As shown, the FASB has responsibility for setting accounting and financial reporting
standards for business enterprises and nongovernmental not-for-profit organizations. The
GASB has responsibility for setting standards for state and local governments and
governmental not-for-profit organizations. The FASAB has responsibility for setting
accounting and reporting standards for federal agencies and departments.
1-4. One should apply the criteria discussed in the section headed Determining Whether a
Not-for-Profit Organization is Governmental. Essentially if an organization is a public
corporation or body corporate and politic or has certain government-like characteristics
described in this section, then it should be treated as a governmental organization and
GASB standards should be followed. Otherwise, one would follow FASB standards.
1-5. Interperiod equity, whether current period revenues were sufficient to pay for current
period services, is an important component of accountability. But, as noted in Chapter 1,
accountability is the cornerstone of governmental financial reporting and is a broader
concept than interperiod equity. See, for example, the discussion of fiscal and
operational accountability in the answer to Question 1-6.
1-6. Disagree. The statement is incomplete. While it is true that GASB standards assist in
assessing operational accountability of business-type activities, those standards assist in
assessing both fiscal accountability and operational accountability of governmental
activities. Specifically, governmental fund reporting standards promote fiscal
1-2
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
Answers to Questions
1-1. General purpose governments differ from special purpose governments primarily in terms
of the scope of their legal powers and the range of services provided. General purpose
governments typically have much more power over citizens and provide a much greater
range of services than do special purpose governments. Examples of general purpose
governments include states, counties, townships, cities, and villages. Special purpose
governments typically include such special districts as those for police and fire
protection, sanitation, and water, and organizations such as school districts and public
colleges and universities.
1-2. Disagree. As discussed in this chapter, government and not-for-profit organizations serve
different functions in society than do business organizations. Not surprising, then, the
objectives of financial reporting for these organizations, as shown in Illustration 1-2, are
quite different from the objectives of business reporting. The most striking difference is
the need for government and not-for-profit organizations to report on accountability, in
addition to financial performance. The different functions served and different reporting
objectives lead to different accounting and reporting practices.
1-3. Illustration 1-1 depicts the standard-setting jurisdiction of the FASB, GASB and FASAB.
As shown, the FASB has responsibility for setting accounting and financial reporting
standards for business enterprises and nongovernmental not-for-profit organizations. The
GASB has responsibility for setting standards for state and local governments and
governmental not-for-profit organizations. The FASAB has responsibility for setting
accounting and reporting standards for federal agencies and departments.
1-4. One should apply the criteria discussed in the section headed Determining Whether a
Not-for-Profit Organization is Governmental. Essentially if an organization is a public
corporation or body corporate and politic or has certain government-like characteristics
described in this section, then it should be treated as a governmental organization and
GASB standards should be followed. Otherwise, one would follow FASB standards.
1-5. Interperiod equity, whether current period revenues were sufficient to pay for current
period services, is an important component of accountability. But, as noted in Chapter 1,
accountability is the cornerstone of governmental financial reporting and is a broader
concept than interperiod equity. See, for example, the discussion of fiscal and
operational accountability in the answer to Question 1-6.
1-6. Disagree. The statement is incomplete. While it is true that GASB standards assist in
assessing operational accountability of business-type activities, those standards assist in
assessing both fiscal accountability and operational accountability of governmental
activities. Specifically, governmental fund reporting standards promote fiscal
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-2
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
Answers to Questions
1-1. General purpose governments differ from special purpose governments primarily in terms
of the scope of their legal powers and the range of services provided. General purpose
governments typically have much more power over citizens and provide a much greater
range of services than do special purpose governments. Examples of general purpose
governments include states, counties, townships, cities, and villages. Special purpose
governments typically include such special districts as those for police and fire
protection, sanitation, and water, and organizations such as school districts and public
colleges and universities.
1-2. Disagree. As discussed in this chapter, government and not-for-profit organizations serve
different functions in society than do business organizations. Not surprising, then, the
objectives of financial reporting for these organizations, as shown in Illustration 1-2, are
quite different from the objectives of business reporting. The most striking difference is
the need for government and not-for-profit organizations to report on accountability, in
addition to financial performance. The different functions served and different reporting
objectives lead to different accounting and reporting practices.
1-3. Illustration 1-1 depicts the standard-setting jurisdiction of the FASB, GASB and FASAB.
As shown, the FASB has responsibility for setting accounting and financial reporting
standards for business enterprises and nongovernmental not-for-profit organizations. The
GASB has responsibility for setting standards for state and local governments and
governmental not-for-profit organizations. The FASAB has responsibility for setting
accounting and reporting standards for federal agencies and departments.
1-4. One should apply the criteria discussed in the section headed Determining Whether a
Not-for-Profit Organization is Governmental. Essentially if an organization is a public
corporation or body corporate and politic or has certain government-like characteristics
described in this section, then it should be treated as a governmental organization and
GASB standards should be followed. Otherwise, one would follow FASB standards.
1-5. Interperiod equity, whether current period revenues were sufficient to pay for current
period services, is an important component of accountability. But, as noted in Chapter 1,
accountability is the cornerstone of governmental financial reporting and is a broader
concept than interperiod equity. See, for example, the discussion of fiscal and
operational accountability in the answer to Question 1-6.
1-6. Disagree. The statement is incomplete. While it is true that GASB standards assist in
assessing operational accountability of business-type activities, those standards assist in
assessing both fiscal accountability and operational accountability of governmental
activities. Specifically, governmental fund reporting standards promote fiscal
1-2
CHAPTER 1: INTRODUCTION TO ACCOUNTING AND FINANCIAL
REPORTING FOR GOVERNMENTAL AND NOT-FOR-
PROFIT ENTITIES
Answers to Questions
1-1. General purpose governments differ from special purpose governments primarily in terms
of the scope of their legal powers and the range of services provided. General purpose
governments typically have much more power over citizens and provide a much greater
range of services than do special purpose governments. Examples of general purpose
governments include states, counties, townships, cities, and villages. Special purpose
governments typically include such special districts as those for police and fire
protection, sanitation, and water, and organizations such as school districts and public
colleges and universities.
1-2. Disagree. As discussed in this chapter, government and not-for-profit organizations serve
different functions in society than do business organizations. Not surprising, then, the
objectives of financial reporting for these organizations, as shown in Illustration 1-2, are
quite different from the objectives of business reporting. The most striking difference is
the need for government and not-for-profit organizations to report on accountability, in
addition to financial performance. The different functions served and different reporting
objectives lead to different accounting and reporting practices.
1-3. Illustration 1-1 depicts the standard-setting jurisdiction of the FASB, GASB and FASAB.
As shown, the FASB has responsibility for setting accounting and financial reporting
standards for business enterprises and nongovernmental not-for-profit organizations. The
GASB has responsibility for setting standards for state and local governments and
governmental not-for-profit organizations. The FASAB has responsibility for setting
accounting and reporting standards for federal agencies and departments.
1-4. One should apply the criteria discussed in the section headed Determining Whether a
Not-for-Profit Organization is Governmental. Essentially if an organization is a public
corporation or body corporate and politic or has certain government-like characteristics
described in this section, then it should be treated as a governmental organization and
GASB standards should be followed. Otherwise, one would follow FASB standards.
1-5. Interperiod equity, whether current period revenues were sufficient to pay for current
period services, is an important component of accountability. But, as noted in Chapter 1,
accountability is the cornerstone of governmental financial reporting and is a broader
concept than interperiod equity. See, for example, the discussion of fiscal and
operational accountability in the answer to Question 1-6.
1-6. Disagree. The statement is incomplete. While it is true that GASB standards assist in
assessing operational accountability of business-type activities, those standards assist in
assessing both fiscal accountability and operational accountability of governmental
activities. Specifically, governmental fund reporting standards promote fiscal
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-3
Ch. 1, Answers, Question 1-6 (Cont’d)
accountability reporting by helping elected officials demonstrate that they have complied
with spending restrictions related to the legally approved budget. Government-wide
reporting standards for governmental activities help officials report on operational
accountability—whether the government’s resources were utilized efficiently and
effectively in meeting operating objectives.
1-7. Financial information related to governmental activities is reported in two different ways
to meet two different reporting objectives. The government-wide financial statements are
intended to report on the government’s operational accountability and therefore
governmental activities are reported in those statements using accrual accounting with an
economic resources measurement focus—similar to commercial accounting. In the
governmental fund financial statements, the reporting objective is fiscal accountability,
leading to the use of modified accrual and a focus on the flow of current financial
resources. As a result, the same underlying transactions result in different amounts being
reported in the government-wide and governmental fund financial statements. These
differences must be reconciled so that readers can understand how the statements relate to
each other.
1-8. Modified accrual accounting is used for preparing governmental fund financial
statements since those statements focus on the flow of current (i.e., expendable) financial
resources and whether resources were raised and expended in conformity with budget and
other fiscal constraints. Revenues that will not be collected in time to pay current period
obligations cannot be used to meet the current year budget. Similarly, obligations that
will not be paid from currently available financial resources do not affect current period
fiscal performance. Thus, under modified accrual only revenues that will be collected in
time to pay for current obligations and only expenditures that will be paid in the current
period or shortly thereafter are recognized in the current period. By contrast, the
government-wide financial statements, as well as proprietary and fiduciary fund financial
statements, focus on the flow of economic resources, both current and noncurrent.
Consequently, the use of the accrual basis of accounting, similar to that used by business
entities, is appropriate for these statements.
1-9. A CAFR should have an introductory section, financial section, and statistical section,
the contents of which are discussed in this chapter. The basic financial statements
required under GASBS 34 are the government-wide financial statements and fund
financial statements with accompanying notes. The basic financial statements, along
with the Management Discussion & Analysis, and other required supplementary
information (RSI), comprise only part of the financial section of a typical CAFR. The
contents of each section are described briefly in the section headed Comprehensive
Annual Financial Report.
1-3
Ch. 1, Answers, Question 1-6 (Cont’d)
accountability reporting by helping elected officials demonstrate that they have complied
with spending restrictions related to the legally approved budget. Government-wide
reporting standards for governmental activities help officials report on operational
accountability—whether the government’s resources were utilized efficiently and
effectively in meeting operating objectives.
1-7. Financial information related to governmental activities is reported in two different ways
to meet two different reporting objectives. The government-wide financial statements are
intended to report on the government’s operational accountability and therefore
governmental activities are reported in those statements using accrual accounting with an
economic resources measurement focus—similar to commercial accounting. In the
governmental fund financial statements, the reporting objective is fiscal accountability,
leading to the use of modified accrual and a focus on the flow of current financial
resources. As a result, the same underlying transactions result in different amounts being
reported in the government-wide and governmental fund financial statements. These
differences must be reconciled so that readers can understand how the statements relate to
each other.
1-8. Modified accrual accounting is used for preparing governmental fund financial
statements since those statements focus on the flow of current (i.e., expendable) financial
resources and whether resources were raised and expended in conformity with budget and
other fiscal constraints. Revenues that will not be collected in time to pay current period
obligations cannot be used to meet the current year budget. Similarly, obligations that
will not be paid from currently available financial resources do not affect current period
fiscal performance. Thus, under modified accrual only revenues that will be collected in
time to pay for current obligations and only expenditures that will be paid in the current
period or shortly thereafter are recognized in the current period. By contrast, the
government-wide financial statements, as well as proprietary and fiduciary fund financial
statements, focus on the flow of economic resources, both current and noncurrent.
Consequently, the use of the accrual basis of accounting, similar to that used by business
entities, is appropriate for these statements.
1-9. A CAFR should have an introductory section, financial section, and statistical section,
the contents of which are discussed in this chapter. The basic financial statements
required under GASBS 34 are the government-wide financial statements and fund
financial statements with accompanying notes. The basic financial statements, along
with the Management Discussion & Analysis, and other required supplementary
information (RSI), comprise only part of the financial section of a typical CAFR. The
contents of each section are described briefly in the section headed Comprehensive
Annual Financial Report.
Loading page 4...
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-4
Ch. 1, Answers (Cont’d)
1-10. The GASB recognizes that while financial information is helpful in assessing operational
accountability, additional information about an organization’s service efforts and
accomplishments is essential for a complete understanding of whether a government’s
resources have been utilized efficiently and effectively. Information about service
efforts includes indicators of nonmonetary resource inputs as well as monetary.
Information about service accomplishments includes indicators of output measures (i.e.,
units of work accomplished) and outcome measures (i.e., impact of work on achieving
goals and objectives). To date the GASB has conducted significant research on SEA
measures and continues to encourage governments to experiment with SEA reporting.
Solutions to Cases
1-1. A search of the FASB’s Web site, www.fasb.org, should reveal the following Statements
of Financial Accounting Standards that are focused on not-for-profit organizations:
Statement No. 136
Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or
Holds Contributions for Others
(Issue Date 6/99)
Statement No. 124
Accounting for Certain Investments Held by Not-for-Profit Organizations
(Issue Date 11/95)
Statement No. 117
Financial Statements of Not-for-Profit Organizations
(Issue Date 6/93)
Statement No. 116
Accounting for Contributions Received and Contributions Made
(Issue Date 6/93)
Statement No. 99
Deferral of the Effective Date of Recognition of Depreciation by Not-for-Profit
Organizations—an amendment of FASB Statement No. 93
(Issue Date 9/88)
Statement No. 93
Recognition of Depreciation by Not-for-Profit Organizations
(Issue Date 8/87)
In addition, the FASB has issued one Statement of Financial Accounting Concepts
related to not-for-profit organizations:
1-4
Ch. 1, Answers (Cont’d)
1-10. The GASB recognizes that while financial information is helpful in assessing operational
accountability, additional information about an organization’s service efforts and
accomplishments is essential for a complete understanding of whether a government’s
resources have been utilized efficiently and effectively. Information about service
efforts includes indicators of nonmonetary resource inputs as well as monetary.
Information about service accomplishments includes indicators of output measures (i.e.,
units of work accomplished) and outcome measures (i.e., impact of work on achieving
goals and objectives). To date the GASB has conducted significant research on SEA
measures and continues to encourage governments to experiment with SEA reporting.
Solutions to Cases
1-1. A search of the FASB’s Web site, www.fasb.org, should reveal the following Statements
of Financial Accounting Standards that are focused on not-for-profit organizations:
Statement No. 136
Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or
Holds Contributions for Others
(Issue Date 6/99)
Statement No. 124
Accounting for Certain Investments Held by Not-for-Profit Organizations
(Issue Date 11/95)
Statement No. 117
Financial Statements of Not-for-Profit Organizations
(Issue Date 6/93)
Statement No. 116
Accounting for Contributions Received and Contributions Made
(Issue Date 6/93)
Statement No. 99
Deferral of the Effective Date of Recognition of Depreciation by Not-for-Profit
Organizations—an amendment of FASB Statement No. 93
(Issue Date 9/88)
Statement No. 93
Recognition of Depreciation by Not-for-Profit Organizations
(Issue Date 8/87)
In addition, the FASB has issued one Statement of Financial Accounting Concepts
related to not-for-profit organizations:
Loading page 5...
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-5
Ch. 1, Solutions, Case 1-1 (Cont’d)
Concepts Statement No. 4
Objectives of Financial Reporting by Nonbusiness Organizations
(Issue Date 12/80)
Brief summaries of each statement are also provided at the Web site.
There is also a Proposed FASB Staff Position, FAS 117-a, Endowments of Not-for-Profit
Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the
Uniform Prudent management of Institutions Fund Act, and Enhanced Disclosures. In
addition, the FASB is re-deliberating two proposed statements relating to not-for-profit
organizations involved in mergers and acquisitions.
Many FASB standards applicable to for-profit entities may also apply to
nongovernmental not-for-profit organizations. Full-text copies of all FASB
pronouncements can be downloaded free of charge from the FASB’s Web site.
1-2. Instructors may wish to provide specific instructions for the students' brief reports. The
GASB’s Web site provides extensive information about the Board’s mission, structure,
and the due-process it follows in setting standards. Significant information about the
GASB’s strategic plan is also provided at the Web site.
Obviously, the content of GASB’s technical agenda and members of its advisory council
will change over time. Although exposure drafts of proposed statements and abbreviated
summaries of new pronouncements can be downloaded from the GASB’s Web site at no
charge, the full-text of statements and other pronouncements can only be obtained by
purchasing them from the GASB’s publication department. In addition, the GASB sells
two annually updated compendiums of its official pronouncements—Original
Pronouncements and Codification of Governmental Accounting and Financial Reporting
Standards—and an annually updated Comprehensive Implementation Guide. All of these
documents are available in hardcopy or as a searchable computer data base called GARS,
the Governmental Accounting Research System. GASB’s Web site provides full
information on how to order all publications and their cost, as well as information about
becoming an annual subscriber to GASB pronouncements and due-process documents.
1-3. Instructors may wish to provide specific instructions for their students' brief reports.
FASAB’s Web site may change over time, but the Web site does provide extensive
information about the FASAB’s mission, structure, and due-process. A good source of
information is the Memorandum of Understanding between the Comptroller General,
Director of OMB, and the Secretary of the Treasury that created the FASAB, which
currently is a 10-member board. Because FASAB’s technical projects and members of
the Accounting and Auditing Policy Committee will change over time, students should
describe the projects and committee representation that currently exist.
1-5
Ch. 1, Solutions, Case 1-1 (Cont’d)
Concepts Statement No. 4
Objectives of Financial Reporting by Nonbusiness Organizations
(Issue Date 12/80)
Brief summaries of each statement are also provided at the Web site.
There is also a Proposed FASB Staff Position, FAS 117-a, Endowments of Not-for-Profit
Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the
Uniform Prudent management of Institutions Fund Act, and Enhanced Disclosures. In
addition, the FASB is re-deliberating two proposed statements relating to not-for-profit
organizations involved in mergers and acquisitions.
Many FASB standards applicable to for-profit entities may also apply to
nongovernmental not-for-profit organizations. Full-text copies of all FASB
pronouncements can be downloaded free of charge from the FASB’s Web site.
1-2. Instructors may wish to provide specific instructions for the students' brief reports. The
GASB’s Web site provides extensive information about the Board’s mission, structure,
and the due-process it follows in setting standards. Significant information about the
GASB’s strategic plan is also provided at the Web site.
Obviously, the content of GASB’s technical agenda and members of its advisory council
will change over time. Although exposure drafts of proposed statements and abbreviated
summaries of new pronouncements can be downloaded from the GASB’s Web site at no
charge, the full-text of statements and other pronouncements can only be obtained by
purchasing them from the GASB’s publication department. In addition, the GASB sells
two annually updated compendiums of its official pronouncements—Original
Pronouncements and Codification of Governmental Accounting and Financial Reporting
Standards—and an annually updated Comprehensive Implementation Guide. All of these
documents are available in hardcopy or as a searchable computer data base called GARS,
the Governmental Accounting Research System. GASB’s Web site provides full
information on how to order all publications and their cost, as well as information about
becoming an annual subscriber to GASB pronouncements and due-process documents.
1-3. Instructors may wish to provide specific instructions for their students' brief reports.
FASAB’s Web site may change over time, but the Web site does provide extensive
information about the FASAB’s mission, structure, and due-process. A good source of
information is the Memorandum of Understanding between the Comptroller General,
Director of OMB, and the Secretary of the Treasury that created the FASAB, which
currently is a 10-member board. Because FASAB’s technical projects and members of
the Accounting and Auditing Policy Committee will change over time, students should
describe the projects and committee representation that currently exist.
Loading page 6...
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-6
Ch. 1, Solutions, Case 1-3 (Cont’d)
All statements and other pronouncements of the FASAB, including compendiums of all
original pronouncements and a Current Text that codifies all pronouncements in topical
format are available for downloading from its Web site at no charge. All due-process
documents are available at that site as well.
1-4. Issue: Is the Native-American Heritage Center and Museum a governmental not-for-
profit entity or nongovernmental not-for-profit entity? This is an essential determination
because if the museum is governmental the auditor will need to examine whether the
museum’s financial statements are in conformity with GASB standards. If it is
nongovernmental, its financial statements must conform to FASB standards.
Analysis: There is no evidence to suggest that the Heritage Center and Museum is a
government per se, that is, a “public corporation or body corporate and politic.” Thus, it
is necessary to apply the three criteria listed in the text to determine whether the
organization is governmental in character. A controlling majority of its governing board
is appointed or approved by the Mound City Council, thus, criterion a is clearly met.
Criterion b is likely met as well, considering that the City could probably dissolve the
center and museum if they wished to do so according to the original charter. It doesn’t
appear that the organization has the power to enact or enforce a tax levy (criterion c).
Only one of the three criteria needs to be met for the museum to be considered
governmental in character. Criterion a is clearly met and b is likely met, so careful
application of the AICPA criteria to the fact situation in this case should lead one to reach
the conclusion that the organization is governmental in character and therefore should
conform to GASB financial reporting standards if it expects to receive an unqualified
(clean) audit opinion. [Note to instructors: In order to avoid confusing students this early
in the course, we have intentionally not discussed specific GASB and FASB standards
applicable to not-for-profit organizations. Unusually inquisitive students can be referred
to Chapter 14 for further information.]
Solutions to Exercises and Problems
1-1. As students may have different CAFRs, there is no single solution to this exercise. It
works well to devote class time to asking students some of the questions listed in the
exercise, and perhaps tabulating the numbers of reports containing statements that are
audited (1) by CPAs, (2) by state auditors, and (3) by employees of the reporting
government. If such a tabulation is made, students may be interested in knowing in which
states the local governmental units are located that are audited by each of the classes of
auditors (or whatever other characteristic is being tabulated). Requiring that students
download or obtain a hardcopy CAFR is a good exercise in obtaining financial
information. Allow students to share their experiences, as some organizations make it
easier to get CAFRs than others. Remind students that governments are not required to
prepare a full CAFR, so some governments may simply refer to their report as the
“audited annual financial statement,” or even the “audit report.” Budgets are often quite
detailed and can be most useful for Chapter 13, so instructors may wish to have their
student’s download or request a hardcopy budget document in addition to the CAFR.
1-6
Ch. 1, Solutions, Case 1-3 (Cont’d)
All statements and other pronouncements of the FASAB, including compendiums of all
original pronouncements and a Current Text that codifies all pronouncements in topical
format are available for downloading from its Web site at no charge. All due-process
documents are available at that site as well.
1-4. Issue: Is the Native-American Heritage Center and Museum a governmental not-for-
profit entity or nongovernmental not-for-profit entity? This is an essential determination
because if the museum is governmental the auditor will need to examine whether the
museum’s financial statements are in conformity with GASB standards. If it is
nongovernmental, its financial statements must conform to FASB standards.
Analysis: There is no evidence to suggest that the Heritage Center and Museum is a
government per se, that is, a “public corporation or body corporate and politic.” Thus, it
is necessary to apply the three criteria listed in the text to determine whether the
organization is governmental in character. A controlling majority of its governing board
is appointed or approved by the Mound City Council, thus, criterion a is clearly met.
Criterion b is likely met as well, considering that the City could probably dissolve the
center and museum if they wished to do so according to the original charter. It doesn’t
appear that the organization has the power to enact or enforce a tax levy (criterion c).
Only one of the three criteria needs to be met for the museum to be considered
governmental in character. Criterion a is clearly met and b is likely met, so careful
application of the AICPA criteria to the fact situation in this case should lead one to reach
the conclusion that the organization is governmental in character and therefore should
conform to GASB financial reporting standards if it expects to receive an unqualified
(clean) audit opinion. [Note to instructors: In order to avoid confusing students this early
in the course, we have intentionally not discussed specific GASB and FASB standards
applicable to not-for-profit organizations. Unusually inquisitive students can be referred
to Chapter 14 for further information.]
Solutions to Exercises and Problems
1-1. As students may have different CAFRs, there is no single solution to this exercise. It
works well to devote class time to asking students some of the questions listed in the
exercise, and perhaps tabulating the numbers of reports containing statements that are
audited (1) by CPAs, (2) by state auditors, and (3) by employees of the reporting
government. If such a tabulation is made, students may be interested in knowing in which
states the local governmental units are located that are audited by each of the classes of
auditors (or whatever other characteristic is being tabulated). Requiring that students
download or obtain a hardcopy CAFR is a good exercise in obtaining financial
information. Allow students to share their experiences, as some organizations make it
easier to get CAFRs than others. Remind students that governments are not required to
prepare a full CAFR, so some governments may simply refer to their report as the
“audited annual financial statement,” or even the “audit report.” Budgets are often quite
detailed and can be most useful for Chapter 13, so instructors may wish to have their
student’s download or request a hardcopy budget document in addition to the CAFR.
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Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-7
Ch. 1, Solutions (Cont’d)
1-2. 1. a. 6. b.
2. d. 7. a.
3. c. 8. c.
4. d. 9. d.
5. b. 10. a.
1-3. This is an exercise that may generate considerable discussion in class, as some of the
answers depend on individual judgments and interpretations. Keeping this in mind, you
may wish to provide some leeway in grading this exercise, depending on how literally
you interpret the terms “funds” and “activities.” See Notes a and b for suggested
guidelines.
Financial Statements
Activities or
Funds Reported
Basis
Of
Accounting
Measurement
Focus
Statement of net assets—government
–wide
GA, BTA
(see Note a)
A ER
Statement of activities—government-
wide
GA, BTA
(see Note a)
A ER
Balance sheet—
governmental funds
GF
(see Note b)
MA CFR
Statement of revenues, expenditures,
and changes in fund balances—
governmental funds
GF
(see Note b)
MA CFR
Statement of net assets—proprietary
funds
PF
(see Note b)
A ER
Statement of revenues, expenses, and
changes in fund net assets—
proprietary funds
PF
(see Note b)
A ER
Statement of cash flows—proprietary
funds
PF
(see Note b)
A ER
Statement of fiduciary net assets FF A ER
Statement of changes in fiduciary net
assets
FF A ER
Notes: a. Some students may wish to put governmental funds (GF) and proprietary funds (PF)
here, but technically that would be incorrect as the information reported in funds is
not the same as that reported at the government-wide level. Nevertheless, you could
give full or partial credit for these answers and use the opportunity to point out the
differences.
b. Some students may understandably view financial information for governmental
activities as being reported in both the governmental funds and the governmental
activities column of the government-wide statements. If so, they will put GA in the
cells for the two governmental funds statements, in addition to GF. Although not all
governmental activities financial information is reported in the fund financial
1-7
Ch. 1, Solutions (Cont’d)
1-2. 1. a. 6. b.
2. d. 7. a.
3. c. 8. c.
4. d. 9. d.
5. b. 10. a.
1-3. This is an exercise that may generate considerable discussion in class, as some of the
answers depend on individual judgments and interpretations. Keeping this in mind, you
may wish to provide some leeway in grading this exercise, depending on how literally
you interpret the terms “funds” and “activities.” See Notes a and b for suggested
guidelines.
Financial Statements
Activities or
Funds Reported
Basis
Of
Accounting
Measurement
Focus
Statement of net assets—government
–wide
GA, BTA
(see Note a)
A ER
Statement of activities—government-
wide
GA, BTA
(see Note a)
A ER
Balance sheet—
governmental funds
GF
(see Note b)
MA CFR
Statement of revenues, expenditures,
and changes in fund balances—
governmental funds
GF
(see Note b)
MA CFR
Statement of net assets—proprietary
funds
PF
(see Note b)
A ER
Statement of revenues, expenses, and
changes in fund net assets—
proprietary funds
PF
(see Note b)
A ER
Statement of cash flows—proprietary
funds
PF
(see Note b)
A ER
Statement of fiduciary net assets FF A ER
Statement of changes in fiduciary net
assets
FF A ER
Notes: a. Some students may wish to put governmental funds (GF) and proprietary funds (PF)
here, but technically that would be incorrect as the information reported in funds is
not the same as that reported at the government-wide level. Nevertheless, you could
give full or partial credit for these answers and use the opportunity to point out the
differences.
b. Some students may understandably view financial information for governmental
activities as being reported in both the governmental funds and the governmental
activities column of the government-wide statements. If so, they will put GA in the
cells for the two governmental funds statements, in addition to GF. Although not all
governmental activities financial information is reported in the fund financial
Loading page 8...
Chapter 01 - Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Entities
1-8
Ch. 1, Solutions, 1-3 (Cont’d)
statements, enough of it is to justify giving credit for this answer as well, as long as
the student understands that the long-term components of GA do not belong in these
cells. Similarly, you may wish to grant credit to students who put BTA in the three
cells for proprietary fund statements, although internal service fund information in
these statements is usually considered part of GA rather than BTA.
1-8
Ch. 1, Solutions, 1-3 (Cont’d)
statements, enough of it is to justify giving credit for this answer as well, as long as
the student understands that the long-term components of GA do not belong in these
cells. Similarly, you may wish to grant credit to students who put BTA in the three
cells for proprietary fund statements, although internal service fund information in
these statements is usually considered part of GA rather than BTA.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-1
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL
GOVERNMENTS
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
2-1 Governmental activities Describe Same
2-2 Business-type activities Describe Same
2-3 Fiduciary activities Describe Same
2-4 Reporting entity Define and explain Revised
2-5 Component unit reporting Explain Same
2-6 Fund categories Explain New
2-7 Definition of fund Explain New
2-8 Modified accrual; definition and rules Distinguish New
2-9 Distinguishing effects of governmental
transactions
Journalize New
2-10 Major fund criteria Explain New
Cases:
2-1 Defining the reporting entity Internet; locating
information in the
CAFR
Same
2-2 Accounting and reporting principles
Identification
Analysis; explanation 2-3
2-3 Identification of major funds; application of
major fund criteria
Internet; identifi-
cation; calculation
New
Exercises/Problems:
2-1 Examine the CAFR Examine Revised
2-2 Various Multiple Choice Items 1,3, and
5 revised;
Other items
are new
2-3 Various True/False Revised
2-4 Matching government-wide and fund financial
reporting characteristics
Matching Revised
format
2-5 Matching transactions with funds Matching Same
2-6 General long-term liability and general capital
asset transactions
Journalize and
explain
2-7 revised
2-7 Determination of major funds Calculation; written
report
2-6 revised
2-1
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL
GOVERNMENTS
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
2-1 Governmental activities Describe Same
2-2 Business-type activities Describe Same
2-3 Fiduciary activities Describe Same
2-4 Reporting entity Define and explain Revised
2-5 Component unit reporting Explain Same
2-6 Fund categories Explain New
2-7 Definition of fund Explain New
2-8 Modified accrual; definition and rules Distinguish New
2-9 Distinguishing effects of governmental
transactions
Journalize New
2-10 Major fund criteria Explain New
Cases:
2-1 Defining the reporting entity Internet; locating
information in the
CAFR
Same
2-2 Accounting and reporting principles
Identification
Analysis; explanation 2-3
2-3 Identification of major funds; application of
major fund criteria
Internet; identifi-
cation; calculation
New
Exercises/Problems:
2-1 Examine the CAFR Examine Revised
2-2 Various Multiple Choice Items 1,3, and
5 revised;
Other items
are new
2-3 Various True/False Revised
2-4 Matching government-wide and fund financial
reporting characteristics
Matching Revised
format
2-5 Matching transactions with funds Matching Same
2-6 General long-term liability and general capital
asset transactions
Journalize and
explain
2-7 revised
2-7 Determination of major funds Calculation; written
report
2-6 revised
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-2
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL
GOVERNMENTS
Answers to Questions
2-1. Certain core services are provided by most general purpose governments—those related
to the protection of life and property (e.g., police and fire protection), public works (e.g.,
streets and highways, bridges, and public buildings), parks and recreation facilities and
programs, and cultural and social services, among others. Governments must also incur
costs for general administrative support (such as, data processing, finance, and personnel)
of its service departments. Core governmental services, together with general
administrative support, comprise the major part of what GASB refers to as governmental
activities. The measurement focus and basis of accounting for these activities is on the
flow of current financial resources on the modified accrual basis in the governmental
funds and on the flow of economic resources on the accrual basis in the Governmental
Activities column of the government-wide financial statements.
2-2. The business-type activities of a government include public utilities (such as electric,
water, gas, and sewer utilities), transportation systems, toll roads and bridges, hospitals,
parking garages and lots, liquor stores, golf courses, airports, and swimming pools,
among other activities. Many of these activities are intended to be self-supporting by
charging users for the services they receive. Focusing financial reporting on economic
resources recognized on the accrual basis of accounting allows the government to
determine whether charges for services are sufficient to cover the full cost of the activity.
This measurement focus and basis of accounting is the same used for reporting
governmental activities in the government-wide financial statements, but quite different
from the current financial resources measurement focus and modified accrual basis of
accounting used in the governmental funds.
2-3. Fiduciary activities of a government involve the government’s discharge of its fiduciary
responsibilities, either as an agent or trustee, for parties outside the government. For
example, a government may serve as agent for other governments in the administering
and collecting of taxes. Fiduciary activities are accounted for in agency funds, investment
trust funds, pension trust funds, and private-purpose trust funds.
Fiduciary activities are reported only in the fund financial statements and not in the
government-wide financial statements because these resources belong to external parties,
not the government. Fiduciary funds use accrual accounting and focus on economic
resources, as do business-type activities. However, reporting for fiduciary activities
differs from that for governmental funds since the latter funds focus primarily on the
budget and current financial resources.
2-2
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL
GOVERNMENTS
Answers to Questions
2-1. Certain core services are provided by most general purpose governments—those related
to the protection of life and property (e.g., police and fire protection), public works (e.g.,
streets and highways, bridges, and public buildings), parks and recreation facilities and
programs, and cultural and social services, among others. Governments must also incur
costs for general administrative support (such as, data processing, finance, and personnel)
of its service departments. Core governmental services, together with general
administrative support, comprise the major part of what GASB refers to as governmental
activities. The measurement focus and basis of accounting for these activities is on the
flow of current financial resources on the modified accrual basis in the governmental
funds and on the flow of economic resources on the accrual basis in the Governmental
Activities column of the government-wide financial statements.
2-2. The business-type activities of a government include public utilities (such as electric,
water, gas, and sewer utilities), transportation systems, toll roads and bridges, hospitals,
parking garages and lots, liquor stores, golf courses, airports, and swimming pools,
among other activities. Many of these activities are intended to be self-supporting by
charging users for the services they receive. Focusing financial reporting on economic
resources recognized on the accrual basis of accounting allows the government to
determine whether charges for services are sufficient to cover the full cost of the activity.
This measurement focus and basis of accounting is the same used for reporting
governmental activities in the government-wide financial statements, but quite different
from the current financial resources measurement focus and modified accrual basis of
accounting used in the governmental funds.
2-3. Fiduciary activities of a government involve the government’s discharge of its fiduciary
responsibilities, either as an agent or trustee, for parties outside the government. For
example, a government may serve as agent for other governments in the administering
and collecting of taxes. Fiduciary activities are accounted for in agency funds, investment
trust funds, pension trust funds, and private-purpose trust funds.
Fiduciary activities are reported only in the fund financial statements and not in the
government-wide financial statements because these resources belong to external parties,
not the government. Fiduciary funds use accrual accounting and focus on economic
resources, as do business-type activities. However, reporting for fiduciary activities
differs from that for governmental funds since the latter funds focus primarily on the
budget and current financial resources.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-3
Ch. 2, Answers (Cont’d)
2-4. A reporting entity consists of the primary government and all other legally separate
organizations for which the government is financially accountable. A primary
government is defined as a state government, a general purpose local government, or a
special purpose government that has a separately elected governing body and that is
fiscally independent of other state and local governments. A component unit differs from
the primary government mainly in terms of the direction of fiscal accountability. A
component unit is financially accountable to the primary government whereas the
primary government is financially accountable for a component unit.
2-5. False. GASB standards indicate that individual component units should prepare separate
financial statements and make them available to the public. Reporting financial
information of component units in one or more separate columns to the right of those for
the primary government in the government-wide financial statements is known as a
discrete presentation. Blending is the alternative method if the financial activities of the
component unit are so intertwined with those of the primary government that they are, in
substance, the same as the primary government. In blended reporting, the financial
information of the component unit is blended with that of the primary government, both
in the appropriate fund and government-wide statements.
2-6. The three categories of funds are governmental, proprietary, and fiduciary. The fund
types included in each category are shown below:
Governmental Proprietary Fiduciary
General Fund
Special revenue funds
Debt service funds
Capital projects funds
Permanent funds
Enterprise funds
Internal service funds
Agency funds
Investment trust funds
Pension trust funds
Private purpose trust
funds
These categories correspond to the three activity categories with the exception that
financial information for internal service funds is generally reported in the Governmental
Activities column of the government-wide financial statements. However, if an internal
service fund predominantly serves an enterprise fund, its financial information is reported
in the Business-type Activities column.
2-7. As a fiscal entity, a fund has its own resources and can incur liabilities to be repaid from
the fund resources. As an accounting entity, the fund has its own self-balancing set of
accounts.
2-8. Governmental funds, the five fund types listed in Illustration 2-2 of the text, focus on the
flow of current financial resources. Consequently, these funds use the modified accrual
basis of accounting. Under modified accrual revenues are recognized if the inflow is
measurable and available to pay current period obligations. Expenditures are recognized
as incurred if they will be paid from available resources.
2-3
Ch. 2, Answers (Cont’d)
2-4. A reporting entity consists of the primary government and all other legally separate
organizations for which the government is financially accountable. A primary
government is defined as a state government, a general purpose local government, or a
special purpose government that has a separately elected governing body and that is
fiscally independent of other state and local governments. A component unit differs from
the primary government mainly in terms of the direction of fiscal accountability. A
component unit is financially accountable to the primary government whereas the
primary government is financially accountable for a component unit.
2-5. False. GASB standards indicate that individual component units should prepare separate
financial statements and make them available to the public. Reporting financial
information of component units in one or more separate columns to the right of those for
the primary government in the government-wide financial statements is known as a
discrete presentation. Blending is the alternative method if the financial activities of the
component unit are so intertwined with those of the primary government that they are, in
substance, the same as the primary government. In blended reporting, the financial
information of the component unit is blended with that of the primary government, both
in the appropriate fund and government-wide statements.
2-6. The three categories of funds are governmental, proprietary, and fiduciary. The fund
types included in each category are shown below:
Governmental Proprietary Fiduciary
General Fund
Special revenue funds
Debt service funds
Capital projects funds
Permanent funds
Enterprise funds
Internal service funds
Agency funds
Investment trust funds
Pension trust funds
Private purpose trust
funds
These categories correspond to the three activity categories with the exception that
financial information for internal service funds is generally reported in the Governmental
Activities column of the government-wide financial statements. However, if an internal
service fund predominantly serves an enterprise fund, its financial information is reported
in the Business-type Activities column.
2-7. As a fiscal entity, a fund has its own resources and can incur liabilities to be repaid from
the fund resources. As an accounting entity, the fund has its own self-balancing set of
accounts.
2-8. Governmental funds, the five fund types listed in Illustration 2-2 of the text, focus on the
flow of current financial resources. Consequently, these funds use the modified accrual
basis of accounting. Under modified accrual revenues are recognized if the inflow is
measurable and available to pay current period obligations. Expenditures are recognized
as incurred if they will be paid from available resources.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-4
Ch. 2, Answers (Cont’d)
2-9. General Fund Debits Credits
Cash 1,000,000
Other Financing Sources—
Proceeds of 5-Year Note 1,000,000
Governmental Activities, Government-wide
Cash 1,000,000
Mortgage Note Payable 1,000,000
General Fund
Expenditures—Capital Outlay 1,000,000
Cash 1,000,000
Governmental Activities, Government-wide
Buildings 1,000,000
Cash 1,000,000
2-10. GASBS 34 requires that any fund that meets the following relative size criteria be
designated as major:
a. Total assets, liabilities, revenues or expenditures/expenses of that governmental or enterprise fund are
at least 10 percent of the corresponding element total (assets, liabilities, and so forth) for all funds of
that category or type (that is, total governmental or total enterprise funds), and (emphasis added)
b. The same element that met the 10 percent criterion in (a) is at least 5 percent of the corresponding
element total for all governmental and enterprise funds combined.
In addition to funds that meet these two criteria, the General Fund of a state or local
government must always be reported as a major fund. Finally, at its discretion
management can report as a major fund any other governmental or enterprise fund that it
considers of significant importance to financial statement users.
Solutions to Cases
2-1. Obtaining a CAFR is becoming less difficult as a growing number of local governments
post their CAFRs and budgets on their Web sites, as well as on the GASB’s Web site.
Usually a bit of surfing under the Finance Department link of a government’s Web site
will reveal the CAFR, which typically is downloadable as an Adobe Acrobat file. At any
rate, once a CAFR is obtained it should be a relatively easy task to scroll down to the
notes to the financial statements. Under the heading Summary of Significant Accounting
Policies, the first note usually found is the description of the reporting entity. All
information needed to complete this case should be readily available once the student
finds the reporting entity note.
2-4
Ch. 2, Answers (Cont’d)
2-9. General Fund Debits Credits
Cash 1,000,000
Other Financing Sources—
Proceeds of 5-Year Note 1,000,000
Governmental Activities, Government-wide
Cash 1,000,000
Mortgage Note Payable 1,000,000
General Fund
Expenditures—Capital Outlay 1,000,000
Cash 1,000,000
Governmental Activities, Government-wide
Buildings 1,000,000
Cash 1,000,000
2-10. GASBS 34 requires that any fund that meets the following relative size criteria be
designated as major:
a. Total assets, liabilities, revenues or expenditures/expenses of that governmental or enterprise fund are
at least 10 percent of the corresponding element total (assets, liabilities, and so forth) for all funds of
that category or type (that is, total governmental or total enterprise funds), and (emphasis added)
b. The same element that met the 10 percent criterion in (a) is at least 5 percent of the corresponding
element total for all governmental and enterprise funds combined.
In addition to funds that meet these two criteria, the General Fund of a state or local
government must always be reported as a major fund. Finally, at its discretion
management can report as a major fund any other governmental or enterprise fund that it
considers of significant importance to financial statement users.
Solutions to Cases
2-1. Obtaining a CAFR is becoming less difficult as a growing number of local governments
post their CAFRs and budgets on their Web sites, as well as on the GASB’s Web site.
Usually a bit of surfing under the Finance Department link of a government’s Web site
will reveal the CAFR, which typically is downloadable as an Adobe Acrobat file. At any
rate, once a CAFR is obtained it should be a relatively easy task to scroll down to the
notes to the financial statements. Under the heading Summary of Significant Accounting
Policies, the first note usually found is the description of the reporting entity. All
information needed to complete this case should be readily available once the student
finds the reporting entity note.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-5
Ch. 2, Solutions (Cont’d)
2-2. A quick look at these financial statements reveals that Ms. Eager has almost no
knowledge of GASB reporting requirements. Let’s examine these financial statements
from the viewpoint of (a) a local CPA who is considering auditing the town’s financial
statements and (b) a member of the town council or a citizen.
a. As a CPA knowledgeable about governmental accounting, you should see many red
flags regarding this potential audit engagement. Do the financial statements that Ms.
Eager has prepared conform to GAAP? The short answer is no! To the CPA
contemplating whether to serve as auditor, these financial statements should set off
alarm bells. He or she only has to compare these statements to the variety of
government-wide and fund financial statements required by GASB standards (see
Illustrations A1-1 through A1-11) to realize that they fall far short of what is required
by GAAP. Among the many problems the CPA should detect (although students will
probably miss many of these problems at this early point in the course) are the
following.
1. The town does not present separate government-wide and fund financial
statements, although with a little work the balance sheet could be converted into a
government-wide statement of net assets.
2. The statement of activities is not in the cost of services format prescribed by
GASB.
3. Because no fund financial statements are prepared, key information such as
unreserved and reserved fund balances of the General Fund (see Illustration A1-3,
for example) and the Road Tax Fund are not presented.
4. Budget and actual comparison information is not presented, either as basic
statements or required supplementary information schedules, as required (see the
Appendix to this chapter).
5. Expense detail is lacking. More functional detail is needed under “Government
services,” such as general government, public safety, public works, and other
relevant functions, so the amounts expended for each service area can be
determined. Presumably, this would also reduce the relatively large amount
reported as “Miscellaneous.”
6. Why are accounts receivable relating to the Sewer Fund missing from the balance
sheet? The presence of sewer fees on the statement of activities suggests that the
Sewer Fund is being operated as an enterprise fund. If so, billings that have not
been collected at year-end should be reported. In addition, GAAP requires
accrual of a receivable and revenue for services provided but unbilled at year-end.
2-5
Ch. 2, Solutions (Cont’d)
2-2. A quick look at these financial statements reveals that Ms. Eager has almost no
knowledge of GASB reporting requirements. Let’s examine these financial statements
from the viewpoint of (a) a local CPA who is considering auditing the town’s financial
statements and (b) a member of the town council or a citizen.
a. As a CPA knowledgeable about governmental accounting, you should see many red
flags regarding this potential audit engagement. Do the financial statements that Ms.
Eager has prepared conform to GAAP? The short answer is no! To the CPA
contemplating whether to serve as auditor, these financial statements should set off
alarm bells. He or she only has to compare these statements to the variety of
government-wide and fund financial statements required by GASB standards (see
Illustrations A1-1 through A1-11) to realize that they fall far short of what is required
by GAAP. Among the many problems the CPA should detect (although students will
probably miss many of these problems at this early point in the course) are the
following.
1. The town does not present separate government-wide and fund financial
statements, although with a little work the balance sheet could be converted into a
government-wide statement of net assets.
2. The statement of activities is not in the cost of services format prescribed by
GASB.
3. Because no fund financial statements are prepared, key information such as
unreserved and reserved fund balances of the General Fund (see Illustration A1-3,
for example) and the Road Tax Fund are not presented.
4. Budget and actual comparison information is not presented, either as basic
statements or required supplementary information schedules, as required (see the
Appendix to this chapter).
5. Expense detail is lacking. More functional detail is needed under “Government
services,” such as general government, public safety, public works, and other
relevant functions, so the amounts expended for each service area can be
determined. Presumably, this would also reduce the relatively large amount
reported as “Miscellaneous.”
6. Why are accounts receivable relating to the Sewer Fund missing from the balance
sheet? The presence of sewer fees on the statement of activities suggests that the
Sewer Fund is being operated as an enterprise fund. If so, billings that have not
been collected at year-end should be reported. In addition, GAAP requires
accrual of a receivable and revenue for services provided but unbilled at year-end.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-6
Ch. 2, Solutions, 2-2 (Cont’d)
7. If the Sewer Fund is an enterprise fund, then a statement of cash flows is required
for that fund.
8. Where are the notes to the financial statements? The notes are a required and
integral part of any set of financial statements.
9. Where is the MD&A—also required by GAAP?
Given the serious reporting deficiencies observed, it is likely the CPA would be required
to render an adverse opinion, since it appears that the financial statements do not fairly
present financial information in conformity with GAAP. Depending on the quality of
the town’s financial records, it is also possible that the CPA would have to issue a
disclaimer report due to missing or insufficient financial information. (Note: You may
wish to look at Chapter 12 for the meaning of adverse and disclaimed audit reports.)
b. A member of the town council or a citizen of the town should be concerned as well
about several of the points made in part a above. Although the treasurer may still be
preparing statements of cash receipts and disbursements for each fund, the lack of
information about cost of services for governmental functions and sewer operations
should be of concern. Moreover, unless the town budgets on a cash basis, the lack of
GAAP-based fund statements results in a lack of full information about available
financial resources in the General and Road Tax Funds for budgeting purposes. The
lack of budget and actual comparison statements or schedules should also be of
concern to a member of the town council or a citizen.
2-3. Identification of which funds are reported as major funds is readily accomplished by
viewing the governmental funds balance sheet and statement of revenues, expenditures,
and changes in fund balances. Once a student calculates 10 percent of total governmental
fund assets, liabilities, revenues, and expenditures, and 5 percent of governmental and
enterprise fund totals for the same elements, it should be relatively simple to compare the
totals for these elements for each major fund to the 10 percent and 5 percent amounts.
Comparisons for the General Fund are unnecessary since this fund is always reported as a
major fund.
Solutions to Exercises and Problems
2-1. Each student should have a different governmental annual report, so will have different
answers to questions in this exercise. We suggest allowing students to discuss their
answers which will give them an idea of the range of the answers of other students.
2-2. 1. b. 6. b.
2. c . 7. b.
3. b. 8. c.
4. a. 9. d.
5. d. 10. c.
2-6
Ch. 2, Solutions, 2-2 (Cont’d)
7. If the Sewer Fund is an enterprise fund, then a statement of cash flows is required
for that fund.
8. Where are the notes to the financial statements? The notes are a required and
integral part of any set of financial statements.
9. Where is the MD&A—also required by GAAP?
Given the serious reporting deficiencies observed, it is likely the CPA would be required
to render an adverse opinion, since it appears that the financial statements do not fairly
present financial information in conformity with GAAP. Depending on the quality of
the town’s financial records, it is also possible that the CPA would have to issue a
disclaimer report due to missing or insufficient financial information. (Note: You may
wish to look at Chapter 12 for the meaning of adverse and disclaimed audit reports.)
b. A member of the town council or a citizen of the town should be concerned as well
about several of the points made in part a above. Although the treasurer may still be
preparing statements of cash receipts and disbursements for each fund, the lack of
information about cost of services for governmental functions and sewer operations
should be of concern. Moreover, unless the town budgets on a cash basis, the lack of
GAAP-based fund statements results in a lack of full information about available
financial resources in the General and Road Tax Funds for budgeting purposes. The
lack of budget and actual comparison statements or schedules should also be of
concern to a member of the town council or a citizen.
2-3. Identification of which funds are reported as major funds is readily accomplished by
viewing the governmental funds balance sheet and statement of revenues, expenditures,
and changes in fund balances. Once a student calculates 10 percent of total governmental
fund assets, liabilities, revenues, and expenditures, and 5 percent of governmental and
enterprise fund totals for the same elements, it should be relatively simple to compare the
totals for these elements for each major fund to the 10 percent and 5 percent amounts.
Comparisons for the General Fund are unnecessary since this fund is always reported as a
major fund.
Solutions to Exercises and Problems
2-1. Each student should have a different governmental annual report, so will have different
answers to questions in this exercise. We suggest allowing students to discuss their
answers which will give them an idea of the range of the answers of other students.
2-2. 1. b. 6. b.
2. c . 7. b.
3. b. 8. c.
4. a. 9. d.
5. d. 10. c.
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-7
Ch. 2, Solutions (Cont’d)
2-3. 1. T.
2. T.
3. F. Fiduciary activities are reported only in the fiduciary fund financial statements.
4. T.
5. F. Integration of budgetary accounts is required for certain governmental fund
types, but is not recommended for proprietary funds.
6. F. A component unit whose activities are closely intertwined with those of the
primary government are reported by blending, which reports the component unit
financial information in the same columns as the primary government.
7. T.
8. F. While it is true that all enterprise fund financial information is reported in the
Business-type Activities column of the government-wide financial statements,
most internal service funds predominantly provide goods or services to
governmental funds and therefore the financial information of these funds is
generally reported in the Governmental Activities column.
9. F. Depreciation of general capital assets should be reported in the Governmental
Activities column of the government-wide financial statements but not in the
governmental fund financial statements.
10. T.
2-4. 1. Governmental funds b, e, f, i
2. Proprietary funds a, d, g, h, j
3. Fiduciary funds a, c, g, k
4. Governmental activities, a, g, h, j (Note: Internal service fund information
government-wide is typically reported in govern-
mental activities)
5. Business-type activities, a, g, j
government-wide
2-7
Ch. 2, Solutions (Cont’d)
2-3. 1. T.
2. T.
3. F. Fiduciary activities are reported only in the fiduciary fund financial statements.
4. T.
5. F. Integration of budgetary accounts is required for certain governmental fund
types, but is not recommended for proprietary funds.
6. F. A component unit whose activities are closely intertwined with those of the
primary government are reported by blending, which reports the component unit
financial information in the same columns as the primary government.
7. T.
8. F. While it is true that all enterprise fund financial information is reported in the
Business-type Activities column of the government-wide financial statements,
most internal service funds predominantly provide goods or services to
governmental funds and therefore the financial information of these funds is
generally reported in the Governmental Activities column.
9. F. Depreciation of general capital assets should be reported in the Governmental
Activities column of the government-wide financial statements but not in the
governmental fund financial statements.
10. T.
2-4. 1. Governmental funds b, e, f, i
2. Proprietary funds a, d, g, h, j
3. Fiduciary funds a, c, g, k
4. Governmental activities, a, g, h, j (Note: Internal service fund information
government-wide is typically reported in govern-
mental activities)
5. Business-type activities, a, g, j
government-wide
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-8
Ch. 2, Solutions (Cont’d)
2-5.
1. k. 7. e.
2. a. 8. i.
3. j. 9. f.
4. g. 10. c.
5. b. 11. h.
6. d.
2-6. 1. Record issuance of $100,000, 3-year note:
General Fund: Debits Credits
Cash 100,000
Other Financing Sources—
3-Year Note Payable 100,000
Governmental Activities:
Cash 100,000
Notes Payable 100,000
2. Record purchase of vehicles at a total cost of $100,000.
General Fund: Debits Credits
Expenditures—Capital Outlay 100,000
Cash 100,000
Governmental Activities:
Equipment 100,000
Cash 100,000
3. Recording these transactions in this manner is completely consistent with GASB
standards. Because the General Fund focuses on current financial resources and uses
the modified accrual basis of accounting, it does not record long-term liabilities, but
does record the inflow of the proceeds of the loan as an Other Financing Source.
This is a temporary account that increases fund balance in the General Fund. At the
government-wide level, however, the focus is on the flow of economic resources
using the accrual basis of accounting. Consequently, the long-term liability for the
$100,000 3-year note is recorded in the Governmental Activities general journal and
reported in the Governmental Activities column of the government-wide statement
of net assets.
Similarly, the General Fund records the outflow of current financial resources as an
Expenditure, a temporary account that reduces fund balance of the General Fund.
The general capital assets are recorded as
2-8
Ch. 2, Solutions (Cont’d)
2-5.
1. k. 7. e.
2. a. 8. i.
3. j. 9. f.
4. g. 10. c.
5. b. 11. h.
6. d.
2-6. 1. Record issuance of $100,000, 3-year note:
General Fund: Debits Credits
Cash 100,000
Other Financing Sources—
3-Year Note Payable 100,000
Governmental Activities:
Cash 100,000
Notes Payable 100,000
2. Record purchase of vehicles at a total cost of $100,000.
General Fund: Debits Credits
Expenditures—Capital Outlay 100,000
Cash 100,000
Governmental Activities:
Equipment 100,000
Cash 100,000
3. Recording these transactions in this manner is completely consistent with GASB
standards. Because the General Fund focuses on current financial resources and uses
the modified accrual basis of accounting, it does not record long-term liabilities, but
does record the inflow of the proceeds of the loan as an Other Financing Source.
This is a temporary account that increases fund balance in the General Fund. At the
government-wide level, however, the focus is on the flow of economic resources
using the accrual basis of accounting. Consequently, the long-term liability for the
$100,000 3-year note is recorded in the Governmental Activities general journal and
reported in the Governmental Activities column of the government-wide statement
of net assets.
Similarly, the General Fund records the outflow of current financial resources as an
Expenditure, a temporary account that reduces fund balance of the General Fund.
The general capital assets are recorded as
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Chapter 02 - Principles of Accounting and Financial Reporting for State and Local Governments
2-9
Ch. 2, Solutions, 2-6 (Cont’d)
an asset, Equipment, in the Governmental Activities general journal at the
government-wide level. The police vehicles will be depreciated at the
government-wide level each year. Depreciation has no effect on the General Fund.
2-7. DATE: xxx
MEMO TO: Town Manager, Town of Trenton
FROM: Independent Auditor
RE: Major Special Revenue Funds
As shown by the blue shading in the calculations provided below, only the
Housing and Urban Development Grant must be reported as a major fund.
Neither the Gas Tax Revenue Fund nor the Trenton Library Fund meets the
GASB threshold for major fund reporting; that is, none of the four elements of
those funds (assets, liabilities, revenues, or expenditures) is at least 10% of the
corresponding total of all governmental funds and at least 5% of the
corresponding total of all governmental and enterprise funds. Both total assets
and total revenues of the Housing and Urban Development Grant meet the 10
percent of all governmental funds and 5 percent of all governmental and
enterprise funds combined criteria. Although the Gas Tax Revenue Funds did not
meet the criteria for major fund reporting, rapidly escalating gas taxes tied to the
current high price of gasoline might warrant reporting this fund as a major fund to
improve accountability to citizens. GASBS 34 permits government officials to
designate any governmental or enterprise fund as a major fund if, in their
judgment, the fund is of sufficient importance to warrant designation as a major
fund.
Calculation of Major Fund Thresholds
Financial
Statement
Elements
Gas Tax Revenue Fund
Housing and Urban
Development Fund Trenton Library Fund
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
Assets Yes-10.3% No-4.6% Yes-11.2% Yes-5.01% No-6.5% No-2.9%
Liabilities No-8.4% No-4.9% No-9.8% Yes-5.7% No-0.0% No-0.0%
Revenues No-9.0% No-4.6% Yes-11.1% Yes-5.7% No-7.8% No-4.0%
Expenditures No-8.3% No-4.6% No-8.7% No-4.9% No-8.0% No-4.5%
2-9
Ch. 2, Solutions, 2-6 (Cont’d)
an asset, Equipment, in the Governmental Activities general journal at the
government-wide level. The police vehicles will be depreciated at the
government-wide level each year. Depreciation has no effect on the General Fund.
2-7. DATE: xxx
MEMO TO: Town Manager, Town of Trenton
FROM: Independent Auditor
RE: Major Special Revenue Funds
As shown by the blue shading in the calculations provided below, only the
Housing and Urban Development Grant must be reported as a major fund.
Neither the Gas Tax Revenue Fund nor the Trenton Library Fund meets the
GASB threshold for major fund reporting; that is, none of the four elements of
those funds (assets, liabilities, revenues, or expenditures) is at least 10% of the
corresponding total of all governmental funds and at least 5% of the
corresponding total of all governmental and enterprise funds. Both total assets
and total revenues of the Housing and Urban Development Grant meet the 10
percent of all governmental funds and 5 percent of all governmental and
enterprise funds combined criteria. Although the Gas Tax Revenue Funds did not
meet the criteria for major fund reporting, rapidly escalating gas taxes tied to the
current high price of gasoline might warrant reporting this fund as a major fund to
improve accountability to citizens. GASBS 34 permits government officials to
designate any governmental or enterprise fund as a major fund if, in their
judgment, the fund is of sufficient importance to warrant designation as a major
fund.
Calculation of Major Fund Thresholds
Financial
Statement
Elements
Gas Tax Revenue Fund
Housing and Urban
Development Fund Trenton Library Fund
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
Assets Yes-10.3% No-4.6% Yes-11.2% Yes-5.01% No-6.5% No-2.9%
Liabilities No-8.4% No-4.9% No-9.8% Yes-5.7% No-0.0% No-0.0%
Revenues No-9.0% No-4.6% Yes-11.1% Yes-5.7% No-7.8% No-4.0%
Expenditures No-8.3% No-4.6% No-8.7% No-4.9% No-8.0% No-4.5%
Loading page 18...
Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-1
CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT
ACCOUNTS; BUDGETARY ACCOUNTING
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
3-1 GASBS 34 reporting model Explain New
3-2 Statement of activities format Describe Same
3-3 Depreciation expense/direct expenses Define 3-3 revised
3-4 Program and general revenue Distinguish Same
3-5 Extraordinary compared with special items Define and compare New
3-6 Expenditure classifications - examples Classify 3-7
3-7 Temporary and permanent accounts Distinguish 3-6
3-8 Revenue classifications Classify Same
3-9 Budgetary comparison schedules/statements Explain New
3-10 Public school systems Explain Same
Cases:
3-1 Revenue and expense/expenditure
classification
Internet, examine,
describe
Same
3-2 Budgetary comparison schedule Internet, examine,
describe
Same
3-3 Charter schools (public school academies) Internet, explain Same
Exercises/Problems:
3-1 CAFR Examine Same
3-2 Various Multiple Choice Some new
items; rest are
revised
3-3 Village of Wymette Explain and calculate New
3-4 City of Marion—recording budget Journal Entries 3-3 revised
3-5 City of Marion—recording encumbrances Journal Entries 3-4 revised
3-5 GF trial balance and closing entries Calculate 3-5 revised
3-6 Subsidiary ledgers Calculate Same
3-7 Appropriations, encumbrances, expenditures Calculate Same
3-8 Computerized accounting system—depart-
mental budgetary comparison report
Analyze and explain New
3-9 Recording budget and operating transactions Journal entries;
Calculate
3-8
3-10 Government-wide statement of activities Prepare 3-9 revised
3-1
CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT
ACCOUNTS; BUDGETARY ACCOUNTING
OUTLINE
Number Topic Type/Task Status
(re: 14/e)
Questions:
3-1 GASBS 34 reporting model Explain New
3-2 Statement of activities format Describe Same
3-3 Depreciation expense/direct expenses Define 3-3 revised
3-4 Program and general revenue Distinguish Same
3-5 Extraordinary compared with special items Define and compare New
3-6 Expenditure classifications - examples Classify 3-7
3-7 Temporary and permanent accounts Distinguish 3-6
3-8 Revenue classifications Classify Same
3-9 Budgetary comparison schedules/statements Explain New
3-10 Public school systems Explain Same
Cases:
3-1 Revenue and expense/expenditure
classification
Internet, examine,
describe
Same
3-2 Budgetary comparison schedule Internet, examine,
describe
Same
3-3 Charter schools (public school academies) Internet, explain Same
Exercises/Problems:
3-1 CAFR Examine Same
3-2 Various Multiple Choice Some new
items; rest are
revised
3-3 Village of Wymette Explain and calculate New
3-4 City of Marion—recording budget Journal Entries 3-3 revised
3-5 City of Marion—recording encumbrances Journal Entries 3-4 revised
3-5 GF trial balance and closing entries Calculate 3-5 revised
3-6 Subsidiary ledgers Calculate Same
3-7 Appropriations, encumbrances, expenditures Calculate Same
3-8 Computerized accounting system—depart-
mental budgetary comparison report
Analyze and explain New
3-9 Recording budget and operating transactions Journal entries;
Calculate
3-8
3-10 Government-wide statement of activities Prepare 3-9 revised
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-2
CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT
ACCOUNTS; BUDGETARY ACCOUNTING
Answers to Questions
3-1. The governmental fund financial statements report current financial resources
information intended to help users assess current period fiscal accountability—whether
revenues were raised only from authorized sources and expended for authorized
purposes. As such, the governmental fund statements lack the mid- to long-term focus on
economic resources and cost of services needed to assess operational accountability.
3-2. Using the net (expense) or revenue format, sometimes referred to as the “cost of services”
approach, identifies the extent to which each function or program is self-supporting from
fees and intergovernmental aid, or must be subsidized by general revenues of the
government.
3-3. Depreciation expense is reported as a direct expense when it relates to capital assets that
are clearly identified with a function or program because it captures a real cost of using
capital assets to provide that service function or program. Even depreciation expense for
infrastructure assets should be reported as a direct expense of the public works or
transportation function, if that is the function responsible for those assets.
3-4. a. General revenues.
b. Program revenues.
c. Program revenues.
d. Program revenues.
e. Program revenues.
f. General revenues.
g. General revenues.
3-5. Extraordinary items are those items (gains or losses) that are both unusual in nature and
infrequent in occurrence. Special items are either unusual in nature or infrequent in
occurrence, but not both. Special items also differ from extraordinary items in that they
are within the control of management. Both types of items are reported as separate line
items below General Revenues in the statement of activities.
3-6. a. Organization unit f. Both character and object
b. Function g. Program
c. Activity h. Function
d. Activity i. Organization unit
e. Object j. Object
3-2
CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT
ACCOUNTS; BUDGETARY ACCOUNTING
Answers to Questions
3-1. The governmental fund financial statements report current financial resources
information intended to help users assess current period fiscal accountability—whether
revenues were raised only from authorized sources and expended for authorized
purposes. As such, the governmental fund statements lack the mid- to long-term focus on
economic resources and cost of services needed to assess operational accountability.
3-2. Using the net (expense) or revenue format, sometimes referred to as the “cost of services”
approach, identifies the extent to which each function or program is self-supporting from
fees and intergovernmental aid, or must be subsidized by general revenues of the
government.
3-3. Depreciation expense is reported as a direct expense when it relates to capital assets that
are clearly identified with a function or program because it captures a real cost of using
capital assets to provide that service function or program. Even depreciation expense for
infrastructure assets should be reported as a direct expense of the public works or
transportation function, if that is the function responsible for those assets.
3-4. a. General revenues.
b. Program revenues.
c. Program revenues.
d. Program revenues.
e. Program revenues.
f. General revenues.
g. General revenues.
3-5. Extraordinary items are those items (gains or losses) that are both unusual in nature and
infrequent in occurrence. Special items are either unusual in nature or infrequent in
occurrence, but not both. Special items also differ from extraordinary items in that they
are within the control of management. Both types of items are reported as separate line
items below General Revenues in the statement of activities.
3-6. a. Organization unit f. Both character and object
b. Function g. Program
c. Activity h. Function
d. Activity i. Organization unit
e. Object j. Object
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-3
Ch. 3, Answers (Cont’d)
3-7. Definitions of these terms are given in the Glossary of the text. Below are briefer
statements:
a. Expenditures and Encumbrances are both charges against appropriations. An
encumbrance is a charge for an estimated amount at the time goods are ordered; an
expenditure is a charge for an actual amount at the time the goods are received
(accrual and modified accrual basis) or paid (cash basis). Encumbrance accounting
is used only in those funds where it is needed to achieve budgetary control over
expenditures.
b. Revenues are increases in net assets of the government as a whole or of a fund
other than from interfund transfers or debt issue proceeds, recognized at the time
the increase is earned (accrual basis), available for use (modified accrual basis) or
received in cash (cash basis). Estimated revenues are amounts expected to be
available for use or received under enabling legislation during a budget period.
Estimated Revenues is a budgetary account representing the expected amount of
revenues to be realized from various sources.
c. The term encumbrances is defined in a above. Reserve for Encumbrances is a
balance sheet account representing the amount segregated from fund balance for
expected liabilities resulting from purchase orders and contracts issued.
d. Reserve for Encumbrances is defined in c above. The Fund Balance of a
governmental fund is the excess of fund assets over fund liabilities,
appropriations, and reserves; in short, the assets available for appropriation
[defined in e below] in governmental funds.
e. Expenditures is defined in a above. An Appropriation is an authorization by the
legislative branch for administrators to incur expenditures for specified purposes
not to exceed specified amounts. Usually the authorization is for a limited time.
Appropriations is a budgetary account.
f. Expenditures, defined in a above, represent outflow of current financial resources
for asset acquisition as well as for salaries, supplies for immediate consumption,
travel, and so forth—whatever is specified in the appropriations. The term is used
in fund financial statements. Expenses, in governmental accounting as well as
business accounting, are expired costs; the full cost of services or goods
consumed in providing services to citizens and others. Expenses are found in the
government-wide financial statements as well as in the proprietary financial
statements.
3-3
Ch. 3, Answers (Cont’d)
3-7. Definitions of these terms are given in the Glossary of the text. Below are briefer
statements:
a. Expenditures and Encumbrances are both charges against appropriations. An
encumbrance is a charge for an estimated amount at the time goods are ordered; an
expenditure is a charge for an actual amount at the time the goods are received
(accrual and modified accrual basis) or paid (cash basis). Encumbrance accounting
is used only in those funds where it is needed to achieve budgetary control over
expenditures.
b. Revenues are increases in net assets of the government as a whole or of a fund
other than from interfund transfers or debt issue proceeds, recognized at the time
the increase is earned (accrual basis), available for use (modified accrual basis) or
received in cash (cash basis). Estimated revenues are amounts expected to be
available for use or received under enabling legislation during a budget period.
Estimated Revenues is a budgetary account representing the expected amount of
revenues to be realized from various sources.
c. The term encumbrances is defined in a above. Reserve for Encumbrances is a
balance sheet account representing the amount segregated from fund balance for
expected liabilities resulting from purchase orders and contracts issued.
d. Reserve for Encumbrances is defined in c above. The Fund Balance of a
governmental fund is the excess of fund assets over fund liabilities,
appropriations, and reserves; in short, the assets available for appropriation
[defined in e below] in governmental funds.
e. Expenditures is defined in a above. An Appropriation is an authorization by the
legislative branch for administrators to incur expenditures for specified purposes
not to exceed specified amounts. Usually the authorization is for a limited time.
Appropriations is a budgetary account.
f. Expenditures, defined in a above, represent outflow of current financial resources
for asset acquisition as well as for salaries, supplies for immediate consumption,
travel, and so forth—whatever is specified in the appropriations. The term is used
in fund financial statements. Expenses, in governmental accounting as well as
business accounting, are expired costs; the full cost of services or goods
consumed in providing services to citizens and others. Expenses are found in the
government-wide financial statements as well as in the proprietary financial
statements.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-4
Ch. 3, Answers (Cont'd)
3-8. a. Taxes e. Intergovernmental revenue
b. Charges for services f. Miscellaneous revenues
c. Licenses and permits g. Charges for services
d. Fines and forfeits h. Licenses and permits
3-9. Budgetary comparison schedules (or statements) must be provided for the General Fund
and each major special revenue fund for which a budget is adopted. In order for budget
to actual comparisons to be meaningful, actual revenues and expenditures must be
reported in the same manner as the budgeted amounts. Actual revenues and expenditures
reported in the statement of revenues, expenditures, and changes in fund balances should
be on the GAAP basis. GASB standards identify several possible differences between
GAAP and budgetary financial accounting. These include basis, timing, perspective, and
entity. GASBS 34 requires that reconciliation of the differences between amounts reported
in the GAAP basis operating statement and those reported in the budgetary comparison
schedule, either on the face of the budgetary comparison schedule or on a separate page.
3-10. Public school systems are expected to follow the classification system specified by the
National Center for Education Statistics (NCES), as refined or mandated by a state
education oversight body. The NCES system combines the GASB expenditure
classification structure into nine categories, most of which are necessary for adequate
internal management and comparable financial reporting across schools.
The NCES revenue classification scheme also groups classifications into numerous
categories, but are generally classified by fund, source, and project/reporting code. The
NCES expenditure and revenue dimensions should be compared with the corresponding
GASB expenditure and revenue classifications described in this chapter. GASB standards
require that expenditures be classified by fund, function or program, organization unit,
activity, character, and object and that revenues be classified by fund and source.
Comparison of the NCES and GASB classification show that they are generally
compatible, but the NCES classification structure is considerably more detailed to meet
the unique reporting needs of public school systems.
Solutions to Cases
3-1. Students should easily be able to locate a city’s Web site, then explore the Finance
Department (or comparable name) link and look for links to financial reports.
Alternatively, a number of cities have links to their CAFRs from the “Project
Pages/Statement 34” link of the GASB Web site (www.gasb.org). Responses to each of
the questions in this case will depend on how a particular city classifies its revenues and
expenses/expenditures.
3-4
Ch. 3, Answers (Cont'd)
3-8. a. Taxes e. Intergovernmental revenue
b. Charges for services f. Miscellaneous revenues
c. Licenses and permits g. Charges for services
d. Fines and forfeits h. Licenses and permits
3-9. Budgetary comparison schedules (or statements) must be provided for the General Fund
and each major special revenue fund for which a budget is adopted. In order for budget
to actual comparisons to be meaningful, actual revenues and expenditures must be
reported in the same manner as the budgeted amounts. Actual revenues and expenditures
reported in the statement of revenues, expenditures, and changes in fund balances should
be on the GAAP basis. GASB standards identify several possible differences between
GAAP and budgetary financial accounting. These include basis, timing, perspective, and
entity. GASBS 34 requires that reconciliation of the differences between amounts reported
in the GAAP basis operating statement and those reported in the budgetary comparison
schedule, either on the face of the budgetary comparison schedule or on a separate page.
3-10. Public school systems are expected to follow the classification system specified by the
National Center for Education Statistics (NCES), as refined or mandated by a state
education oversight body. The NCES system combines the GASB expenditure
classification structure into nine categories, most of which are necessary for adequate
internal management and comparable financial reporting across schools.
The NCES revenue classification scheme also groups classifications into numerous
categories, but are generally classified by fund, source, and project/reporting code. The
NCES expenditure and revenue dimensions should be compared with the corresponding
GASB expenditure and revenue classifications described in this chapter. GASB standards
require that expenditures be classified by fund, function or program, organization unit,
activity, character, and object and that revenues be classified by fund and source.
Comparison of the NCES and GASB classification show that they are generally
compatible, but the NCES classification structure is considerably more detailed to meet
the unique reporting needs of public school systems.
Solutions to Cases
3-1. Students should easily be able to locate a city’s Web site, then explore the Finance
Department (or comparable name) link and look for links to financial reports.
Alternatively, a number of cities have links to their CAFRs from the “Project
Pages/Statement 34” link of the GASB Web site (www.gasb.org). Responses to each of
the questions in this case will depend on how a particular city classifies its revenues and
expenses/expenditures.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-5
Ch. 3, Solutions, Case 3-1 (Cont’d)
a. Occasionally, one may find a city that classifies its program revenues and direct
expenses by program, but functional classifications, similar to those described in this
chapter, are much more common. In most cases, all function or program line items
on the statement of activities will report a net expense, with numbers in parentheses.
b. On the statement of revenues, expenditures, and changes in fund balances, revenues
and expenditures are reported in separate columns for the General Fund and other
major governmental funds. Information for all nonmajor governmental funds is
reported in aggregate in a single column. Students will likely find that the revenues
reported on this statement are classified by source (taxes, licenses and permits,
charges for services, etc.). Some cities will report a different amount for tax
revenues on their statement of activities than on their statement of revenues,
expenditures, and changes in fund balances because all tax revenues levied for the
year will be reported on the former statement, while those that will not be collected
during the current fiscal year or within 60 days thereafter will be reported as deferred
taxes on the latter statement.
c. Expenditures will generally be classified by function on the statement of revenues,
expenditures, and changes in fund balances and, infrequently, by program. Students
are almost certain to find different amounts reported for expenses on the statement of
activities and expenditures on statement of revenues, expenditures, and changes in
fund balances. Among other explanations, expenses exclude outlays for capitalized
assets, but include depreciation expense; expenditures include capital outlays but
exclude depreciation expense. Generally, expenses and expenditures will not be the
same amounts for the reasons just explained.
3-2. Again the responses to individual questions will depend on the practices of the particular
city selected. Some general expectations for each question include:
a. Typically more detail is provided for revenues and expenditures in the budgetary
comparison schedule, though not always. The reason for including more detail in the
budgetary comparison schedule, both for revenues and expenditures, is to better
match the level of detail used in the budget document. For revenues, cities often
report budget and actual information for subclasses of sources, such as various types
of taxes. For expenditures, cities sometimes report budget and actual information for
organization units and objects.
b. Students will probably find that actual revenues on the budgetary comparison
schedule agree in amount with those reported on the GAAP operating statement. If a
difference is noted between these amounts, it is likely attributable to revenues being
recognized on a cash basis for budgetary purposes, rather than modified accrual.
c. Some students will discover that actual expenditures on the budgetary comparison
schedule differ from those reported on the GAAP operating statement. The
explanation given in most of these cases will be that expenditures on the budgetary
comparison schedule also include encumbrances outstanding at year-end.
3-5
Ch. 3, Solutions, Case 3-1 (Cont’d)
a. Occasionally, one may find a city that classifies its program revenues and direct
expenses by program, but functional classifications, similar to those described in this
chapter, are much more common. In most cases, all function or program line items
on the statement of activities will report a net expense, with numbers in parentheses.
b. On the statement of revenues, expenditures, and changes in fund balances, revenues
and expenditures are reported in separate columns for the General Fund and other
major governmental funds. Information for all nonmajor governmental funds is
reported in aggregate in a single column. Students will likely find that the revenues
reported on this statement are classified by source (taxes, licenses and permits,
charges for services, etc.). Some cities will report a different amount for tax
revenues on their statement of activities than on their statement of revenues,
expenditures, and changes in fund balances because all tax revenues levied for the
year will be reported on the former statement, while those that will not be collected
during the current fiscal year or within 60 days thereafter will be reported as deferred
taxes on the latter statement.
c. Expenditures will generally be classified by function on the statement of revenues,
expenditures, and changes in fund balances and, infrequently, by program. Students
are almost certain to find different amounts reported for expenses on the statement of
activities and expenditures on statement of revenues, expenditures, and changes in
fund balances. Among other explanations, expenses exclude outlays for capitalized
assets, but include depreciation expense; expenditures include capital outlays but
exclude depreciation expense. Generally, expenses and expenditures will not be the
same amounts for the reasons just explained.
3-2. Again the responses to individual questions will depend on the practices of the particular
city selected. Some general expectations for each question include:
a. Typically more detail is provided for revenues and expenditures in the budgetary
comparison schedule, though not always. The reason for including more detail in the
budgetary comparison schedule, both for revenues and expenditures, is to better
match the level of detail used in the budget document. For revenues, cities often
report budget and actual information for subclasses of sources, such as various types
of taxes. For expenditures, cities sometimes report budget and actual information for
organization units and objects.
b. Students will probably find that actual revenues on the budgetary comparison
schedule agree in amount with those reported on the GAAP operating statement. If a
difference is noted between these amounts, it is likely attributable to revenues being
recognized on a cash basis for budgetary purposes, rather than modified accrual.
c. Some students will discover that actual expenditures on the budgetary comparison
schedule differ from those reported on the GAAP operating statement. The
explanation given in most of these cases will be that expenditures on the budgetary
comparison schedule also include encumbrances outstanding at year-end.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-6
Ch. 3, Solutions, Case 3-2 (Cont’d)
d. If actual revenues and/or expenditures are prepared on a non-GAAP budgetary basis,
the budgetary comparison schedule should indicate such, either in the schedule
heading or the Actual column heading.
e. Although a variance column is not required by GASB standards, it is difficult to
imagine a city not providing a column showing the variance between actual and either
the adopted or final budget amounts.
3-3. a. In most states, charter schools (or public school academies) are considered public
schools receiving public funds. Consequently, these schools should follow GASB
standards in order to ensure that financial statements conform to generally accepted
accounting principles. Generally, these schools are small and may only have need
for a General Fund and a special revenue fund for their food service program. The
revenue and expense classification scheme described in the Appendix to Chapter 3,
based on NCES guidance, is an appropriate starting place for building a chart of
accounts and an accounting information system. Budgetary accounting is required
by GAAP.
b. Students should check their own state’s Department of Education (or comparable
agency) for other guidance for traditional pre-K through 12 schools. The Michigan
Association of Public School Academies also provides resources for charter schools
and their accountants (www.charterschools.org ). The U.S. Charter Schools website
(www.uscharterschools.org ) provides valuable guidance in developing systems of
financial and operational accountability for those who are new to charter schools, as
well as links to other resources.
Solutions to Exercises and Problems
3-1. Each student should have a different governmental annual report, so will have different
answers to the questions in this exercise. Some time spent in class to allow students to
report on their own answers and to get an idea of the range of answers of other students is
useful.
3-2. 1. d. 6. b.
2. b. 7. b.
3. c. 8. c.
4. a. 9. b.
5. a. 10. c.
3-6
Ch. 3, Solutions, Case 3-2 (Cont’d)
d. If actual revenues and/or expenditures are prepared on a non-GAAP budgetary basis,
the budgetary comparison schedule should indicate such, either in the schedule
heading or the Actual column heading.
e. Although a variance column is not required by GASB standards, it is difficult to
imagine a city not providing a column showing the variance between actual and either
the adopted or final budget amounts.
3-3. a. In most states, charter schools (or public school academies) are considered public
schools receiving public funds. Consequently, these schools should follow GASB
standards in order to ensure that financial statements conform to generally accepted
accounting principles. Generally, these schools are small and may only have need
for a General Fund and a special revenue fund for their food service program. The
revenue and expense classification scheme described in the Appendix to Chapter 3,
based on NCES guidance, is an appropriate starting place for building a chart of
accounts and an accounting information system. Budgetary accounting is required
by GAAP.
b. Students should check their own state’s Department of Education (or comparable
agency) for other guidance for traditional pre-K through 12 schools. The Michigan
Association of Public School Academies also provides resources for charter schools
and their accountants (www.charterschools.org ). The U.S. Charter Schools website
(www.uscharterschools.org ) provides valuable guidance in developing systems of
financial and operational accountability for those who are new to charter schools, as
well as links to other resources.
Solutions to Exercises and Problems
3-1. Each student should have a different governmental annual report, so will have different
answers to the questions in this exercise. Some time spent in class to allow students to
report on their own answers and to get an idea of the range of answers of other students is
useful.
3-2. 1. d. 6. b.
2. b. 7. b.
3. c. 8. c.
4. a. 9. b.
5. a. 10. c.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-7
Chapter 3, Solutions (Cont’d)
3-3.
a. The answer is no to both parts of the question. Subject to an ordinance or
policy that requires a minimum end-of-year fund balance, any unreserved
fund balance above that amount can be considered available for
appropriation in the same manner as revenues and other financing
sources. Consequently, if the sum of any excess fund balance and
estimated revenues exceeds appropriations, then village officials would be
in compliance with any balanced budget requirement. In fact, legislative
bodies often budget the use of a portion of fund balance if it exceeds any
minimum requirement established by law or policy.
b.
Fund Balance at 6-30-2010 after all closing entries will be $595,000, as
shown below:
FUND BALANCE
$ 580,000 Balance as of 6-30-2009
3,190,000 To close revenues for the year
(3,175,000) To close expenditures for the year
$ 595,000 Balance as of 6-30-2010
Note: Estimated Revenues and Appropriations are closed to Budgetary
Fund Balance by reversing the original budgetary entry. So the
balance of Budgetary Fund Balance will be zero.
3-4. City of Marion
a. Estimated revenues total—FY 2011 $ 4,650,000
Appropriations total—FY 2011 4,800,000
Therefore, fund balance at the end of
FY 2010 must be at least $ 150,000
or else the fund would be thrown into a deficit.
3-7
Chapter 3, Solutions (Cont’d)
3-3.
a. The answer is no to both parts of the question. Subject to an ordinance or
policy that requires a minimum end-of-year fund balance, any unreserved
fund balance above that amount can be considered available for
appropriation in the same manner as revenues and other financing
sources. Consequently, if the sum of any excess fund balance and
estimated revenues exceeds appropriations, then village officials would be
in compliance with any balanced budget requirement. In fact, legislative
bodies often budget the use of a portion of fund balance if it exceeds any
minimum requirement established by law or policy.
b.
Fund Balance at 6-30-2010 after all closing entries will be $595,000, as
shown below:
FUND BALANCE
$ 580,000 Balance as of 6-30-2009
3,190,000 To close revenues for the year
(3,175,000) To close expenditures for the year
$ 595,000 Balance as of 6-30-2010
Note: Estimated Revenues and Appropriations are closed to Budgetary
Fund Balance by reversing the original budgetary entry. So the
balance of Budgetary Fund Balance will be zero.
3-4. City of Marion
a. Estimated revenues total—FY 2011 $ 4,650,000
Appropriations total—FY 2011 4,800,000
Therefore, fund balance at the end of
FY 2010 must be at least $ 150,000
or else the fund would be thrown into a deficit.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-8
Ch. 3, Solutions, 3-4 (Cont’d)
General Ledger Subsidiary Ledger
Debits Credits Debits Credits
b. ESTIMATED REVENUES 4,650,000
BUDGETARY FUND
BALANCE 150,000
APPROPRIATIONS 4,800,000
Estimated Revenues Ledger:
TAXES 3,000,000
INTERGOVERNMENTAL REVENUES 1,000,000
LICENSES AND PERMITS 400,000
FINES AND FORFEITS 150,000
MISCELLANEOUS REVENUES 100,000
Appropriations Ledger:
GENERAL GOVERNMENT 950,000
PUBLIC SAFETY 2,000,000
PUBLIC WORKS 950,000
HEALTH AND WELFARE 850,000
MISCELLANEOUS 50,000
3-8
Ch. 3, Solutions, 3-4 (Cont’d)
General Ledger Subsidiary Ledger
Debits Credits Debits Credits
b. ESTIMATED REVENUES 4,650,000
BUDGETARY FUND
BALANCE 150,000
APPROPRIATIONS 4,800,000
Estimated Revenues Ledger:
TAXES 3,000,000
INTERGOVERNMENTAL REVENUES 1,000,000
LICENSES AND PERMITS 400,000
FINES AND FORFEITS 150,000
MISCELLANEOUS REVENUES 100,000
Appropriations Ledger:
GENERAL GOVERNMENT 950,000
PUBLIC SAFETY 2,000,000
PUBLIC WORKS 950,000
HEALTH AND WELFARE 850,000
MISCELLANEOUS 50,000
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-9
Ch. 3, Solutions (Cont'd)
3-5.
General Ledger Subsidiary Ledger
Debits Credits Debits Credits
a. ENCUMBRANCES⎯2011 394,000
RESERVE FOR
ENCUMBRANCES⎯2011 394,000
Encumbrances Ledger:
GENERAL GOVERNMENT 50,000
PUBLIC SAFETY 200,000
PUBLIC WORKS 75,000
HEALTH AND WELFARE 65,000
MISCELLANEOUS 4,000
b. Purchase orders issued by a governmental fund have the effect of using all
or a portion of one or more appropriations for that fund. Issuance of
purchase orders or other commitment documents is a step in the
expenditure of an appropriation; administrators may be subject to legal
penalties if they expend more resources than were appropriated. Recording
encumbrances helps administrators avoid overexpending appropriations.
The same legal issues do not exist in business organizations, although a
well-managed business should certainly keep track of outstanding
purchase orders and contracts to have a clear understanding of what
transactions are in process that will result in the acquisition of assets, the
incurring of expenses, and the incurring of liabilities.
3-9
Ch. 3, Solutions (Cont'd)
3-5.
General Ledger Subsidiary Ledger
Debits Credits Debits Credits
a. ENCUMBRANCES⎯2011 394,000
RESERVE FOR
ENCUMBRANCES⎯2011 394,000
Encumbrances Ledger:
GENERAL GOVERNMENT 50,000
PUBLIC SAFETY 200,000
PUBLIC WORKS 75,000
HEALTH AND WELFARE 65,000
MISCELLANEOUS 4,000
b. Purchase orders issued by a governmental fund have the effect of using all
or a portion of one or more appropriations for that fund. Issuance of
purchase orders or other commitment documents is a step in the
expenditure of an appropriation; administrators may be subject to legal
penalties if they expend more resources than were appropriated. Recording
encumbrances helps administrators avoid overexpending appropriations.
The same legal issues do not exist in business organizations, although a
well-managed business should certainly keep track of outstanding
purchase orders and contracts to have a clear understanding of what
transactions are in process that will result in the acquisition of assets, the
incurring of expenses, and the incurring of liabilities.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-10
Ch. 3, Solutions (Cont'd)
3-6.
a. $14,980,000 (the sum of the amounts presently in the Estimated Revenues
column of the subsidiary ledgers).
b. $15,000,000 (the sum of the 01/01 entries in the Estimated Revenues
column)
c. 1. Yes
2. 02/28 (45 6 folio entry to Property Taxes)
3. $20,000
4. Decreased
d. $12,080,000 (the sum of the amounts in the Revenues column)
e. Property tax revenue is being accrued; revenue from the other three sources
is being recognized when the cash is received. That is, when it is first
measurable and available according to the modified accrual basis of
accounting.
3-10
Ch. 3, Solutions (Cont'd)
3-6.
a. $14,980,000 (the sum of the amounts presently in the Estimated Revenues
column of the subsidiary ledgers).
b. $15,000,000 (the sum of the 01/01 entries in the Estimated Revenues
column)
c. 1. Yes
2. 02/28 (45 6 folio entry to Property Taxes)
3. $20,000
4. Decreased
d. $12,080,000 (the sum of the amounts in the Revenues column)
e. Property tax revenue is being accrued; revenue from the other three sources
is being recognized when the cash is received. That is, when it is first
measurable and available according to the modified accrual basis of
accounting.
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-11
Ch. 3, Solutions (Cont'd)
3-7.
a. $62,200. The refund of prior year expenditure and the refund on P.O. 350
do not add to appropriation authority⎯the former is generally reported as
revenue of the current year; the latter is a reduction of expenditures from
this year's appropriation. Similarly, the cost of stationery transferred to the
Town Water Utility is a reimbursement of expenditures from this year's
appropriation. The unauthorized transfer of $46,000 from Office Supplies
to Personal Services should be disregarded.
b. None. The outstanding purchase orders, #378 and #385, are not for office
supplies but for office equipment and should not have been charged to this
appropriation.
Clerical errors in recording the encumbrance for #356, the encumbrance
credit for #350, and the erroneous charge of #380 to this appropriation and
failure to credit Encumbrances when #380 was filled do not affect the
computation of the correct answer to b, although they would need to be
corrected in the account—if the "comparison" is a subsidiary ledger
account.
c. $1,110 (#350, $605; #356, $420; #370, $425; less $330 and $10 considered
reimbursements of this year's expenditures of this appropriation).
d. $61,090 ($62,200 - $1,110).
3-11
Ch. 3, Solutions (Cont'd)
3-7.
a. $62,200. The refund of prior year expenditure and the refund on P.O. 350
do not add to appropriation authority⎯the former is generally reported as
revenue of the current year; the latter is a reduction of expenditures from
this year's appropriation. Similarly, the cost of stationery transferred to the
Town Water Utility is a reimbursement of expenditures from this year's
appropriation. The unauthorized transfer of $46,000 from Office Supplies
to Personal Services should be disregarded.
b. None. The outstanding purchase orders, #378 and #385, are not for office
supplies but for office equipment and should not have been charged to this
appropriation.
Clerical errors in recording the encumbrance for #356, the encumbrance
credit for #350, and the erroneous charge of #380 to this appropriation and
failure to credit Encumbrances when #380 was filled do not affect the
computation of the correct answer to b, although they would need to be
corrected in the account—if the "comparison" is a subsidiary ledger
account.
c. $1,110 (#350, $605; #356, $420; #370, $425; less $330 and $10 considered
reimbursements of this year's expenditures of this appropriation).
d. $61,090 ($62,200 - $1,110).
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-12
Ch. 3, Solutions (Cont'd)
3-8.
a. Apparently, Lincoln City uses a 10-digit account number structure having
three segments. Presumably, the first segment is the fund code, with 01
representing the General Fund. As the heading implies, the second
segment (divided into two sub-segments) is the organizational unit, with 08-
00 assigned to the Parks and Recreation Department. The zeros in the
second sub-segment can be replaced with numbers representing activities
within the department, such as parks, aquatic recreation, athletic facilities,
administration, and so forth. The third segment represents the object of
expenditure. This segment can be further subdivided to provide greater
expenditure detail, such as 7120 for building materials, 7130 for
maintenance supplies, and 7140 for office supplies. This account structure
appears to meet the GASB’s expenditure classification requirements.
b. Encumbrance control procedures are generally used only for purchases of
goods and services for which there is delay between placing the order or
contract and receipt of the goods or services. Recurring expenditure
requirements such as payroll and utilities are fairly predictable, so
encumbrance procedures are generally not necessary to adequately control
these expenditures. Conferences and training are usually not “ordered” in
advance in the sense of a purchase order or contract for future service.
Even if conference registrations or airline reservations are made in advance,
those are usually paid at the time of the registration or reservation and thus
are actual, not estimated, expenditures.
c. At the mid-point of FY2010, the Parks and Recreation Department has
expended or encumbered the following percentages of its appropriations:
Personnel Services 45.5%
Materials and Supplies 62.5%
Conferences and Training 37.5%
Contractual Services 69.5%
3-12
Ch. 3, Solutions (Cont'd)
3-8.
a. Apparently, Lincoln City uses a 10-digit account number structure having
three segments. Presumably, the first segment is the fund code, with 01
representing the General Fund. As the heading implies, the second
segment (divided into two sub-segments) is the organizational unit, with 08-
00 assigned to the Parks and Recreation Department. The zeros in the
second sub-segment can be replaced with numbers representing activities
within the department, such as parks, aquatic recreation, athletic facilities,
administration, and so forth. The third segment represents the object of
expenditure. This segment can be further subdivided to provide greater
expenditure detail, such as 7120 for building materials, 7130 for
maintenance supplies, and 7140 for office supplies. This account structure
appears to meet the GASB’s expenditure classification requirements.
b. Encumbrance control procedures are generally used only for purchases of
goods and services for which there is delay between placing the order or
contract and receipt of the goods or services. Recurring expenditure
requirements such as payroll and utilities are fairly predictable, so
encumbrance procedures are generally not necessary to adequately control
these expenditures. Conferences and training are usually not “ordered” in
advance in the sense of a purchase order or contract for future service.
Even if conference registrations or airline reservations are made in advance,
those are usually paid at the time of the registration or reservation and thus
are actual, not estimated, expenditures.
c. At the mid-point of FY2010, the Parks and Recreation Department has
expended or encumbered the following percentages of its appropriations:
Personnel Services 45.5%
Materials and Supplies 62.5%
Conferences and Training 37.5%
Contractual Services 69.5%
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Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting
3-13
Ch. 3, Solutions, 3-8 (Cont'd)
Utilities 51.1%
Capital Outlay 43.1%
Other 72.1%
At first glance, it appears that the Materials and Supplies, Contractual
Services, and Other accounts could expend their appropriations well before
the end of the fiscal year. Additional information about normal seasonal
usage patterns would be required, however, to confirm if the spending rate
is too rapid for these accounts. Larger quantities of materials and supplies
may be used every spring and early summer in preparing parks and
recreation facilities for heavy summer use. Contractual services may have
involved a larger than average service contract that was fulfilled early in the
year and contracts may have been signed early in the year for services to be
provided later in the year. Other is a miscellaneous category, albeit a large
one, for which analysis of what it entails and expected spending rates would
need to undertaken before any conclusions can be reached.
d. It may appear that the Personnel Services, Conferences and Training, and
Capital Outlay accounts could get by with lower appropriations. This is
likely not the case, however, since departments typically have to defend
their appropriation requests during the budgeting process. Parks and
recreation departments often require more labor in the summer for grounds
maintenance, swimming pool lifeguards, recreational activity instructors,
and for other purposes. Consequently, personnel expenditures will likely be
greater in the second half of the fiscal year. Similarly, many conferences
are held in late summer and fall so it may be that department officers and
staff will be attending conferences or training events later in the year. The
relatively small budget authorization for capital outlay suggests that the
purpose of the account is to acquire equipment. Late acquisition of
equipment might reflect a strategy to hold off until it is known whether these
monies might be needed for other purposes, or perhaps management is
3-13
Ch. 3, Solutions, 3-8 (Cont'd)
Utilities 51.1%
Capital Outlay 43.1%
Other 72.1%
At first glance, it appears that the Materials and Supplies, Contractual
Services, and Other accounts could expend their appropriations well before
the end of the fiscal year. Additional information about normal seasonal
usage patterns would be required, however, to confirm if the spending rate
is too rapid for these accounts. Larger quantities of materials and supplies
may be used every spring and early summer in preparing parks and
recreation facilities for heavy summer use. Contractual services may have
involved a larger than average service contract that was fulfilled early in the
year and contracts may have been signed early in the year for services to be
provided later in the year. Other is a miscellaneous category, albeit a large
one, for which analysis of what it entails and expected spending rates would
need to undertaken before any conclusions can be reached.
d. It may appear that the Personnel Services, Conferences and Training, and
Capital Outlay accounts could get by with lower appropriations. This is
likely not the case, however, since departments typically have to defend
their appropriation requests during the budgeting process. Parks and
recreation departments often require more labor in the summer for grounds
maintenance, swimming pool lifeguards, recreational activity instructors,
and for other purposes. Consequently, personnel expenditures will likely be
greater in the second half of the fiscal year. Similarly, many conferences
are held in late summer and fall so it may be that department officers and
staff will be attending conferences or training events later in the year. The
relatively small budget authorization for capital outlay suggests that the
purpose of the account is to acquire equipment. Late acquisition of
equipment might reflect a strategy to hold off until it is known whether these
monies might be needed for other purposes, or perhaps management is
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Subject
Accounting