Terms in this set (163)
Define fund as the term is used in governmental accounting.
A fund is a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions or limitations.
What is the purpose of fund accounting?
To help ensure compliance with legal restrictions on the use of governmental resources. Funds are generally established pursuant to law. They are a control for budgetary compliance and help ensure resources are spent for the specific purposes intended.
List the 3 categories of funds used in governmental accounting and describe the types of activities accounted for in each category.
Governmental-type (to account for the basic day-to-day-services provided by government
Proprietary-type (to account for governmental activities that operate in a manner similar to private sector enterprises in the sense that they charge fees for services)
Fiduciary-type (to account for resources held in a trust or agency capacity for others)
Describe the difference between economic resource measurement focus and current financial resources measurement focus. Which measurement focus is used in each fund category?
Measurement focus relates to what is being expressed in the financial statements and which resources are being measured. The economic resources measurement focus is used in measuring whether revenues exceeded expenses. It takes account of transactions and events that affect all the resources available to the activity - financial and capital. Proprietary-type and fiduciary-type funds use the economic resources measurement focus.
The current financial resources measurement focus is concerned with flows of cash and near-cash items. It takes account of current financial resources only. Acquisitions of capital assets are reported as outflows of financial resources, rather than as exchanges of financial resources for capital resources. Proceeds of long-term debt are reported as inflows of financial resources rather than as long-term liabilities. Governmental-type funds use the current financial resources measurement focus.
How has government budgeting influenced the measurement focus and basis of accounting used in the government funds category?
The governmental budget process is one of estimating the yield from taxes and other sources and authorizing the expenditure of those resources. Although most state laws require governmental budgets to be balanced,
they do not specify that budgetary balance must be achieved in the accrual accounting sense
. The revenue aspect of the budget focuses on the availability of resources for spending. When budgets provide authority to spend, the authority relates to current outflows of budgetary resources. Thus, the budget and budgetary measurements focus on the short run. For example, once resources are used to acquire capital assets, the resources are no longer available for spending. Governmental accounting systems have historically provided information to help manage budget execution. As a result, accounting measurements within the funds have tended to be similar to budgetary measurements.
Compare the timing of revenue and expense (or expenditures) recognition using the accrual basis of accounting with that used the modified accrual basis of accounting. Which basis of accounting is used in each fund category?
Under the full accrual basis of accounting, revenues are recognized in the period in which they are earned, and expenses are recognized when resources are consumed or liabilities are incurred.
Under the modified accrual basis of accounting, revenues are recognized in the period in which they are measurable and available. Expenditures under modified accrual accounting are generally recognized in the period in which services and goods are received and a liability is incurred, but there are specific exceptions to this rule so certain items are not recognized until the liabilities come due for payment.
Governmental-type - modified accrual basis of accounting.
Proprietary-type & fiduciary-type - accrual basis of accounting.
List the governmental-type funds and briefly describe the use of each.
General - to account for all financial resources not accounted for in some other fund; or more generally, the day-to-day general activities of government.
Special Revenue - to account for the proceeds of specific revenue sources that are restricted or otherwise limited to spending for specified purposes other than debt service and capital projects.
Debt Service - to account for financial resources restricted or otherwise limited to spending for principal and interest on general long-term debt.
Capital Projects - to account for financial resources restricted or otherwise limited to spending for capital outlays, including facilities and other capital assets.
Permanent - to account for resources legally restricted so that only earnings from the resources (and not
the principal itself) may be used to support governmental programs.
Why are there no capital assets in governmental-type funds?
There are no capital assets in governmental-type funds because those funds account only for inflows and outflows of financial resources. Governmental-type funds can be used and indeed are used to acquire capital assets. When that happens, however, the accounting within the funds is such that there is an expenditure of financial resources, rather than an exchange of a financial resource for a capital asset. Capital assets are reported in government-wide financial statements, but not in fund financial statements
List the proprietary-type funds, and briefly describe the use of cash.
Enterprise - to account for resources used to supply goods and services, for a fee, to users primarily external to the government itself, such as the general citizenry.
Internal Service - to account for resources used to supply goods or services, on a cost-reimbursement basis, within the government unit and other governments. (The government unit is the predominant user.)
Both funds are used to account for activities involved in providing goods or services.
The difference lies in the fact that Enterprise funds sell primarily to nongovernmental users (e.g., citizens who use a toll road or toll bridge), whereas Internal service funds sell to users within the governmental unit and to other governments (but the government unit must be the predominant user).
Why do proprietary-type funds, use full accrual accounting?
In order to determine full cost - that is both operating costs and capital costs.
Having full costs enables managers of these entities to have appropriate data for determining user charges.
List the fiduciary-type funds, and briefly describe the use of cash.
Pension Trust - to account for resources held in trust for employee retirement plans and other employee benefit plans.
Investment Trust - to account for resources of an external investment pool managed by a sponsoring government.
Private-Purpose Trust - to account for resources of all other trust arrangements maintained by a governmental unit for the benefit of individuals, other governments, and private organizations.
Agency - to account for resources held in a custodial capacity for some other organization and that must be disbursed according to law or contractual agreement.
Discuss why Agency Funds do not have a fund balance.
Because the governmental unit does not own the assets. Instead, the governmental unit simply holds resources belonging to others and disburses those resources in accordance with law or contract.
What is a budget? What purpose does it serve?
A budget is a formal estimate of the resources that an organization plans to spend for a particular purpose or over a particular time period, and the proposed means of acquiring those resources.
It informs the reader of what activities the organization plans to undertake and how the organization expects to finance them.
Identify the types of budgets prepared by state and local governments.
They also prepare cash forecasts.
Identify various approaches to budget preparation. Which approach is most common in practice?
The object-of-expenditure approach is the most common in practice.
List the steps involved in preparing a budget.
The steps in preparing a budget are:
1. Prepare budgetary policy guidelines.
2. Prepare a budget calendar.
3. Prepare and distribute budget instructions.
4. Prepare revenue estimates.
5. Prepare departmental (or program) expenditure requests.
6. Prepare nondepartmental expenditure and interfund transfer requests.
7. Prepare a capital outlay request summary (if appropriate)
8. Consolidate departmental expenditure requests, nondepartmental expenditure and interfund transfer requests, capital outlay requests and revenue estimates. Submit to the CEO for review and revision.
9. Prepare the budget document.
10. Present the budget document to the legislative body.
11. Hold public hearings on the budget
12. Record the approved budget in the accounts.
13. Determine the property tax (millage) rate.
What is the purpose of a budget calendar?
A budget calendar is needed to ensure each person knows when his or her (and everyone else's) part of the budgetary process is due. A budget calendar formalizes all key dates in the budgetary process. The calendar itself can be a simple listing of dates or it can be in the form of a complex flowchart.
Why should a capital budget be prepared for a period greater than one year?
Long-range capital planning helps avoid the possibility of "unexpected" large expenditures, and allows the organization to formulate a sound, long-range revenue raising plan.
What is a millage rate?
Tax rate that, when applied to the assessed valuation of property being taxed, will provide the desired amount of revenue.
What is an appropriation?
An appropriation is a legal authorization for a government to spend specified amounts of money for specified purposes.
Does the balance in the Estimated revenues account represent as asset? Why or why not?
No, does not represent an asset. It is a budgetary account against which actual revenues are compared for budget administration.
What information is conveyed by the Budgetary fund balance account?
The budgetary fund balance account predicts the effect (increase or decrease) on the actual fund balance during the budget period (usually a fiscal year) assuming that actual revenues will equal estimated revenues and expenditures will equal appropriations.
Identify five typical sources of revenues received by local governments.
Charges for services
Fines and forfeits
Identify the various sub classification of expenditures used in government budgeting and accounting.
Organizational unit (or department)
What is the purpose of encumbrance accounting?
To protect an appropriation from being overexpended. Encumbrances show the amounts of an appropriation that have been "used up" by the issuance of purchase orders before the items are received and actual expenditures and liabilities are recognized.
The General Fund is defined as the fund used to account for all financial resources not accounted for in another fund, but it is actually much more than that. Explain why.
General Fund is generally the most significant fund. It accounts for the day-to-day operating activities of government - public safety services, parks and recreation, social services, street maintenance, etc. It also accounts for the taxes and other resources raised to finance those services. General Fund activities are driven by a budget that becomes law after approval by the entity's governing body.
What is the minimum number of Special Revenue Funds you would expect a local government to have?
The minimum number of Special Revenue Funds that a government might be expected to have is zero. There is no absolute need for Special Revenue Funds, because the activities can be financed from the General Fund, unless the governing body (or higher level authority) requires that a specific financing source must be used only to finance a specific activity.
What are some similarities and differences between a General Fund and a Special Revenue Fund?
The General Fund and Special Revenue Funds generally perform the same types of operating services.
Both governmental type funds, use the same measurement focus and basis of accounting to account for and report on their activities.
They differ in that the General fund accounts for revenues and other financing sources raised to provide for all day-to-day-operating activities, whereas Special Revenue Funds are used to account for a specific revenue source that must be used only to finance a specified activity.
What are the financial implications of a situation in which the debits to aggregated Estimated revenues are less than the aggregate credits to Appropriations?
The governing body expects to operate at a deficit for the year. Presumably, the governing body expects that the existing fund balance is sufficient to finance the year's deficit. Unless there is a large enough available fund balance to finance the planned deficit for the year, the government is likely to encounter fiscal stress.
Do the difference between full accrual accounting and modified accrual accounting apply to revenues, expenditures or both? Explain.
Revenues and expenditures.
Under full accrual accounting, revenues are recognized when earned; under modified accrual accounting, revenues are recognized when measurable and available.
Under full accrual accounting, expenses are recognized when the liability is incurred or resources are consumed; under modified accrual accounting, there are specific exceptions to accrual accounting so that certain expenditures may be recognized on the cash basis of accounting.
Give an example of a revenue source that, when the modified accrual basis of accounting is used, can be accrued before cash is received, and explain why the accrual can be made?
Property tax revenue. The reason an accrual can be made is that revenues are recognized under the modified accrual basis of accounting when they are measurable and available. The amount of property taxes to be raised is known at the time of the tax levy because the tax rate or rates and the assessed values to which the rates are applied are known precisely; hence, the revenues are measurable. Property tax revenues meet the available criterion if the taxes are collectible either in the current period or soon enough thereafter to meet the expenditures of the current period.
Give examples of liabilities that must be accrued under the modified accrual basis of accounting, and explain why those accruals must be made.
Liabilities that must be accrued under the modified accrual basis of accounting are those that, once incurred, normally are paid in a timely manner and in full from current financial resources, like salaries, professional services, supplies, utilities, and travel.
What is a voucher?
A voucher is a document that authorizes payment for services or supplies and that shows the appropriate account to be charged.
Which financial statements or schedule must be prepared for General Funds?
Statement of revenues, expenditures, and changes in fund balance
Budgetary comparison statement
For a General Fund or a Special Revenue Fund, what does a credit balance in the fund balance account(s) at the end of the year signify? What does a debit balance signify?
A credit balance in the fund balance accounts signifies that cumulative revenues and other financing sources exceed cumulative expenditures and other financing uses.
A debit balance in the fund balance accounts means there is a net deficiency, so there are no resources available for spending.
Does a credit balance in the fund balance account(s) at the end of the year necessarily mean the fund has sufficient cash to pay its liabilities in a timely manner? Explain.
No. A credit balance in the fund balance accounts does not mean there is sufficient cash to pay liabilities in a timely manner. The assets are likely to include taxes receivable, and it is possible that the reported liabilities will exceed the cash balance.
What is the purpose of establishing an allowance for uncollectible property taxes at the time the property tax levy is recorded?
Establishing an allowance for uncollectible property taxes causes revenues to be recognized in an amount equal to the net realizable value of the receivables.
What is the basic rule for recognizing property tax revenues in governmental-type funds?
Property tax revenues are recognized in the fiscal period for which the taxes are levied, provided the taxes are
(collected in the period or within approx. 60 days after period end).
What is a property tax lien?
Legal right to prevent the sale of a piece of property as a means to satisfy a claim against the property's owner.
What is the basic rule for recognizing sale tax and personal income tax revenues in governmental-type funds?
Revenues from those taxes are recognized (net of refunds and other uncollectible amounts) in the period the
underlying exchange occurs
and the resources are available (collected in current period or soon enough thereafter length of time must be defined).
Cite two examples of circumstances in which a government may find it necessary to record deferred revenues in governmental-type fund?
a. property taxes will not be collected in time to pay liabilities of the current period; that is, more than 60 days after the end of the year;
b. property taxes are collected before the period for which the tax is levied;
c. it receives cash on a grant before it has met all eligibility requirements.
What is the basic rule for recognizing intergovernmental grant revenues in governmental-type funds?
Revenues on intergovernmental grants accounted for in governmental-type funds are recognized when all eligibility requirements have been met and the resources are available. ("Available" for grants is defined in the same way it is defined for sales and income taxes.)
Describe the implication of the phrase "normally expected to be liquidated with expendable available financial resources" as applied to accruing liabilities for compensated absences in governmental-type funds?
Means that the liability has matured and come due for payment. As applied to compensated absences, this means, in effect, that employees have accumulated vacation days, that they have either been terminated or have retired as of the end of the fiscal year, and that they will receive cash for the unused compensated absences shortly after the start of the following year. The resulting expenditure and liability will be accrued.
Identify the four categories of interfund transactions. Which of the four results in the recognition of revenues and expenditures (expenses)?
The four categories of interfund transactions are: interfund loans, interfund services provided and used, interfund reimbursements, and interfund transfers. Interfund services provided and used results in recognition of revenues to the provider and expenditures (expenses) to the user. Interfund reimbursements result in expenditures (expenses) to the entity on whose behalf the purchase of goods or services was made.
Why is depreciation not recorded in governmental-type funds?
Depreciation is not recorded in governmental-type funds because it is an expense, not an expenditure. Governmental-type funds record outflows of financial resources - expenditures. Hence, regarding capital assets, the outflow is recognized when the asset is acquired, not when it is used.
What is the accounting treatment for supplies inventories if the purchases method is used to record their acquisition?
Entire cost of inventory purchased during the year is charged to expenditures. Accounting standards require that material amounts of inventory must be reported on the balance sheet.
To record the asset, a credit is made to a corresponding balance sheet account, in this instance, Nonspendable fund balance. Year-to-year changes in the inventory are recorded by increasing and decreasing the inventory and Nonspendable fund balance accounts.
What is the purpose of reporting fund balance in five classifications? What is the difference between Restricted fund balance and Assigned fund balance?
To help users of financial statements determine the extent to which an entity is free to use its available fund balance for general governmental purposes.
Fund balance is presented in descending order of constraint. Restricted fund balance is highly constrained because the constraint may result from a grantor requirement, a contractual obligation, the laws or regulations of another government, a constitutional provision, or enabling legislation. Assigned fund balance is minimally constrained and can be readily removed because it represents an internal intent to spend.
How are open encumbrances at year-end reported in the financial statements?
If the open encumbrances are from orders placed using restricted, committed, or assigned funds, no further reporting on the face of the financial statement is needed because the constraint is already shown through the classification itself.
If open encumbrances result from orders placed with unassigned funds, then they should be reported as assigned fund balance.
Explain the relationship between Debt Service Fund and Capital Projects Funds.
The relationship between Debt Service Funds and Capital Project Funds is that the latter are used to record the receipt and disbursement of resources to acquire or build capital assets, whereas, Debt Service Funds are used to account for the accumulation of resources and the payment of principal and interest on debt as it comes due.
Are acquisitions of capital assets always accounted for through Capital Project Funds? Explain.
No. Capital assets of a relatively minor nature, such as vehicles, equipment, and furniture often are acquired with General Fund or Special Revenue Fund resources.
Under what circumstances are Capital Projects Funds used?
Used to record the transactions incurred in the acquisition or construction of capital facilities and other major capital assets, other than those financed by proprietary and trust funds.
Required when capital project is funded in
whole or in part by general obligation bond proceeds
How are Capital Projects Funds controlled?
Capital Projects Funds are controlled through the provisions of bond indentures, restrictive provisions of grant agreements, and so forth. In addition, formal budgetary integration into the accounts can be used as an additional control tool. Usually governmental units also use encumbrance accounting to control the expenditures.
Why is encumbrance accounting generally used for Capital Projects Funds?
Encumbrance accounting is part of the overall control system used for Capital Projects Funds. Through the use of encumbrance accounting, a project manager will be able to determine the remaining expendable resources for a given project.
Are capital assets recorded in Capital Projects Funds? Why or why not?
Capital assets are not recorded in Capital Projects Funds because the purpose of such funds is to provide control over the acquisition and use of financial resources to acquire and/or build capital facilities. The assets themselves are not financial resources (or, "financial" assets), therefore, they are not accounted for in these funds.
Under what circumstances are Debt Service Funds used?
Debt Service Funds are used when required by law or if a government is accumulating financial resources for principal and interest payments maturing in future years.
Why are Debt Service Funds used?
Debt Service Funds are used when required by law or if a government is accumulating financial resources for principal and interest payments maturing in future years.
Are budgets typically recorded in Debt Service Funds?
No. Some governments use budgets to control spending activities in Debt Service Funds. Due to the limited activities of these funds, however, it is possible to control their activities without formally recording a budget in the accounts.
When is interest recorded as an expenditure in Debt Service Funds?
Interest generally is recorded as an expenditure of a Debt Service Fund when it is currently
due and payable
When is general long-term debt principal recorded in Debt Service Funds?
The principal of general long-term debt is recorded in Debt Service Funds when it matures. A liability for interest on long-term debt is recorded in the fiscal year in which it becomes due and payable.
What information can a city oversight body obtain from a Debt Service Fund?
a. the governmental unit is accumulating resources to service its general long-term debt according to the provisions of the debt agreements.
b. the governmental unit is investing assets according to the terms of the debt agreement and the government's investment policies.
c. the governmental unit is able to make future debt service payments from accumulated resources.
On what bases are investments valued on governmental fund balance sheets?
Investments generally are valued at fair value on a governmental balance sheet although some, such as debt instruments purchased with a maturity of one year or less, can be valued at amortized cost.
Bonds that finance capital projects sometimes are issued at a premium or a discount. How might a bond premium be accounted for? A bond discount?
The effect of a premium on bonds issued to finance a capital project is that more resources are received on the issuance of the bonds than originally planned. The use of these resources will depend on the terms of the bond issue. This extra cash may be used in the construction activities, or, in some instances, it must be transferred to a Debt Service Fund. The key is the terms of the bond indenture. Bond premiums should be accounted for separately from the face amount of the bond. The accounting for a bond premium will include a
credit to the account, Other financing source—bond issue premium
The effect of a discount on bonds issued to finance a capital project is that less resources are received on the issuance of the bonds than originally planned. This means that there may not be enough resources available to complete the project. As a result, the project manager may have to "scale down" the project or seek additional funds. The accounting for a bond discount will include a
debit to the account, Other financing use—bond issue discount
What is arbitrage and what is its significance in government financial management?
"Arbitrage" refers to the practice of borrowing money at a given rate of interest and simultaneously investing that money at a higher interest rate, that is, "living off the spread." The Federal government has rules that strictly control this practice where
tax exempt general obligation bonds are involved
. Arbitrage often is a concern in Capital Projects Funds because the activities accounted for in these funds typically are financed, at least in part, with general obligation bond proceeds.
Under what circumstances are Permanent Funds used?
Used to account for resources that are legally restricted in a manner that
(1) only earnings on the principal of these resources can be expended
(2) the earnings must be used to support the programs that benefit the government.
How are the activities of Permanent Funds controlled?
Applicable state laws and individual trust agreements. Therefore, the accounting system must be designed to provide information and reports that permit a review of this stewardship role.
Are budgets typically recorded in Permanent Funds?
No, unless required by legal provisions. The earnings from Permanent Funds may be transferred to another fund, such as a Special Revenue Fund. The Special Revenue Fund, will budget these proceeds as part of its budgeting process.
How are Permanent Funds different from Fiduciary Funds?
Permanent Funds must benefit a government's own programs. Fiduciary Funds are used to hold assets in a trustee capacity for the benefit of entities or individuals outside the government. Therefore, a key difference between Permanent Funds and Fiduciary Funds is
who will benefit from distributions from the funds
. Another difference is that only the earnings of a Permanent Fund may be used, but the earnings and principal of a Fiduciary may be used if the trust agreement so allows.
What is the cause-and-effect relationship between the revenues and the expenses of a proprietary fund?
The "cause and effect" relationship between the revenues and expenses of a proprietary fund refers to the fact that the expenses of these funds are incurred to generate revenues. Generally, as the level of services provided by a proprietary fund increases and expenses increase, the total revenues received for the services will also increase. This is in contrast with a governmental-type fund where there is no relationship between expenditures and revenues (see Q7-2).
Why are the revenues and expenditures of governmental-type funds "independent" of each other?
Because the expenditures relate to the level of services provided by the governmental unit. While the level of revenues should be sufficient to finance the expenditures, the providers of revenues do not generally receive services in proportion to the amount of revenue provided.
When should an Internal Service Fund be used?
An Internal Service Fund should be used when a governmental unit can provide goods or services to other departments or governments at a lower cost or in a more convenient or dependable manner than if an outside organization were used. Also, the economic resources measurement focus / full accrual basis of accounting used by Internal Service Funds allows them to recoup all costs, enabling replenishment of capital resources through their billings.
What is a flexible budget?
Budget in which the level of budgeted expenses is related to the level of operations as opposed to a pre-determined level independent of the level of operations.
How does the net position section of a balance sheet of a proprietary fund differ from the fund balance section of a governmental-type fund?
The net position section of a proprietary fund can have 3 sections:(1) invested in capital assets, net of related debt, (2) restricted net assets, and (3) unrestricted net assets.
The fund balance section of a governmental-type fund can have as many as 5 components: nonspendable, restricted, committed, assigned, and unassigned.
Why is depreciation recorded as an expense in proprietary funds, but not as an expenditure in governmental-type funds?
Proprietary funds - because the economic resources measurement focus is used. Thus, fixed assets used in the operations of the fund initially are recorded as assets and depreciated over their useful lives.
Governmental-type funds - expenditures measure the use of liquid resources. The use of these resources is accounted for when the fixed assets are acquired or paid for, not when they are used in operating the governmental unit.
What is the difference between an Enterprise Fund and an Internal Service Fund?
An Internal Service Fund is used when a governmental unit provides goods and/or services to departments or agencies within the governmental unit or to other governmental units. Internal service funds may be used only if the reporting government is the predominant participant in the activity.
An Enterprise Fund is used when a governmental unit provides goods and/or services primarily to consumers (generally, the citizenry) who are not part of the government itself. It is possible that other departments, agencies, etc. of the government may use these goods or services, but that is generally only a small portion of the activity of the Enterprise Fund.
Does the accounting guidance issued by FASB apply to proprietary funds?
What are revenue bonds? How do they differ from general obligation bonds?
Debt securities that are secured by the revenues generated by a proprietary fund operation.
General obligation bonds, on the other hand, are secured by the "full faith and credit," that is, the general taxing authority, of the government.
Does a government that offers pension benefits to its employees necessarily maintain a Pension Trust Fund? Explain.
No. A government can offer benefits to its employees by participating in an external pension plan. In such cases, the government does not use a pension trust fund.
Distinguish between a defined benefit pension plan and a defined contribution pension plan.
Defined benefits plan - plan that specifically identifies the formula that will be used to calculate future pension benefits for employees as long as they live. The governmental unit is committed to make payments to the retiree over his/her life after retirement.
Defined contribution pension plan - plan that specifically identifies the formula that determines the amount the governmental unit will contribute into a fund that a retiree must accumulate to provide for his/her own retirement. The government has no liability except for its required contribution.
What is an actuary? What is the actuary's role in pension administration?
Actuaries have special expertise in calculating the long-term cost of risk. Actuaries are closely associated with the operations of pension plans.
Distinguish between a pension contribution and pension cost.
Pension contribution - actual amount of cash paid by an employer government to a pension plan.
Pension cost - actuarially-determined amount that represents the economic cost to a government of providing pension benefits, without regard to the timing of specific contributions.
What financial statements are prepared for Pension Trust Funds?
Pension Trust Funds prepare a statement of changes in fiduciary fund (or plan) net position and a statement of fiduciary fund (or plan) net position.
Identify the schedule that are prepared for Pension Trust Funds.
A schedule of funding progress
A schedule of employer contributions.
What are other postemployment benefits?
Other postemployment benefits are benefits included in pension plans that are not specific payments related directly to the pension plan.
Primarily health care benefits
Can the governmental unit sponsoring an external investment pool participate in it?
Yes, the sponsoring government may participate in an external investment pool, but one or more of the participants must be a legally separate government that is not part of the same reporting entity as the sponsoring government.
What financial statements are prepared for an Investment Trust Fund?
The financial statements that are prepared for an Investment Trust Fund are a statement of changes in net position and a statement of net position.
How are investments in an Investment Trust Fund valued? How are changes in value treated?
Fair value. Changes in fair value are treated as increases or decreases in the asset carrying amounts with a corresponding credit (debit) to an additions (deductions) account.
When are Private Purpose Trust Funds used?
Used to account for resources held by a government, in a trustee capacity, whose beneficiaries must be outside of the government. These beneficiaries may be other governments, individuals, or private organizations.
How are Private Purpose Trust Funds controlled? Are budgets used in PPTF?
Private Purpose Trust Funds are controlled through the trust agreement and state laws.
Budgets are not usually found in these funds and encumbrance accounting is not normally used.
What financial statements are used for Private Purpose Trust Funds?
Statement of changes in fiduciary net position
Statement of fiduciary net position
Define an agency relationship.
Agency relationship - entity is the custodian of resources that belong to some other organization. Resources are received and disbursed according to some agreement and a trust agreement does not exist.
Is an operating statement prepared for an Agency Fund? Why or why not?
No because it does engage in "operations".
Assets = liabilities
Transactions accounted for in Agency Funds are "balance sheet only," that is, changes in assets and liabilities are the only types of transactions recorded in Agency Funds.
Does an Agency Fund have a fund balance? Why or why not?
Agency Funds do not have a fund balance for the same reasons that Agency Funds do not prepare operating statements.
Which groups are the major external users of governmental financial reports?
a. those to whom government is primarily accountable - the citizenry
b. those who directly represent the citizens - legislative and oversight bodies
c. those who lend or participate in the lending process - lenders and creditors.
List three ways in which financial reporting can assist in fulfilling government's duty to be publically accountable and can also assist users in assessing that accountability.
a. providing information to determine whether current-year revenues were sufficient to pay for current-year services;
b. demonstrating whether resources were obtained and used in accordance with the entity's legally-adopted budget, and demonstrating compliance with other finance-related legal or contractual requirements; and
c. providing information to assist users in assessing the service efforts and accomplishments of the governmental entity.
Assume a primary government appoints a voting majority of the governing board of a legally separate organization. When determining the financial reporting entity, what other requirements must be met for the primary governments to be considered financially accountable for that organization?
a. the primary government can appoint a voting majority of the organization's governing body, and
1. the primary government is able to impose its will on that organization, or
2. there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government.
Under certain circumstances, a primary government can be financially accountable for a legally separate organization even if it does not appoint a majority of the governing board. This can occur if the organization is fiscally dependent on the primary government and there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government..
When reporting component units in a governmental organization's financial statements, how does the process of blending differ from the process of discrete presentation?
a. Blending is the process of treating the funds used by the component unit as if they were the funds of the primary government.
b. Discrete presentation is the process of reporting the component unit's funds in a separate column in the reporting entity's government-wide financial statements.
List the major components of the financial section of a comprehensive annual financial report.
The major components of the Financial Section of a comprehensive annual financial report are:
A. Auditor's report
B. Management's discussion and analysis
C. Basic financial statements
1. Government-wide financial statements
2. Fund financial statements
3. Notes to the financial statements
D. Required supplementary information other than MD&A
E. Combining statements and individual fund statements and schedules
What are the minimum requirements established by the GASB for general purpose external financial reports?
Management's discussion and analysis (MD&A)
Basic financial statements (government-wide financial statements, fund financial statements, and notes to the financial statements)
Required supplementary information other than MD&A.
List the two government-wide financial statements and seven fund financial statements that comprise the basic financial statements.
The 9 statements that comprise the basic financial statements are as follows:
1. Government-wide financial statements
a. Statement of net position
b. Statement of activities
2. Fund financial statements
a. Governmental funds
(1) Balance sheet
(2) Statement of revenues, expenditures, and changes in fund balances
b. Proprietary funds
(1) Statement of net position (or balance sheet)
(2) Statement of revenues, expenses, and changes in fund net position
(3) Cash flows statement
c. Fiduciary funds
(1) Statement of fiduciary net position
(2) Statement of changes in fiduciary net position
What is the purpose of management's discussion and analysis?
Provides an objective analysis of the government's financial operations and financial position, based on facts known to management as of the date of the auditor's report. It should be easily readable and should help the reader understand the fiscal policies, economic factors, and other matters that affect the data reported in the financial statements.
Discuss the difference between fund financial statements and government-wide fiancial statements, covering (a) the scope of the statements and (b) the measurement focus and basis of accounting each in each set of standards.
Fund financial statements report on the activities and balances of each of the government's major funds, using the measurement focus and basis of accounting peculiar to each category of funds. Government-wide statements report on the activities and balances of the entity as a whole in a more highly aggregated manner, using the economic resources measurement focus and the accrual basis of accounting.
What measurement focus and basis of accounting should be used in reporting each of the three fund categories in fund financial statements?
Governmental - current financial resources MF and modified accrual BA
Proprietary - economic resources MF and accrual BA
Fiduciary - economic resources MF and accrual BA
What is a special item in financial reporting?
A significant transaction or event that is within the control of management and that is either unusual in nature or infrequent in occurrence.
What kind of information is compared in a budgetary comparison schedule?
A budgetary comparison schedule compares (a) the original appropriated budget, (b) the final appropriated budget, and (c) actual inflows, outflows and balances for the year, presented on the government's budgetary basis of accounting.
List four basic differences between the information content of the fund financial statements and the government-wide financial statements.
The basic differences between the information content of the fund financial statements and the government-wide statements are:
a. Fund statements focus on major funds; government-wide statements aggregate the funds into two broad categories, one for governmental activities and one for business-type activities.
b. In the fund statements, governmental fund assets, liabilities, inflows and outflows are reported using the current financial resources measurement focus and modified accrual basis of accounting. In the government-wide statements, governmental activities are reported using the economic resources measurement focus and accrual basis of accounting.
c. Discretely presented component units are not reported in the fund financial statements, but are reported in the government-wide statements. The government-wide statements are formatted to distinguish between the primary government and its discretely presented component units.
d. Information about fiduciary funds is reported in the fund statements, but not in the government-wide statements.
Describe the column headings generally used in the government-wide statement of net position. (4)
Columns for the primary government's governmental activities, the primary government's business-type activities, a total of the two, and a fourth column for the aggregate of the component units.
Describe the three components of net assets in the government-wide statement of net position.
(a) invested in net assets, net of related debt
What is the purpose of a classified statement of net position?
The purpose of a classified statement of net position is to provide information on the relative liquidity of assets and liabilities. Assets and liabilities are each separated as between those that are current and those that are non-current.
What three categories of revenues are deducted from expenses to compute the net expenses or revenues for each function or programs shown in the government-wide statement of activities?
a. Charges for services.
b. Program-specific operating grants and contributions
c. Program-specific capital grants and contributions
How are interfund activities and balances reported in government-wide financial statements?
Interfund activities and balances should be eliminated in government-wide financial statements. When aggregating the governmental-type funds for the government-wide statements, due-to's and from's and transfers in and out should be eliminated against each other. The same should occur among the proprietary-type funds. The remaining internal balances (such as transfers from a governmental fund to a proprietary fund) are eliminated against each other in the total columns of the government-wide statements.
How is Internal Service Fund activity reported in government-wide statements?
Internal Service Funds are eliminated in the government-wide financial statements
. Because Internal Service Funds generally provide most of their services to governmental-type activities, the balance sheet accounts of the Internal Service Funds should be aggregated with the balance sheet accounts of the governmental-type activities. Internal service fund "profits or losses" should be eliminated by decreasing or increasing the expenses of the functions billed by the Internal Service Fund.
When should sales tax revenues and property tax revenues be recognized for governmental activities in the government-wide statement of activities?
Property tax revenues - recognized (net of estimated refunds and uncollectible amounts) in the period for which the taxes are levied - even if the enforceable legal claim arises or the due date for payment of the taxes occurs in a different period.
Sales tax revenues -
when the underlying exchange transaction on which the tax is imposed occurs
. Therefore, in effect, sales tax revenue would be recognized at the time of the taxable sale.
Describe the difference between expenditure recognition and measurement in the governmental funds financial statements and expense recognition for governmental activities in government-wide financial statements.
In the fund financial statements, governmental-type funds are reported using the current financial resources measurement focus and modified accrual basis of accounting.
In the government-wide financial statements, governmental activities are reported using the economic resources measurement focus and the accrual basis of accounting.
Describe the difference in reporting capital assets and long-term debt in the governmental funds financial statements and reporting those elements for governmental activities in government-wide financial statements.
Fund financial statements - current financial resources measurement focus.
Government-wide financial statements - economic resources measurement focus.
As a result, long-term assets (such as capital assets) and long-term liabilities (such as bonds payable) are reported in the government-wide statement of net position, but not in the fund balance sheets.
Acquisitions of capital assets and payments of debt principal are reported as expenditures in the fund financial statements.
Describe three items that require reconciliation between fund financial statements and government-wide financial statements.
a. Reporting capital outlays as expenditures in fund statements, but reporting depreciation expense in government-wide statements.
b. Reporting proceeds of long-term debt as inflows of resources (and repayment of debts as outflows of resources) in fund financial statements, but reporting them as liabilities and repayments of liabilities on government-wide statements.
c. Reporting revenues on the modified accrual basis (when "measurable and available') in fund financial statements, but reporting them on the accrual basis in government-wide statements.
d. Reporting expenditures in fund financial statements, but reporting expenses in government-wide statements.
e. Reporting Internal Service Funds as proprietary-type funds in the fund statements, but reporting them mostly as governmental activities (and adjusting expenses by Internal Service Fund profits and losses) in government-wide statements.
What characteristics distinguish NFPOs from for-profit organizations? What characteristics distinguish government organizations from NFPOs?
(1) receive significant amounts of resources in the form of contributions from providers who do not expect to receive monetary benefits in return
(2) operate for purposes other than to earn profits
(3) lack defined ownership interests that can be sold, transferred or redeemed.
Governmental entities have one or more of these characteristics:
(1) their officers are either popularly elected or a controlling majority of their governing boards are appointed or approved by entities that are clearly governmental
(2) they may have the power to tax
(3) they may have the power to issue tax-exempt debt
(4) they can be dissolved unilaterally by a government and their net assets assumed by it without compensation.
What financial statements must be prepared by all VHWO's and ONPOs? What additional financial statements must be prepared by VHWOs?
(1) a statement of financial position
(2) a statement of activities
(3) a statement of cash flows
VHWOs prepare a statement of functional expenses.
Identify and briefly describe the three classifications of net assets on the financial statements of NFPOs.
1. Unrestricted net assets - resources that are neither temporarily nor permanently restricted.
2. Temporarily restricted net assets - generally from contributions whose use is limited by donor-imposed stipulations that expire either by the passage of time or can be fulfilled and removed by actions of the organization in accordance with the stipulations.
3. Permanently restricted net assets - generally from contributions and other asset inflows whose use is limited by donor-imposed stipulations that do not expire
State the four elements of the general rule for reporting the receipt of contributions other than services and collections.
The general rule for reporting the receipt of contributions other than services and collections is that they must be:
(a) reported as revenues or gains in the period received;
(b) reported as assets, decreases of liabilities, or expenses, depending on the form the benefits take;
(c) measured at the fair value of the benefits received; and
reported as either restricted support or unrestricted support.
Illustrate the kinds of restrictions that donors may impose on the use of the resources they contribute for NFPOs.
Temporary or permanent restrictions.
Temporary restriction = a donation that must be used for a specific purpose, such as a special training program or temporary restriction relating to when the gift may be used.
Permanent restriction = endowment whose principal must be maintained intact permanently, but whose income may be used either for any purpose the organization wishes or for a specific purpose, such as the conduct of specific training programs.
How are pledges that are expected to be uncollectable reported in the financial statements of NFPOs?
Estimated uncollectible pledges are reported by NFPOs as deductions from revenue generated by the pledges and as contras (subtractions) from the related receivables.
Discuss the differences between a donor-imposed restriction and a conditional promise to give. How is each reported in the financial statements?
A donor-imposed restriction limits the purpose for which the money can be spent, when the money can be spent of whether the money can be spent. Must be reported generally as restricted revenues.
A conditional promise to give is a promise that binds the donor on the occurrence of a specified future and uncertain event. Not recognized as revenues and receivables until the conditions on which they depend are substantially met.
Describe the circumstances under which contributed services must be recognized as revenues and expenses in the financial statements.
(1) create or enhance nonfinancial assets
(2) require specialized skills, and are provided by individuals who possess those skills, and would typically need to be purchased if the services were not donated.
When should an NFPO make a reclassification of its net assets?
A reclassification of net assets is made when resources classified as restricted have been released from restrictions. Example: Temporarily restricted to unrestricted.
Under what circumstances must an NFPO recognize a contributed work of art as revenue? Under what circumstances does the organization have an option not to recognize it as revenue?
An NFPO must recognize a contributed work of art as revenue if the contributed work is not part of a collection.
An NFPO has an option not to recognize a contributed work of art as revenue provided the donation is added to a collection and the collection meets all of the following conditions:
(1) the collection is held for public exhibition, education, or research in furtherance of public service
(2) the piece is maintained/preserved
(3) proceeds from the sale of collection items to be used to acquire other items for the collection.
Discuss the meaning of fair value when applied to NFPO's investments and give examples of how fair value may be determined.
The fair value of an investment is the price that would be paid to sell it in an orderly transaction between market participants at the measurement date.
Quoted price in an active market, such as a registered stock exchange (level 1 in the hierarchy of determining fair values).
Observable measure such as the quoted price for similar assets in active or nonactive markets (level 2 in the hierarchy).
Unobservable inputs, using its assumptions based on the best available information (level 3 in the hierarchy).
Identify and briefly describe the major funds used internally by NFPO's.
1. The Unrestricted Current Fund = used to account for resources over which governing boards have discretionary control.
2. Restricted Current Funds = resources available for use in the operations of an organization, as specified by donors, could also include resources provided under contract.
3. Land, Buildings and Equipment Fund = financial resources to be used to acquire land, buildings, and equipment and also for capital assets currently used in the operations of the organization, together with associated depreciation and long-term debt.
4. Endowment Funds = include permanently restricted endowments and endowments that will come available after an amount of time or occurrence of event.
What are the different basis of accounting?
What is the most common fund in Gov. accounting?
How do we record bad debt expense in Gov. Accounting?
Reduce revenue, no bad debt expense journal entry.
DEBIT Property tax receivable, CREDIT Allowance, CREDIT Revenues
When preparing the budget for next year what do we need to consider?
Last years actual spending
When Gov. officials say there is a balanced budget, are they lying?
May be balanced in modified accrual but not not for full accrual. May be balanced at the beginning of year but not at the end. Required to submit a balanced budgets but not required to adopt a balanced budget.
If appropriation more than estimated revenues, how do we record it?
There will be a deficit.
DEBIT estimated revenues
DEBIT budgetary fund balance
What type of fund is a special revenue fund?
Governmental - used to account for the proceeds of specific revenue sources that are restricted or committed to spending for specified purposes other than debt service or capital projects.
What is a tax anticipation notes?
Note that will be paid when tax revenue received
How is a tax anticipation note recorded?
DEBIT cash, CREDIT tax anticipation notes payable
Mid year, you are trying to figure out how much you have left to spend. What do you do?
Appropriations - encumbrances - expenditures
When property tax is levied, what do you do when you write off allowance?
DEBIT - Property tax receivable
CREDIT - Allowance for refunds and uncollectible taxes
CREDIT - Revenues
To record the use of some of the allowance on reduced tax bills:
DEBIT - Allowance
CREDIT - Receivable
To reduce the balance of allowance:
DEBIT - Allowance
CREDIT - Revenue
How do delinquent tax revenues work? What revenue is recognized?
To reclassify receivables to delinquent:
DEBIT - Property taxes receivable - delinquent
CREDIT - Property tax receivable
To reclassify allowance account to delinquent:
DEBIT - Allowance
CREDIT - Allowance - delinquent
To record deferral of property taxes to be collected after the first 60 days:
DEBIT - Revenues - property tax
CREDIT - Deferred revenues - property taxes
To record assessment of late-payment penalties:
DEBIT - Interest and penalties receivable
CREDIT - Revenues - interest and penalties
To reclassify taxes, interest and penalties receivable as tax lien:
DEBIT - Tax liens receivable
CREDIT - Property tax receivable - delinquent
CREDIT - Interest and penalties receivable
Revenue is recognized when measurable and available.
When do we recognize interest expense?
When due and payable.
How is debt recorded in Gov. accounting? How is it different from full accural?
Debt is not recorded in Gov. accounting. It is only recorded when the cash inflow is received or when the cash outflow is repaid.
Only when making the Gov. wide financial statements is it recorded on the books.
In full accrual, it would have been recorded when incurred and kept on the books until paid off.
What is the difference between an enterprise fund and an internal service fund?
Enterprise - mainly external users, produce profits and transfer them to General Fund
ISF - mainly internal users, underpriced and subsidized by General Fund
How do you calculate net investment in capital assets?
CA - AD - debt for asset
How can Gov. spend net assets of fiduciary funds?
They can' t, the money does not belong to the government. They are holding it for someone else.
What is the difference between private purpose trust and permanent fund?
Permanents fund accounts for restricted funds hose earnings are the only portion that can be spent and the interest must be used to support the programs that benefit the government or its citizens.
PPTF fund accounts for principal and interest maintained to benefit those outside the government (specific individuals, organizations or other governments).
use agency funds?
Used when a governmental unit is the custodian for resources that belong to others.
Used as a
for recording the collection of property taxes by one government on behalf of other governments.
What are the 2 funds presented in funds financial statements?
Major vs. nonmajor (aggregated and displayed in a single column in the fund statements)
If charge for Gov. service, where does revenue go on FS?
Statement of Activities:
Program revenue - charges for services
instead of general revenue.
How are ISF activities shown on FS?
ISF should be reported in a separate column on the face of the proprietary fund financial statements.
Revenues of ISF are offset against expenditures of the funds that purchased services from them. Net assets of ISF are then allocated as appropriate to either governmental or business type activities.
Major funds requirements are not required for Internal Service Funds.
Who sets the standards for NFPO accounting standards?
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