Find more slides, ebooks, solution manual and testbank on www.downloadslide.com CHAPTER 16 ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS, PART I Chapter Outline I State and local government units produce two complete and distinct sets of financial statements which are presented together in a comprehensive annual financial report A User needs for governmental financial information are so diverse that the GASB requires two sets of statements to be prepared The fund-based statements are more for the citizens whereas the government-wide statements are more for investors, such as bondholders B Fund-based financial statements are designed primarily to present information about the General Fund and other major activities This approach stresses fiscal accountability over financial resources a For governmental funds, all current financial resources and claims to those financial resources are presented using modified accrual accounting for timing purposes b For proprietary funds and fiduciary funds, all economic resources are reported using accrual accounting for timing purposes C Government-wide financial statements (a statement of net assets and a statement of activities) are designed to present an overview of the government as a whole and emphasizes operational accountability a In these statements, all economic resources are measured using accrual accounting for timing purposes b The governmental funds and most of the internal service funds are combined and reported as governmental activities c The enterprise funds and any remaining internal service funds are combined and reported as business-type activities d Because the government does not have control over the use of the assets reported in the fiduciary funds, they are excluded from the government-wide financial statements II For internal purposes, governmental accounting records its individual activities within selfbalancing sets of accounts known as funds A Governmental funds account for activities where service to the public is the main emphasis a General fund b Special revenue funds c Capital projects funds d Debt service funds e Permanent funds B Proprietary funds account for activities of the government where a user charge is assessed a Enterprise funds b Internal service funds C Fiduciary funds account for assets held in a trustee capacity for external parties a Investment trust funds McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-1 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com b Private-purpose trust funds McGraw-Hill/Irwin 16-2 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com c d Pension trust funds Agency funds III Governmental accounting has traditionally stressed establishing control over current financial resources to ensure appropriate usage of the public’s money A Budgetary entries are recorded for a number of the activities within the governmental funds a The entry is recorded at the start of the year and is then reversed at the end of the year b The initial and amended budget are reported along with actual figures for the period as required supplemental information in the comprehensive annual financial report As an alternative, this information can be shown as a separate statement within the fund-based financial statements B Financial commitments (such as contracts and purchase orders) are recorded as encumbrances a These entries help avoid overspending of appropriated amounts b The encumbrances are removed from the records when the commitment becomes a liability IV In government-wide financial statements, acquiring a capital asset is reported as a capital asset and incurring an expense is reported as an expense However, for the governmental funds, on the fund-based financial statements, the reduction of current financial resources that results from the purchase of a capital asset, incurrence of an expense, or payment of a long-term debt is reported as an expenditure In this manner, the statements report the usage made of the money held by the government activity A On the fund-based statements, supplies and prepaid items can be reported by either the consumption method or the purchases method B On the government-wide financial statements, the recording of the acquisition of infrastructure items such as bridges and sidewalks is required V Governments often have nonexchange transactions where revenues such as taxes are received without a corresponding earning process To guide the recognition of such transactions, four separate categories have been identified A Derived tax revenues such as income taxes and sales taxes are recognized when the underlying event occurs B Imposed nonexchange transactions such as property taxes, fines, and penalties are recognized when the resources are required to be used or in the first period when use is permitted C Government-mandated nonexchange transactions, usually a government grant to fulfill a legally required objective, are recognized when all eligibility requirements have been met D Voluntary nonexchange transactions such as most grants and gifts are recognized when all eligibility requirements have been met VI Governments often raise significant amounts of financial resources by issuing long-term bonds A In the government-wide financial statements, the debt is simply recorded B In the fund-based financial statements for the governmental funds, the inflow of financial resources is reported as an ―other financing source.‖ Payment of the debt is shown as McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com an expenditure Long-term debts are not shown in the fund-based financial statements for the governmental funds Learning Objectives Having completed Chapter Sixteen of the textbook, ―Accounting for State and Local Governments (Part One),‖ students should be able to fulfill each of the following learning objectives: Understand that two separate sets of financial statements must be created and reported by a state or local government unit Identify examples of the wide variety of users of government financial statements and discuss their specific information needs Explain the overall differences between government-wide financial statements and fundbased financial statements Identify the three major classifications of funds and each of the individual fund types within those classifications Describe the basic content of both government-wide financial statements and fund-based financial statements for the governmental funds Explain the structure and reason for budgetary entries and the subsequent reporting of that information Explain the structure and reason for recording encumbrances and the subsequent reporting of that information Describe the reporting of the acquisition of capital assets on both fund-based financial statements and government-wide financial statements Discuss the historical method of reporting infrastructure assets and the current reporting that is now required 10 Identify the four types of nonexchange transactions and explain when each type of revenue should be recognized 11 Describe the accounting that is utilized for the issuance of a long-term liability within both the fund-based financial statements and the government-wide financial statements 12 Describe the types of transfers that can occur within a government and indicate the appropriate reporting for each type Answer to Discussion Question Is it an Asset or a Liability? Some students seem to believe that the unique features of government financial reporting are more arbitrary than substantive To them, accounting is accounting and the specific type of reporting entity should not be an important consideration For that reason, this discussion question is placed early in the coverage of governmental accounting to point out that these entities not necessarily view transactions in the same manner as a for-profit business Examination of the construction of a high school is an excellent example of the essential accounting problems created by a government’s unique perspective The decision to build this McGraw-Hill/Irwin 16-4 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com facility virtually assures the government that it will incur significant cash outflows for years to come Whereas a business constructs a building in hopes of generating cash inflows, government officials are aware that the maintenance, heating, etc of the school will far outweigh any direct cash inflows Hence, Mautz’s question – is it an asset or a liability—is not easy to answer Governmental accounting now solves this issue in a very unique way In the fund-based financial statements, construction costs are reported as an expenditure whereas, in the government-wide financial statements, the high school is reported as a capital asset The reduction in current financial resources is reflected in one statement but the cost of construction is still shown as an asset in the other set of statements Prior to class discussion, students can be required to read Mautz’s entire article as additional background information In class, students can be encouraged to discuss whether showing this high school in two such different ways is misleading or actually provides the information needed Students should be asked their opinion as to the benefit of having two completely different sets of financial statements A quality, in-depth discussion can certainly result from the article described here Answers to Questions User needs are often complex and contradictory Specific procedures in the governmental reporting process are an outgrowth of those needs GASB Concepts Statement No.1, ―Objectives of Financial Reporting,‖ has identified three primary user groups: citizenry, legislative and oversight bodies, and investors and creditors The needs of these users are broad and no single set of financial statements and principles can satisfy all expectations The satisfaction of diverse user needs is a constant focus of governmental accounting This has lead to the dual-perspective model which leads to the production of two distinct types of financial statements Accountability and control have been a constant goal of governmental accounting Governmental accounting provides the citizenry of a democracy with a method for evaluating the governmental actions of raising and allocating resources Elected and appointed officials have authority over the public’s money They should be held accountable for generating and using these resources wisely in meeting the public’s needs Accounting shoud help citizens in evaluating these officials on their honesty, wisdom, and stewardship GASB Statement No.34 has refined the reporting of governmental activities by providing information about the government as a whole Focusing on individual accountability for the various government activities does not necessarily meet all user needs Government reporting still focuses on current financial resources in the fund-based finacial statements, but provides an additional focus on all assets and all liabilities in the government-wide financial statements, thus meeting broader user needs Two financial statements make up the government-wide financial statements: The Statement of Net Assets and The Statement of Activities There are a number of fundbased financial statements The two fundamental financial statements covered here in Chapter 16 were the Balance Sheet for the governmental funds and the Statement of Revenues, Expenditures, and Other Changes in Fund Balances for the governmental funds McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com In fund-based accounting, governmental funds use the current resources measurement focus and the modified accrual basis for the timing of revenue and expense recognition The current financial resources focus traditionally includes only assets such as cash, receivables, and investments that can be used for spending purposes and the liabilities to be paid out of these current assets The modified accrual basis recognizes revenues when they become available and measurable and expenditures when they cause a reduction in current financial resources Governments must disclose the length of time being used to determine availability Proprietary and Fiduciary funds generally use the economic resources measurement focus and the accrual basis for the timing of revenue and expense recognition The economic resources measurement focus reports all assets (including capital and other noncurrent assets) as well as all liabilities (including long-term obligations) Government-wide financial statements use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition similar to for-profit organizations Current financial resources are primarily cash, investments, and receivables These items are expected to be used to meet the current period government spending needs This category also normally includes inventories and prepaid expenses Liabilities are recognized under the current financial resources focus when a claim against current financial resources is created In many cases, that means that payment will be made during the current period or within 60 days of the subsequent period Disclosure is required for the number of days being applied Governmental Funds: Account for activities with a service orientation a General Fund b Special Revenue Fund c Capital Projects Fund d Debt Service Fund e Permanent Fund Proprietary Funds: Account for functions that are financed (at least in part) by user charges a Enterprise Fund b Internal Service Fund Fiduciary Funds: Account for monies held by the government in a trustee capacity a Investment Trust Fund b Private-Purpose Trust Fund c Pension Trust Fund d Agency Fund 10 The following fund types fall within the governmental funds classification: a The General Fund is used to account for ongoing activities such as public safety and sanitation More specifically, the General Fund records any activities that not fall under one of the other fund types McGraw-Hill/Irwin 16-6 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com b Special Revenue Funds account for financial resources that have been restricted as to expenditure for a specified operating purpose Money can come from sources such as grants, taxes, and gifts c Capital Projects Funds account for monies (and their eventual expenditure) to be used in acquiring or constructing government facilities or other capital assets d Debt Service Funds account for the accumulation of resources that will be used to pay the principal and interest of long-term debts incurred by the service activities e Permanent Funds account for assets contributed to the government by an external donor with the stipulation that the principal cannot be spent but any income can be used within the government, often for a designated purpose 11 The following fund types fall within the proprietary funds classification: a An Enterprise Fund accounts for any governmental activity that is financed in whole or in part by outside user charges, such as a subway system b An Internal Service Fund is used to record any activity that provides service to other departments or agencies within the government on a cost-reimbursement basis A motor pool, a centralized computer operation, or a print shop can be accounted for as Internal Service Funds if a user fee is charged and they only exist to serve the other functions of government 12 Fiduciary Funds: Account for monies held by the government in a trustee capacity a Investment Trust Fund Accounts for the outside portion of investment pools where the reporting government has accepted funds from other governments resulting in a larger investment and hopefully a higher return b Private-Purpose Trust Fund Accounts for money held in a trustee capacity, for example, money confiscated from illegal operations c Pension Trust Fund Accounts for the employee retirement system d Agency Fund Accounts for resources held by the government as an agent for individuals, private organizations, or other government units 13 In government-wide financial statements, financial figures are shown as either governmental activities or business-type activities All governmental funds and most internal service funds appear in the governmental acitivities All of the enterprise funds and any remaining internal service funds are lumped into the business-type activities Fiduciary funds are not shown in the government-wide financial statements 14 In fund-based financial statements, for the governmental funds, a separate column must be shown for (a) the General Fund, (b) any other fund that qualifies as major, and (c) all other funds accumulated as a whole in a single column 15 The physical recording of a budget is viewed as a method of expressing public policy and financial intent, providing a financial plan for the period The budget establishes spending limitations, which enhances financial planning and control The adoption of the budget for each activity anticipates the inflow of financing resources and sets approved expenditure levels Subsequently, comparisons can be drawn between actual and budgeted figures at any time during the fiscal period, thus evaluating performance 16 Comparisons between the original budget, the final budget, and actual figures must be reported in the required supplemental information presented after the notes to the financial McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-7 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com information in the comprehensive annual financial report Alternatively, the information can be presented as a separate statement within the government’s fund-based financial statements 17 An encumbrance is the recording of a purchase commitment (such as a contract or a purchase order) The encumbrance entry is recorded at the time the commitment is made prior to incurring a liability This recording supports the spending control emphasis of the fund-based financial statements Reviewing the Expenditures account and the Encumbrances balance provides the total amount of current financial resources spent and committed Thus, the chance of an over-commitment of resources is decreased The encumbrance is removed when this commitment becomes a legal liability Until then, no transaction has taken place so encumbrances are not included in government-wide financial statements 18 Encumbrances (commitments) that remain outstanding at the end of a fiscal period are reported within the Equity section as a reserved fund balance No liability is reported; instead, the need to hold financial resources to satisfy the eventual cost of the commitment is disclosed 19 Expenditures include outflows or reductions of net current financial resources from the acquisition of goods or services (or the payment of a long-term liability) Modified accrual accounting recognizes these expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available Fund-based accounting for the governmental funds records expenditures instead of expenses and capital assets 20 Modified accrual accounting recognizes expenditures when a claim against the current financial resources is incurred that will be paid from resources that are available Governments must disclose the length of time (often 60 days) used to determine availability 21 Within the governmental funds, fund-based financial statements focus on expenditures rather than expenses Expenditures and transfers should be recorded when the liability is incurred Therefore, the entire cost of capital assets is treated as an expenditure as the liability is incurred Government-wide financial statements record capital assets in a manner similar to for-profit organizations Buildings, machines, and other capital assets are capitalized and expensed over their useful lives 22 Traditionally, the purchase method has been used for prepaid expenses and supplies The cost is recorded immediately as an expenditure when the liability is incurred or the money is paid Another method is the consumption method, which is similar to for-profit organization Supplies and prepayments are recorded as assets when acquired As they are then consumed, they are recorded as expenditures matching them with the appropriate fiscal period McGraw-Hill/Irwin 16-8 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com On fund-based financial statements for the governmental funds, either method can be selected 23 The four classifications of nonexchange revenues that a state or local government can recognize are: a Derived tax revenues A tax assessment is imposed because an underlying exchange takes place For example, revenues are recognized for a sales tax when a sale occurs and the tax is imposed b Imposed nonexchange revenues An assessment is imposed but no underlying transaction takes place Examples include property taxes and fines or penalties that are levied Revenues are recognized in the period when resources are required to be used or the first period that use is permitted c Government-mandated nonexchange transactions Monies are provided from one government to another to help pay for legally required programs or actions Examples include grants from the federal government to a city that must only be used for a mandated legal requirement such as an improvement in the school system Revenues are recognized when all eligibility requirements have been met d Voluntary nonexchange transactions Monies conveyed willingly to a state or local government by an individual, another government, or an organization usually for a specific purpose but without legally mandated requirements Revenues are recognized when all eligibility requirements have been met An example would be money donated to the city for the beautification of the local parks 24 A receivable is not recorded for property taxes until the demand for money represents an enforceable legal claim, which is normally specified by state law Many governments encourage the early payment of property taxes (by sending out bills early or by giving some type of a cash discount) Thus, cash can actually be reported before the government even records the initial receivable The revenue from the property tax should be reported net of estimated uncollectible tax in the period in which it is supposed to be used or the first period in which it can be used For example, property taxes assessed to finance the government's costs in 2008 should be reported as revenue in 2008 Because the receivable and the revenue recognition are split, it is possible to record the receivable (or cash, if collected early) before the revenue In that case, a Deferred Revenue account is established 25 No revenues are recognized in either set of financial statements because the proceeds of bonds must be paid back In fund-based financial statements, Cash is increased along with an ―Other Financing Sources‖ figure For example, if the bonds were issued for a construction project, this entry is recorded in the Capital Project Fund Payments of both interest and debt are then recorded when they become due, becoming a claim on current financial resources An Expenditure account is recognized for the debt and related interest and is usually shown in the Debt Service Fund In government-wide financial statements, the cash and debt are both increased and payment of debt would be similar to for-profit financial statements McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-9 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 26 A special assessment is an improvement made to property by the government, which is paid for in part or in whole by the owners of the property being benefited Adding curbing and sidewalks to a local street is an example of a special assessment if the residents of that street are required to pay a portion of the cost Typically, the government places a lien on the property to insure payment The accounting for special assessment projects depends on the liability being incurred by the government If the government is in no way liable for the work done and any debt incurred, an Agency Fund is used to account for the monetary inflows and outflows The government is simply serving as a conduit to get the project completed and the debt paid If the government is responsible (even secondarily responsible) for the cost of the project, a more elaborate method of accounting is necessary In the government-wide financial statements the debt and the infrastructure asset are recorded as in for-profit accounting The taxes are assessed, reported as revenues, collected, and used to pay the debt The infrastructure asset and long-term debt are not recorded in the fund-based financial statements Instead, the expenditures for the work are recorded in a Capital Projects Fund while cash collected from citizens is recorded as revenue 27 In fund-based financial statements, interfund transactions are recorded in both funds simultaneously at the time of authorization For example, monetary transfers from the General Fund to another fund such as the Debt Service Fund would be recorded in both funds The recipient records this transfer as an ―Other Financing Source‖ and the party making the transfer records an ―Other Financing Use.‖ If the transfer is being made to a proprietary fund, it is often shown in the statement of revenues, expenses, and other changes in net assets as a ―capital contribution‖ or as a ―transfer in.‖ 28 Intra-activity transactions occur totally within the governmental activities or totally within the business-type activities so that no net effect is created Therefore, these transfers are not reported on government-wide financial statements Interactivity transactions occur between a governmental activity and a business-type activity so that they affect the balances in each Consequently, they are reported in both columns on the government-wide financial statements but are then offset in the total column 29 An internal exchange transaction is a transfer within the government that is recorded as if the transaction had actually occurred with an outside party Such transactions occur between one of the government’s activities and an internal service or enterprise fund and are normally to pay for work or services being rendered These exchanges are reported as revenues and as either expenditures or expenses An example would be a payment from a police department to the city’s motor pool for vehicle maintenance This exchange would be included by both departments in the fund-based financial statements as if it were a transaction with an outside party On government-wide financial statements, any such transactions between a government activity and a related internal service fund would be McGraw-Hill/Irwin 16-10 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com C True—Prior to GASB 34, only the final budget and the actual figures for the period were reported That was considered somewhat misleading since the budget could be revised near the end of the year to establish agreement GASB 34 required the original budget also to be disclosed D False—A Budgetary Fund Balance account does have to be set up as part of the budget entry to indicate that a surplus (or deficit) is anticipated However, an expected surplus requires a credit to the Budgetary Fund Balance rather than a debit E False—Budgetary information only relates to fund-based financial statements and has no impact on the government-wide financial statements 43 A False—Revenue should be recognized when all eligibility requirements have been met Here, the eligibility requirements, if any, could have been met during 2008 It is likely that the eligibility requirements have not been met but that is not necessarily the case B False—If there are no eligibility requirements, the revenue should be recognized immediately in December 2008 when the award is made C False—A grant is a government-mandated nonexchange transaction when the award was made to help the recipient government meet legal requirements That is not specified here However, if the state government had passed a law that all school children had to receive hot lunches and had then furnished this grant to help meet that requirement, it would have been a government-mandated nonexchange transaction D True—The cash is recognized because it had been received but no revenue can be reported because all eligibility requirements have not yet been met Thus, a deferred revenue should be established for the amount received E False—Revenue recognition rules for nonexchange transactions were set up by GASB Statement No 33 44 a Fund-based financial statements – the fund balance goes up by $6 million because of the inflow of current financial resources Government-wide financial statements – the net asset balance does not change Both assets (cash) and liabilities (bonds payable) go up by the McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-37 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com same $6 million amount b Fund-based financial statements – the fund balance goes down by $149,000 because of the outflow of current financial resources Government-wide financial statements – the net asset balance does not change One asset (truck) goes up while a second asset (cash) goes down c Fund-based financial statements – the fund balance goes down for the General Fund by $17,000 because of the outflow of current financial resources Government-wide financial statements – the net asset balance does not change This is an internal exchange transaction within the governmental activities so that no net change is created d Fund-based financial statements – the fund balance is not affected because the resources will not be collected quickly enough to be available in the current period An asset (receivable) is recognized along with a liability (deferred revenue) so that the size of the fund balance is not affected Government-wide financial statements – A $75,000 receivable is recognized so that the net asset balance goes up by that amount e Fund-based financial statements – the fund balance is not affected The money is not recognized as a revenue until all eligibility requirements have been met Since that does not appear to be the case, the cash will go up along with a liability for the deferred revenue Government-wide financial statements – the net asset balance does not change The accounting is the same as explained for the fund-based financial statements f Fund-based financial statements – the fund balance should go up by $1 million The sale took place in the current year and the resources will all be received within the 75 day period being used to define available resources Government-wide financial statements – the net asset balance goes up by $1 million because the sale was made in the current period g Fund-based financial statements – the fund balance is not affected Although an encumbrance may be recorded to avoid spending more McGraw-Hill/Irwin 16-38 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com than the appropriated amount, that has no impact on the fund balance Government-wide financial statements – a purchase order or other commitment has no impact on the net asset balance h Fund-based financial statemetns – the fund balance goes down by $18,000 because the transfer has been approved and will remove current financial resources Government-wide financial statements – there is no impact on the net asset balance of the governmental activities because this is an intraactivity transfer from one Governmental Fund to another There is no net effect 45 A False—A transfer out will be shown by the governmental activities and a transfer in will be reported by the business-type activities Those two figures will be netted together so that no overall impact is shown in the total column for the government However, both figures appear in their own separate columns B True—Because only governmental activities are involved, the transfer creates no difference in the overall total This is an intra-activity transfer C True—The General Fund reports the resource outflow as an other financing use The resources were reduced but it was not for an expenditure D False—The General Fund will report the transfer out as an other financing use and the column for "all other funds" will show the transfer-in as an other financing source E False—The General Fund does not report expenses in the fund-based financial statements but rather expenditures McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-39 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 46 A Correct change is $40,000 increase—According to the preliminary information, the Capital Projects Fund reported an increase in its fund balance for the year of $40,000 In arriving at those figures, a $10,000 revenue and the related expenditure were recorded in that fund for this sidewalk construction Because the government had no obligation, these cash flows should actually have all been reported in the Agency Fund The auditing firm should remove both the revenue of $ 10,000 and the expenditures of $10,000 from the Capital Projects Fund Because they are of the same amount but have an opposite effect on current financial resources, this removal leaves the overall change in the fund balance at $40,000 B Correct change is $140,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase Here, a revenue of $10,000 was reported within the government-wide statements However, because the city had no obligation, that revenue should have been in an Agency Fund Removing this revenue (and the asset that was recorded at the same time) reduces the net asset increase for the city from $150,000 to $140,000 47 Correct change is a $10,000 increase—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000 However, this particular $20,000 should have been reported as a debt since it is due in 60 days rather than as an other financing source (which serves to increase the fund balance) Reclassifying the $20,000 to a debt leaves the overall increase in the fund balance for the period as only $10,000 48 A Correct change is a $66,000 increase—According to the preliminary information, the General Fund reported an increase in its fund balance during the year of $30,000 However, the $9,000 revenue and $45,000 in expenditures were erroneously recorded in that fund Together, those transactions had caused the fund to go down by a net of $36,000 Removing them (to record them within an enterprise fund) will remove this $36,000 reduction from the General Fund and cause the increase in the fund balance to rise from $30,000 to $66,000 McGraw-Hill/Irwin 16-40 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com B Correct change is a $150,000 increase—According to the preliminary information, the overall change in the net assets of the city during the year (on the government-wide financial statements) was a $150,000 increase An error has been made in that this display was reported in the governmental activities (General Fund) rather than the business-type activities (Enterprise Fund) That increases one column in the statement of assets (the business-type activities) and decreases the other (the governmental activities) by exactly the same amount So, moving the transactions does not change the overall records for the government as a whole C Correct change is a $54,000 increase—According to the preliminary information, the overall change in the net assets of the Enterprise Fund on the fund-based financial statements was a $60,000 increase However, the art display was not included as it should have been Adding in the $9,000 revenue and the $15,000 expense creates a $6,000 net reduction that drops the positive change from $60,000 to $54,000 49 A Correct change is a $42,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase The government, though, has recognized a revenue for the amount received in the current period The amount received should have been $300,000 times 40% or $120,000 However, the discount reduces that figure by $12,000 to $108,000 That money cannot be spent until 2009 and, so, must be reported in 2008 as a deferred revenue and not as a revenue Removing this revenue reduces the overall increase in net assets by $108,000 from $150,000 to $42,000 B Correct change is a $78,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000 The government, though, had recognized a revenue for the amount of cash received The amount received should have been $300,000 times 40% or $120,000 However, the discount reduces that figure by $12,000 to $108,000 That money cannot be spent until 2009 and, so, must be reported in 2008 as a deferred revenue and not as a revenue Removing this $108,000 revenue reduces the overall change in net assets from an increase of $30,000 to a decrease of $78,000 McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-41 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 50 A Correct change is a $42,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase However, as shown above in 49 (part A), $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2009) Incorrectly, the city recorded the $108,000 as a revenue When removed, the increase in net assets drops from $150,000 to $42,000 Recognition (and the removal) of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other is a liability B Correct change is a $78,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000 However, as shown above, $108,000 was received that should have been recorded as a deferred revenue until the period when it can be used (2009) The city incorrectly recorded the $108,000 as a revenue When removed, the increase in net assets drops from an increase of $30,000 to a decrease of $78,000 Recognition of the receivable and the deferred revenue cause no change in net assets since one is an asset and the other a liability 51 A Correct change is $290,000 decrease—According to the preliminary information, the General Fund reported an increase in its fund balance for the year of $30,000 However, $320,000 was recognized here as a revenue although an eligibility requirement does remain (lowering air pollution by 25 percent) No revenue can be recognized until all eligibility requirements have been met Changing the $320,000 from a revenue to a deferred revenue reduces the $30,000 increase in the fund balance to a $290,000 decrease B Correct change is a $170,000 decrease—According to the preliminary information, the change in net assets of the city on government-wide financial statements was a $150,000 increase However, $320,000 was recognized as a revenue although an eligibility requirement remains (lowering air pollution by 25 percent) No revenue can be recognized until that time Changing $320,000 from a revenue to a deferred revenue reduces the $150,000 increase in the fund balance to a $170,000 decrease Depreciation of the machine is being handled properly 52 A Correct change is a $150,000 increase—According to the preliminary information, the overall change in the net assets of the city on the government-wide financial statements was a $150,000 increase Changing a revenue from a general revenue to a program revenue does not affect the overall change in net assets McGraw-Hill/Irwin 16-42 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com B Correct amount of net expenses is $90,000—According to the preliminary information, the parks reported net expenses of $100,000 The net expense figure is computed as direct expenses less any program revenues The $10,000, though, should have been a program revenue If this revenue had been appropriately included, net expenses would have only been $90,000 rather than $100,000 Develop Your Skills Research Case No textbook is ever going to cover all of the many areas discussed within complex authoritative pronouncements The subtle nuances of such rules can only be experienced and appreciated through the study of the actual document The student needs to be aware of the extent of the official guidance that is available and gain confidence by working directly with these pronouncements Here, an issue has been raised in connection with the handling of several unusual transactions In real life, no better method of resolving such questions exists than to actually study the standard itself A review of the Contents of GASB 34 indicates that when working with government-wide financial statements "Reporting Contributions to Term and Permanent Endowments, Contributions to Permanent Fund Principal, Special and Extraordinary Items, and Transfers" is covered in paragraph 53 Apparently, additional information about "Special and Extraordinary Items" is to be found at paragraphs 55-56 For fund-based financial statements, "Special and Extraordinary Items" are explained at paragraph 89 Paragraph 55 then defines extraordinary items as "transactions or other events that are both unusual in nature and infrequent in occurrence." The paragraph directs the reader to APB Opinion No 30 for further information on the exact nature of the terms "unusual in nature" and "infrequent in occurrence." Paragraph 56 defines special items as "significant transactions or other events within the control of management that are either unusual in nature or infrequent in occurrence." Paragraph 53 indicates that a number of balances, including special and extraordinary items, should be reported on the government-wide statement of activities "separately from, but in the same manner as, general revenues That is, these sources of financing the net cost of the government's programs should be McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-43 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com reported at the bottom of the statement of activities to arrive at the all-inclusive change in net assets for the period." Following that, in paragraph 54, an illustration is presented of a statement of activities that shows the handling of special items (but not extraordinary items) Paragraph 89 provides instruction on the handling of these two items within fund-based financial statements by first saying that the definitions are the same here as for government-wide financial statements The placement of these items, though, "should be reported separately after 'other financing sources and uses."' In this case, GASB 34 provides clear guidance as to the identity of these two accounts as well as their placement in the financial statements In practice, accountants rarely refer to textbooks when official guidelines are available Students, therefore, need to become comfortable with locating the source of authoritative information about a topic in order to become proficient at reading and understanding the material provided Research Case Here, the accountants and officials of the City of Danmark are looking for assistance in classifying a revenue as either a program revenue (reported directly with a specific activity) or a general revenue (shown for the government as a whole) A study of GASB 34 provides extensive assistance in this case in paragraph 48 by spelling out that "program revenues derive directly from the program itself or from parties outside the reporting government's taxpayers or citizenry, as a whole; they reduce the cost of the function to be financed from the government's general revenues The statement of activities should separately report three categories of program revenues: (a) charges for services, (b) program-specific operating grants and contributions, and (c) program-specific capital grants and contributions.‖ Examples of program revenues are then given that include: Revenue collected for garbage collection Building permits A state grant for the sheriff’s department to participate in a drug awareness program Earnings on endowments if the money is restricted to a program specifically identified in the endowment agreement McGraw-Hill/Irwin 16-44 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com In contrast, general revenues are defined in the negative in paragraph 52: "all revenues are general revenues unless they are required to be reported as program revenues." Thus, if any revenue does not meet the specific definition of a program revenue, it is automatically labeled as a general revenue Taxes are included in this category as well as any other revenues of the government that not meet the program revenue criteria Analysis Case 1) In an audit of a state or local government, the extent of the independent auditor's report is enlarged based on Government Auditing Standards (issued by the Comptroller General of the United States) from that of a for-profit company as it also mentions reports that are available about the government's internal control procedures as well as its compliance with laws and regulations This information could be provided in the audit report or, as mentioned here, through separate reports 2) A number of items are shown in order to reconcile the net changes in fund balances for the governmental funds and the changes in net assets These typically include Internal service funds that are included within the Governmental Activities Recognition of expenses under accrual accounting that are not recognized under modified accrual accounting Recording capital assets as expenditures in the fund-based financial statements Differences in the reporting of long-term debt issuance and payment 3) The largest sources of general revenues for many cities are property taxes and sales taxes However, a wide variety of revenue sources are possible 4) The amount of expenditures will vary widely based on the size of the government Classifications usually include public safety, sanitation, and the like 5) The General Fund should only shows current financial resources as its assets: cash and investments, various receivables, and amounts due from other funds Although not financial resources, prepaid accounts and inventory are normally included 6) Most governments will indicate in the note to their financial statements that payables and receivables are viewed as available if collected within 60 days of the end of the year Other lengths of time, though, can be used McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-45 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com 7) This question focuses on interperiod equity: Is the government spending more than it takes in so that future generations may have to suffer or is the government taking in more than it spends so future generations will have the benefit of an inherited surplus Analysis Case Students need to continue updating their education throughout their careers One method for doing this is to become familiar with the information available on the GASB website This assignment directs the students to look at any Exposure Drafts (EDs) currently being studied by the GASB for the possibility of becoming an official statement By looking at this site on a regular basis, an accountant can keep up with all issues being studied by the Board as well as the authoritative evolution of accounting pronouncements as new standards are produced At the time of this writing, five items are listed under the ―Exposure Drafts‖ heading on the GASB website Three are Exposure Drafts: Accounting and Financial Reporting for Intangible Assets, Pension Disclosures, and Elements of Financial Statements One (titled Fund Balance Reporting and Governmental Fund Type Definitions) is a Invitation to Comment and another (titled Accounting and Financial Reporting for Derivatives) is a Preliminary Views document Students can download any of these documents and read them as a way to help them understand the evolutionary nature of financial accounting For example, the Exposure Draft on Accounting and Financial Reporting for Intangible Assets is only 38 pages long and discusses six specific issues that students should be capable of reading and understanding: the description and characteristics of intangible assets the classification of intangible assets as capital assets the capitalization of costs incurred in connection with intangible assets the accounting for costs of internally generated computer software the possibility of an intangible asset having an indefinite life the retroactive treatment of intangible assets based on the accounting rules that are established To a student, such readings can seem tedious and difficult—at least initially However, any person who is involved actively in the financial reporting of a state or local government is probably willing to expend much time and energy in order to be aware of possible financial reporting changes and their consequences It is important to remember, though, that all of these documents may eventually be rejected outright, accepted, or may undergo either slight or radical revisions A preliminary views document, an exposure draft, and a invitation to comment are both signs that an authoritative pronouncement is under serious consideration McGraw-Hill/Irwin 16-46 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com but, over the decades, many proposals have gotten to each these levels without the Board's being able to reach sufficient consensus to establish an authoritative principle Communication Case Most accountants and accounting students understand that the GASB sets official standards for the accounting and financial reporting to be carried out by state and local government organizations However, probably only a very small portion of either of these groups truly knows what the established mission of the GASB actually is At the current time, the mission statement of the GASB is listed at the very top of the body’s home page (www.gasb.org) "The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports." Given the extensive (some would say "radical") changes created by the GASB in requiring both fund-based financial statements and government-wide financial statements, comparison of this impact with the above mission statement is an interesting exercise Clearly, the Board must have felt that the changes made, especially the addition of government-wide financial statements, did meet the goal of reporting that results "in useful information for users of financial reports." The major purpose, it would seem, of adding this entirely new layer of reporting was to help provide information to users that would provide them with an completely new perspective of the state or city However, whether this particular requirement will be successful in guiding and educating "the public, including issuers, auditors, and users of those financial reports" is difficult to ascertain The pronouncement itself does provide a wealth of information about the changes made by the GASB, the purpose as well as the justification However, whether that information could be construed as helping to guide and educate the public and other users might be difficult to establish One interesting class exercise that can carried out with this mission statement is to ask the students just what they thought the GASB could to meet this last part of their mission statement, the line that charges them to "guide and educate the public, including issuers, auditors, and users of those financial reports." McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-47 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com Communication Case Students not always appreciate the amount of debate and compromise that the FASB and GASB must usually go through to arrive at an official accounting pronouncement Because of their inexperience, students sometimes see the creation of accounting standards as a quest for the one true and correct path: One way of accounting is right for each situation and all other ways are necessarily wrong In practice, though, many possible "right" ways usually exist as potential solutions to any accounting problem Because of the public debate created by many of these issues, the official bodies often receive numerous recommendations whenever any new standard is discussed and proposed The Board has to study each of these and then arrive at the one approach that best fits in with the members' conceptual understanding of accounting and reporting Furthermore, there are political ramifications to consider as the Board attempts to arrive at a final solution that pacifies the qualms of all the various interested parties However, the Board does help to explain its standards by presenting extensive background information This assignment is designed to give students the opportunity of looking at some of the alternatives examined by the GASB prior to establishing its Statement No 34 The paragraphs assigned here present a number of different approaches that were suggested by members of the public and considered by the GASB In all cases, individuals who had some interest in government accounting felt that these alternatives were better solutions than the dual system of government-wide financial statements and fund-based financial statements mandated by GASB 34 Many respondents preferred a single set of financial statements rather than the dual approach finally chosen However, GASB found that there was no consensus that any one set of statements was preferable or provided the needed information by itself Others simply felt that no significant change was necessary in government accounting and that the system in use at that time (very similar to the current fund-based financial statements) was adequate The GASB justifies its decision to move away from the previous model by stating (in paragraph 245) that "some of the information that today's users need surpasses the capabilities of the previous reporting model, particularly for governmental activities." The suggestion was also made that the fund-based financial statements for governmental funds not be based on measuring and reporting current financial resources Rather, each government would use the basis of McGraw-Hill/Irwin 16-48 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com accounting utilized for budgetary purposes (such as a cash system or a modified cash system) The logic of this argument was that these fund-based financial statements are created to provide control and financial accountability which is established by the budgetary process and should, therefore, reconcile with the budget GASB rejected this idea because the wide variety of possible budgetary methods would eliminate consistency and comparability Another solution put forth was to leave the current model as it is but make significant changes to it Basically, GASB responded that one set of statements could simply not expand to suit the wide array of user needs that had arisen over the years Other suggestions encompassed trying to adapt the basis of accounting utilized for the governmental funds to be more useful to a wider array of financial statement users In other words, significant changes were recommended for this portion of the fund-based financial statements GASB indicated here that the Board felt that useful information was being provided by the previous model which focused on current financial resources and that such information should not be lost by the creation of a new model Communication Case One of the truly significant additions to state and local government accounting resulting from GASB 34 was the Management’s Discussion and Analysis This written report is meant to be a discussion of the financial information being reported by the government in a verbal rather than a purely quantitative fashion Students often not understand the range of information that can be uncovered within an MD&A by a careful reader Here, the student can read the MD&A for an actual city The information that is provided is quite extensive and can cover a wide range of subjects such as the following: An explanation of fund-based financial statements An explanation of government-wide financial statements An explanation of governmental funds, proprietary funds, and fiduciary funds The purpose of the various funds such as the general fund and the debt service fund A comparison of the governmental activities and the business-type activities The method by which the government generates revenues The diversity of expenditures made within the governmental funds The bond rating for the government McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-49 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com A discussion of the budgetary process Information about both capital assets and long-term liabilities The reporting of infrastructure assets that were acquired before the adoption of GASB 34 Information about proprietary operations Excel Case This type of spreadsheet would appear to be very helpful in budget planning because city officials could plug in various increase and decrease rates and see the impact on the fund balance over time There are a number of different ways that a spreadsheet could be created to solve this particular problem Here is one possible approach: Create Column Headings: In Cell A4, enter label text "Year" In Cell B4, enter label text "Revenue Change" In Cell C4, enter label text "Revenues" In Cell D4, enter label text "Expenditures Change" In Cell E4, enter label text "Expenditures" In Cell F4, enter label text "Ending Fund Balance" In Cell G4, enter label text "Projected Change in Revenue" In Cell H4, enter label text "Projected Change in Expenditures" Click and drag across Cells A4 to H4 Select Format, Cells, Alignment, and click the "Wrap Text" box Click OK If needed, place the cursor on the line between the Column Letters and drag the boundary on the right side of the column headings until the columns are the width you want In Cell A5, enter label text "2007" for first year In Cell C5, enter Revenues of $1,400,000 In Cell E5, enter Expenditures of $1,480,000 In Cell F5, enter beginning Fund Balance of $400,000 In Cell G5, enter -2% for Projected Change in Revenue Per Year In Cell H5, enter +3% for Projected Change in Expenditures Per Year In Cell A6, enter label text "2008." Perform Calculations: In Cell B6, enter formula to calculate Revenue Change (Revenue times Projected Revenue Change): =+C5*$G$5 Note here that adding the $ symbol to Column and Row addresses creates an "absolute" reference which will remain static throughout the spreadsheet In Cell C6, enter formula to adjust Revenues by Revenue Change: =+C5+B6 McGraw-Hill/Irwin 16-50 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution manual and testbank on www.downloadslide.com In Cell D6, enter formula to calculate Expenditures Change (Expenditures times Projected Expenditures Change): =+E5*$H$5 In Cell E6, enter formula to change Expenditures by Expenditures Change: =+E5+D6 In Cell F6, enter formula to calculate the new ending Fund Balance (initial Fund Balance plus Revenue minus Expenditures): =+F5+C6-E6 Copy formulas to adjacent rows: Click and drag across Cells A6 through F6 and release Place cursor on Fill Handle (small black box in lower right corner of selection box) and click and drag down through Row At that point, you should see that the city will have a negative fund balance of $277,539 at the end of 2010 Simply, by changing cells G5 and H5, the impact of any different level of rate changes can be ascertained For example, if revenues decrease 5% and expenditures decrease 3% each year, changing those two cells will show that the fund balance will be a positive $14,937 at the end of 2011 Or, by assuming revenues increase by 4% and expenditures increase by 7%, the fund balance will be a negative $146,066 at the end of 2010 Any other combination of changes can be examined in the same way McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-51 ... Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-5 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com In fund-based accounting, ... is shown as McGraw-Hill/Irwin Hoyle, Schaefer, Doupnik, Advanced Accounting, 9/e © The McGraw-Hill Companies, Inc., 2009 16-3 Find more slides, ebooks, solution manual and testbank on www.downloadslide.com... solution manual and testbank on www.downloadslide.com b Private-purpose trust funds McGraw-Hill/Irwin 16-2 © The McGraw-Hill Companies, Inc., 2009 Solutions Manual Find more slides, ebooks, solution