Solution manual advanced accounting 11e by BEAMS 19 chapter

The Codification discusses three fund categories governmental, proprietary, and fiduciary and eight fund types general, special revenue, permanent, capital projects, debt service, inter

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Chapter 19

AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL

GOVERNMENTAL UNITS

Questions

1 The Governmental Accounting Standards Board has primary responsibility for setting standards that

provide GAAP for state and local governmental units The most authoritative literature includes GASB Statements of Standards and GASB Interpretations The second level of authoritative literature includes GASB Technical Bulletins and those AICPA audit and accounting guides and statements of position that

the AICPA intended to make applicable to governments and that the GASB has cleared

Before 1984, the Municipal Finance Officers Association (MFOA) and its National Committee on

Governmental Accounting provided guidance via the publication of Municipal Accounting and Auditing

in 1951 and Governmental Accounting, Auditing, and Financial Reporting (GAAFR) in 1968 Since

1974, the AICPA has also issued industry audit guides for audits of state and local governmental units

2 The Municipal Finance Officers Association (MFOA), now referred to as the Government Finance Officers

Association (GFOA), first issued Governmental Accounting, Auditing, and Financial Reporting (GAAFR) in 1968 For many years, this resource book – often referred to as the Blue Book due to its

distinctive blue cover - constituted the most complete frameworks of accounting principles specific to governmental units, and provided standards for preparing and evaluating the financial reports of governmental units Updated periodically to reflect changes to governmental accounting, the 2005 GAAFR

is the most recent version with a new version expected late 2011

3 According to the AICPA’s Audit and Accounting Guide, a governmental entity is generally created for the

administration of public affairs and has one or more of the following characteristics:

▪ Popular election of officers or appointment (or approval) of a controlling majority of the

members of the organization’s governing body by officials of one or more state or local governments;

▪ The potential for unilateral dissolution by a government with the net assets reverting to a

government; or

▪ The power to enact or enforce a tax

An organization may also be classified as a governmental entity if it possesses the ability to issue debt that

is exempt from federal taxation

4 A fund is a separate fiscal and accounting entity with a self-balancing set of accounts, “segregated for the

purpose of carrying on specific activities or attaining certain objectives in accordance with special

regulations, restrictions, or limitations.” [GASB Codification] Fund accounting facilitates budgetary

control

A governmental unit may have hundreds of funds, but only eight fund types The Codification

discusses three fund categories (governmental, proprietary, and fiduciary) and eight fund types (general, special revenue, permanent, capital projects, debt service, internal service, enterprise, and trust and agency

funds)

5 Governmental funds are “expendable” or “source and disposition” funds through which most

governmental functions are financed These funds are essentially working capital entities They include the general fund, special revenue funds, permanent funds, capital projects funds, and debt service funds

Proprietary funds are “nonexpendable” or “commercial type” funds used to account for ongoing

activities that are similar to those found in private enterprise They use the business accounting equation and their reporting parallels that of a business entity in most regards They include two fund types— enterprise funds and internal service funds

Fiduciary funds are used to account for assets held by the governmental unit as trustee or agent

for individuals, private organizations, and other governmental units Fiduciary funds include trust funds (pension, investment, and private purpose) and agency funds

6 The five types of governmental funds are the general fund, permanent funds, special revenue funds, capital

projects funds, and debt service funds Each is a working capital entity, therefore, each is used to account for a portion of a government’s general government working capital They are distinguished by the purpose for which the resources of each fund may (must) be used Working capital to be used for construction/acquisition of major general government fixed assets should be accounted for in capital projects funds; that to be used to pay principal and interest on general long-term debt should be accounted for in debt service funds Special revenue funds are used to account for portions of working capital to be used for other specific general operating purposes Permanent funds report resources that are legally restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting government’s programs—that is, for the benefit of the government of its citizenry

7 The governmental fund accounting equation is:

Current Assets - Current Liabilities = Fund Balance

8 The two types of proprietary funds are enterprise funds and internal service funds Both charge fees for

their services that are intended to recover part, if not all, of the costs of providing goods or services The key distinction between the two is that the predominant customers of internal service funds are other departments or agencies of the government, whereas the predominant customers of enterprise funds are outside entities or individuals

9 The accounting equation for a proprietary fund is essentially the business accounting equation—

Current + Noncurrent – Current – Noncurrent = Net Assets

10 Under the modified accrual basis of accounting, fixed assets are not recorded in the general fund, because

general fixed assets do not represent financial resources available for current expenditures, i.e., they are not working capital items In the fund financial statements, the general fund is used to account for unrestricted resources that can be expended currently for operating purposes Since fixed assets result from expending resources for long-term needs, they are not included in the fund financial statements

With the advent of GASB 34, the general fund is reported in the government-wide statements under the accrual basis of accounting General fund fixed assets – which have typically been documented informally in the accounting records and noted in the old general fixed asset account group – will appear in the government-wide statement of net assets

11 Modified accrual accounting is the system of accounting in which revenues are recognized in the

accounting period in which they become available and measurable and expenditures are recognized in the

accounting period in which the related fund liability is incurred and objectively measurable Unmatured

interest on general long-term debt is an exception for which the expenditure is recognized when due Modified accrual accounting applies to governmental funds (general fund, special revenue funds, permanent funds, debt service funds, and capital projects funds) and to asset and liability accounting for agency funds

12 Governmental and proprietary funds use different focuses when measuring financial positions and

operating results in the fund financial statements The two types of focuses are the “economic resources” measurement focus and the “flow of current financial resources” measurement focus The accrual basis (used with proprietary funds and trust funds) refers to recognition of revenues and expenses as in business accounting and follows the economic resources measurement focus, whereby all economic resources, whether current or noncurrent, are reported The modified accrual basis of accounting (used with governmental funds) is consistent with a flow of current financial resources measurement focus, whereby funds report on current resources and current obligations

19-3 Under GASB 34, both governmental funds and proprietary funds use the accrual basis of accounting and the “economic resources” measurement focus in the government-wide statements

13 Governmental revenue sources, addressed in GASB 33, are varied and include taxes, grant receipts, and

collections of user fees and fines Exchange transactions are those “in which each party receives and gives

up essentially equal values.” Nonexchange transactions are those “in which a government gives (or

receives) value without directly receiving (or giving) equal value in exchange.” Many of the transactions in governmental funds are nonexchange in nature, because general governmental activities often address the needs of the public and are funded by taxpayers who generally do not receive benefits in direct relation to

their tax payments

14 A short term note payable will generally be paid with current resources, thus it is accounted for as a

liability of the governmental fund Long-term debt is not included in the fund financial statements, since it will be repaid with future, not current financial resources The long term debt will, however, appear as a liability in the government-wide statement of net assets This is one of the reconciling items between the fund and government-wide statements

15 Interfund transfers are not expenditures or expenses, and they are classified separately from revenues,

expenditures, and expenses in the financial statements of the various funds Interfund transfers are essentially shifts of resources between funds, not costs or liabilities incurred by the entity Interfund

transfers consist of residual equity transfers (nonrecurring or nonroutine transfers of equity between funds) and operating transfers (all other legally authorized transfers between funds) Interfund

transactions that would be treated as revenues, expenditures, or expenses if they involved an external entity are not interfund transfers, but rather are quasi-external transactions and are treated as revenue, expenditures, or expenses in the normal fashion

16 An appropriation is an authorization from the legislative body to make expenditures for specified

purposes If approval by the legislative body is for each detailed expenditure item in the budget (a line-item budget), the legislative body will have maximum control because each detailed change would require legislative approval If the budget is approved in total or by major categories but not for each detailed item, the city manager (or other chief executive) can shift resources within the categories approved without legislative approval An appropriation by department, for example, permits a city manager to shift appropriations for police supplies to police equipment or overtime pay without legislative approval

17 Under GASB 34, the governmental and proprietary fund financial statements of a general-purpose

government include the following:

Fund financial statements

Governmental Funds

Balance sheet – governmental funds (modified accrual basis) Statement of revenues, expenditures, and changes in fund balances (modified accrual

Proprietary Funds

Statement of net assets (accrual basis) Statement of revenues, expenses, and changes in net assets (accrual basis) Statement of cash flows (accrual basis, direct method)

18 A reciprocal transfer is one which is expected to be repaid by the fund borrowing the money; whereas with

a nonreciprocal transfer repayment is not expected

19 The GAAP Guidelines, listed in descending order of authority are as follows:

1 GASB Statements and GASB Interpretations This category also includes AICPA and FASB

pronouncements made applicable to state and local governments by a GASB Statement or Interpretation

2 GASB Technical Bulletins This category also includes AICPA Industry Audit and Accounting

Guides and Statements of Position if specifically made applicable to state and local governments

by the AICPA and cleared by the GASB

3 Consensus positions of GASB’s Emerging Issues Task Force (EITF) and AICPA Practice

Bulletins if specifically made applicable to state and local governments by the AICPA and cleared by the GASB

4 Implementations Guides published by the GASB staff and industry practices that are widely

recognized and prevalent in state and local government

5 Other accounting literature (including FASB standards not made applicable to governments by

a GASB standard)

GASB statements are the most authoritative

20 Interfund loans are loans that are made by one fund to another and must be repaid Interfund transfers

occur when one fund provides resources to another for legally authorized purposes (an operating transfer)

or when one fund helps to establish or enhance another (a residual equity transfer) Interfund services provided and used include sales and purchases between funds at approximate external market value An interfund reimbursement is necessary when an expenditure applicable to one fund is made by a different

fund

21 Expenses reflect the cost of assets or services used by an entity, and they are recognized in the period

incurred Expenditures, unique to government accounting, typically reflect the use of governmental fund

working capital Proprietary funds recognize expenses, whereas governmental funds recognize expenditures

22 A comprehensive annual financial report (CAFR) contains three major sections—introductory, financial

and statistical The introductory section of a CAFR includes a table of contents, a letter of transmittal, a list

of principal officers, and an organizational chart The financial section includes the management’s discussion and analysis, the auditor’s report, the government-wide financial statements, and the fund financial statements The statistical section contains statistical tables with comparative data from several periods of time

23 Fiscal accountability is the responsibility of a government to demonstrate compliance with public

decisions regarding the use of financial resources Operational accountability measures the extent of a

government’s success at meeting operating objectives efficiently and effectively and its ability to meet operating objectives in the future

SOLUTIONS TO EXERCISES

[AICPA adapted]

E19-3

6 special revenue funds

7 internal service funds

8 capital projects funds

E19-7

Assumes repayment during the same year borrowed If the note had not matured by the end of the year of the borrowing, interest expenditures and interest payable would be accrued

At the same time a memo entry will be made noting a liability in the long-term debt records This is used to prepare the government-wide statements where long-term debts are recorded in governmental funds

At the same time a memo entry will be made noting an asset in the fixed asset records

This is used to prepare the government-wide statements where fixed assets are recorded

in governmental funds

At the same time a memo entry will be made removing the asset from the fixed asset records

At the same time a memo entry will be made noting a liability in the long-term debt

records This is used to prepare the government-wide statements where long-term debts

are recorded in governmental funds

E19-8

Actually, the net asset increase is reported as a $100,000 increase (revenues) and a

$2,000 decrease (uncollectible accounts expense) Further, it is relatively uncommon to

have tax revenues in proprietary activities

Assumes repayment during the same year borrowed If the note had not matured by the

end of the year of the borrowing, interest expense and interest payable would be accrued

Interest expense should be accrued on proprietary fund long-term debt as well as on

proprietary fund short-term debt

E19-9

1 debt service fund

2 permanent fund

3 special revenue fund

5 capital projects fund, debt service fund

E19-10

1 capital projects fund, debt service fund

2 internal service fund

3 enterprise fund

4 special revenue fund

5 general fund

E19-11

1 pension trust fund

2 enterprise fund

3 internal service fund

4 general fund

5 general fund (may also be allocated to other funds after collection)

E19-12

1 General Fund

2 General Fund

Year end accrual

At the same time a memo entry will be made noting an asset in the fixed asset account

records

3 General Fund

At the same time a memo entry will be made removing the asset from the fixed asset

records

4 General Fund

5 General Fund

Enterprise Fund

6 General Fund

E19-13

1 Capital Projects Fund

At the same time a memo entry will be made noting a liability in the long-term debt

records This is used to prepare the government-wide statements where long-term debts

are recorded in governmental funds

2 General Fund

At the same time a memo entry will be made noting an asset in the fixed asset records

3 Enterprise Fund

4 Capital Projects

At the same time a memo entry will be made noting a construction work in process asset

in the fixed asset records

5 General Fund

6 General Fund