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Chapter 2 1 ---------------------------------------------------------CHAPTER 2-------------------------------------------------------

REVIEW QUESTIONS

Q 2-1 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.

Q 2-2 The basic purpose of fund accounting is to help ensure compliance with legal restrictions on the use of governmental resources. Funds are generally established pursuant to law. They serve as a control mechanism to ensure budgetary compliance and help ensure resources are spent for the specific purposes intended.

Q 2-3 The three categories of funds are: 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); and fiduciary-type (to account for resources held in a trust or agency capacity for others).

Q 2-4 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,

Q 2-5 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.

Q 2-6 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, the term “available” meaning that the revenues must be collected either within the current period or soon enough thereafter to be used to pay the bills of the current period.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 funds use the modified accrual basis of accounting. Proprietary-type and fiduciary-type funds use the accrual basis of accounting.

Q 2-7 The governmental-type funds and their purposes are:

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.Introduction to Governmental and Not-for-Profit Accounting 7th Edition Ives Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 2 2 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.

Q 2-8 The controller is at least partially correct. The general rule in governmental accounting is to use as few funds as possible in the accounting system. Using fewer funds makes accounting and budgeting more flexible and less cumbersome. On the other hand, having separate funds does help to demonstrate accountability for restricted resources, as in the case of bonds approved by the citizens for use only to construct a specific capital project. Thus, although it is theoretically possible to run city government using only one fund, that is not likely to occur very often.

Q 2-9 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.

Q 2-10 The proprietary funds and their uses are as follows:

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).

Q 2-11 Enterprise funds and internal service 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.

Q 2-12 The fiduciary-type funds and their uses are as follows:

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.

Q 2-13 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.

DISCUSSION SCENARIOS AND ISSUES

D 2-1 The General Fund was used to account for basic day-to-day services, including sanitation. The suggestion to cover all sanitation costs through a separate user fee requires establishment of an Enterprise Fund. Enterprise Funds use an economic resources measurement focus and the accrual basis of accounting, as contrasted with the General Fund’s use of the current financial resources measurement focus and

Chapter 2 3 modified accrual basis of accounting. The changeover will require capitalizing the capital assets and depreciating them.

D 2-2 The proposal presumably calls for billing each department when they use the central motor pool so the pool will be able to cover all operating costs. This requires establishing an Internal Service Fund.Internal Service Funds use the economic resources measurement focus and accrual basis of accounting.This differs from the current financial resources measurement focus and modified accrual basis of accounting currently used to account for the vehicles. The vehicles will need to be capitalized and depreciated.

D 2-3 These are the some of the points that might be covered:

• Excessive use of Special Revenue Funds reduces the government’s budgetary flexibility. Doing

away with them may help the government finance higher priority needs without raising taxes.

• The issue is worth studying, because some Special Revenue Funds may still have a valid basis and

some may no longer have a valid basis.

• Special Revenue Funds are not necessarily related to “special interests” as that term is generally

used.

• Special Revenue Funds are often established to finance a particular need (say, parks improvement)

and to dedicate the resources to meeting that need (say, parks admission fees). Therefore, merging restricted resources with General Fund resources will make it impossible for the restricted resources to be used for the purposes for which they were raised.

D 2-4 These are some of the points that might be covered.

• The mayor’s proposal is undoubtedly illegal. Advise the mayor to seek another appropriation if he

wishes to increase the level of police protection.

• If the mayor persists, advise him to obtain a legal opinion from Cordelia’s corporation counsel,

because the bonds were sold to construct a firehouse.

• Tell the mayor that citizens and the media will surely wonder what happened to the new firehouse

– and start asking questions.

EXERCISES

E 2-1 (5 minutes)

• Governmental-type
• Governmental-type
• Fiduciary-type
• Fiduciary-type
• Proprietary-type

E 2-2 (5 minutes)

• Capital Projects Fund – Current financial resources (CFR); Modified accrual basis (MA)
• General Fund – CFR; MA
• Pension Trust Fund – Economic resources (ER); Accrual basis (A)
• Agency Fund – ER; A
• Internal Service Fund – ER; A

E 2-3 (5 minutes)

• General Fund
• Capital Projects Fund
• Debt Service Fund
• Pension Trust Funds

Chapter 2 4

E 2-4 (15 minutes)

• False. Unless legally mandated or financial resources are being accumulated for debt service

coming due in future years, Debt Service Funds are not absolutely required. Capital Projects Funds are not required to be used if, say, smaller items of equipment are acquired with general tax revenues and paid for directly from the General Fund.

• True
• False. Governments may supplement specific sources of revenue for Special Revenue Funds

with transfers from the General Fund. However, the proceeds of specific sources of revenue should comprise a substantial portion of the resource inflows to the Special Revenue Fund.

• False. Capital assets financed by Proprietary Fund resources are accounted for in a Proprietary

Fund, not in a Capital Projects Fund.

• False. Debt Service Funds are used to accumulate resources for paying debt service coming due

both in the current and future years. In fact, such funds must be used if the government is accumulating resources for debt service coming due in future years.

E 2-5 (10 minutes)

• False. The acquisition or construction of capital assets in governmental-type funds is recorded

as an expenditure and is not capitalized and depreciated.

• True
• True
• False. Property tax revenues are recognized to the extent they are measurable and available.

Available means collected in the current period or soon enough thereafter to be used to pay the bills of the current period, generally 60 days after the accounting period ends.

E2-6 (15 minutes)

• True
• False. Enterprise Funds may (and often do) received subsidies from the General Fund.
• False. Enterprise Funds report expenses. Capital outlays result in assets, which are depreciated.

To ascertain the capital assets acquired during the year, read the statement of cash flows.

• False. Expenses are accrued if applicable to the current year, regardless of when they ae

expected to be paid.

• True

E2-7 (10 minutes)

• False. By definition, Fiduciary Funds are used to account for assets held by a government in a

trust or agency capacity for others (individuals, other governments or private organizations).

• True
• True
• False. Equity securities of a Pension Trust Fund are reported at fair value.

E 2-8 (15 minutes)

Financial statements prepared for Enterprise Funds differ from financial statements prepared for the General Fund because Enterprise Funds use the economic resources measurement focus and accrual basis of accounting, whereas the General Fund uses the current financial resources measurement focus and modified accrual basis of accounting. As a result, Enterprise Fund balance sheets contain capital assets and long-term liabilities, but the General Fund balance sheet does not. The Enterprise Fund operating statement reports expenses (including depreciation), but the General Fund operating statement shows capital outlays and repayment of bond principal as expenditures and bond proceeds as resource inflows. The Enterprise