Questions for Review and Discussion

2-1 Chapter 2 Fund Accounting Questions for Review and Discussion

• In governmental accounting, a fund is a fiscal and accounting entity with a self-

balancing set of accounts used to account for an organization’s resources and claims against those resources. In business accounting, by contrast, funds generally refer either to working capital (current assets less current liabilities) or to selected components of working capital.

• The accounting equation as applied in government accounting and not-for-profit

accounting is essentially the same as that applied in business accounting. The primary difference is that in business, assets = liabilities + owner’s equity, whereas in government and not-for-profit entities, since there are no “owners” as the term is used in business, assets = liabilities + fund balance.

• Nonspendable fund balance includes amounts that are not in spendable form or are

required to be maintained intact. Restricted fund balance includes amounts constrained to specific purposes by their providers, through constitutional provisions, or by enabling legislation. Committed fund balance includes amounts constrained to specific purposes determined by the highest decision-making authority of the government itself. Assigned fund balance includes amounts a government intends to use for a specific purpose.

• GASB in 2007 in Concepts Statement No. 4 Elements of Financial Statements

provided definitions and explanations of seven key elements that comprise basic financial statements—five relating to financial position (assets, liabilities, deferred outflow of resources, deferred inflow of resources and net position) and two relating to resource flows. These elements as defined by GASB are: “Assets are resources with present service capacity that the government presently controls.” “Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid.” “A deferred outflow of resources is the consumption of net assets by the government that is applicable to a future reporting period.” “A deferred inflow of resources is the acquisition of net assets by the government that is applicable to a future reporting period.” “Net position is the residual of all other elements presented in a statement of financial position; that is the assets and deferred outflows less the liabilities and deferred inflows.” “An outflow of resources is a consumption of net assets by the government that is applicable to the reporting period.” An inflow of resources is an acquisition of net assets by the government that is applicable to the reporting period.

• Governments establish funds neither to account for specific functions nor to divide

evenly their resources. Instead, they create funds mainly to promote control and Government and Not-for-Profit Accounting Concepts and Practices 6th Edition Granof Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Granof & Khumawala 6e, Government and Not-for-Profit Accounting 2-2 accountability over restricted resources. The general fund of the city is probably larger than all of the special revenue funds combined because most of the city’s assets are unrestricted and the unrestricted assets can be aggregated in a single fund.

• There are no capital projects reported in the capital projects fund and generally no

long-term debts reported in the debt service fund because these funds are maintained to account for the resources that will be used to construct or acquire capital assets or to pay the interest and principal on long-term debts. These resources are set apart from other resources because they can only be used for their specified purposes.

• The presence of long-lived assets and long-term debt on the balance sheets of

enterprise and internal service funds indicates that the assets and debts are within the funds’ measurement focus. It thereby implies that the funds are on a full accrual basis.

• Proprietary funds are used to account for business-type activities and they adhere to

business-type accounting principles. They typically charge for the goods or services they provide and need data on the full cost (including depreciation) of services provided so that they can establish prices. Governmental funds, by contrast, are accounted for on a modified accrual basis. They receive their revenues from taxes, grants and other sources that are not necessarily tied to cost of service.

• Fiduciary funds are used to account for resources held by the government as either a

trustee (a party that administers property for a beneficiary) or an agent (one who acts on behalf of another). The two main types are trust funds and agency funds.Trust funds are used to account for assets that the government holds for the benefit of parties other than the government itself. Agency funds are used to account for assets (e.g., taxes collected by one government on behalf of another) that a government holds temporarily for other parties.

• Permanent funds are a type of trust fund, but they benefit the government itself,

rather than outside parties. Therefore, they are considered governmental funds, not fiduciary funds. However, like fiduciary funds, only the income of a permanent fund, not the principal, may be spent. The principal must remain permanently intact.

• The financial statements must be prepared from a government-wide and a funds

perspective. The government-wide financial statements are consolidated and are on a full accrual basis. The funds perspective statements are combined. The governmental funds are accounted for on a modified accrual basis; the proprietary funds on a full accrual basis.

• An agency fund is used to account for assets held on behalf of other governments,

funds or individuals, usually for a short period, such as a year. Custodial in nature, agency funds have only assets and liabilities, no revenues and expenditures.

• A CAFR is a government’s Comprehensive Annual Financial Report. Its main

components are an introductory section (that includes a letter of transmittal and a

Granof & Khumawala 6e, Government and Not-for-Profit Accounting 2-3 GFOA (Government Finance Officers Association) Certificate of Achievement for Excellence in Financial Reporting (if received), a financial section (that includes management’s discussion and analysis, the financial statements, notes to the financial statements and required supplementary information) and a statistical section (that includes economic, demographic and financial data).

• Temporarily restricted resources are those that must be used for a specific purpose

(e.g., to support donor-designated programs or activities) or cannot be spent until some time in the future (e.g., when a donor makes good on a pledge). Permanently restricted resources are typically endowments, only the income from which can be spent. Unrestricted funds, of course, are not subject to restrictions. The restrictions are based on donor mandates. Hence, restrictions imposed by other parties (e.g., creditors) are not taken into account for purposes of resource classification. These guidelines apply to not-for-profits, not governments and are based on FASB rather than GASB pronouncements.Exercises

EX 2-1

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EX 2-2

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Granof & Khumawala 6e, Government and Not-for-Profit Accounting 2-4

EX 2-3

• Focus on cash

(1) No entry necessary — no cash involved.

(2) Cash $ 300,000 Contribution revenues $ 300,000 To record the partial collection of the note

(3) Building acquisition expenditure $ 120,000 Cash $ 120,000 To record the cash paid to acquire the building

(4) No entry necessary — no cash involved

Focus on cash plus current financial resources (1) Note receivable $1,000,000 Contribution revenue $1,000,000 To record the note received

(2) Cash $ 300,000 Note receivable $ 300,000 To record the partial collection of the note

(3) Building acquisition expenditure $ 120,000 Cash $ 120,000 To record the cash paid to acquire the building (No recognition is given to the long-term note or to the building, a long-term asset.)