STATE AND LOCAL GOVE RNMENT ACCOUNTING AND

Copyright © 2018 Pearson Education, Inc.1

CHAPTER 2

STATE AND LOCAL GOVE RNMENT ACCOUNTING AND

FINANCIAL REPORTING MODEL: THE FOUNDATIO N

ANSWERS TO QUESTIONS

Question 2-1

Governments operate in a different environment than businesses. Governments must comply with the many finance-related legal and contractual requirements, regulations, restrictions, and agreements that affect their financial management and accounting. Such compliance must be demonstrable and be reported regularly. Governments should also prepare financial statements in conformity with generally accepted accounting principles (GAAP), which provide uniform minimum national standards of and guidelines for annual financial reporting to groups and persons outside the government. Therefore, one fundamental feature of a government’s accounting system is that it must maintain and provide information that accomplishes multiple purposes.Whereas business accounting systems must provide data both for GAAP reporting and for income tax reporting, governmental accounting systems must provide data both for external reporting in conformity with GAAP and for controlling and reporting on finance-related legal compliance matters. This necessitates having different accounting systems for businesses and governments.

Question 2-2

The measurement focus for the three fund categories are:

• Proprietary Funds—economic resources (revenues and expenses) measurement focus,

which is the measurement focus used by business enterprises.

• Governmental Funds—the current financial resources measurement focus.

• Fiduciary Funds—the same measurement focus as proprietary funds—the economic

resources measurement focus.

An economic resources measurement focus results in accounting for all assets—both current and noncurrent—and all liabilities—both current and long-term. A current financial resources measurement focus results in accounting for financial assets and related liabilities. Noncurrent assets and long-term liabilities are not reported under a current financial resources measurement focus.The GASB’s approach to each measurement focus also includes two financial statement elements not found in accounting for other types of entities—deferred outflows of resources and deferred inflows of resources. These elements arise from changes in net assets that the GASB has determined should not be reflected as changes in fund balance (governmental funds) or net position (proprietary funds and fiduciary funds) until a future period.

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Copyright © 2018 Pearson Education, Inc.2 Question 2-3

For governmental funds:

• Revenues must be (1) “available”—collectible within the period or soon enough thereafter

to be used to pay for the expenditure liabilities incurred during the period, as well as levied or earned—and (2) measurable to be recognized.

• Expenditures are financial assets expended during a period for current operations, capital

outlay, and debt service including (a) long-term debt principal retirement and (b) interest on both short-term and long-term indebtedness.

For proprietary funds:

• Revenues are recognized when earned and measurable. There is no “availability” criterion

for revenues recognized in proprietary funds.

• Expenses are costs consumed or expired during a period.

Difficulty: 1

Learning Objective: 2

AACSB: Reflective thinking

Question 2-4

General capital assets are not considered appropriable resources and unmatured general long-term liabilities are not current liabilities. Hence, these assets and liabilities would not appropriately be accounted for within a municipality's governmental (expendable) funds, which are net current financial resource entities. Further, general capital assets are considered to belong to the government as a whole, not to a particular department or enterprise; and unmatured general long-term liabilities are likewise considered obligations of the government, not of a specific fund. Thus, neither fits into the existing fund structure of state and local governmental accounting, and both are accounted for through the General Capital Assets and General Long-Term Liabilities nonfund accounts. They are reported only in the government-wide financial statements.

Question 2-5

Capital assets and long-term liabilities are accounted for in:

General Capital Assets and General Long-Term Liabilities accounts Enterprise Funds Internal Service Funds Trust Funds (some)

Copyright © 2018 Pearson Education, Inc.3 Question 2-5 (continued) General capital assets and general long-term liabilities are accounted for in the General Capital Assets and General Long-Term Liabilities accounts. They are related to general government (governmental) activities.

Question 2-6

A Special Revenue Fund should be used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified general government purposes other than debt service or capital projects.

A Capital Projects Fund should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for general government capital outlays, including the acquisition or construction of capital facilities and other capital assets.

A Debt Service Fund should be used to account for and report financial resources that are restricted, committed, or assigned to expenditure for principal and interest on general long-term liabilities.

Question 2-7

Proprietary funds include Enterprise Funds and Internal Service Funds. Proprietary fund financial statements include a balance sheet (statement of net position), statement of revenues, expenses, and changes in fund net position, and statement of cash flows.

Question 2-8

Governmental funds include the General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent Funds. Governmental fund financial statements include a balance sheet, statement of revenues, expenditures, and changes in fund balance (GAAP basis), and statement of revenues, expenditures, and changes in fund balance - budget and actual (on the budgetary basis of accounting).

Question 2-9

Fiduciary funds include Private-Purpose Trust Funds, Investment Trust Funds, Pension Trust Funds, and Agency Funds. Trust fund financial statements include a statement of net position and a statement of changes in fiduciary net position. Agency Fund financial statements include a statement of net position and a statement of changes in agency fund assets and liabilities. (The latter is required in a comprehensive annual financial report but not in the basic financial statements).

Copyright © 2018 Pearson Education, Inc.4 Question 2-10

One only: General Fund and General Capital Assets and General Long-Term Liabilities accounts

One, none, or many—all other fund types:

Special Revenue Funds Internal Service Funds Private-Purpose Trust Funds Capital Projects Funds Enterprise Funds Investment Trust Funds Debt Service Funds Pension Trust Funds Permanent Funds Agency Funds

Question 2-11

Interfund loans are amounts provided by one fund to another with a requirement for and expectation of repayment. Interfund loans are the only type of interfund transaction that initially affects only balance sheet accounts. Because interfund loans are expected to be repaid, a loan is reported as a receivable (asset) in the lending fund and as a payable (liability) in the debtor fund.Neither fund balance nor net position of any fund changes because of an interfund loan—whether it is a short-term loan or a long-term loan.

Interfund transfers are flows of assets (such as cash or goods) from one fund to another without equivalent flows of assets or services in return and without a requirement for repayment.

 In governmental funds, transfers should be reported as other [nonexpenditure] financing uses in the funds making transfers and as other [nonrevenue] financing sources in the funds receiving transfers. In proprietary funds, transfers should be reported as the last item before the subtotal for changes in net position.

Question 2-12

The Basic Financial Statements, which must be accompanied by Management’s Discussion and Analysis and certain other required supplementary information, include the government-wide financial statements (Statement of Net Position and Statement of Activities), the three sets of fund financial statements (governmental funds financial statements, proprietary funds financial statements, and fiduciary funds financial statements), and the related notes. The Comprehensive Annual Financial Report (CAFR) of a governmental unit includes the basic financial statements and

is much more extensive. A CAFR contains:

• Introductory materials e.g., letter(s) of transmittal,
• Management's Discussion and Analysis,
• Basic Financial Statements and notes as well other required supplementary information,