03.01 State and Local Government Concepts

Question 1

What is a government?

Answer 1

Governments are large, complex organizations with many semiautonomous entities. A financial reporting entity consists of the primary government and its component units, if any, that present the results of the government’s operations and financial position. Each of these entities must be accountable for the public resources it receives and can expend those resources only in compliance with specific legal restrictions.

Question 2

What is presented in a government-wide FS?

Answer 2

Government-wide FS present an entire governmental unit’s results. These FS provide information about the government’s overall operating results and how effectively its resources were used to fulfill its obligations.
Additionally, self-balancing sets of accounts called funds are established to categorize and report operating results in the government’s FS. Funds help ensure fiscal compliance by segregating each unit’s resources for tracking and reporting purposes

Question 3

What are the required financial statements for governments?

Answer 3

Government-wide financial statements
Governmental funds financial statements
Proprietary funds financial statements
Fiduciary funds financial statements

Question 4

What statements are included in government-wide financial statements?

Answer 4

Statement of net position
Statement of activities

Question 5

What statements are included in governmental funds financial statements?

Answer 5

Balance sheet
Statement of revenues, expenditures, and changes in fund balances

Question 6

What statements are included in proprietary funds financial statements?

Answer 6

Statement of net position
Statement of revenues, expenses, and changes in fund net position
Statement of cash flows (direct method)

Question 7

What statements are included in fiduciary funds financial statements?

Answer 7

Statement of fiduciary net position
Statement of changes in fiduciary net position

Question 8

How are state and local government FS categorized?

Answer 8

State and local (e.g. city) government FS are characterized by their measurement focus (i.e. which items are reported) and basis of accounting (i.e. when and how to report items).

Question 9

What are the two types of measurement focus for government financial statements?

Answer 9

Economic resources measurement focus
Current financial resources measurement focus

Question 10

What is the economic resources measurement focus?

Answer 10

The economic resources measurement focus requires reporting all resources obtained and obligations incurred (current and long-term). This focus is always associated with full accrual accounting.

Question 11

What is the current financial resources measurement focus?

Answer 11

The current financial resources measurement focus is a single-period focus that measures the extent to which financial resources obtained during a period are sufficient to cover costs incurred (i.e. budgets) during that same period. This focus is always associated with modified accrual accounting.

Question 12

What are the two bases of accounting?

Answer 12

Full accrual accounting - the method typically required by GAAP
Modified accrual accounting - has a budgetary focus, highlighting the extent to which financial resources obtained during a period are sufficient to cover costs incurred during that same period.

Question 13

What is the accounting system used and the measurement focus of governmental funds?

Answer 13

Accounting system - modified accrual
Measurement focus - current financial resources

Question 14

What is the accounting system used and the measurement focus of proprietary funds?

Answer 14

Accounting system - full accrual
Measurement focus - economic resources

Question 15

What is the accounting system used and the measurement focus of fiduciary funds?

Answer 15

Accounting system - full accrual
Measurement focus - economic resources

Question 16

What is the accounting system used and the measurement focus of government wide entities?

Answer 16

Accounting system - full accrual
Measurement focus - economic resources

Question 17

What is the modified accrual method?

Answer 17

The modified accrual method combines cash accounting with accrual accounting. One of the principles that is central to modified accrual accounting is the interperiod equity concept.

Question 18

What is the interperiod equity concept?

Answer 18

The interperiod equity concept keeps the focus on a single period, with the revenues of the period intended to cover the spending of that period. This is consistent with the idea of trying to maintain a balanced budget so that costs in the current period aren’t paid by future taxpayers. At the same time, this focus on evaluating government activity one period at a time means that future periods are essentially ignored.

Question 19

Under modified accrual accounting, what are the measurement principles for revenue transactions?

Answer 19

Revenues are recognized in the period they are available to spend, which means collectible in the current period to pay liabilities, or within 60 days after year end. Revenues that are not measurable are treated as available to spend once they are collected.

Question 20

Under modified accrual accounting, what are the measurement principles for cost transactions?

Answer 20

Costs are recognized using the expenditure principle. Costs are recorded in the period that the obligation to pay them arises, whether this is before or after the period in which the government is actually using the assets or services. Costs are generally recorded when the related fund liability is incurred, except as it relates to unmatured interest on LT debt, as this is only recorded when it becomes legally due.

Question 21

Under modified accrual accounting, what are the measurement principles for long-term assets and liability transactions?

Answer 21

These are generally not accounted for since they represent future period activity. The purchase of an asset is simply treated as a current outflow of financial resources, and the proceeds from a long-term borrowing are treated as a current inflow. No depreciation is recorded on assets, and interest and principal owed on LT debt are not recorded until the periods in which they must be paid.

Question 22

Under modified accrual accounting, what are the measurement principles for reporting?

Answer 22

The FS that are prepared include a balance sheet to present the financial position and a statement of revenues, expenditures, and changes in fund balance to present the flow of financial resources during the year. There is no equivalent in modified accrual reporting to a statement of cash flows.

Question 23

Under modified accrual accounting, what are the measurement principles for accountability?

Answer 23

Budgets are typically developed at the beginning of each year, and the focus of governmental financial reporting is on determination of compliance with budgets and accountability for resources. Any fund utilizing annual budgets must prepare a reconciliation.

Question 24

What is a fund?

Answer 24

A self-balancing set of accounts.

Question 25

What are the three broad categories of funds?

Answer 25

Governmental, proprietary, and fiduciary.

Question 26

What are governmental funds?

Answer 26

These funds generally have a budgetary focus and the main emphasis of reporting is sources, uses, and balances of current financial resources. These are for activities that are primarily funded by taxation or other mandatory payments and are virtually unique to government. Modified accrual accounting is used.

Question 27

What are proprietary funds?

Answer 27

These funds generally have an operations orientation, and the main emphasis of reporting is determining income, financial position, changes in financial position, and cash flows using the economic resources approach. These are for activities that a primarily funded by voluntary payments for goods and services by users and that resemble businesses. Accrual accounting is used, in virtually identical fashion to private businesses.

Question 28

What are fiduciary funds?

Answer 28

These funds generally are oriented toward the accounting for assets, and the main emphasis of reporting is net position and changes to net position using the economic resources approach. These are for activities that most closely resemble not-for-profit organizations, including trusts and agency activities. The trust and custodial funds use accrual accounting.

Question 29

What are the types of governmental funds?

Answer 29

General, special revenue, capital projects, debt service, permanent
A government unit must have one general fund but can establish as many special revenue, capital projects and permanent funds as needed to account for the various activities that fit these categories.

Question 30

What are the types of proprietary funds?

Answer 30

Internal service, enterprise

Question 31

What are the types of fiduciary funds?

Answer 31

Pension trust, investment trust, private purpose trust, custodial

Question 32

What is a governmental general fund?

Answer 32

This general fund accounts for and reports any activity or function by the government unit that is not being accounted for in another fund, such as general operations, public safety, public works, culture, and recreation. Revenue sources include income, sales and property taxes, fees, fines, licenses, permits, and grants.

Question 33

What is a governmental special revenue fund?

Answer 33

Special revenue funds are used to account for and report specific revenues from earmarked sources that are restricted or committed to be used to finance designated activities other than capital projects and debt service. Revenue sources include fees, grants, specific taxes, and other earmarked revenue sources.

Question 34

What is a governmental capital projects fund?

Answer 34

Capital project funds account for major acquisition or construction activities of capital assets, other than those financed by proprietary or trust funds. This fund accounts for and reports the financial resources that are restricted, committed, or assigned for these types of capital outlays. Revenue sources include special tax revenues, proceeds from bonds, transfers, or capital grants.

Question 35

What is a governmental debt service fund?

Answer 35

The debt service fund is responsible for accumulating and making interest and principal payments on the tax-supported debts of the governmental funds. The DSF accounts for an reports the resources that are restricted, committed, or assigned for this long-term debt purpose. The expenditures may also include premiums on issuance of bonds. Revenue sources include portions of property taxes and transfers.

Question 36

What is a governmental permanent fund?

Answer 36

Permanent funds account for and report assets whose principal is restricted and may not be spent (nonexpendable fund) but must be invested permanently (the income is, however, spendable/expendable - endowment fund). Investments are reported at their fair values, with a few minor exceptions. Revenue sources are usually from the investment earnings of the trust.

Question 37

What are proprietary funds?

Answer 37

Proprietary funds use accrual accounting and have an operations orientation. These funds resemble private businesses because they are funded primarily by payments from users for goods and services.

Question 38

What is an internal service fund?

Answer 38

A type of proprietary fund. If the users are internal, the proprietary fund is classified as an internal service fund. Internal service funds render services or provide foods to other funds within the government entity, charging the other funds directly for those services.

Question 39

What is an enterprise fund?

Answer 39

A type of proprietary fund. If the users are external, the proprietary fund is classified as an enterprise fund. Enterprise funds account for activities financed by voluntary payments for goods and services rendered to the payers. Often a user fee is paid.

Question 40

What are the required financial statements for proprietary funds?

Answer 40

Statement of net position
Statement of revenues, expenses, and changes in fund net position
Statement of cash flows

Question 41

What are fiduciary funds?

Answer 41

Fiduciary funds account for resources held by a government in a trustee or custodial capacity for other entities. All trust funds make use of the economic resources measurement focus and the accrual basis of accounting in the same way as proprietary funds. Custodial funds are a bit atypical in that they only report assets and liabilities. Accordingly, custodial funds do not report equity and do not utilize measurement focus but do employ the accrual basis of accounting to recognize assets and liabilities.

Question 42

What is a pension trust (fiduciary fund)?

Answer 42

These account for government employee pensions and other post-retirement benefits for which the government is trustee. Two RSI schedules are required: funding progress and employer contributions.

Question 43

What is an investment trust (fiduciary fund)?

Answer 43

These account for pooled resources that are being invested on behalf of multiple government entities for which this specific government entity is trustee.

Question 44

What is a private purpose trust (fiduciary fund)?

Answer 44

These account for resources that are being held for the benefit of private persons or organizations or other governments. These could be expendable or nonexpendable.

Question 45

What is a custodial (fiduciary) fund?

Answer 45

These account for collected amounts that must be transferred to other funds or outsiders. An odd characteristic of custodial funds is that all of the assets held belong to others (held in a custodial capacity), so assets always equal liabilities, and the custodial fund has no equity section at all.

Question 46

What are the primary government categories of the statement of net position?

Answer 46

Governmental activities - include transactions involving taxes and other nonexchange transactions. Governmental activities aggregate the financial position of the governmental funds and the internal service funds.
Business-type activities - include transactions involving user charges and fees to external entities for goods and services provided. Business-type activities aggregate the financial position of the enterprise funds.