18.5 Flashcards
Both Curry City and the State have a general sales tax on all merchandise. Curry City’s tax rate is 2% and the State’s rate is 4%. Merchants are required by law to remit all sales tax collected each month to the State by the 15th of the following month. By law, the State has 45 days to process the collections and to make disbursements to the various jurisdictions for which it acts as an agent. Sales tax collected by merchants in Curry total $450,000 in May and $600,000 in June. Both merchants and the State make remittances in accordance with statutes. What amount of sales tax revenue for May and June is included in the June 30 year-end government-wide financial statements of the State and Curry?
State:
Curry:
$700,000
$350,000
A government’s assessment imposed on exchange transactions is a nonexchange transaction that results in derived tax revenues, for example, sales taxes. These revenues should be recognized in the government-wide financial statements on the accrual basis when the underlying exchange occurs. Given that the underlying exchanges occurred in May and June, the State and Curry should recognize the related derived tax revenues regardless of whether remittances were made and received by the fiscal year-end. Thus, the State should recognize revenues of $700,000 [($450,000 + $600,000) × (4% ÷ 6%)], and Curry should recognize revenues of $350,000 [($450,000 + $600,000) × (2% ÷ 6%)].
Governmental fund financial statements are prepared using the
Economic Resources Measurement Focus:
Current Financial Resources Measurement Focus:
Accrual Basis:
Modified Accrual:
No
Yes
No
Yes
The current financial resources measurement focus and the modified accrual basis of accounting are required in the financial statements of governmental funds. The emphasis is on determination of financial position and changes in it (sources, uses, and balances of financial resources). Revenues should be recognized when they become available and measurable. Expenditures should be recognized when the fund liability is incurred, if measurable. However, unmatured interest on general long-term liabilities is recognized when due.
Which of the following should be included in the introductory section of a local government’s comprehensive annual financial report?
Letter of Transmittal.
A state or local government must prepare a comprehensive annual financial report. It (1) covers all funds and activities of the primary government and (2) provides an overview of the discretely presented component units of the reporting entity. The CAFR includes introductory, financial, and statistical sections. The introductory section contains (1) a letter of transmittal from the appropriate government officials, (2) an organization chart, and (3) names of principal officers.
All of the following should be presented in the budgetary comparison schedules of a state or local government except
Variance between the final budget and actual amounts.
Budgetary comparison schedules must include the original appropriated budget, the final appropriated budget, and the actual inflows, outflows, and balances. A separate column to report the variance between the final budget and actual amounts is encouraged but not required.
A city taxes merchants for various central district improvements. Which of the following accounting methods, if any, assist in assuring that these revenues are expended legally?
Fund Accounting:
Budgetary Accounting:
Yes
Yes
To ensure budgetary control and accountability, budgetary accounts are integrated into the accounting system of a governmental entity. Such integration is necessary in (1) general, (2) special revenue, and (3) other annually budgeted governmental funds with many revenues, expenditures, and transfers. Accordingly, funds and budgetary accounts are useful for assuring fiscal accountability.
Property taxes and fines represent which of the following classes of nonexchange transactions for governmental units?
Imposed nonexchange revenues.
Imposed nonexchange revenues result from assessments on nongovernmental entities for property taxes, fines, and forfeitures.
For the budgetary year ending December 31, Maple City’s general fund expects the following inflows of resources:
Property taxes, licenses, and fines: $9,000,000
Proceeds of debt issue: 5,000,000
Interfund transfers for debt service: 1,000,000
In the budgetary entry, what amount should Maple record for estimated revenues?
$9,000,000
Estimated revenues is an anticipatory asset and is debited for the amount expected to be collected from a governmental body’s main sources of revenue. In the general fund, the main sources of revenue are taxes, fees, penalties, etc. ($9,000,000). Expected proceeds from the issuance of debt is an other financing source. An expected transfer from a different fund is an other financing source.
At December 31, Alto Township’s committed appropriations that had not been expended during the year totaled $10,000. These appropriations do not lapse at year end. Alto reports on a calendar-year basis. On its December 31 balance sheet, the $10,000 should be reported in the general fund as
Fund balance - committed.
Outstanding encumbered amounts at year end are reclassified from unassigned fund balance to committed or assigned fund balance (as appropriate). If the constraint on the use of resources was imposed by the government’s highest decision maker, the amounts are reclassified as fund balance – committed. Thus, encumbrances are never reported in the body of the statements. However, significant encumbrances are disclosed in the notes.
A city received a $9,000,000 federal grant to finance the construction of a homeless shelter. In which fund should the proceeds be recorded?
Capital Project.
The diversity of governmental activities and the need for legal compliance require multiple accounting entities (funds). A fund is an independent, distinct fiscal and accounting entity with a self-balancing set of accounts. Items in a fund are segregated because they relate to activities or objectives that are subject to special regulations or limitations. Funds are classified as governmental, proprietary, or fiduciary depending on their activities and objectives. Governmental funds emphasize fiscal accountability. They account for the nonbusiness activities of a government and its current, expendable resources (most often taxes). Capital project funds account for financial resources restricted, committed, or assigned to be expended for capital purposes. These resources include federal grant proceeds to be used for construction of major capital facilities, such as homeless shelters.
If a city government is the primary reporting entity, which of the following is an acceptable method to present component units in its combined financial statements?
Discrete presentation.
The reporting entity consists of the primary government and its component units. A component unit is a legally separate entity for which the primary government is financially accountable. A component unit must be blended or discretely presented. A blended component unit is in effect the same as the primary government. Thus, its balances and transactions are reported in a manner similar to those of the primary government. Discrete presentation involves reporting component unit information in columns and rows separate from the information of the primary government.
The renovation of Fir City’s municipal park was accounted for in a capital projects fund. Financing for the renovation, which was begun and completed during the current year, came from the following sources:
Grant from state government: $400,000
Proceeds from general obligation bond issue: 500,000
Transfer from Fir’s general fund: 100,000
In its governmental fund statement of revenues, expenditures, and changes in fund balances for the current year, Fir should report these amounts as
Revenues:
Other Financing Sources:
$400,000
$600,000
Governmental fund revenues are increases in fund financial resources other than from (1) interfund transfers, (2) debt issue proceeds, and (3) redemptions of demand bonds. Thus, revenues of a capital projects fund include grants. The grant (a voluntary nonexchange transaction) is recognized when all eligibility requirements, including time requirements, have been met. When modified accrual accounting is used, as in a capital projects fund, the grant also must be available. Other financing sources include proceeds from bonds and interfund transfers in. Thus, revenues of $400,000 and other financing sources of $600,000 ($500,000 + $100,000) are reported in the governmental fund statement of revenues, expenditures, and changes in fund balances.
Meen County reported a combined fund balance of $980 million for all governmental funds, an increase of $110 million, or 12.64%, from the prior year. The increase is primarily due to the issuance of a general obligation bond. The bond agreement stipulated that the proceeds are to be used for road infrastructure refurbishments. The proceeds of the bond issue are reported as
Restricted.
Fund balance is reported only for a governmental fund. It is classified according to the limits on the specific purposes for which resources may be used. Restricted fund balance includes amounts that may be spent only for specific purposes established by (1) a constitutional mandate, (2) enabling legislation, or (3) an external provider. The bond agreement (generally transacted with an external provider) stipulated that the proceeds are to be used for road infrastructure refurbishments.
Which of the following is a governmental fund that uses the current financial resources measurement focus?
Special Revenue Fund.
Governmental funds include the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds.
Which of the following items is an example of imposed nonexchange revenue for a governmental entity?
Property taxes.
Imposed nonexchange revenues result from assessments on nongovernmental entities, including individuals, other than assessments on exchange transactions. Examples are property taxes, fines, and forfeitures.
In governmental accounting, a fund is
I. The basic accounting unit
II. Used to assist in ensuring fiscal compliance
Both I & II.
Although government-wide financial statements also are reported, the diversity of governmental activities and the need for legal compliance preclude the use of a single accounting entity. Thus, independent, distinct entities called funds are established. A fund is a fiscal and accounting entity with a self-balancing set of accounts. It records (1) financial resources (including cash), (2) related liabilities, (3) residual equities or balances, and (4) changes in them. These items are recognized separately because they relate to specific activities or certain objectives that are subject to special regulations or limitations. A fund accounting system of a governmental reporting entity must be able to present fairly in conformity with GAAP and with full disclosure the financial position and results of operations of the funds. Moreover, it must determine and demonstrate compliance with finance-related legal and contractual provisions.
