18.7 Flashcards
The standards for reporting interfund activity classifies such activity as
Reciprocal and nonreciprocal.
Interfund activity may be reciprocal or nonreciprocal. Reciprocal interfund activity is similar to exchange and exchange-like transactions, for example, interfund loans and services provided and used. Nonreciprocal interfund activity is similar to nonexchange transactions, for example, interfund transfers and reimbursements.
In the current year, New City issued purchase orders and contracts of $850,000 that were chargeable against current-year budgeted appropriations of $1 million. The journal entry in the general fund to record the issuance of the purchase orders and contracts should include a
Credit to encumbrances outstanding of $850,000.
When a purchase order is approved or a contract is signed, an estimated liability is recorded in a budgetary account for the amount of the purchase order. The entry is a debit to encumbrances and a credit to encumbrances outstanding.
Beginning on the first day of the new fiscal year, Modi Township’s commission approved and established a self-insurance fund by collecting insurance premiums from employees and paying medical bills directly. The fund balance classification used for this type of activity is
Committed.
Amounts in committed fund balance may be spent only for specific purposes established by a formal act of the entity’s highest decision maker (e.g., a county commission). However, this decision maker may redirect the resources by following the necessary due process procedures.
The city of Pine’s fiscal year end is June 30. Pine levies property taxes in January of each year for the calendar year. One-half of the levy is due in May, and one-half is due in October. Property tax revenue is budgeted for the period in which payment is due. The following information pertains to Pine’s property taxes for the period from July 1, Year 5, to June 30, Year 6:
Year 5 Levy $2,000,000 Collected in: May: $950,000 July: $50,000 October: $920,000 December: $80,000
Year 6 Levy: $2,400,000 Collected in: May: $1,100,000 July: $600,000 October December
The $40,000 balance due for the May Year 6 installments was expected to be collected in August Year 6. What amount should Pine recognize for property tax revenue for the fiscal year ended June 30, Year 6?
$2,200,000
Property tax revenue should be recognized in the fiscal period for which it is levied, provided the availability criterion is met. This criterion is relevant because property taxes are accounted for in governmental funds, which use the modified accrual basis. The levy for the fiscal year ended June 30, Year 6, equals 50% of the amount for calendar year Year 5 (this part was previously deferred because it was levied in January Year 5 for the calendar year ended December 31, Year 5) and 50% of the amount for the Year 6 calendar year, or $2,200,000 [($2,000,000 + $2,400,000) × 50%]. This amount is available because it was collected within the current period or expected to be collected soon enough thereafter (generally within 60 days) to be used to pay liabilities of the current period. Accordingly, the $40,000 of taxes expected to be collected in August Year 6 is available and should be recognized as revenue.
Which of the following statements is the most significant characteristic in determining the classification of an enterprise fund?
The pricing policies of the activity establish fees and charges designed to recover its cost.
Enterprise funds account for activities that benefit outside parties who are willing to pay for them. They serve defined customer groups and are generally financed through fees.
Fund balance is reported only for a general fund. Amounts in
Nonspendable fund balance must be kept intact if not in a form that is nonspendable.
Nonspendable fund balance includes amounts that either (1) are in a form (e.g., inventory, prepayments, or long-term loans) that is not spendable or (2) must be kept intact (e.g., the principal of a permanent fund).
In which situations, if any, should property taxes due to a governmental unit be recorded as deferred inflows of resources?
I. Property taxes receivable are recognized in advance of the year for which they are levied.
II. Property taxes receivable are collected in advance of the year in which they are levied.
Both I & II.
A property tax assessment is made to finance the budget of a specific period. Thus, the revenue produced should be recognized in the period for which the assessment was levied. When property taxes are recognized or collected in advance, they should be recorded as deferred inflows of resources in a governmental fund. They are not recognized as revenue until the period for which they are levied. A property tax assessment is an imposed nonexchange revenue transaction. In such a transaction, assets should be recognized when (1) an enforceable legal claim arises or (2) resources are received, whichever is earlier. Thus, recognition of a receivable in a year prior to that for which the property taxes were levied implies that, under the enabling statute, the enforceable legal claim existed in that prior year.
The measurement focus of the fund-based financial statements of a governmental fund is on the determination of
Economic Resources:
Financial Position:
Statement of Financial Position:
No
Yes
Yes
The measurement focus refers to what is being measured or tracked by the information provided in the financial statements. The measurement focus of governmental funds financial statements is on current financial resources, specifically financial position and changes in financial position. The measurement focus of the government-wide statements, proprietary funds, and fiduciary funds is on economic resources.
The modified accrual basis of accounting should be used in preparing the fund financial statements of which of the following funds?
Capital projects fund.
Governmental fund types, including the general fund and special revenue, capital projects, debt service, and permanent funds, are required by current accounting and reporting standards to use the modified accrual basis of accounting in the preparation of their fund financial statements.
Disclosure of the significant accounting policies of a state or local government is required when
A policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry.
Disclosure of significant accounting policies is required when (1) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; (2) a selection has been made from existing acceptable alternatives; and (3) GAAP have been applied in an unusual or innovative way.
The city of Cal maintains several fund types. The following were among Cal’s cash receipts during the current year:
State grant received in a voluntary nonexchange transaction: $1,000,000
Interest on bank accounts held for employees’ pension plan: 200,000
What amount of these cash receipts should be accounted for in Cal’s general fund?
$1,000,000.
The general fund is used to account for all financial resources of a governmental unit that are not accounted for in another fund. The interest is accounted for in a pension trust fund. Thus, the general fund accounts for the $1 million grant only.
Which of the following information is needed to prepare the budgetary comparison schedules for a local government?
Original Budget.
Budgetary comparison schedules (BCSs) are required supplementary information (RSI). They are reported for (1) the general fund and (2) each major special revenue fund with a legally adopted annual budget. A BCS includes (1) the original budgets, that is, the first complete appropriated budgets; (2) the final appropriated budgets; and (3) the actual inflows, outflows, and balances stated on the budgetary basis of accounting. A reconciliation of budgetary and GAAP information also should be provided.
Should a special revenue fund with a legally adopted budget prepare its financial statements using the accrual basis and integrate budgetary accounts into its accounting system?
Fund Statements Use Accrual Basis:
Integrate Budgetary Accounts:
No
Yes
Use of the modified accrual basis is required for the fund financial statements of all governmental funds. Thus, a special revenue fund should prepare its financial statements using the modified accrual basis. The integration of budgetary accounts into the formal accounting system is a control used to assist in controlling expenditures and enforcing revenue provisions. The extent to which the budgetary accounts should be integrated varies among governmental fund types and according to the nature of fund transactions. However, integration is necessary in the general, special revenue, and other annually budgeted governmental funds with many revenues, expenditures, and transfers. Thus, a special revenue fund with a legally adopted budget should integrate its budgetary accounts into its accounting system.
In the government-wide statement of activities, special items are transactions or other events that are
Unusual in nature or infrequent in occurrence and within management’s control.
Extraordinary items are both unusual in nature and infrequent in occurrence. Special items are significant transactions or other events within the control of management that are either unusual or infrequent. They are reported separately after extraordinary items.
Financial reporting by general-purpose governments includes presentation of management’s discussion and analysis as
A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities.
MD&A is required supplementary information (RSI) that precedes the basic financial statements and provides an overview of financial activities. It is based on currently known facts, decisions, or conditions and includes comparisons of the current and prior years, with an emphasis on the current year, based on government-wide information. Currently known facts are those of which management is aware at the audit report date.
