4A - State and Local Government Concepts Flashcards
The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal, and interest in connection with:
a proprietary fund.
a pension trust fund.
both a pension trust fund and a proprietary fund.
neither a pension trust fund nor a proprietary fund.
neither a pension trust fund nor a proprietary fund.
Debt service funds are governmental funds used to account for the accumulation of resources for, and the repayment of, general obligation long-term debt principal and interest. Debt accounted for in a pension trust or a proprietary fund is serviced from that fund and is not general long-term debt.
Which of the following transactions should be reported as a liability in the general fund financial statements?
An amount set aside to pay for an unfilled contract
An amount that is due within one year of the balance sheet date
Principal on long-term debt due 90 days after the balance sheet date
An amount to be paid from current financial resources
An amount to be paid from current financial resources
Modified accrual accounting (revenues and expenditures reporting using the flow of current financial resources measurement focus) is used in the governmental funds, including the general fund. The General Fund is the primary governmental fund and is used to account for most routine general government operations.
A government’s unmatured long-term indebtedness should be reported as general long-term liabilities, rather than governmental fund liabilities
The modified accrual basis of accounting should be used for which of the following funds?
Pension trust fund
Enterprise fund
Proprietary fund
Capital projects fund
Capital projects fund
In governmental accounting, the measurement focus and basis of accounting used depend on the nature of the fund. The flow of current financial resources measurement focus and the modified accrual basis are used in the governmental funds where revenues and expenditures are recorded, such as the General, Special Revenue, Capital Projects, Debt Service, and Permanent Funds
The City of Cobb has two trust funds for the benefit of the city’s library, trust fund A and trust fund B. Only the earnings from trust fund A can be expended and both the principal and interest from trust fund B can be expended. How should the City of Cobb report each trust fund?
Trust fund A: Permanent
Trust fund B: Permanent
Trust fund A: Special revenue
Trust fund B: Special revenue
Trust fund A: Permanent
Trust fund B: Special revenue
Trust fund A: Special revenue
Trust fund B: Permanent
Trust fund A should be classified as a permanent fund because the principal amount of the fund is restricted in use and only the earnings can be expended.
Trust fund B is classified as a special revenue fund because the fund’s principal and earnings are both restricted to use for the city’s library only. Trust fund B would be a permanent fund if, like trust fund A, the principal was prohibited from use
Which of the following funds do not have a flow of financial resources measurement focus?
Enterprise funds
Debt service funds
Special revenue funds
Capital projects funds
Enterprise funds
Financial statements for governmental funds should be prepared and presented utilizing the flow of current financial resources measurement focus. Special revenue funds, debt service funds, and capital projects funds are all governmental funds.
Proprietary funds (enterprise and internal service funds) use the flow of economic resources measurement focus and the accrual basis of accounting
Lake County received the following proceeds that are legally restricted to expenditure for specified purposes:
Levies on affected property owners to install sidewalks: $500,000
Gasoline taxes to finance road repairs: $900,000
What amount should be accounted for in Lake’s special revenue funds?
$900,000
$1,400,000
$500,000
$0
900,000
Special revenue funds are used to account for resources raised from revenues that are either restricted or committed for expenditure for specific general government purposes other than capital outlay or debt service.
Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays.
The sidewalks are capital in nature and would not be part of a special revenue fund but of a capital fund, whereas the road repairs are not capital but maintenance
King City Council will be establishing a library fund. Library fees are expected to cover 55% of the library’s annual resource requirements. King has decided that an annual determination of net income is desirable in order to maintain management control and accountability over the library. What type of fund should King establish in order to meet their measurement objectives?
Internal service fund
Special revenue fund
Enterprise fund
General fund
Enterprise funds
Enterprise funds are used to report any activities for which a fee is charged, and 55% of the library’s needs are covered by fees
The measurement focus of governmental-type funds is the determination of:
financial position.
both flow of financial resources and financial position.
neither flow of financial resources nor financial position.
flow of financial resources
both flow of financial resources and financial position.
The measurement focus of governmental type funds is on both:
the changes in financial position and
financial position.
The flow of financial resources refers to the changes in financial position from the sources and uses of financial resources (GASB 1300.102). By contrast, the measurement focus of a proprietary fund is on determining “operating income, changes in net position (or cost recovery), financial position, and cash flows”—similar to a commercial entity
Governmental financial reporting should provide information to assist users in which situation(s)?
- Making economic, social, and political decisions
- Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens
I only
II only
Neither I nor II
Both I and II
Both I and II
GASB Concepts Statement 1, Objectives of Financial Reporting, is the basis for this question. Item I is an appropriate response because the Concepts Statement says at paragraph 32: “financial reporting by state and local governments is used in making economic, social, and political decisions and in assessing accountability….” Item II is also an appropriate response because paragraph 61, in the discussion of accountability, states that “interperiod equity is a significant part of accountability” and thus “financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume (financial) burdens for services previously provided.” (Emphasis added)
Which of the following funds of a governmental unit uses the same basis of accounting as the special revenue fund?
Enterprise funds
Internal trust funds
Pension trust funds
Permanent funds
Pension trust funds
Special revenue funds are classified as governmental funds. The other governmental funds are the general fund, capital projects funds, debt service funds and permanent funds. Governmental funds use the modified accrual basis of accounting. Enterprise funds are a type of proprietary fund and investment and pension trust funds are types of fiduciary funds. They use the accrual basis of accounting
Revenues should be recognized in the period that they become susceptible to accrual, both measurable and available to finance that period’s expenditures.
“Available to finance the period’s expenditures” means the resources are legally available for use during the period and collected within the period or early enough in the next period to be used to pay the liabilities of the period. “Early enough in the next period” cannot exceed 60 days for property taxes; therefore, most governments apply the same limits to other revenue sources.
The first item, Year 3 property taxes, is collected in the same year and so would be recognized as revenue. The second item, Year 2 taxes collected in Year 3, is recognized in the year collected or Year 3. The third item, Year 3 taxes but not collected until January of Year 4, would be recognized as revenue in Year 3, as the collection happens within the 60-day limit:
$14,000,000 + $1,000,000 + $2,000,000 = $17,000,000
A town’s fund financial statements are prepared following major fund reporting requirements, and combining fund statements detailing nonmajor funds are also provided. In reviewing the annual comprehensive financial report (ACFR), you notice that all the internal service funds were combined and reported in a single column in the basic financial statements. The combining financial statements for internal service funds included a column for each of the town’s four internal service funds. The explanation of this presentation is:
none of the internal service funds accounted for 10% of the total assets, liabilities, revenues, or expenditures/expenses of the proprietary funds or 5% of those elements of all funds.
management did not feel that any internal service fund was important enough for separate presentation in the basic financial statements, although the officials had the option of including any fund felt to be important.
major fund reporting requirements do not apply to internal service funds.
the internal service funds provided service specifically for governmental activities.
major fund reporting requirements do not apply to internal service funds
Major fund reporting requirements do not apply to internal service funds. Therefore, they are usually combined for financial reporting and presented individually with combining statements. The other answer choices are not sufficient explanations for the town’s presentation of the internal service fund financial information
The Government Accounting Standards Board (GASB) is the body authorized to promulgate standards of financial accounting and reporting for:
U.S. companies that engage in transactions with governmental units.
nonprofit units.
governmental units.
None of the answer choices are correct
governmental units.
The Government Accounting Standards Board (GASB) is the body authorized to promulgate standards of financial accounting and reporting for governmental units. It was created by the Financial Accounting Foundation (FAF) in 1984 as successor to the NCGA and is recognized by the AICPA Code of Professional Conduct as an authorized body whose pronouncements must be followed in order to conform to the Compliance with Standards Rule (ET 1.310.001) and Accounting Principles Rule (ET 1.320.001)
Which events are supportive of interperiod equity as a financial reporting objective of a governmental unit?
- A balanced budget is adopted.
- Transfers out equal transfers in.
I only
II only
Neither I nor II
Both I and II
I only
The intent of balanced budget laws is to achieve interperiod equity, such that current taxpayers neither pay disproportionately for future years’ services nor receive current-year services that must be paid for by future taxpayers. In contrast, transfers among funds should always be equal; however, equality of transfers in and out has no bearing on the extent to which interperiod equity is achieved in governmental external financial reporting. (GASB Concepts Statement 1)
GASB N50.115 indicates governments should recognize revenues from property taxes net of estimated uncollectible amounts. The entire levy would not be considered revenue because $25,000 of it is estimated to be uncollectible. The $25,000 of uncollectible taxes is not considered a bad debt expense because the measurement focus of a governmental fund is on expenditures, decreases in resources, rather than expenses.
Which of the following funds of a governmental unit uses the same basis of accounting as the special revenue fund?
Capital projects
Nonexpendable trust
Internal service
Enterprise
Capital projects
In governmental accounting, the measurement focus and basis of accounting used depend on the nature of the fund. The flow of current financial resources measurement focus and the modified accrual basis are used in the governmental funds (General, Special Revenue, Capital Projects, Debt Service, and Permanent Funds) where revenues and expenditures are recorded.
The flow of economic resources measurement focus and the accrual basis are used in proprietary funds (Enterprise and Internal Service Funds) where revenues and expenses are recorded. Modified accrual accounting is used for nonexpendable trusts.
A capital projects fund for a new city courthouse recorded a receivable of $300,000 for a state grant for which all eligibility requirements have been met and a $450,000 transfer from the general fund. What amount should be reported as revenue by the capital projects fund?
$450,000
$300,000
$750,000
$0
$300,000
Transfers are other financing sources and are never recognized as revenues. If the receivable is associated with an unrestricted grant or with a restricted grant for which all eligibility requirements have been met, the state grant should be reported as revenues.
Which of the following characteristics of service efforts and accomplishments is the most difficult to report for a governmental entity?
Timeliness
Consistency
Relevance
Comparability
Relevance
The service efforts and accomplishments (SEA) performance of governmental entities is primarily measured by output, outcome, and efficiency measures. These measures report what services the entity has provided, whether those services have achieved the objectives established, and what effects they have had upon the recipients and others. SEA performance information measures should meet the characteristics of relevance, understandability, comparability, timeliness, consistency, and reliability.
All of these measures, except for understandability and relevance, can be objectively examined. Understandability and relevance will be subject to the user’s own interpretation. As understandability is not listed in the answer choices, only relevance can be the proper answer.
Which entity develops and distributes accounting standards for government entities?
IASB
FASB
GASB
SEC
GASB
Some not-for-profit organizations are government entities, but others are nongovernment.
Government not-for-profit organizations follow the SLG (state and local government) GAAP hierarchy in determining applicable GAAP. These not-for-profit organizations are prohibited by GASB Statement 29 from applying FASB not-for-profit standards.
Nongovernment not-for-profit organizations should follow the business GAAP hierarchy and look to the FASB for primary guidance in determining applicable GAAP.
There are significant differences in GAAP applicable to government and nongovernment not-for-profit organizations.
An enterprise fund must be used when which of the following criteria are met?
- The activity is financed with debt that is secured solely by a pledge of the net revenues from fees of the activity.
- Goods or services are provided on a cost-reimbursement basis.
- Laws require that the cost of providing services be recovered with fees and charges, rather than with taxes.
I and II
II and III
I only
I and III
I and III
Activities are required to be reported as enterprise funds if either I or III is true. In addition, if pricing policies of the activity establish fees and charges designed to recover costs, an enterprise fund must be used. The language describing funds as providing goods and services “on a cost-reimbursement basis” applies to internal service funds.
The City of Smithville enters into securities lending transactions. The costs of these transactions should be:
netted with interest revenue from investment of cash collateral.
reported as expenditures or expenses.
reported as intangible assets.
reported as increases in the carrying value of the collateral.
reported as expenditures or expenses.
“The costs of securities lending transactions should be reported as expenditures or expenses in the operating statement.” They should not be netted with interest revenue or the income from the investment of any cash collateral (GASB I60.106).
Government C sponsors a public entity risk pool in which Government C is also a participant. However, Government C is not the predominant participant in the pool. For the situation described, indicate the fund(s) Government C must use to account for the risk pool.
Internal service
Enterprise
Agency
Special revenue
Enterprise
The proper accounting and financial reporting for this risk pool depends on whether the sponsoring government is also the predominant participant.
If Government C is not the predominant participant, the pool would be treated as a stand-alone pool in substance and thus be accounted for in an enterprise fund and Government C’s participation in the pool would be considered incidental.
Sig City used the following funds for financial reporting purposes:
General fund
Internal service fund
Airport enterprise fund
Pension trust fund
Capital projects fund
Special revenue fund
Debt service fund
How many of Sig’s funds use the accrual basis of accounting?
Three
Two
Five
Four
Three.
The economic resources measurement focus and the accrual basis of accounting are used for proprietary funds and fiduciary funds. Proprietary funds consist of enterprise and internal service funds. GASB 1300.102.b indicates both enterprise and internal service funds use accrual accounting. The pension trust fund is a fiduciary fund. GASB 1300.102.b details that fiduciary funds use the accrual basis of accounting. The current financial resources measurement focus and the modified accrual basis of accounting are used for governmental funds. The general fund, capital projects fund, special revenue fund, and debt service fund are all governmental funds.
State University received two contributions during the year that must be used to provide scholarships. Contribution A for $10,000 was collected during the year, and $8,000 was spent on scholarships. Contribution B is a pledge for $30,000 to be received next fiscal year. What amount of contribution revenue should the university report in its statement of activities?
$40,000
$38,000
$8,000
$10,000
40,000
State University would report the full amount of the pledges as revenue because the availability criterion does not apply. The Statement of Activities is a government-wide statement using the full accrual basis of accounting. The contributions are restricted to scholarships but this purpose restriction by the donor is not a condition that must be met before the donation is made. It does not function like an “expenditure driven” government grant (the recipient must incur allowable costs before it recognizes any grant revenue).