ACG4501 Chapter 02 The Use of Funds in Governmental Accounting

Question 1

Q2-1 Define fund as the term is used in governmental accounting.

Answer 1

Governmental Accounting: The accounting systems used by various governmental organizations are termed as governmental accounting. There are two kinds of accounting systems.
They are:
- Federal accounting system managed by federal accounting standards advisory board (FASAB).
- State and local government accounting system manage by governmental accounting standards board (GASB).

Fund: any resource created and maintained for a specific purpose is known as fund. The following are some of the characteristics of a fund.

• It is self balancing, which records both resources and related liabilities.
• It is created for a specific purpose or objective
• It is maintained by a special regulation or law.
• For example, pension fund and employee welfare fund.

Question 2

Q2-2 What is the purpose of fund accounting?

Answer 2

Purpose of fund accounting:

• Fund accounting helps in recording resources and liabilities against those resources. This creates accountability for every resource received against that fund.
• It creates control over the funds allotted for every governmental activity.
• It helps in verifying whether the activities are adhering to the budget allotted.
• It helps in planning the future activities of business.
• It provides reliability, accuracy, and timely data for future activities.

Question 3

Q2-3 List the three categories of funds used in governmental accounting, and describe the types of activities accounted for in each category

Answer 3

Governmental type funds:

• Basic services of state and local government are accounted in this fund.
• Resources for this fund is accumulated majority through tax.
• This fund is exclusively for managing the day to day operations of the government
• The expenditure of this fund is directly linked o budgets.
• The planning tenure of government-type funds is short term by nature

Proprietary type funds:

• Governmental organizations which operate like private sector enterprise maintain these propriety funds.
• The service charges of the governmental organization are to cover the expense, and not to create profits,
• many governmental organizations are self-supportive, because their service charges cover the cost of the organization.

Fiduciary-types funds:

• Resources held for others by the government are know as fiduciary funds
• These resources cannot be utilized by the government for its operations
• These funds cannot be used for governmental welfare programs
• The term others mean individual, other government, other private organization, and agency.

Question 4

Q2-4 Describe the difference between economic resources measurement focus and current financial resources measurement focus. Which measurement focus is used in each fund category?

Answer 4

Measurement focus refers to what is being measured in reporting the financial statement of an organization.
Economic resources and current financial resources are the two types of measurement focus which are used by the governmental units. All governmental-type funds use current financial resources as measurement focus and all proprietary-type funds and fiduciary-type funds use economic resources as measurement focus.

Under economic resources measurement focus, all assets and all liabilities are reported on the balance sheet.
Under current resources measurement focus, only current assets and current liabilities are reported on the balance sheet.

The difference between all assets and liabilities is termed as net assets of the fund.
The difference between the current assets and current liabilities is term as fund balance or net current assets.

Question 5

Q2-5 How has governmental budgeting influenced the measurement focus and basis of accounting used in the governmental funds category?

Answer 5

The governmental budget process is one of estimating the yield from taxes and other sources and authorizing the expenditure of those resources. Although most state laws require governmental budgets to be balanced, they do not specify that budgetary balance must be achieved in the accrual accounting sense. The revenue aspect of the budget focuses on the availability of resources for spending. When budgets provide authority to spend, the authority relates to current outflows of budgetary resources. Thus, the budget and budgetary measurements focus on the short run. For example, once resources are used to acquire capital assets, the resources are no longer available for spending. Governmental accounting systems have historically provided information to help manage budget execution. As a result, accounting measurements within the funds have tended to be similar to budgetary measurements.

Question 6

Q2-6 Compare the timing of revenue and expense (or expenditure) recognition using the accrual basis of accounting with that using the modified accrual basis of accounting. Which basis of accounting is used in each fund category?

Answer 6

Revenue Recognition:

• Under the full accrual basis of accounting, revenues are recognized in the period in which they are earned and measurable.
• Under the modified accrual basis of accounting, revenues are recognized in the period in which they are measurable and available, the term “available” meaning that the revenues must be collected either within the current period or soon enough thereafter (within 60 days after completing the current period)

Expense or expenditure recognition:

• Under the accrual basis of accounting expense or expenditures are recognized at the time of revenue recognition.
• Under the modified accrual basis of accounting expenses are recognized when liabilities are incurred.

General funds, special revenue funds, debt service funds, capital project funds, and permanent funds are governmental-type funds which use the modified basis of accounting.

Enterprise funds and internal service funds are proprietary-type funds that use the accrual basis of accounting.

Pension-trust funds, investment-trust funds, private-purpose trust funds, and agency funds are fiduciary-type funds that use the accrual basis of accounting.

Question 7

Q2-7 List the governmental-type funds, and briefly describe the use of each.

Answer 7

Governmental-type funds are the funds, which are used to account for the general day-to-day operating services of governmental units. It is also used to account for the allocation of resources for particular governmental functions. The main focus of governmental-type funds is to use current financial resources.

The governmental-type funds and their purposes are:
- General - to account for all financial resources not accounted for in some other fund; or more generally, the day-to-day general activities of government.
- Special Revenue - to account for the proceeds of specific revenue sources that are restricted or otherwise limited to spending for specified purposes other than debt service and capital projects.
- Debt Service - to account for financial resources restricted or otherwise limited to spending for principal and interest on general long-term debt.
- Capital Projects - to account for financial resources restricted or otherwise limited to spending for capital outlays, including facilities and other capital assets.
- Permanent - to account for resources legally restricted so that only earnings from the resources (and not
the principal itself) may be used to support governmental programs.

Question 8

Q2-8 The controller for the City of Walla Walla recently made the following comment: “At a minimum, we could run city government with the use of only one fund.” Do you agree with this statement? Why or Why not?

Answer 8

• There is no consistency among governmental entities in creating and using the funds.
• Some governments may use more than one fund, as they perform several types of activities.
• Some government entities can run with the use of only one fund if they concentrate and perform a particular activity
• Depending on the nature of the government, the requirement of the type of fund changes.

Question 9

Q2-13 Discuss why Agency Funds do not have a fund balance.

Answer 9

• Fund balance is the difference between assets and liabilities.
• Agency funds do not have a fund balance, since there are no net assets in agency funds.
• All resources help are equalized by the liabilities in the agency fund statement of fiduciary net assets.
• Preparation of statement of changes in fiduciary net assets is not included in agency funds, since they have no net assets.

Question 10

Q2-13 Discuss why Agency Funds do not have a fund balance.

Answer 10

• Fund balance is the difference between assets and liabilities.
• Agency funds do not have a fund balance, since there are no net assets in agency funds.
• All resources help are equalized by the liabilities in the agency fund statement of fiduciary net assets.
• Preparation of statement of changes in fiduciary net assets is not included in agency funds, since they have no net assets.

Question 11

D2-1

Answer 11

D2-1 answer

Question 12

D2-2

Answer 12

D2-2 answer

Question 13

D2-3

Answer 13

D2-3 answer

Question 14

D2-4

Answer 14

D2-4 answer

Question 15

E2-1 State which category of funds (governmental-type, proprietary-type, or fiduciary-type) would be used by a state government for each of the following purposes:

1. To construct a new highway
2. To pay salaries of personnel who maintain state parks.
3. To accumulate resources to pay pension benefits for its employees
4. To collect sales taxes on behalf of local governments that impose such a tax.
5. To operate a central printing department that prints forms and reports for all state departments.

Answer 15

E2-1 answer

Question 16

E2-1 State which category of funds (governmental-type, proprietary-type, or fiduciary-type) would be used by a state government for each of the following purposes:

1. To construct a new highway
2. To pay salaries of personnel who maintain state parks.
3. To accumulate resources to pay pension benefits for its employees
4. To collect sales taxes on behalf of local governments that impose such a tax.
5. To operate a central printing department that prints forms and reports for all state departments.

Answer 16

1. Governmental fund
2. Proprietary funds
3. Fiduciary funds
4. Governmental fund
5. Proprietary funds

Question 17

For each scenario shown, state which fund type would be used and which measurement focus and basis of accounting would be used for each fund type.

1. To construct a new highway
2. To pay salaries of personnel who maintain state parks.
3. To accumulate resources to pay pension benefits for its employees
4. To collect sales taxes on behalf of local governments that impose such a tax.
5. To operate a central printing department that prints forms and reports for all state departments.

Answer 17

1. Type of Fund: Government fund
   Internal classification: Capital project fund
   Measurement focus: Current financial resources
   Basis of accounting: Modified accrual

2. 
Type of Fund:Proprietary Fund
Internal classification: Internal service
Measurement focus: Economic resources
Basis of accounting: Accrual

3.
Type of Fund: Fiduciary fund
Internal classification: Pension Trust
Measurement focus:  Economic resources
Basis of accounting: Accrual

4.
Type of Fund: Government fund
Internal classification: Special Revenue
Measurement focus: Current financial resources
Basis of accounting: Modified accrual

5.
Type of Fund: Proprietary Fund
Internal classification: Internal service fund
Measurement focus: Economic resources
Basis of accounting: Accrual

Question 18

E2-3 The information is extracted from or based on the notes to the financial statements issued by New York City. For each item described, identify the fund used by New York City.

1. “This is the general operating fund of the City. Substantially all tax revenues, federal and State aid (except aid for capital projects) and other operating revenues are accounted for in (this fund)
2. This fund… accounts for resources used to construct or acquire fixed assets and make capital imrovements
3. This fund, required by State Legislation… into which payment fo real estate taxes and other revenues are deposited in advance of debt service payment dates. Debt service on all City bonds is paid from this fund”
4. These funds account for assets held on behalf of the city’s employees to pay pension benefits.

Answer 18

1. Governmental funds.
2. Proprietary funds
3. Governmental funds
4. Fiduciary funds