Ch 11 - Acct for State and Local Gov'ts (Part 1) Flashcards

Question

Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which fund should this gift be recorded? A. Permanent fund. B. Investment trust fund. C. Private-purpose trust fund. D. Special revenue fund.

Answer 1

A. Permanent fund.

Answer 2

A. Governmental Accounting Standards Board.

Answer 3

C. Both I and II. Answer (C) is correct. GASB Concepts Statement 1 states, “Financial reporting by state and local governments is used in making economic, social, and political decisions and in assessing accountability.” It also states that “interperiod equity is a significant part of accountability and is fundamental to public administration.” 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 burdens for services previously provided.”

Answer 4

A. Operational accountability. Answer (A) is correct. Fiscal accountability is the responsibility of governments to justify that their actions currently comply with public decisions concerning the raising and spending of public resources in the short term. Operational accountability is a government’s responsibility to report the extent to which it has met accounting objectives efficiently and effectively, using all resources available, and whether it can continue to do so in the near future. The governmental funds financial statements focus on the fiscal accountability of governmental activities. However, governmentwide financial statements focus on the operational accountability of the governmental and business-type activities of the government as a whole. The financial statements of fiduciary funds and proprietary funds provide information about operational accountability.

Answer 5

D. Permanent funds. Answer (D) is correct. Governmental funds (the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds) emphasize sources, uses, and balances of current financial resources, often with use of budgetary accounts. Expendable assets are assigned to funds based on their intended use, liabilities are assigned to the funds from which they will be paid, and the difference (fund equity) is the fund balance. Permanent funds report resources legally restricted so that earnings only, not principal, may be expended for the benefit of the government or its citizenry, that is, to support the government’s programs. An example is a perpetual-care fund for a public cemetery. Permanent funds should be distinguished from private-purpose trust funds.

Answer 6

D. Fund. Answer (D) is correct. An accounting system should permit state and local governments to (1) present fairly and with full disclosure the funds and activities of state and local governments in conformity with GAAP and (2) demonstrate compliance with finance-related legal and contractual provisions. To satisfy these objectives, state and local government accounting systems use funds. 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 all of the above. Items in a fund are separated because they relate to specific activities or certain objectives that are subject to special regulations or limitations. The three categories of funds used by state and local governments are governmental, proprietary, and fiduciary.

Answer 7

A. Private purpose trust funds. Answer (A) is correct. Fiduciary funds include pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and agency funds. Pension (and other employee benefit) trust funds report resources held for (1) members and beneficiaries of pension plans (defined benefit or contribution), (2) other postemployment benefit plans, or (3) other employee benefit plans. Investment trust funds are used by a sponsoring government to report the external portions of external investment pools. Private-purpose trust funds are used for all other trust arrangements, whether the beneficiaries are individuals, private entities, or other governments.

Answer 8

B. Yes...Yes

Answer 9

B. $1,000,000 Answer (B) is correct. The general fund is used to account for all transactions 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 only the $1,000,000 grant.

Answer 10

C. Gasoline taxes to finance road repairs. Answer (C) is correct. Special revenue funds account for restricted or committed proceeds of specific revenue sources. Expenditures must be for a specified purpose (but not debt service or a capital project). Thus, the basis of the fund is a substantial inflow from restricted or committed revenue sources. Gasoline taxes levied to finance road repair are revenues legally restricted to expenditures for specified purposes that should be accounted for in special revenue funds.

Answer 11

B. Internal service fund. Answer (B) is correct. An internal service fund is used when one governmental entity provides goods or services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. However, if the reporting government is not the predominant participant, the activity should be reported as an enterprise fund.

Answer 12

A. $1,400,000 Answer (A) is correct. Proprietary funds include enterprise funds and internal service funds. Thus, the proprietary equity balances equal $1,400,000 ($1,000,000 + $400,000).

Answer 13

C. Capital projects funds. Answer (C) is correct. The capital projects fund accounts for resources restricted, committed or assigned to be expended for capital purposes. These resources include general obligation bond proceeds dedicated to the construction of major capital facilities such as schools, bridges, or tunnels. But other capital facilities may be financed through proprietary funds or certain trust funds.

Answer 14

D. Both I and II. Answer (D) is correct. Enterprise funds may be used to account for any activity of a state or local government that provides goods or services to external users for a fee. Both a state-operated hospital and a state-operated lottery are typical enterprise fund activities.

Answer 15

C. Enterprise fund in some cases. Answer (C) is correct. Internal service funds may be used for activities that provide goods and services to other subunits of the primary government and its component units or to other governments on a cost-reimbursement basis. However, if the reporting government is not the predominant participant, the activity should be reported as an enterprise fund.

Answer 16

C. Agency fund. Answer (C) is correct. Agency funds may account for certain grants and other financial assistance to be transferred to, or spent on behalf of, secondary recipients (individuals, private entities, or other governments). The agency fund acts purely as a custodian. It receives the grants and passes them through to the ultimate recipients. However, if the recipient government has administrative or direct financial involvement in the program, the pass-through grant is accounted for in an appropriate governmental, proprietary, or trust fund.

Answer 17

D. Debt service. Answer (D) is correct. The debt service fund is the only fund listed that is classified as a governmental fund. The other funds are proprietary or fiduciary. Governmental funds use the modified accrual basis, and proprietary and fiduciary funds use the accrual basis.

Answer 18

A. Yes... Yes Answer (A) is correct. According to the modified accrual basis of accounting, expenditures are recognized when liabilities are incurred. For general long-term debt, however, principal and interest expenditures ordinarily are recognized when payments on the debt are due.

Answer 19

B. Expenditure. Answer (B) is correct. Governmental funds are accounted for on the modified accrual basis. Accordingly, a general fund normally recognizes an expenditure (a use of financial resources) when the liability is incurred, if measurable. When previously ordered goods are received, the entry in the general fund includes a debit to expenditures for the actual amount to be paid. Thus, an expenditure is recognized when the liability is incurred, that is, when performance of a contract is complete or virtually complete.

Answer 20

D. May be allocated between or among accounting periods or may be accounted for as expenditures of the period of acquisition. Answer (D) is correct. Prepaid insurance may be reported by either the purchases method or the consumption method. Under the purchases method, an expenditure is reported when the policy is purchased. Under the consumption method, an expenditure is reported as the asset is consumed.

Answer 21

Answer (A) is correct. Government-wide financial statements are prepared using the economic resources measurement focus and the accrual basis of accounting and should report all of the government’s assets, liabilities, revenues, expenses, gains, and losses. The economic resources measurement focus differs from the shorter-term flow-of-current-financial-resources approach used in governmental funds. It measures revenues and expenses in the same way as in proprietary funds or commercial accounting but does not necessarily emphasize net income. Instead, the emphasis is on a longer-range measure of revenues earned or levied (and accrued immediately if measurable). Moreover, the economic resources model focuses on cost of services. The accrual basis of accounting recognizes most transactions when they occur, regardless of when cash is received or paid.

Answer 22

A. Yes... No... Yes... No Answer (A) is correct. The economic resources measurement focus and the accrual basis of accounting are required in the proprietary fund financial statements. The economic resources measurement focus differs from the shorter-term flow-of-current-financial-resources approach used in governmental funds. It measures revenues and expenses in the same way as in commercial accounting but does not necessarily emphasize net income. Instead, the emphasis is on a longer-range measure of revenues earned or levied (and accrued immediately if measurable). Moreover, the economic resources model focuses on cost of services. The accrual basis of accounting recognizes most transactions when they occur, regardless of when cash is received or paid.

Answer 23

A. Yes... No... Yes... No Answer (A) is correct. The economic resources measurement focus and the accrual basis of accounting are required in the fiduciary fund financial statements. Liabilities of defined benefit pension plans and of postemployment benefit plans other than pensions are recognized on the accrual basis, that is, when the transaction or event occurs. For plan liabilities for benefits and refunds, the transaction occurs when the benefits and refunds become due and payable under the plan’s terms.

Answer 24

A. General. Answer (A) is correct. Governmental units normally record the purchases of supplies inventory in an internal service fund or in the general fund. However, an internal service fund is a proprietary fund for which an amount for net assets, not fund balance, is reported. A fund balance is reported for the general fund. In accounting for supplies, the expenditure account may be debited when the materials and supplies are purchased or when they are consumed. Under either method, the inventory of supplies remaining at year end must be reported on the balance sheet as an asset. Under the purchases method, resources have already been deemed to be expended to acquire these supplies. Thus, part of the unassigned fund balance should be reclassified as nonspendable because of an increase in an inventory of supplies. This nonspendable classification must be established (credited) to indicate the unavailability of resources in this amount for other expenditures.

Answer 25

A. Yes... No Answer (A) is correct. The general fund is accounted for on the modified accrual basis. This basis of accounting recognizes revenues in the period in which they are susceptible to accrual (measurable and available). The enterprise fund is a proprietary fund that is accounted for on the accrual basis. This basis of accounting recognizes revenues in the accounting period in which the exchange occurs.

Answer 26

B. Both I and II. Answer (B) is correct. Property taxes are recognized on the modified accrual basis in the governmental funds. A property tax assessment is made to finance the budget of a specific period. Hence, the revenue produced should be recognized in the period for which the assessment was levied, provided it meets the criterion of being susceptible to accrual (available and measurable). When property taxes are recognized or collected in advance, they should be recorded as deferred revenue in a governmental fund. They are not recognized as revenue until the year for which they are levied. A property tax assessment is classified as an imposed nonexchange revenue transaction. In such a transaction, assets (not revenues) should be recognized when an enforceable legal claim arises or when 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 arose in that prior year.

Answer 27

C. Funds from the levy are measurable and available to the district. Answer (C) is correct. Debt service funds apply the modified accrual basis of accounting. Thus, revenues are recognized when they are susceptible to accrual (measurable and available). Moreover, assets from imposed nonexchange revenue transactions, such as property tax levies, should be recognized when an enforceable legal claim arises or the resources are received, whichever is earlier. If the legal claim arises in the period after that for which the property taxes are levied, a receivable is recognized when revenues are recognized. Revenues are recognized in the period for which the taxes are levied if the availability criterion is met. For property taxes, this criterion is met if the taxes are collected within the current period or soon enough afterward (not exceeding 60 days) to pay current liabilities.

Answer 28

B. No... Yes... No... Yes Answer (B) is correct. 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 therein (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 noncurrent liabilities is recognized when due.

Answer 29

A. Buildings. Answer (A) is correct. Infrastructure assets are capital assets that normally are stationary and can be preserved for a longer time than most capital assets, e.g., roads, bridges, water and sewer systems, drainage systems, and lighting systems. However, buildings, other than those that are ancillary parts of a network of infrastructure assets, are not deemed to be infrastructure assets.

Answer 30

B. At estimated fair value as revenue. Answer (B) is correct. The amount to be reported for a capital asset ordinarily is its cost. However, if a capital asset is donated to a governmental unit, it should be recorded at its estimated fair value at the time of acquisition plus any ancillary charges. If the capital asset is accounted for in a proprietary fund, it should be reported in the government-wide statement of net assets and in the proprietary funds statement of net assets. For a voluntary nonexchange transaction, such as a contribution, assets are recognized when all eligibility requirements are met or the resources are provided, whichever is earlier. Revenue is recognized in the government-wide statement of activities and the proprietary funds statement of revenues, expenses, and changes in fund net assets (or fund equity) when eligibility requirements are met. Because an enterprise fund uses the accrual basis of accounting, the resources need not be “available.”

Answer 31

B. At historical cost, including ancillary charges. Answer (B) is correct. Capital assets include land, land improvements, easements, buildings, vehicles, machinery, equipment, works of art, historical treasures, infrastructure, and other tangible and intangible operating assets with useful lives greater than one reporting period. They are reported at historical cost, including ancillary charges necessary to put them in their intended location and condition for use. Ancillary charges, e.g., freight, site preparation, and professional fees, are directly attributable to acquisition of the assets.

Answer 32

C. $7,500 Answer (C) is correct. General capital assets are not specifically related to activities reported in nongovernmental funds, usually result from expenditure of governmental fund financial resources, and should be reported at historical cost in the governmental activities column of the government-wide statement of net assets. They are not reported as assets in the fund financial statements. Moreover, capital assets must be depreciated unless they are infrastructure assets that meet certain requirements. The modified accrual basis of accounting is required in the financial statements of governmental funds, and the accrual basis of accounting is required in the government-wide statements. Thus, the calculation of the $1,500 net increase in the fund balance for governmental funds most likely reflects a $9,000 expenditure (modified accrual basis) to acquire the general capital assets. The effect of the expenditure is a decrease in current financial resources of $9,000. However the government-wide statements report an expense of $3,000 (accrual basis) for depreciation and a depreciated asset with a carrying amount of $6,000 ($9,000 cost – $3,000 depreciation). The effect of recognizing depreciation expense is a decrease in economic resources of $3,000. Reconciling the net increase in fund balance for governmental funds to the change in net assets for governmental activities therefore requires adding $6,000 ($9,000 modified accrual basis expenditure – $3,000 accrual basis expense). The change in net assets for governmental activities is $7,500 ($1,500 + $6,000 reconciling item).

Answer 33

D. Governmental activities column of the government-wide statement of net assets. Answer (D) is correct. General capital assets are not specifically related to activities reported in nongovernmental funds, usually result from expenditure of governmental fund financial resources, and should be reported in the governmental activities column of the government-wide statement of net assets. They are not reported as assets in governmental funds or in a general fixed assets account group. General noncurrent liabilities are not reported as liabilities in governmental funds or in a general noncurrent debt account group. They should be reported in the governmental activities column of the government-wide statement of net assets. General noncurrent liabilities include the unmatured principal amounts of general obligation indebtedness (such as bonds, warrants, and notes); lease-purchase agreements and other commitments not recorded as current liabilities in governmental funds; and the noncurrent portions of liabilities for capital leases, operating leases with scheduled rent increases, compensated absences, claims and judgments, pensions, special termination benefits, and landfill closure and postclosure care.

Answer 34

C. No depreciation expense is required to be recognized. Answer (C) is correct. Under the modified approach, infrastructure assets that are part of a network or subsystem of a network (eligible infrastructure assets) need not be depreciated if the government uses an asset management system with certain characteristics and documents that the assets are being preserved approximately at (or above) a condition level established and disclosed by the government. An asset management system should include an updated inventory of eligible infrastructure assets, perform condition assessments and summarize results using a measurement scale, and make annual estimates of the annual amounts needed to maintain the assets at the established condition level.

Answer 35

A. General capital asset. Answer (A) is correct. In the government-wide financial statements, a capital lease obligation associated with general governmental activities is recorded as a general capital asset and a liability under the accrual basis of accounting. In governmental fund financial statements, the asset financed by a capital lease is debited to an expenditure, and the lease financing is credited to an other financing source under the modified accrual basis of accounting.

Answer 36

A. Purchase of fixed assets. Answer (A) is correct. The general fund is a governmental fund. Governmental funds report capital outlays as expenditures. Thus, the purchase of fixed assets affects the excess of revenues over expenditures.

Answer 37

D. Appropriations exceed actual expenditures. Answer (D) is correct. Fund balance is a real account. It is the difference between the assets and liabilities of a governmental fund. Appropriations (public funds set aside for a specific purpose) are recognized in the budgetary entry at the beginning of the fiscal period. If they exceed the government’s actual expenditures for the year, fund balance increases unless sufficient encumbrances are carried over to offset the excess.

Answer 38

C. $2,100,000 credit balance. Answer (C) is correct. The initial entry to record the budget consists of a $30,000,000 debit to estimated revenues, a $27,000,000 credit to appropriations, and a $900,000 credit to estimated transfer to debt service fund (an estimated other financing use). The $2,100,000 difference between the debit and the sum of the credits is credited to budgetary fund balance. Some accountants prefer to use budgetary fund balance in the budgetary entry rather than fund balance. Budgetary fund balance is a nominal account that is eliminated at the end of the period. Fund balance is a real (balance sheet) account.

Answer 39

A. $9,000,000 Answer (A) is correct. Revenues are recognized in governmental funds when they are susceptible to accrual (measurable and available). They are increases in (sources of) fund financial resources other than from interfund transfers, debt issue proceeds, and redemptions of demand bonds. Interfund transfers-in are classified as other financing sources. Proceeds of long-term debt not recorded as fund liabilities also are classified as other financing sources. The major source classifications are (1) taxes, (2) licenses and permits, (3) intergovernmental revenues, (4) charges for services, (5) fines and forfeits, and (6) miscellaneous revenues. Hence, Maple’s revenues include taxes, licenses, and fines equal to $9 million.

Answer 40

B. Debit to encumbrances of $850,000. Answer (B) is correct. When a purchase order is approved or a contract is signed, an estimated liability is recorded in the encumbrances account for the amount of the purchase order. The entry is a debit to encumbrances and a credit to the appropriate fund balance classification.

Answer 41

C. II only. Answer (C) is correct. The encumbrances account is debited when goods are approved to be purchased, and a purchase order is prepared. When he goods are actually received, it is credited. Thus, the encumbrances account includes only those amounts that represent outstanding purchase orders.

Answer 42

B. No... Yes Answer (B) is correct. The encumbrances account will be decreased when previously ordered goods have been received. Expenditures and vouchers payable will be increased for the actual amount to be paid for the goods.

Answer 43

C. $500,000 Answer (C) is correct. In fund accounting, when a commitment is made to expend monies, the encumbrances account is debited and fund balance-committed (or assigned) is credited. When the goods are received, this entry is reversed. Because goods totaling $500,000 were not received at year end, encumbrances outstanding total $500,000 ($5,000,000 – $4,500,000). Assuming that encumbrances outstanding at year end do not lapse, they should be reported in the appropriate classification of fund balance.

Answer 44

D. ($5,000) Answer (D) is correct. Expenditures are actual decreases in net financial resources. They are recognized in the governmental funds when fund liabilities are incurred, if measurable. When goods are received by, or services are rendered to, a governmental unit, a journal entry is made to debit expenditures control and to credit vouchers payable. In addition, a previously recorded encumbrance must be reversed. This entry involves crediting encumbrances and debiting the appropriate classification of fund balance for $5,000.

Answer 45

C. No... Yes Answer (C) is correct. The current financial resources measurement focus and the modified accrual basis of accounting are required in the financial statements of governmental funds. Because a special revenue fund is a governmental fund, it should maintain its accounts on the modified accrual basis. The integration of budgetary accounts into the formal accounting system is a management control technique 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 considered essential in the general fund, special revenue funds, and other annually budgeted governmental funds with numerous types of revenues, expenditures, and transfers. Thus, a special revenue fund with a legally adopted budget should integrate its budgetary accounts into its accounting system.

Answer 46

B. $300,000 Answer (B) is correct. The amount in the unassigned fund balance is equal to the amount of assets available to finance expenditures of the current and succeeding years that is not nonspendable, restricted, committed, or assigned. Unassigned fund balance is the residual classification of the general fund. The fund balance is $400,000 ($1,000,000 assets – $600,000 liabilities). Given that $100,000 is committed, the unassigned fund balance is $300,000 ($400,000 – $100,000). Fund balance is committed to the extent it can only be used for specific purposes determined by formal action of the government’s highest decision maker.

Answer 47

D. A recording error. Answer (D) is correct. The entry to record an encumbrance is a debit to encumbrances and a credit to the appropriate classification of fund balance. Thus, the amount by which budgetary fund balance is encumbered should never exceed encumbrances. If it does, a recording error must exist.

Answer 48

D. Enterprise. Answer (D) is correct. Encumbrances are budgetary control accounts. They are used only for internal purposes in governmental funds, especially general and special revenue funds. An enterprise fund is a proprietary fund. The accounts and reports of proprietary funds are maintained and prepared in essentially the same way as in for-profit accounting. Thus, budgetary control accounts are not used in enterprise funds.

Answer 49

A. Derived tax revenue. Answer (A) is correct. Derived tax revenues are assessments on exchange transactions, for example, income, sales, and, in this case, hotel room rentals. The government recognizes assets when the underlying exchange occurs (or when resources are received, if earlier). Revenues (net of estimated refunds) are recognized when the underlying exchange occurs. The requirements to use the proceeds for promotion of tourism is a purpose restriction, and the resulting net assets, equity, or fund balance is restricted until used.

Answer 50

C. Time period in which the resources can be used begins. Answer (C) is correct. A governmental fund is accounted for on the modified accrued basis. Thus, revenues are recognized when the resources to be received are susceptible to accrual (measurable and available). Furthermore, imposed non-exchange revenues also cannot be recognized until (1) the period in which the resources must be used or (2) the first period in which use is permitted. But a receivable may be accrued when the governmental body has a legally enforceable right to the resources.

Answer 51

B. $300,000 Answer (B) is correct. Governmental fund revenues are increases in fund financial resources other than from interfund transfers, debt issue proceeds, and 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 must also be “available.” Other financing sources include proceeds from bonds and interfund transfers.

Answer 52

C. $400,000... $600,000 Answer (C) is correct. Governmental fund revenues are increases in fund financial resources other than from interfund transfers, debt issue proceeds, and 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. Thus, Fir reports revenues of $400,000 and other financing sources of $600,000 ($500,000 + $100,000) in its governmental fund statement of revenues, expenditures, and changes in fund balances.

Answer 53

A. $5,000,000 in Year 1. Answer (A) is correct. The general obligation debt will be reported as a general noncurrent liability in the governmental activities column of the government-wide statements of net assets, and expenditures will be recorded in Year 1 and Year 2. The face amount of long-term debt, issuance premium or discount, certain payments to escrow agents for bond refundings, transfers, and sales of capital assets not qualifying as special items are reported as other financing sources and uses in the governmental funds statement of revenues, expenditures, and changes in fund balances. Thus, the entry in the capital projects fund in Year 1, the year of receipt, to record the bond proceeds is a debit to cash and a credit to other financing sources - bond issue proceeds for $5,000,000.

Answer 54

A. The relationship between the amount of value given and received. Answer (A) is correct. In a nonexchange transaction, a government either gives or receives value without directly receiving or giving equal value in return.

Answer 55

C. $75,000 Answer (C) is correct. The private donations are voluntary nonexchange transactions. These arise from legislative or contractual agreements, other than exchanges, entered into willingly by the parties (e.g., certain grants and private donations). Revenues are recognized by recipients when all eligibility requirements are met. Thus, a recipient debits an asset or a liability and credits revenue. Eligibility requirements are that (1) the recipient has certain characteristics (e.g., it is a public college); (2) any time requirements are satisfied (e.g., use in a given period); (3) the donation is on an expenditure-driven basis, and the recipient has incurred costs; and (4) a contingent recipient action required by the provider has occurred. In the case of the contributions to Public College, only the first requirement applies, and it has been satisfied. The promise of $50,000 in cash to be paid the following year is recognizable as a receivable and a revenue in the current year if, in addition to meeting eligibility requirements, (1) the promise is verifiable and (2) the resources are measurable and probable of collection. The $25,000 of restricted cash already received also should be treated as revenue. The testamentary gift is not recognized as revenue because of verifiability and collectibility issues. For example, the gift may not be received for many years if the recent graduate is young, and the will may be changed.

Answer 56

Management's Discussion & Analysis

Answer 57

Required Supplementary Information

Answer 58

C. A description of currently known facts, decisions, or conditions expected to have significant effects on financial activities. Answer (C) is correct. Management’s discussion and analysis (MD&A) is required supplementary information (RSI) that precedes the basic financial statements and provides an analytical 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.

Answer 59

C. Information about each major component unit must be provided in the reporting entity’s basic statements. Answer (C) is correct. To provide an overview of component units, discrete presentation of component unit data is required in the government- wide statements, but fiduciary component units are included only in the fund statements. Blended component units are reported in accordance with GASB guidance. Each major component unit should be reported in the basic statements by presentation (1) in a separate column in the government-wide statements, (2) in combining statements of major component units after the fund statements, or (3) of condensed statements (a statement of net assets and a statement of activities) in the notes. The aggregated total component unit information should be the entity totals derived from the component units’ statements of net assets and activities. However, major component unit information is not required for fiduciary component units.

Answer 60

D. Use separate columns to distinguish between governmental and business-type activities. Answer (D) is correct. The basic financial statements include government-wide financial statements, fund financial statements, and the notes to the financial statements. Government-wide financial statements do not display funds or fund types but instead report information about the overall government. They distinguish between the primary government and its discretely presented component units and between the governmental activities and business-type activities of the primary government by reporting such information in separate rows and columns.

Answer 61

D. No... No Answer (D) is correct. Noncurrent liabilities directly related to and expected to be paid from a proprietary fund, such as an enterprise fund, are not general noncurrent liabilities. They should be reported in the proprietary fund statement of net assets as well as the government-wide statement of net assets. They are specific fund liabilities even though they are backed by the full faith and credit of the governmental unit. The water and sewer fund and the municipal recreation center fund are both enterprise funds.

Answer 62

C. Net (expense) revenue for each function equal to expenses minus program revenues. Answer (C) is correct. The statement of activities presents operations in a format that displays net (expense) revenue for each function, thereby reporting the relative financial burden to the taxpayers for that function. The net (expense) revenue for each governmental or business-type function equals expenses (at a minimum, the direct expenses of the function) minus program revenues, i.e., charges or fees and fines deriving directly from the function or program, and contributions that are restricted to the function or program.

Answer 63

B. Fiduciary activities. Answer (B) is correct. Fiduciary funds account for resources held by the government in trust or as an agent for (1) specific individuals, (2) private organizations, or (3) other governments. These resources are not available to finance the government’s programs. Consequently, they are reported only in the fund statements (statements of fiduciary net assets and changes in fiduciary net assets). Moreover, fund receivables from, or payables to, fiduciary funds are treated in the government-wide statement of net assets as amounts arising from transactions with external parties, not as internal balances. Thus, they are reclassified, not eliminated in the preparation of the government-wide statements.

Answer 64

C. Interfund transfers... Expenditures Answer (C) is correct. Cash receipts of a debt service fund provided by the general fund are interfund transfers (other financing sources), not revenues. The cash receipts are interfund transfers because they are nonreciprocal activities with no repayment required. Cash payments made to retire principal and interest payments of serial bonds are recorded as expenditures of the governmental unit’s resources. An expenditure is recognized in a governmental fund when the liability is incurred, if measurable, except for the unmatured principal and interest on general long-term debt (e.g., the serial bonds), which are recognized when due.

Answer 65

D. $0 Answer (D) is correct. The debt service fund of a governmental unit is a governmental fund that accounts for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. Bond issuance premium may be recorded as an other financing source in the debt service fund. However, because this fund has a current financial resources measurement focus, that is, a focus on fiscal accountability for current spendable resources, premium is not amortized in the debt service fund.

Answer 66

B. $400,000 Answer (B) is correct. A debt service fund is used to account for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. Water treatment plants and other utilities are customarily accounted for in enterprise funds because they tend to be financed and operated in the same manner as private businesses. Cash accumulations to cover payment of principal and interest on enterprise fund obligations are accounted for in the enterprise fund itself. Hence, only the $400,000 of proceeds from general long-term obligations should be accounted for in the debt service funds.

Answer 67

D. $5,300,000... $0 Answer (D) is correct. Debt service funds account for resources restricted, committed, or assigned to paying principal and interest. But these funds do not account for the debt itself. They also account for resources being accumulated for future principal and interest payments. The general fund does not account for these transactions, except to record transfers to the debt service fund.

Answer 68

B. The main operating fund is always reported as a major fund. Answer (B) is correct. The focus of governmental and enterprise fund financial statements is on major funds. Major fund reporting is not required for internal service funds. Each major fund is presented in a separate column and nonmajor funds in one column. Combining statements are not required for nonmajor funds. The main operating fund (e.g., the general fund) is always reported as a major fund, and any governmental or enterprise fund believed to be particularly important to users may also be reported in this way. Other individual governmental or enterprise funds must be reported as major if they meet the quantitative thresholds.

Answer 69

C. Total liabilities of that fund are 10% of the total liabilities of all governmental funds and 5% of the total liabilities of all governmental and enterprise funds combined. Answer (C) is correct. The main operating fund (e.g., the general fund) is always reported as a major fund, and any governmental or enterprise fund believed to be particularly important to users also may be reported as a major fund. Moreover, any fund must be reported as major if revenues, expenditures/expenses, assets, or liabilities (excluding revenues and expenditures/expenses reported as extraordinary items) of the fund are (1) at least 10% of the corresponding element total for all funds of the same category or type, that is, for all governmental or all enterprise funds, and (2) the same element that met the 10% criterion is at least 5% of the corresponding element total for all governmental and enterprise funds combined.

Answer 70

D. A financial statement in balance sheet format. Answer (D) is correct. A balance sheet is required for governmental funds. It should be in balance sheet format (assets = liabilities + fund balances) with a total column and segregation of fund balances into reserved and unreserved amounts.

Answer 71

C. Proceeds of long-term debt should be reported in the other financing sources and uses classification. Answer (C) is correct. A statement of revenues, expenditures, and changes in fund balances is required for governmental funds. It reports inflows, outflows, and balances of current financial resources for each major fund, for nonmajor funds in the aggregate, and in a total column. In this statement, the other financing sources and uses classification appears after excess (deficiency) of revenues over expenditures. Other financing sources and uses include the face amount of long-term debt, issuance premium or discount, some payments to escrow agents for bond refundings, transfers, and sales of most capital assets.

Answer 72

A. $100,000 Answer (A) is correct. Other financing sources and uses are reported in the governmental funds statement of revenues, expenditures, and changes in fund balances. They include (1) the face amount of long-term debt, (2) issuance premium or discount, (3) some payments to escrow agents for bond refundings, (4) interfund transfers, and (5) sales of capital assets. Accordingly, the only item reported in the general fund as other financing uses is the $100,000 transfer to a debt service fund.

Answer 73

B. $34,000 Answer (B) is correct. Separate rows and columns are used in the government-wide financial statements to distinguish between governmental and business-type activities of the primary government. Governmental activities are normally reported in governmental funds and internal service funds. Proprietary funds consist of enterprise and internal service funds. Business-type activities are usually reported in enterprise funds. Thus, the change in net assets for governmental activities is $34,000 ($25,000 net increase for all governmental funds + $9,000 net increase for the internal service funds). Fiduciary activities, such as those of an employee pension fund, are reported only in the fiduciary fund financial statements because their resources are not available for the government’s programs.

Answer 74

C. Distinguishes between operating and nonoperating revenues and expenses. Answer (C) is correct. A statement of revenues, expenses, and changes in fund net assets or fund equity (either label may be used) is the required operating statement for proprietary funds. Operating and nonoperating revenues and expenses should be distinguished, with separate subtotals for operating revenues, operating expenses, and operating income.

Answer 75

D. Assets and liabilities must be classified. Answer (D) is correct. A statement of net assets or balance sheet is required for proprietary funds, and assets and liabilities must be classified as current or noncurrent. Either a net assets format (assets – liabilities = net assets) or a balance sheet format (assets = liabilities + net assets) may be used. Furthermore, net assets should be reported in three components (invested in capital assets, net of related debt; restricted; and unrestricted), capital contributions should not be displayed as a separate component, and designations should not be shown on the face of the statements.

Answer 76

A. Agency fund. Answer (A) is correct. The debt service transactions of a special assessment issue for which the government is not obligated in any manner should be reported in an agency fund rather than a debt service fund. This treatment reflects the limitation of the government’s duty to act as an agent for the assessed property owners and the bondholders.

Answer 77

B. Fiduciary activities. Answer (B) is correct. The resources of fiduciary activities are not available to finance the government’s programs. Thus, they are reported only in the fund financial statements. Fiduciary activities are reported in or with the fiduciary funds of the primary government. Fiduciary component units are reported with the primary government’s fiduciary funds only in the fund financial statements.

Answer 78

A. I and II only. Answer (A) is correct. Fiduciary fund financial statements include information about all fiduciary funds and similar component units. The statements report information in a separate column for each fund type but not by major fund. The notes present financial statements for individual pension plans and postemployment healthcare plans unless separate GAAP reports have been issued. A statement of fiduciary net assets (equivalent to the statement of plan net assets required for defined benefit pension plans) is required for fiduciary funds. It reports assets, liabilities, and net assets for each fiduciary fund type but does not present the three components of net assets reported in the government-wide statement of net assets or in the proprietary fund statement of net assets. A statement of changes in fiduciary net assets (equivalent to the statement of changes in plan net assets required for defined benefit pension plans) is required for fiduciary funds. It reports additions to, subtractions from, and the annual net change in net assets for each fiduciary fund type.

Answer 79

D. Other financing uses control $1,500,000 Answer (D) is correct. Accounting for state and local governments requires that transfers be reported as other financing sources by the governmental fund receiving the transfer and other financing uses by the governmental fund making the transfer. However, the bond issue proceeds and the cost of construction will be accounted for in the capital projects fund. Accordingly, the general fund should record only the interfund transfer out. The appropriate entry is to debit other financing uses control – interfund transfer for $1,500,000 and to credit a liability. The capital projects fund should credit other financing sources – interfund transfer for $1,500,000 and debit a receivable.

Answer 80

B. Expenditures. Answer (B) is correct. Enterprise funds are used to account for operations similar to those of private businesses. This rendition of services by the enterprise fund to the general fund is presumably at prices equivalent to external exchange values. Thus, it is classified as an interfund service provided and used. The result is revenue to the seller (the enterprise fund) and an expenditure to the buyer (the general fund). Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures control and credit due to enterprise fund.

Answer 81

D. As an asset of $10,000 and a liability of $4,000. Answer (D) is correct. In a special revenue fund, funds due to the special revenue fund are receivables (assets), and funds due to another fund from the special revenue fund are payables (liabilities). Thus, Grove should report a $10,000 asset and a $4,000 liability in the special revenue fund.

Answer 82

B. Results in expenditures or expenses to buyer funds and revenues to seller funds. Answer (B) is correct. Interfund services provided and used are transactions at prices equivalent to external exchange values. They result in revenues to seller funds and expenditures or expenses to buyer funds. Unpaid amounts are interfund receivables or payables.