Ch 16 Government Flashcards
What is the primary purpose of government vs. Business enterprise
Gov: enhance and maintain well being of citizens by providing
services in accordance with public policy goals
Bus: wealth creation, maximizing shareholder value
GASB
Governmental Accounting Standards Board
Serve as public sector counterpart of Financial Accounting
Standards Board
Governments serve a broader group of stakeholders including…6
1 taxpayers 2 citizens 3 elected representatives 4 oversight groups 5 bond holders 6 others in financial community
How are government revenues raised?
Through involuntary taxes
(Rather than a willing exchange between parties in a business
Transaction)
Monitoring actual compliance with budgeted public policy priorities is…
Central to government public accountability reporting
Governments exist longer than for profit businesses and are not typically subject to…
Bankruptcy and dissolution
Accounting for state and local governments is not merely a matching of expenses with earned revenues so…
Net income can be determined
Without a profit motive, what should be reported by a government for the short term?
Who are the potential users of the financial info?
Government reporting focuses on methods used to generate
Current resources and uses of those resources
Help public informed so proper decisions are more likely to be made
For longer term, what financial information is required by the government?
2) Who requires it?
Information to reflect overall financial stability of the government
2) Creditors
Who addresses issues and sets standards for financial reporting of state and local governments?
GASB
GASB is an independent body functioning under the oversight of…
The Financial Accounting Foundation
The unique aspects of any system of accounting should be a direct result of the…
Perceived needs of financial statement users
3 groups of primary users of external state and local governmental financial reports
1 citizenry
2 legislative and oversight bodies
3 investors and creditors
Needs: Citizenry
Evaluate the likelihood of tax or service fee increases, to determine
Sources and uses of resources
And forecast revenues in order to influence spending decisions
Needs: Legislative and oversight bodies 4
1) Assess overall financial condition when developing
budgets/program recommendations
2) Monitor operating results to assure compliance with mandates
3 determine reasonableness of taxes and fees, for changes
4 ascertain ability to finance more programs + capital needs
Needs: investors and creditors
Know amount of available and likely future financial resources
To measure the debt position and ability to service debt
Significant obstacle government reporting encounters pertaining to users needs?
User needs are so broad that no 1 set of financial statements
Or accounting principles can possibly satisfy all expectations
2 sets of statements produced by state and local governments
1 fund financial statements
2 government-wide financial statements
Fund financial statements: 3 functions
1 give picture of current activities of government
2 report current period revenues and expenditures in connection
With individual government functions
3 disclose restrictions placed on use of resources of gov activities
Who is likely to study the fund financial statements?
Citizens interested in the operation of government
What time horizon do government wide financial statements have?
Longer term focus
Government wide financial statements report…4
1 All revenues
2 all costs
3 assets
4 liabilities
Who is interested in government wide financial statements?
2) why?
Creditors, especially bondholdrs
2) to assess the likelihood of being paid when obligations come
Due
Fund financial statements report…2
1 individual government activities and amount of financial resources
Allocated to them each period
2 use made of resources
Through fund financial statements, citizens can assess the government’s…
Fiscal accountability in raising and utilizing money
What services do fund financial statements report on? 4
1 public safety
2 education
3 health and sanitation
4 construction of new roads
The primary measurement focus for public service activities is the amount and changes in…
Current financial resources such as cash and receivables
The timing and recognition of revenues and expenses in fund financial statements is based on…
Modified accrual accounting
When does modified accrual accounting recognize revenues?
2) when does it recognize expenditures?
Rev: when resulting current financial resources are both measurable
And available for use
2) expenditures: when they reduce current financial resources
In government accounting the term to be “used” means that current financial resources will…
Be received soon enough in the future to be used in paying for
Current period expenditures
Determination of “soon enough” is up to who?
The reporting government
Recognition of property taxes, what is the period?
60 day maximum period
Government wide financial statements, why were they created?
To report government’s financial affairs as a whole
Provide method to assess operational accountability and
Governments ability to meet its operating objectives
Government wide financial statements, how they help users:
Determine whether the government’s overall…
Financial position improved or deteriorated during the reporting
Period
Government wide financial statements, how they help users:
Understand the costs of…
Providing services to citizenry
Government wide financial statements, how they help users:
See how the government…
Finances its programs
Government wide financial statements, how they help users:
Understand the extent to which the government has invested in…
Capital assets (roads, bridges, other infrastructure)
Government wide financial statements, why have they become relevant in recent years?
A number of local governments have declared bankruptcy or
Face financial difficulties
There is a need to assess financial stability with state and local
Government
To achieve its reporting goals, government wide financial statements measurement focus is on all…
Economic resources (not just financial resources)
What type of accounting is utilized by government wide financial statements?
Accrual accounting (similar to business entities)
What is the cornerstone of all financial reporting in government?
Accountability
Accountability, what does it require?
Requires governments to answer to citizenry
Fund financial statements allow readers to focus on…
Individual government activities (police department, library)
What 3 questions do fund statements answer?
1 how did the government generate its current financial resources?
2 where did those financial resources go?
3 what amount of those financial resources is presently held?
Current financial resources
Monetary assets available for officials to spend to meet the
Government’s needs this year
When reporting current financial resources, a government is primarily monitoring what 4 items?
1 cash
2 investments
3 receivables
4 current claims to those resources
Historically, which 3 accounts have never been seen to have a direct impact on current financial resources?
1 buildings
2 equipment
3 long term debt
Fund financial statements: emphasis
Individual public service activities during the current period
Fund financial statements: measurement focus
Current financial resources (cash, investments, receivables, claims
On those assets)
Fund financial statements: general information
Inflows and outflows of current financial resources
Fund financial statements: timing and recognition
Modified accrual accounting
Government-wide financial statements: emphasis
Government as a whole
Government-wide financial statements: measurement focus
All economic resources (all assets, liabilities, other resources)
Government-wide financial statements: General information
Overall financial health
Government-wide financial statements: timing and recognition
Accrual accounting
Fund
define, function
Separate quasi independent book keeping system
For internal monitoring purposes
Only the minimum number of funds consistent with legal and operating requirements should be established, because unnecessary funds result in…3
1 inflexibility
2 undue complexity
3 inefficient financial administration
3 distinct groups of fund classification
1 governmental funds
2 proprietary funds
3 fiduciary funds
2 reasons funds are classified into three distinct groups?
1 classification system provides clearer reporting of gov activities
2 separate groups allows for unique accounting principles to be
Applied to each
Governmental funds
All funds that account for activities gov carries out primarily to
Provide citizens with services
Financed primarily from taxes and other general revenue sources
Examples of accounts reported as government funds
Police and fire departments
Proprietary funds
Account for gov’s ongoing activities, similar to those conducted
By for profit organizations
Proprietary funds encompass operations that assess a user charge so that…
Determining profitability or cost recovery is important
Examples of accounts reported within proprietary funds?
Municipal golf course and toll road
Fiduciary funds
Account for monies held by gov in a trustee or agency capacity
Such assets must be maintained for others and cannot be used
By the gov for its own programs
Common example of fiduciary fund
Monitoring of assets held in pension plan for government employees
In many state and municipal accounting systems, governmental funds tend to dominate because…
A service orientation usually prevails
Why are governmental funds subdivided into 5 categories?
Provide better reported info and control
Form an overall structure for financial reporting purposes
5 categories governmental funds are subdivided into
1 the general fund 2 special revenue funds 3 capital projects funds 4 debt service funds 5 permanent funds
The general fund
Accounts for and reports all financial resources not accounted
For/reported in another fund
Will often report major expenditures (eduction, public safety, social
Services, highways, etc.)
Special revenue funds
Account for resources that are restricted or committed for a
Specific purpose other than debt payments or capital projects
Due to donor stipulations or legislative mandates, these financial
Resources must be spent in a designated fashion
In special revenue funds, restrictions were attached to the revenue to require…
That the expenditure be used for specific operating purposes
Example of special revenue funds
In Charlotte, NC, money from a room occupancy tax that must
Go towards support of NASCAR Hall of Fame
Capital projects fund
Accounts for financial resources restricted, committed or assigned
for capital outlays (constructing bridges, school, municipal offices)
Funding for capital outlays normally comes from…3
1 grants
2 sale of bonds
3 transfers from general revenue
In Capital project funds, the actual capital asset being obtained is…
Not reported there
Only the money to finance the purchase or construction is recorded
Debt service funds
Record financial resources accumulated to pay long term liabilities
And interest as they come due
Monitor balances currently available to make the eventual payment
To satisfy long term liabilities
Ex. Birmingham, Alabama reported approximately $34 million of
Cash and investments in its debt service funds to pay LT debt
And interest, for year ended the fund had $21.6 million in principal
Payments and $13.7 million in interest payments
Debt service funds do not account for…
A government’s long term debt
Permanent funds
Accounts for financial resources restricted by external donor,
Contract or legislation
Has stipulation that principal can never be spent, but any income
Can be used by the government, often for designated purpose
Example of permanent funds
City of Dallas, TX reported holding $8 million from private donations
Whose income was designated to maintain 4 parks and help
finance other municipal projects
Another name for private donations with designated income?
Endowments
Proprietary funds
Fund category accounts for gov activities such as (bus system,
Toll road or subway) assess a user charge
Services resemble those found in the business world
Because user charge helps the government make a profit/recover its cost, proprietary funds are reported in…
Much the same way on both fund financial statements and
Government wide financial statements
Proprietary funds are broken down into what 2 divisions?
1 enterprise funds
2 internal service funds
Enterprise funds
Any gov operation open to the public and financed (at least in part)
By user charges
The number of enterprise funds has increased dramatically over recent years as gov officials attempt to expand services without raising taxes, thus those citizens utilizing a particular service must…
Shoulder a higher percentage of its cost
Example of enterprise funds
Municipalities: Public swimming pools, golf course, airport, water
and sewage service
Which any 3 criteria can be met to require an activity to be classified as an enterprise fund?
1 activity generates revenues that provide sole security for debts
Of activity
2 laws or regulations require recovering activity’s costs (including depreciation and debt service) through Fees or charges
3 fees and charges are set at prices intended to recover costs
Including depreciation and debt service
Internal service funds
Accounts for operation that provides services to another
department or agency within the gov for a fee
Internal service funds charge for their services, but here the work is for the primary benefit of…
Parties within the government (rather than outside users)
Both proprietary funds and fiduciary funds: timing of revenues and expenses
Use economic resources measurement focus and accrual
accounting
Because these assets are not available for the benefit of the government, fiduciary funds are…
Omitted entirely from government wide financial statements
Although separate statements are included within fund financial
Statements
4 distinct types of fiduciary funds
1 investment trust funds
2 private purpose trust funds
3 pension trust funds
4 agency funds
Investment trust funds
Accounts for outside portion of investment pools when the
reporting gov has accumulated financial resources from other govs
In order to have more money to invest so that higher rate of
Return can be earned
Investment trust fund example
Commonwealth if Virginia held $2.5 billion in local gov investment
pool that helps local govs maximize return
By commingling resources for investment purposes
Private purpose trust funds 3
Accounts Monies held in trustee capacity for benefit of specifically
Designated external parties (invididuals, privates orgs, other govs)
Unclaimed property is usually recorded here
Ex. Education savings trusts
Pension trust funds 3
Accounts for assets being held to pay employee benefits after
Retirement
Fund reports all assets held, but only current liability amounts
Ex. City of Philadelphia reported assets of $5 billion for its pension
Trust fund
Agency funds
Records any resources a gov holds as an agent for individuals,
Private orgs or other gov units
Ex. One gov can collect taxes and tolls for another
Money often passes through agency fund…
Very quickly
To ensure safety and control, the agency fund…
Separately maintains this money until transferred to the proper authority
2 financial statements that make up government wide financial statements
1 statement of net position
2 statement of activities
Government wide financial statements, how is the reporting separated?
Separated into governmental activities and business type activities
2 fund financial statements covered in the chapter
1 balance sheet
2 statement of revenues, expenditures and changes in fund
balances
In fund financial statements major funds, how are they reported?
Are reported in their own separate column
While other governmental funds are grouped into a single column
What is the criterion to be considered a major fund? 3
1 total assets, liabilities, revenues or exp. Are at least 10 % of
Total for all funds of that category (total governmental or total
enterprise funds)
And
2 at least 5 percent of corresponding total for all governmental
+ enterprise funds combined
3 or can be reported as major if government officials think it’s
Important
Fund balance (in fund financial statements), define
2) What is not needed?
Indicates amount of net current financial resources at that time
For each separate fund
2) stockholder’s’ equity section is not needed on balance sheet
What is the purpose of the 5 fund balance classifications?
To indicate the availability to government officials of this excess
Amount
5 fund balance classifications
1 fund-balance - Nonspendable 2 fund-balance - restricted 3 fund-balance - committed 4 fund-balance - assigned 5 fund-balance - unassigned
fund-balance - Nonspendable
Amount of funds resources can’t be spent
indicates assets are present but not available for gov spending
What 2 situations of reporting of fund-balance - Nonspendable necessary?
1 some assets (supplies or prepaid expenses) aren’t in spendable
Form
2 financial resources are occasionally received that can’t be
Spent because of externally imposed limitations (gift with stipulation)
fund-balance - restricted
Indicates amount of assets held by gov must be spent in manner
Designated by external party
Ex. Grant from government to teachers to be used in certain manner,
Bond covenant requires proceeds to be used in certain manner
fund-balance - committed
Assets have been designated for a particular purpose, by a highest
Level decision maker in the government (not by an outside party)
Money can be switched if necessary
Ex. State legislature sets aside $100 million to build a highway
fund-balance - assigned
Frequently, In regular operations of gov money is designated for
Specific purpose without formal action by highest level decision
Maker
Money can be switched if necessary
Ex. Gov’s finance committee designates $1 million cash to be used
In a few months to pay current installment of bond
fund-balance - unassigned
Only found in general fund and reflects any amount of resources
Where no use has been designated externally or internally
This money is available to government officials for any purpose
Viewed as appropriate
Advantage of having 2 sets of records?
Reduces what would otherwise be massive amount of work at
The end of each fiscal year
Budgeting is an essential element of what 3 areas in government?
1 financial planning
2 control
3 performance evaluation processes
Governments usually adopt budgets that have the force of law,
Are subject to…
Sanction for overspending budgetary authorizations and have
Extensive controls to ensure budgetary compliance
Budget
Legally approved plan for operations
Budgets: the first significant accounting procedure encountered by state and localities?
Recording budgetary entries
To enhance accountability, government officials normally are required to adopt…
2) why?
An annual budget for each separate activity
2) to anticipate inflow of financial resources and establish approved
Expenditure levels
Important purpose budget serves:
Expresses…
Public policy
Ex. If more money is budgeted for child care and less for the environment, citizens are made aware of decision
Important purpose budget serves:
Serves as an expression of…
Financial intent for upcoming fiscal year
Important purpose budget serves:
Provides control because it…
Establishes spending limitations for each activity
Important purpose budget serves:
Offers a means of…
Evaluating performance by allowing comparison of actual results
With levels set in budget
Important purpose budget serves:
Indicates whether the government anticipates having…
Sufficient revenues to pay for all of the expenditures that have
Been approved
Appropriation
Authorized expenditure
Budgetary fund balance (in fund financial statement)
Indicates an anticipated surplus
Budgetary entries reflect a government’s…
Interperiod equity
Interperiod equity
Alignment of revenues and spending during a period
And possible shift of payments to future generations
If a government projects revenues as $10 million but approves expenditures of $11 million, the extra million must be…
Financed in some manner
Usually by issuance of debt to be paid in the future
Government officials can vote to change appropriation levels of…
Budget if more or less money becomes available than anticipated
Encumbrances
Recording of financial commitments
Budgetary procedure that has historically played a role in gov
Accounting
In contrast to for profit accounting, purchase commitments and
Contracts are often recorded in…
Governmental funds prior to becoming legal liabilities
What does the recording of encumbrances provide an efficient method for?
Monitoring financial commitments so officials won’t accidentally
Overspend a fund’s appropriated amount
Encumbrances are recorded in which financial statement, which are they not recorded in?
Recorded in fund financial statement
Not recorded in government wide financial statements
When is an encumbrance removed?
When assets are received/services rendered
And actual legal liability replace encumbrance
At the end of the fiscal period, any encumbrances that remain outstanding are…
Removed from accounting records by reversing original entry
When are encumbrance entries not needed?
If fund balance has already been reclassified as restricted,
committed or assigned in recognition of eventual expenditure
Purchases method
Used by governmental funds to account for prepaid costs
Records prepaid costs as expenditures at point that claim to
Financial resources is created (rather than capitalizing to inventory)
For disclosure purposes, any remaining supplies or prepaid items (such as rent or insurance) are…2
Entered into accounting records as assets just prior to production
Of financial statements
At that time asset is recorded with offsetting amount in
fund balance-Nonspendable
Purchases method reflects modified accrual accounting because…
The entire cost is recognized as an expenditure when current
financial resources are initially reduced
Consumption method, what does it parallel?
parallels process used in creating government wide financial
Statements
Consumption method
Supplies or prepayments are recorded as assets
Subsequently, as utility is consumed by usage of time, cost is
Reclassified into expenditures account
When is the expenditure recognized under the consumption method?
Recognized in period of specific usage
Under the consumption method, because these assets can’t be spent for government programs or other needs, an equal portion of fund balance account should be reclassified as…
Nonspendable
Non exchange transactions
Revenues where no earning process exists
Gov does not provide a direct and equal benefit for the amount
Received
Ex. Property taxes, income taxes, grants, fines, gifts
An earnings process does exist for…
Interest and rent
4 classifications of non exchange transactions
1 derived tax revenues
2 imposed non exchange revenues
3 government mandated non-exchange transactions
4 voluntary nonexchange transactions
Derived tax revenues
Tax assessment is imposed when underlying exchange takes
Place
Ex. Income tax, sales tax
Imposed non exchange revenues
Property taxes, fines and penalties since gov mandates an
assessment, but no underlying transaction occurs
Government mandated non exchange transactions
Monies, such a as grants conveyed from one gov to another
To help cover costs of required program
Voluntary nonexchange transactions
Money has been conveyed willingly to the state or local gov by an individual, another gov or organization
usually for particular purpose
Accounting for imposed non exchange revenues is a bit more complicated because…
No underlying transaction exists to guide timing of revenue
recognition
4 eligibility requirements for government mandated or voluntary nonexchange transactions
1 required characteristics of recipients
2 time requirements
3 reimbursement
4 contingencies
Time requirements
Programs can specify when the money is to be used
Reimbursement AKA expenditure driven programs
Many grants are designed to reimburse gov for amounts spent
According to guidelines
Contingencies (in voluntary nonexchange transactions only)
Revenue may be withheld until specified procurement action
Has been taken
Although not revenue, the issuance of bonds serves as…
A major sources of financing for state and local governments
Issuance costs of debt, accounting treatment
Expensed when incurred
Bonds reacquired and an additional amount is paid, how are they reported on the statement of net position?
2) reacquired and less than net carrying amount is paid?
Deferred outflow of resources
2) deferred inflow of resources
Tax anticipation notes, how are these short term debts recorded differently on fund statements vs. Government wide statements?
No
Tax anticipation notes
Short term liabilities only outstanding until a certain amount of
Taxes are collected
Government wide financial statements handle the debt and subsequent construction from special assessments in the same manner as…
For profit enterprises
Inter fund transactions are commonly used within government units as a way to…
Direct sufficient resources to all activities and functions
Inter fund transactions, which statements are they reported in?
Usually Not reported in?
Reported in fund statements
Usually not reported in government wide financial statements
2 distinctions drawn for transfers in government wide financial reporting
1 Intra activity transactions
2 interactivity transactions
Intra activity transactions
Occur between 2 governmental funds or between 2 enterprise
Funds
So totals aren’t affected and reported in government wide financial
Statements
Interactivity transactions 3
Occur between governmental funds and enterprise funds
Impact total amount of resources reported for both governmental activities and business activities
Government wide financial statements doe report interactivity
Transactions
The most common inter fund transactions are…
Transfers within governmental funds to ensure adequate financing
Of budgeted expenditures
Other financing uses/sources
Designations appropriate on fund financial statements
Financial resources are being moved in and out of these funds
Although not with revenues or expenditures that have been earned
Or incurred
Due to/Due from accounts
Equivalent of inter fund payable and receivable balances
