FAR SEC 17

Question 1

What is the GASB hierarchy? (2 elements)

Answer 1

The Governmental Accounting Standards Board (GASB) establishes GAAP for state and local governments in the U.S. The following is the hierarchy of authoritative GAAP:

1) GASB statements of Governmental Accounting Standards (GASBSs)
2) GASB technical bulletins, GASB implementation guides, and AICPA guidance cleared by the GASB

Question 2

What is the reporting entity? (3 elements)

Answer 2

1) Financial accountability is the primary criterion for defining the reporting entity.
2) The reporting entity consists of the primary government and its component units.
3) The primary government is financially accountable for the entities that make up its legal entity and certain other entities.
ii) Any state or general-purpose local government qualifies as a primary government.
iii) Special-purpose governments (SPGs) (such as school systems or fire departments) are legally separate entities that are primary governments or component units.
-Primary governments are required to be legally and fiscally independent and have a separately elected governing body.
iv) If an SPG is engaged in one governmental program (e.g., an assessment or drainage district), it may combine the government-wide and fund statements (listed in Subunit 17.2).
v) If an SPG is engaged only in business-type activities, it reports the statements for enterprise funds. If it is engaged only in fiduciary activities, it reports the statements for fiduciary funds.
-Public colleges and universities must apply the guidance for special-purpose governments.

Question 3

How does the term “primary government” relate to the attributes of the reporting entity under governmental accounting? (4 elements)

Answer 3

1) The primary government is financially accountable for the entities that make up its legal entity and certain other entities.
2) Any state or general-purpose local government qualifies as a primary government.
3) Special-purpose governments (SPGs) (such as school systems or fire departments) are legally separate entities that are primary governments or component units.
-Primary governments are required to be legally and fiscally independent and have a separately elected governing body.
4) If an SPG is engaged in one governmental program (e.g., an assessment or drainage district), it may combine the government-wide and fund statements (listed in Subunit 17.2).
5) If an SPG is engaged only in business-type activities, it reports the statements for enterprise funds. If it is engaged only in fiduciary activities, it reports the statements for fiduciary funds.
-Public colleges and universities must apply the guidance for special-purpose governments.

Question 4

How does the “component unit” relate to “financial accountability? (3 elements)

Answer 4

1) A component unit is a legally separate organization for which the primary government is financially accountable.
2) Financial accountability means that the primary government
i) Appoints a voting majority of the governing body of the separate organization and
ii) Can impose its will on, or has a potential financial benefit or burden relationship with, the separate organization.
3) Financial accountability also exists if the separate organization (a) is financially dependent on the primary government and (b) has a financial benefit or burden relationship with the primary government.
-For example, assume that a water district is financially dependent because a county must approve the issuance of its bonds. But if the district does not receive a subsidy from, or provide resources to, the county, it has no financial benefit or burden relationship with the primary government. Thus, in this example, the district is not a component unit of the county, even though its budget is fiscally dependent on the county.

Question 5

What is financial accountability with respect to governmental accounting? (3 elements)

Answer 5

1) Financial accountability means that the primary government
2) Appoints a voting majority of the governing body of the separate organization and
Can impose its will on, or has a potential financial benefit or burden relationship with, the separate organization.
3) Financial accountability also exists if the separate organization (a) is financially dependent on the primary government and (b) has a financial benefit or burden relationship with the primary government.

Question 6

When should a separate organization be treated as a component unit?

Answer 6

A separate organization also must be treated as a component unit if its exclusion would cause the financial statements to be misleading.

Question 7

What are the reporting requirements for reporting component units in governmental accounting? (3 elements)

Answer 7

1) The financial statements of the reporting entity should include information from all component units.
i) This information should include the totals that would have been included in component unit statements.
2) The statements of the reporting entity should distinguish between the primary government and most of its component units in a way that does not suggest that they are one legal entity.
i) For this purpose, the government-wide financial statements should report information about discretely (individually) presented component units in separate rows and columns.
-The equity interest in a component unit must be reported as an asset.
ii) Information about fiduciary component units is reported only in the fiduciary fund statements of the primary government.
3) But component units that are, in substance, the same as the primary government are reported using the blending method. Their balances and transactions are reported similarly to those of the primary government in the government-wide and fund statements.
i) The primary government’s general fund is the only general fund reported.
-The general fund of a blended component unit is reported as a special revenue fund of the primary government.
ii) Blending is appropriate only if
-The component unit’s governing body is substantively the same as the primary government’s, or
-The component unit exclusively or almost exclusively benefits the primary government.
iii) Moreover, the primary government must have a financial benefit or burden relationship with the component unit or operational responsibility for it.

Question 8

What are the attributes of the basis of accounting for the financial statements of governmental funds? (3 elements)

Answer 8

1) The basis of accounting is the timing of the recognition in the financial records of economic events or transactions. The basis of accounting of a fund depends on its measurement focus.
-This measurement focus is what is being measured or tracked by information in the financial statements.
2) The modified accrual basis of accounting is used to report the governmental fund financial statements.
i) The measurement focus is on current financial resources, that is, on determining financial position and changes in it.
ii) The reporting elements are sources, uses, and balances of current financial resources.
3) In governmental funds, revenues increase fund financial resources. The primary examples of nonrevenue increases are interfund transfers (one-way asset flows with no repayment required) and debt issue proceeds. Under the modified accrual basis, revenue or another increase in financial resources (such as bond issue proceeds) is recognized when it is susceptible to accrual.
i) Revenue (net of estimated uncollectible amounts) is accrued when it is measurable and available.
a) Available means collectible within the current period or soon enough thereafter to be used to pay current liabilities.
-Ordinarily, material revenues are not recorded until received.
However, they are accrued if receipt is delayed beyond the normal time.
b) When a governmental fund records an asset, but the revenue is not available, a deferred inflow of resources is reported. It is a receipt of net assets that applies to a future period and is presented separately after liabilities in the government-wide statement of net position.
ii) Expenditures are decreases in fund financial resources.
a) They usually are measurable and should be recognized when goods or services are acquired, i.e., when the related liability is incurred.
-But expenditures for principal and interest on general long-term debt usually are recognized only when those amounts are due.
b) Expenditures do not result from (1) an interfund transfer or expiration of a demand (redeemable) bond takeout arrangement.
-Interfund transfers are covered in Study Unit 18, Subunit 1.
iii) Expenses are not recognized under the modified accrual basis of accounting.

Question 9

What is the definition of “basis of accounting”?

Answer 9

The basis of accounting is the timing of the recognition in the financial records of economic events or transactions. The basis of accounting of a fund depends on its measurement focus.

Question 10

For governmental accounting, what is the measurement focus?

Answer 10

This measurement focus is what is being measured or tracked by information in the financial statements.

Question 11

What are the three attributes of the modified accrual basis used for governmental accounting?

Answer 11

1) The modified accrual basis of accounting is used to report the governmental fund financial statements.
2) The measurement focus is on current financial resources, that is, on determining financial position and changes in it.
3) The reporting elements are sources, uses, and balances of current financial resources.

Question 12

What basis of accounting is used for governmental accounting?

Answer 12

The modified accrual basis of accounting is used to report the governmental fund financial statements.

Question 13

What is the measurement focus of governmental accounting?

Answer 13

The measurement focus is on current financial resources, that is, on determining financial position and changes in it.

Question 14

What are the reporting elements of governmental accounting? (3 elements)

Answer 14

The reporting elements are
1) sources,
2) uses,
3) and balances of current financial resources.

Question 15

What elements increase governmental funds?

Answer 15

In governmental funds, revenues increase fund financial resources. The primary examples of nonrevenue increases are interfund transfers (one-way asset flows with no repayment required) and debt issue proceeds.

Question 16

What is revenue or other increase in governmental financial resources recognized under the modified cost basis for governmental accounting?

Answer 16

Under the modified accrual basis, revenue or another increase in financial resources (such as bond issue proceeds) is recognized when it is susceptible to accrual.

Question 17

For governmental accounting, when is revenue susceptible to accrual? (3 elements)

Answer 17

1) Revenue (net of estimated uncollectible amounts) is accrued when it is measurable and available.
2) Available means collectible within the current period or soon enough thereafter to be used to pay current liabilities.
-Ordinarily, material revenues are not recorded until received. However, they are accrued if receipt is delayed beyond the normal time.
3) When a governmental fund records an asset, but the revenue is not available, a deferred inflow of resources is reported. It is a receipt of net assets that applies to a future period and is presented separately after liabilities in the government-wide statement of net position.

Question 18

For governmental accounting, what are the attributes of expenditures? (4 elements)

Answer 18

1) Expenditures are decreases in fund financial resources.
2) They usually are measurable and should be recognized when goods or services are acquired, i.e., when the related liability is incurred.
-But expenditures for principal and interest on general long-term debt usually are recognized only when those amounts are due.
3) Expenditures do not result from (1) an interfund transfer or (2) expiration of a demand (redeemable) bond takeout arrangement.
Interfund transfers are covered in Study Unit 18, Subunit 1.
4) Expenses are not recognized under the modified accrual basis of accounting.

Question 19

Which two events DO NOT result in expenditures for governmental accounting?

Answer 19

Expenditures do not result from (1) an interfund transfer or (2) expiration of a demand (redeemable) bond takeout arrangement.

Question 20

For governmental accounting, how is the accrual basis of accounting used? (3 elements)

Answer 20

1) The accrual basis of accounting is used to report the (1) government-wide, (2) proprietary fund, and (3) fiduciary fund statements.
2) The measurement focus is on economic resources. The emphasis is on (a) a longer-term measure of operating results and (b) the cost of services.
3) Thus, revenues and expenses are measured in the same way as in for-profit accounting.

Question 21

For the accrual basis of governmental accounting, how do cash flows relate to recognizing economic transactions or events? (4 elements)

Answer 21

1) Under the accrual basis, most economic transactions and other events that can be measured are recognized without regard to cash flows.
2) Moreover, an expense is recognized when goods or services are used or consumed instead of an expenditure when they are acquired.
-Acquired but unused goods and services are assets.
3) Revenues, expenses, gains, losses, assets, deferred outflows of resources, liabilities, and deferred inflows of resources that result from exchange or exchange-like transactions are accrued when the exchange occurs.
4) Except for revenues, recognition of the elements of nonexchange transactions is not affected by the basis of accounting. Nonexchange transactions are covered in Study Unit 18, Subunit 1.

Question 22

When is the cash basis used in governmental accounting?

Answer 22

The cash basis is not used in governmental accounting except for miscellaneous cash items that are not measurable until cash is received or paid.

Question 23

When are transfers recognized for governmental accounting?

Answer 23

Transfers are recognized in all affected funds when the interfund receivable and payable are recognized. Interfund transfers are covered in Study Unit 18, Subunit 1.

Question 24

What are funds required for governmental accounting?

Answer 24

The diversity of governmental activities and the need for legal compliance require multiple accounting entities (funds).

Question 25

For governmental accounting, what is the accounting entity called a fund? (7 elements)

Answer 25

1) A fund is an independent, distinct fiscal and accounting entity with a self-balancing set of accounts. Items in a fund are segregated because they relate to activities or objectives that are subject to special regulations or limitations. A fund records
2) Financial resources (including cash),
3) Deferred outflows of resources,
4) Liabilities,
5) Deferred inflows of resources,
6) Residual equities or balances, and
7) Changes in them (6).

Question 26

For governmental accounting, what is the limit on the quantity of funds that should exist?

Answer 26

No more than the number of funds required by law and efficient financial administration should be created.

Question 27

What are the three types of funds in governmental accounting?

Answer 27

Funds are classified as governmental, proprietary, or fiduciary depending on their activities and objectives.

Question 28

What are the subtypes of governmental funds? (5 elements)

Answer 28

1) General funds
2) Special revenue funds
3) Capital projects funds
4) Debt service funds
5) Permanent funds

Question 29

What are general funds?

Answer 29

The general fund accounts for all financial resources except those required to be accounted for in another fund.
-Only one general fund may be reported.

Question 30

How many general funds may be reported?

Answer 30

Only one general fund may be reported.

Question 31

What are special revenue funds? (4 elements)

Answer 31

1) Special revenue funds account for restricted or committed inflows from specific revenue sources. Expenditure must be for a specified purpose (but not debt service or a capital project).
2) A government may have a special revenue fund for (a) road maintenance or (b) operation of its municipal auditorium.
3) Donations for programs to be administered by the government also are accounted for in special revenue funds.
4) A special revenue fund is not used for resources held as a fiduciary activity.

Question 32

What are capital project funds? (4 elements)

Answer 32

1) Capital projects funds account for financial resources restricted, committed, or assigned to be expended for capital purposes.
2) These resources include general obligation bond proceeds to be used for construction of major capital facilities, such as schools or bridges.
3) The capital assets themselves are not accounted for in these funds.
4) Other capital facilities may be financed through proprietary funds or certain trust funds.

Question 33

What kind of fund is a general fund?

Answer 33

Governmental fund

Question 34

What kind of fund is a special revenue fund?

Answer 34

Governmental fund

Question 35

What kind of fund is a capital projects fund?

Answer 35

Governmental fund

Question 36

What are debt service funds?

Answer 36

1) 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.
2) They also account for resources being accumulated for future principal and interest payments.
3) A debt service fund is used if it is required by law.

Question 37

What kind of fund is a debt service fund?

Answer 37

Governmental fund

Question 38

What are permanent funds? (3 elements)

Answer 38

1) Permanent funds account for resources that are restricted to the use of earnings (not principal) for the benefit of the government or its citizens.
2) An example is a perpetual-care fund for a public cemetery.
3) Private-purpose trust funds are not permanent funds.

Question 39

What kind of fund is a permanent fund?

Answer 39

Governmental fund

Question 40

What are governmental funds?

Answer 40

Governmental funds emphasize fiscal accountability. They account for the nonbusiness activities of a government and its current, expendable resources (most often taxes). Accordingly, they use the modified accrual accounting basis with a current financial resources measurement focus.

Question 41

What are proprietary funds?

Answer 41

Proprietary funds emphasize operational accountability. They account for the business-type activities of a government and its economic resources. Consequently, they use the accrual basis of accounting with an economic resources measurement focus. Proprietary funds serve defined customer groups and generally are financed through fees.

Question 42

What are the two types of proprietary funds?

Answer 42

Enterprise funds and internal service funds.

Question 43

What are enterprise funds?

Answer 43

Enterprise funds account for activities that benefit outside parties (the reporting government is not the predominant participant) who are willing to pay for them, such as parking garages and utilities. They are the funds most like private businesses.

Question 44

What kind of fund is an enterprise fund?

Answer 44

Proprietary fund

Question 45

What is an internal service fund?

Answer 45

Internal service funds account for activities performed primarily for the benefit of other agencies, such as a centralized information technology department or motor pool.
-Unless enterprise funds are the predominant participants in an internal service fund, the activities it accounts for generally are governmental, not business-type.

Question 46

What kind of fund is an internal service fund?

Answer 46

Proprietary fund

Question 47

What are fiduciary funds?

Answer 47

Fiduciary funds provide operational information about the fiduciary activities of a government. They (a) have an economic resources measurement focus; (b) use accrual accounting; and (c) report capital assets, long-term liabilities, and deferred flows of resources.

Question 48

What are the four types of fiduciary funds?

Answer 48

Pension or employee benefit, investment trust funds, private-purpose funds, custodial funds.

Question 49

What are pension and other employee benefit funds?

Answer 49

Pension (and other employee benefit) trust funds report fiduciary activities for pensions, other postemployment benefit plans, and certain other employee benefit programs.

Question 50

What kind of fund is a pension or other employee benefit fund?

Answer 50

Fiduciary fund

Question 51

What are investment trust funds?

Answer 51

Investment trust funds report fiduciary activities involving (1) the external portion of investment pools and (2) individual investment accounts held in a trust meeting certain criteria.

Question 52

What kind of fund is an investment trust fund?

Answer 52

Fiduciary fund

Question 53

What is a private-purpose trust fund?

Answer 53

Private-purpose trust funds report all fiduciary activities (1) not reported in the other fiduciary trust funds and (2) accounted for in a trust meeting certain criteria.

Question 54

What kind of fund is a private-purpose trust fund?

Answer 54

Fiduciary fund

Question 55

What is a custodial fund?

Answer 55

Custodial funds report fiduciary activities not required to be reported in the other fiduciary funds, such as collection of sales taxes for other governments.

Question 56

What kind of fund is a custodial fund

Answer 56

Fiduciary fund

Question 57

What is shown on the table of fund classification?

Answer 57

Question 58

For governmental accounting, what is the annual comprehensive financial report?

Answer 58

An annual comprehensive financial report should be prepared. It covers all funds and activities of the primary government and provides an overview of the discretely presented component units of the reporting entity. The annual comprehensive financial report includes introductory, financial, and statistical sections.

Question 59

For the governmental accounting financial report, what is in the introductory section? (4 elements)

Answer 59

1) The introductory section contains the following:
2) Letter of transmittal from the appropriate government officials
3) Organization chart
4) Names of principal officers

Question 60

What are the sections of the Annual Comprehensive Report for governmental accounting? (3 elements)

Answer 60

1) Introductory section
2) Financial section
3) Statistical section

Question 61

What is found in the financial section of the Annual Comprehensive Report? (5 elements)

Answer 61

1) Independent auditor’s report
2) Management’s discussion and analysis (MD&A)
3) Basic financial statements
4) Required supplementary information (RSI) other than MD&A
5) Combining statements and individual fund statements and schedules

Question 62

For the Annual Comprehensive Report, what is the Management’s discussion and analysis (MD&A)? (2 elements)

Answer 62

1) MD&A is required supplementary information. It is analysis of financial activities based on currently known facts, decisions, or conditions expected to significantly affect financial position or results of operations.
i) MD&A compares the current and prior years, with an emphasis on the current year, based on government-wide information. The focus is on the primary government.
ii) MD&A requirements are stated in general terms to encourage reporting of only the most relevant information.
2) MD&A discusses the basic financial statements, including (a) their relationships to each other, (b) differences in the information provided, and (c) analyses of relationships between information in the fund statements and the government-wide statements.

Question 63

What are the three topics discussed in the MD&A report for the Annual Comprehensive Financial Report?

Answer 63

MD&A discusses the basic financial statements, including
(a) their relationships to each other,
(b) differences in the information provided, and
(c) analyses of relationships between information in the fund statements and the government-wide statements.

Question 64

In the Annual Comprehensive Financial Report for governmental accounting, what are the three types of statements found in the basic financial statements category?

Answer 64

1) Government-wide financial statements
2) Proprietary funds financial statements
3) Fiduciary funds financial statements

Question 65

What statements are included in the governmental funds financial statements (annual comprehensive financial report)? (2 elements)

Answer 65

1) Balance sheet (with reconciliation to government-wide statement of net position)
2) Statement of revenues, expenditures, and changes in fund balances (with reconciliation to government-wide statement of activities)

Question 66

Where are governmental funds financial statements found?

Answer 66

In the Annual Comprehensive Financial Report.

Question 67

What are the three items found in the proprietary funds financial statements (annual comprehensive financial report)?

Answer 67

1) Statement of net position
2) Statement of revenues, expenses, and changes in fund net position
3) Statement of cash flows
NOTE: Only proprietary funds report a statement of cash flows.

Question 68

Where are the proprietary funds financial statements found?

Answer 68

In the Annual Comprehensive Financial Report.

Question 69

Which items are included in the fiduciary funds financial statements (annual comprehensive financial report)?

Answer 69

1) Statement of fiduciary net position
2) Statement of changes in fiduciary net position

Question 70

Which three items are found in the notes to the financial statements (annual comprehensive financial report)?

Answer 70

1) Notes are an integral part of the basic financial statements. They disclose information essential to fair presentation not reported in the statements. The focus is on the primary government’s
i) Governmental activities,
ii) Business-type activities,
iii) Major funds, and
iv) Nonmajor funds in the aggregate.
2) The notes include a summary of significant accounting policies.
3) Disclosure of significant accounting policies is required when (1) a selection has been made from existing acceptable alternatives; (2) a policy is unique to the industry in which the government operates, even if the policy is predominantly followed in that industry; and (3) GAAP have been applied in an unusual or innovative way.

Question 71

Where do “notes to the financial statements” appear in the hierarchy of the Annual Comprehensive Financial Reports?

Answer 71

Financial Section => Basic Financial Statements => Notes to the Financial Statements

Question 72

What is the summary of the significant accounting policies for governmental accounting?

Answer 72

A depreciation method is a selection from existing acceptable alternatives and should be included in a summary of significant accounting policies. But financial statement disclosure of accounting policies should not duplicate details presented elsewhere in the financial statements, such as the composition of inventories and capital assets.

Question 73

What is found in the required supplementary information (RSI) section of the financial section of the annual comprehensive financial report? (4 elements)

Answer 73

1) RSI other than MD&A is presented in a separate section of the annual comprehensive financial report after the notes to the basic financial statements.
2) RSI includes (a) schedules, (b) statistical data, (c) budgetary comparison schedules, and (d) other information that is an essential part of financial reporting. It should be presented with, but not as a part of, the basic financial statements of a governmental entity.
3) Budgetary comparisons generally should be presented for the general fund and each major special revenue fund that has a legally adopted annual budget. The schedules include the following stated on the government’s budgetary basis:
a) Original appropriated budget
b) Final appropriated budget as adjusted by authorized changes
c) Actual inflows, outflows, and balances
NOTE: A separate column to report the variance between the final budget and actual amounts is encouraged but not required.
4) Essential disclosures also include information about infrastructure assets reported using the modified approach.

Question 74

Where does the required supplementary information (RSI) other than MD&A appear in the hierarchy of the Annual Comprehensive Financial Report?

Answer 74

Annual Comprehensive Financial Report => The Financial Section => Required Supplementary Information (RSI)

Question 75

For the annual comprehensive financial report (RSI section), how should budgetary comparisons be presented? (5 elements)

Answer 75

1) Budgetary comparisons generally should be presented for the general fund and each major special revenue fund that has a legally adopted annual budget. The schedules include the following stated on the government’s budgetary basis:
2) Original appropriated budget
3) Final appropriated budget as adjusted by authorized changes
Actual inflows, outflows, and balances
4) NOTE: A separate column to report the variance between the final budget and actual amounts is encouraged but not required.

Question 76

What items are included in the combining statement and individual fund statements and schedules? (3 elements)

Answer 76

Combining statements and individual fund statements and schedules
1) Combining statements are included in the annual comprehensive financial report by fund type when the primary government has more than one (a) nonmajor governmental or enterprise fund or (b) internal service or fiduciary fund.
-For example, a government with two or more internal service funds presents (for those funds only) the following combining statements: (1) net position; (2) revenues, expenses, and changes in fund net position; and (3) cash flows.
2) Combining statements also are included when the reporting entity has more than one nonmajor discretely presented component unit.
3) Individual fund statements are reported when (a) the primary government has just one nonmajor fund of a given type or (b) prior-year or budgetary comparisons are not included in RSI.

Question 77

Where are the combining statements and individual fund statements and schedules found in the hierarchy of the annual comprehensive financial report?

Answer 77

Annual Comprehensive Financial Report => Financial Section => Combining Statements and Individual Fund Statements and Schedules

Question 78

What is the statistical section of the annual comprehensive financial report?

Answer 78

The statistical section focuses on the primary government.

Question 79

What three elements elements are found in the statistical section of the annual comprehensive financial report? ( 3 elements)

Answer 79

1) It reports information in five categories:
i) Financial trends indicate changes in financial position over time.
ii) Revenue capacity is an entity’s ability to produce own-source revenues (e.g., taxes but not shared revenues).
iii) Debt capacity relates to the entity’s debt burden and the ability to issue new debt.
iv) Demographic and economic information pertains to the socioeconomic environment.
v) Operating information provides context.
2) Narrative explanations should provide analysis of the quantitative data.
3) Ten years of selected financial, economic, and other data are required to be presented in the statistical section.

Question 80

What are the five categories of information provided in the statistical section of the annual comprehensive financial report?

Answer 80

It reports information in five categories:
1) Financial trends indicate changes in financial position over time.
2) Revenue capacity is an entity’s ability to produce own-source revenues (e.g., taxes but not shared revenues).
3) Debt capacity relates to the entity’s debt burden and the ability to issue new debt.
4) Demographic and economic information pertains to the socioeconomic environment.
5) Operating information provides context.

Question 81

Where is the statistical section in the hierarchy of the annual comprehensive financial report?

Answer 81

Annual Comprehensive Financial Report => Statistical Section

Question 82

What is shown on the circle diagram for the Annual Comprehensive Financial Report?

Answer 82

Question 83

What is shown on the Memory Aids diagram?

Answer 83

Question 84

What are the attributes of budgetary accounting (with respect to governmental accounting)? (3 elements)

Answer 84

1) The budget is a statement of financial intent indicating how the government plans to raise revenue and expend its resources. For most governments, the emphasis of budgeting and appropriations is on planning and control of governmental funds.
2) The budget ordinarily is legally enforceable against the financial managers.
-The budget also is a basis for evaluating performance. Actual expenditures or expenses are compared with amounts budgeted.
3) Budgets should be prepared for varying periods of time and from multiple perspectives. Examples of budgets include the following:
i) An annual budget controls financial operations, preferably through the accounting system.
ii) A long-term budget is a planning document that contains estimates of revenues and expenditures or expenses (ordinarily over a 4-to-6-year period). It emphasizes major program or capital outlays, with the latter referred to as capital budgets.
iii) The appropriated budget incorporates the legislatively granted expenditure authority and the related estimates of revenue.
iv) The flexible budget distinguishes between fixed and variable amounts.
-A series of flexible budgets is prepared for proprietary funds. Each contains alternative budget estimates based on varying levels of output.
v) The fixed budget is appropriate for governmental funds in which expenditures and level of activity are set by legislative authorization.

Question 85

How does budget integration apply for governmental accounting? (2 elements)

Answer 85

1) Most governments integrate their budgets into the accounting system.
Budget integration should be done for the following governmental funds:
i) The general fund
ii) Special revenue funds
iii) Other funds with numerous transactions
2) Common terminology and classifications must be used consistently throughout the budget, the accounts, and the financial reports of each fund.
i) The budget should include every fund of the government.
ii) The basis of accounting for the budget preferably should correspond to the basis of accounting used by the fund for which the budget is being prepared.
iii) However, if the law requires another basis, governments often keep supplemental records that permit reporting in accordance with GAAP.

Question 86

What is an annual budget?

Answer 86

An annual budget controls financial operations, preferably through the accounting system.

Question 87

What is a long-term budget?

Answer 87

A long-term budget is a planning document that contains estimates of revenues and expenditures or expenses (ordinarily over a 4-to-6-year period). It emphasizes major program or capital outlays, with the latter referred to as capital budgets.

Question 88

What is the appropriated budget?

Answer 88

The appropriated budget incorporates the legislatively granted expenditure authority and the related estimates of revenue.

Question 89

What is a flexible budget?

Answer 89

The flexible budget distinguishes between fixed and variable amounts.
-A series of flexible budgets is prepared for proprietary funds. Each contains alternative budget estimates based on varying levels of output.

Question 90

What is a fixed budget?

Answer 90

The fixed budget is appropriate for governmental funds in which expenditures and level of activity are set by legislative authorization.

Question 91

Which three funds are subject to budget integration?

Answer 91

Budget integration should be done for the following governmental funds:
1) The general fund
2) Special revenue funds
3) Other funds with numerous transactions

Question 92

What common terminology and classifications must be used for budget integration in the annual comprehensive financial report? (3 elements)

Answer 92

Common terminology and classifications must be used consistently throughout the budget, the accounts, and the financial reports of each fund.
1) The budget should include every fund of the government.
2) The basis of accounting for the budget preferably should correspond to the basis of accounting used by the fund for which the budget is being prepared.
3) However, if the law requires another basis, governments often keep supplemental records that permit reporting in accordance with GAAP.

Question 93

Are the budgetary account year-end balances reported in the financial statements of the annual comprehensive financial reports?

Answer 93

No. Despite being formally integrated into the accounting system, the budgetary amounts are reversed at year-end and are not reported in the financial statements. The following are the principal accounts used in the entry to record the annual budget:

Question 94

For governmental accounting, what are the budgetary accounts? (5 elements)

Answer 94

1) Estimated revenues
2) Estimated other financing sources
3) Estimated other financing uses
4) Appropriations
5) Budgetary fund balance

Question 95

For governmental accounting budgetary accounts, what is the estimated revenues account?

Answer 95

Estimated revenues is an anticipatory asset (a debit).
-It records the amount expected to be collected from a government’s main sources of revenue, such as taxes, fees, and fines.

Question 96

For governmental accounting budgetary accounts, what is the estimated other financing resources account?

Answer 96

Estimated other financing sources is an anticipatory asset (a debit) that includes the sources of financing other than revenues.
Examples are
1) The face amount of long-term debt,
2) Debt issuance premium,
3) Receipt of interfund transfers, and
4) Sales of capital assets not qualifying as special items. Special items are (a) within management’s control and (b) either unusual or infrequent but not both.

Question 97

For governmental accounting budgetary accounts, what is the estimated other financing uses account?

Answer 97

Estimated other financing uses is an anticipatory liability (a credit) used to record an expected flow of resources to another fund.
-Examples are (1) debt issuance discount and (2) interfund transfers out.

Question 98

For governmental accounting budgetary accounts, what is the appropriations account?

Answer 98

Appropriations is an anticipatory liability (a credit). It records the amount authorized to be spent by the government for the fiscal period.
-Unless a balanced budget or deficit is planned, estimated revenues exceed appropriations. The excess allows for some flexibility if revenues are lower, or expenditures higher, than expected.

Question 99

For governmental accounting budgetary accounts, what is the budgetary fund balance account?

Answer 99

Budgetary fund balance is the difference (fund equity) between the anticipatory assets and anticipatory liabilities of a governmental fund. It records the budgeted change in fund equity for the year.

Question 100

In the budgetary accounts for government accounting, how can funds be transferred between budgetary accounts during the year?

Answer 100

As conditions change during the year, a portion of the fund balance may be moved to appropriations to acknowledge new circumstances in the budget.

Question 101

How is year-end closing performed on the budgetary accounts for governmental accounting?

Answer 101

The budgetary entries are reversed.

Question 102

For governmental accounting, how is the fund balance reported?

Answer 102

Fund balance is reported only for a governmental fund. It is classified according to the limits on the specific purposes for which resources may be spent. A negative residual amount should not be reported for nonspendable, restricted, committed, or assigned fund balances in any fund. The following is the hierarchy of classifications:

Question 103

What four classifications exist for the governmental fund balances? (5 elements)

Answer 103

Fund balance is reported only for a governmental fund. It is classified according to the limits on the specific purposes for which resources may be spent. A negative residual amount should not be reported for nonspendable, restricted, committed, or assigned fund balances in any fund. The following is the hierarchy of classifications:

Question 104

What are the governmental fund classifications? (5 elements)

Answer 104

1) Nonspendable
2) Restricted
3) Committed
4) Assigned
5) Unassigned

Question 105

What is the nonspendable government fund balance classification?

Answer 105

Nonspendable. This classification includes amounts that either (1) are in a form (e.g., inventory, prepayments, or long-term loans) that is not spendable or (2) must be kept intact (e.g., the principal of a permanent fund).
-But, if the proceeds of such an item are restricted, committed, or assigned, they are presented in one of those classifications.

Question 106

What is the restricted government fund balance classification? (4 elements)

Answer 106

1) Restricted. This classification includes amounts that may be spent only for specific purposes established by
2) A constitutional mandate,
3) Enabling legislation, or
4) An external provider.

Question 107

What is the committed government fund balance classification?

Answer 107

Committed. These amounts may be spent only for specific purposes established by a formal act of the entity’s highest decision maker (e.g., a county commission).
-This decision maker may redirect the resources by following the necessary due process procedures.

Question 108

What is the assigned government fund balance classification? (5 elements)

Answer 108

1) Assigned. This classification includes amounts not nonspendable, restricted, or committed.
2) Amounts are only reported as assigned in the general fund if they are intended to be used for a specific purpose.
3) Expenditure is limited only by the entity’s intent to use such amounts for specific purposes.
4) An example of an assignment is an appropriation of fund balance to offset a budget deficit expected in the next year.
-The amount should equal no more than the excess of expected expenditures over expected revenues.
5) An assignment should not create a deficit in unassigned fund balance.

Question 109

What is the unassigned government fund balance classification?

Answer 109

Unassigned. The general fund is the only fund that reports a positive balance (the sum of the amounts not classified elsewhere). The reason is that amounts reported in other governmental funds have been restricted, committed, or assigned, e.g., for debt payment or construction projects.
-In other governmental funds, this classification is used only for a deficit balance, e.g., when expenditures exceed amounts restricted, committed, or assigned to the fund.

Question 110

For governmental accounting, what is an encumbrance?

Answer 110

A government commits to expend resources when a contract is signed or a purchase order is approved. The amount (an estimate of actual cost) then may be formally recorded in a budgetary account called an encumbrance.
-By contrast, a for-profit entity does not accrue a payable until the goods are delivered or the service is performed.

Question 111

When should encumbrance accounting be used?

Answer 111

Encumbrance accounting may be used only for internal purposes in governmental funds, especially general and special revenue funds.

Question 112

What are the reporting requirements for encumbrances? (4 elements)

Answer 112

1) Reporting. If amounts previously have been encumbered and classified as restricted, committed, or assigned, no separate display is needed in those classifications.
2) If an encumbered amount has not been restricted, etc., it is not classified as unassigned. Instead, it is included in committed or assigned fund balance.
3) An encumbrance is not reported in the body of the statements. Encumbering an amount does not further limit the specific purposes for which it may be used.
-For example, an encumbered amount is reported not as committed for encumbrances but with other such amounts having the same purpose.
4) Significant encumbrances are disclosed in the notes.

Question 113

What is the nature of the encumbrance entry in terms of debits/credits?

Answer 113

The encumbrance entry is to debit encumbrances and credit encumbrances outstanding.

Question 114

For encumbrances, what journal entries occur after goods are delivered or services are performed? (3 elements)

Answer 114

2)When the goods are delivered or the services are performed, two entries are made.
2) The encumbrance entry is reversed.
3) The legal obligation to pay is recognized.
-Governmental funds debit expenditures rather than expenses and credit vouchers payable rather than accounts payable for the actual cost of the goods or services.

Question 115

For encumbrances, how is year-end closing done? (3 elements)

Answer 115

1) A government may intend, or be required, to honor outstanding encumbrances. But encumbrances are not reported in the financial statements.
2) A government may reclassify fund balance to acknowledge in its financial statements the claim on next period’s resources of commitments made during the reporting period.
3) Common anticipated liabilities, such as wages payable and payroll taxes payable, need not be encumbered because of the controls in place for such expenditures.

Question 116

What is shown on the summary table for encumbrances effects?

Answer 116

Question 117

What is the role of the GASB conceptual framework for governmental accounting?

Answer 117

The Governmental Accounting Standards Board’s (GASB) conceptual framework provides a basis for the development and application of accounting standards for state and local governments.

Question 118

What are the major headings in the GASB Concepts Statement 1, Objectives of Financial Reporting? (4 elements)

Answer 118

1) Government-type activities
2) Business-type activities
3) Accountability and interperiod equity
4) Objectives

Question 119

For the GASB conceptual framework with respect to governmental-type activities, what are the eight characteristics of the governmental environment?

Answer 119

The following are characteristics of the governmental environment:
1) The representative form of government and the separation of powers
2) National, state, county, and city governments and the interflow of revenues
3) The expectations of taxpayers about the services they receive
4) A budget as a policy decision and a legally binding control
5) Use of fund accounting
6) Governments at the same level with dissimilar functions
7) Assets, e.g., highways and bridges that do not earn revenue
8) Citizens who want the maximum services for the minimum taxes

Question 120

According to the GASB conceptual framework, who are the users of the financial reporting for government-type activities? (3 elements)

Answer 120

The following are users of financial reporting for governmental-type activities:
1) Citizens (those to whom the government is directly accountable)
2) Legislative and oversight bodies (representatives of the citizenry)
3) Investors and creditors (providers of financing)

Question 121

According to the GASB conceptual framework, what are the uses of governmental reporting? (4 elements)

Answer 121

The following are uses of governmental reporting:
1) Comparing actual results with budgeted amounts
2) Assessing financial condition and operating results
3) Determining compliance with laws, rules, and regulations
4) Evaluating efficiency and effectiveness

Question 122

According to the GASB conceptual framework, what are the business-type activities? (5 elements)

Answer 122

Business-type activities
1) Involve exchange (reciprocal) transactions.
2) Have large investments in revenue-producing capital assets (e.g., toll roads).
3) Often have one function. Thus,
i) Comparisons among governments are simpler and
ii) Fund accounting is less likely to be used.
4) May still be influenced by the political process (e.g., rate setting).
5) May have budgets that lack legal force.

Question 123

According to GASB, what is the main objective of governmental financial reporting?

Answer 123

Accountability is the primary objective of all governmental financial reporting. It is based on the public’s right to know.

Question 124

According to the GASB conceptual framework, what are the attributes of accountability and interperiod equity? (3 elements)

Answer 124

1) Fiscal accountability is the responsibility of a government to justify that its actions comply with public decisions about obtaining and expending public resources in the short term.
2) Operational accountability is the responsibility to report the extent to which accounting objectives have been met efficiently and effectively using available resources. It is also the responsibility to report whether those objectives can be met for the foreseeable future.
3) Interperiod equity is part of accountability. Financial resources received during a period should suffice to pay for the services provided during that period. Moreover, debt should be repaid during the period of usefulness of the assets acquired.
i) Thus, governmental reporting should help users assess whether future taxpayers must pay for services already provided.
ii) Governmental reporting also should help users (e.g., citizens, lawmakers, and oversight bodies) to make economic, political, and social decisions. For example, revenue forecasts may help advocates for (or opponents of) spending for education or transportation.

Question 125

According to the GASB conceptual framework, what are the objectives of financial reporting? (3 elements)

Answer 125

1) Public accountability. The government should provide information about
i) Whether current revenues suffice to pay for current services
ii) Compliance with the budget and other requirements
iii) Service efforts, costs, and accomplishments
2) Evaluating operating results. The government should provide information about
i) Sources and uses of financial resources
ii) How its activities were financed and its cash needs were met
iii) Whether its financial condition improved or declined
3) Assessing services provided. The government should provide information about
i) Financial position and condition
ii) Noncurrent nonfinancial resources
iii) Legal or contractual restrictions and potential risks

Question 126

According to the GASB concepts statement measurement of elements of financial statements, what are the six qualitative characteristics of governmental reporting?

Answer 126

The following are qualitative characteristics of state and local governmental reporting:
1) Understandability
2) Reliability
3) Relevance
4) Timeliness
5) Comparability
6) Cost-benefit limitations

Question 127

According to the GASB concepts statement measurement of elements of financial statements, what are the elements of the statement of net position? (5 elements)

Answer 127

Statement of Net Position
1) Assets are resources with current service capacity that are currently controlled.
2) Liabilities are present obligations to sacrifice resources that the government has little or no discretion to avoid.
3) A deferred outflow of resources is a consumption of net assets that applies to a future reporting period.
4) A deferred inflow of resources is an acquisition of net assets that applies to a future reporting period.
5) Net position is the residual of all other elements in a statement of net financial position (net assets).

Question 128

According to the GASB concepts statement measurement of elements of financial statements, what are the two elements of resource flows statements?

Answer 128

1) An outflow of resources is a consumption of net assets that applies to the reporting period.
2) An inflow of resources is an acquisition of net assets that applies to the reporting period.