Governmental Flashcards
Purpose of Financial Reporting (Paramount Objective)
Accountability
Interperiod Equity
Characteristics of Financial Reporting
TRUCCR (Trucker)
Timeliness Relevance Understandibility Comparability Consistency Reliability
Elements of Financial Statements
Assets
Liabilities
Deferred Outflow and Inflow of Resources
Net Position (NOT Net Assets)
GASB Concept Statements
Are NOT GAAP
Provide guidance in standard setting activities
Deferred Income Tax Expense with Reversal over multiple Years
Deferred income tax expense is the net change in deferred tax accounts for the year. Because the firm began the year without any deferred tax accounts, that change equals the net sum of the ending deferred tax accounts for 2004. Enacted tax rates are used to compute the change in deferred tax accounts.
Ending deferred tax liability (from depreciation temporary differences): $2,000(.25) - $1,200(.30) $140
Less ending deferred tax asset (from warranty temporary difference): $300(.25) + $100(.30) ($105)
Equals net change in deferred tax accounts, and deferred income tax expense $35
The 2005 temporary difference for depreciation is subtracted from the 2006 difference, because the 2005 difference is an originating difference, whereas the 2006 difference is the reversing difference.
At the end of the previous year, a firm reported a $6,000 deferred tax asset from a net-operating-loss carry-forward that can be carried forward several years into the future. The tax rate is 30%. For the current year, the firm records estimated warranty expense of $30,000 for the year and incurred $10,000 of warranty-claims costs. Taxable income for the current year is $12,000. Compute income tax expense (benefit) for the current year.
The unused net operating loss (NOL) at the beginning of the year is $20,000 (= $6,000/.3).
The firm pays no tax for the current year, because $12,000 of the NOL is used to absorb the $12,000 of taxable income. $8,000 of the NOL remains to carry forward to the next year.
Also, there is a future temporary difference of $20,000 from the future warranty deduction ($30,000 - $10,000 current-year claims). In total, then, the basis for the ending deferred tax asset is $28,000 (= $8,000 + $20,000). The ending deferred tax asset balance is $8,400 (= $28,000 x .3).
The beginning deferred tax asset balance is $6,000. Therefore, the deferred tax asset is increased by $2,400 and income tax benefit of that amount also is recorded (credited) in the tax-accrual entry.
The City of Palo Alto’s Service Efforts and Accomplishments Report for Fiscal Year 2010 reported that the average response to fire calls within 8 minutes occurred on 90% of the fire calls in 2010. This rate met the benchmark target goal of 90%. According to GASB’s conceptual framework, this information is classified as a measure of
Outcome
Budget Implications
GASB Concepts Statement No. 1 lists the following four financial reporting implications associated with the legally adopted annual budget: (1) expression of public policy, (2) expression of financial intent, (3) form of control, and (4) it may provide a basis for evaluating performance (if the government established service efforts and accomplishment goals as part of its budget process). Since budgets are usually prepared according to requirements of state and local laws, the budget is not required to be prepared on the GAAP basis. Many state and local governments prepare the budget on the cash basis. When this occurs, the budget-to-actual statement is presented on the budget basis (i.e., cash basis) and a reconciliation of the cash basis to the GAAP basis is included in the notes to the basic financial statements.
Essential Financial Information
GASB Concepts Statement No. 3, basic financial statements, the accompanying notes to the basic financial statements, and required supplemental information are essential information and therefore required in general purpose external financial reporting. Supplemental information is useful but not required. Service efforts and accomplishment information are classified as supplemental information and are therefore voluntarily reported.
GASB CS No 1
GASB Concepts Statement No. 1 states that interperiod equity is a basic component of accountability and fundamental to public administration.
Primary users of External Financial Info
GASB Concepts Statement No. 1 defines the primary users of the general purpose external financial report as the citizenry (e.g., taxpayers), legislative and oversight bodies (e.g., school boards), and investors and creditors (e.g., bond insurers). Typically, internal managers who have access to information through internal reporting are not considered primary users.
Fixed Assets
General fixed assets are items on which financial resources have been expended and accountability must be maintained; however, their main purpose is NOT the generation of revenues.
Agency Fund Examples (Fiduciary)
A county and city tax collection fund is an agency fund administered to collect and distribute property taxes collected to the county and the city.
Fund accounting is used by governmental units with resources that must be
Governmental accounting systems are organized and operated on a fund basis. A fund is a fiscal and accounting entity with a self-balancing set of accounts that record cash and other financial resources, along with the related liabilities and residual equities or balances, which are segregated for the purpose of carrying on specific activities or attaining certain objectives. GASB Codification 1100.102
Fund Characteristics
A fund is both a fiscal and an accounting entity. A fund is “fiscal” because it has assets, liabilities, revenue, expenditure or expense, and fund balance or other equity accounts. A fund is “accounting” because it has its own ledgers and contains a self-balancing set of accounts. A fund is not a separate legal entity.
Which of the following has the highest level of authority for setting GAAP for nongovernmental not-for-profit organizations?
FASB, NOT GASB
Careful on GASB as well as it is NOT GAAP for Governmental either?
Expenditures and Modified Accrual
On the Statement of Revenues, Expenditures, and Changes in Fund Balances, which reports transactions using the modified accrual basis of accounting, repayment of principal on long-term debt, payments to vendors, and purchases of fixed assets are all reported as expenditures.
Expenditures Control Account
Same as Expenditures (is NOT the Appropriaitons Budget Account)
The Expenditures control account is a temporary account that must be closed at the end of the fiscal year. The Expenditures control account is debited as resources are expended during the year. When the books are closed at the end of the year, this account should be CREDITED for $9,000,000 so that the balance in the account is zero.
Primary Measurement Focus
Current Financial Resources for Governmental Funds and Economic Resources for Accrual Based (Enterprise etc).
Proprietary funds account for activities of the governmental unit that are similar to activities conducted by commercial enterprises. The orientation of accounting and reporting for proprietary funds is similar to that used in private businesses.
The accrual basis of accounting is used, and the measurement focus is on income determination, financial position, and cash flow (GASB Codification 1300.102).
Grant Revenue
NEEDS REVIEW
Todd City should recognize the grants as revenues in the accounting period when they are susceptible to accrual. For grants, the expenditure of resources is a prime factor in determining eligibility for accrual. All of the operating grant has been spent; therefore, 100% should be recognized as revenue.
Since only 90% of the capital grant has been spent, only 90% can be recognized as revenue.
Budgetary Accounts
Appropriations
Estimated Revenues
Estimated Other Financing Sources & Uses
Fund Balance (Dr or Cr) is Plug Balance
Required for General and Special Revenue only
Revenues vs Sources
Transfers in from other funds are classified as “Other Financing Sources” and are not revenues. The other three amounts are classified as revenues and, for budget purposes, should be included in determining “estimated revenues.” The total is $5,550,000.
Closing Budget and Actual Accounts
Assuming that both actual and budgetary transactions are closed to the fund balance, closing appropriations, a credit balance account, would increase the fund balance whereas closing expenditures, a debit balance account, would decrease the fund balance.
Since appropriations were greater than expenditures, the net effect would be to increase the fund balance.
Encumbrance Accounting
Primarily for Government Funds
- Dr Encumbrance and Cr Budgetary Fund Balance
- Reverse for Amount Received (PO Filled at Orig Price)
- Book Invoice at Invoice Price (Dr Expenditure, Cr Vouchers Payable)
Outstanding POs at Year End
“Reserved” NO LONGER Used
Fund Balance Committed or Assigned is now used
Dr Fund Balance - Unassigned
Cr Fund Balance - Assigned
YE Closing of Encumbrances
- If Cancelled, close out the Budgetary Fund Balalnce and Encumbrance Accounts
- If Carried Forward: Close out nominal Budgetary fund balance to real account fund balance assigned (or committed or restricted)
Encumbrances vs Expenditures
No expenditures are recorded at the time purchase orders were issued. Encumbrances represent a commitment made to the vendor in the form of a purchase order prior to incurring actual expenditures. At the time a purchase order is issued, the encumbrance account is increased by the amount of the purchase orders - in this case, $40,000. Expenditures of $39,100 will be recorded when goods are received along with the invoices, and at that time the $40,000 encumbered will be also be reversed out.
Ye Encumbrances Open
Encumbrances outstanding at year’s end represent outstanding purchase orders or unfilled contracts. The fund balance classification is either restricted, committed, or assigned depending on the level of authority behind the encumbrance.
If the government intends to use the resources the specific purposes but is not a constraint imposed by external parties or enabling legislation (i.e., restricted) or by formal action of the government’s highest decision making authority (i.e., committed) then a portion of the fund balance needs to be assigned for the outstanding encumbrances to indicate that a portion of the fund balance needs to be assigned for the outstanding encumbrances to indicate that a portion of the fund balance is not available for future appropriations.
Fund Balance Classification
The fund balance classification is either restricted, committed, or assigned depending on the level of authority behind the encumbrance.
If the government intends to use the resources the specific purposes but is not a constraint imposed by external parties or enabling legislation (i.e., restricted) or by formal action of the government’s highest decision making authority (i.e., committed). Assigned fund balances should be used to indicate that a portion of the fund balance is not available for expenditure.
The use of reserve for encumbrances indicates that a portion of the fund balance has been segregated for expenditure on vendor performance.
Deferred Inflows and Outflows
Occur IN a period, but are related to a FUTURE period.
EXAMPLE: receive restricted Grant (Inflow) in x1 and met all restrictions, but funds to be spend in x2.
GASB SPECIFICALLY limits use of the word deferred to deferred outflows and inflows of resources.
Only items DESIGNATED by GASB can be classified as such and this is a NEW concept statement (GASB CS 4).
Debt Service Fund Revenue vs Deferred Inflow
The Debt Service Fund recognizes revenue when it is measurable and available. Since the first installment will be received 120 days into Year 20x2, no revenue is recognized in Year 20x1.
Since the Debt Service Fund uses the modified accrual basis of accounting, revenues are recognized with measurable and available. The $200,000 is not expected to be available and hence should be reported as a deferred inflow or resources in Year 20x1.
Since the entire levy is due starting in Year 20x2, the entire amount is a deferred inflow of resources in Year 20x1.
