Section 1 - Ch4

Question 1

Modified and Accrual Accounting

Answer 1

• You only use modified accrual for Gov’t funds (5 types).
• Everything else is accrual accounting! (Proprietary, Fiduciary and Government-Wide Reporting)

Question 2

General Purpose External Financial Reports

Answer 2

General Purpose External Financial Reports: provide info on govt’s :

• Financial position (a point in time/snapshot)
• Result of operations (operating statement: Rev & Exp): shows change from start to end of year; if operating results are positive à net position increase

Question 3

Intro to Accounting Measurement

Answer 3

*Intro to Accounting Measurement

• Cash Accounting: (simple) cash in/cash out.
  
  • -Does not provide complete picture of financial position (if invoices are sent or property received without payment, no entry is recorded until “cash” is transferred)
• Accrual Accounting: revenues are reported when “earned” and expenses are reported when “incurred”.
  
  • Advance payments are liabilities (deferred revenue), when goods are delivered recognize revenue.

Governmental Activities: accumulate resources in “funds”. (Modified Accrual)

• Current financial resources measurement focus (MA)

Business-Type Activities: certain activities are run like a business by establishing fees and charges. (Accrual) Revenues are recognized when earned and expenses when incurred.

• Economic resources measurement focus (Accrual)

Question 4

Measurement Focus

Answer 4

*Measurement Focus: 2 measurement focuses are used to measure transactions:

• Economic resources (Accrual) à ACCRUAL: Proprietary Funds, Fiduciary Funds, Gov’t-wide statements
• Current financial resources (MA) à Modified Accrual: Gov’t funds

Measurement Focus refers to “WHAT” (not when) is being measured in the accounting process.

Question 5

Economic Resources (Accrual)

Answer 5

Economic Resources (Accrual)

• Fixed assets are capitalized and depreciated
• Debt proceeds are liabilities

Capital Assets: considered an investment; recorded as an asset when purchased on balance sheet, not an expense (does not impact operating statement). A portion of the investment is considered an expense on operating statement as depreciation. Capital Assets are NOT used in “current financial resources method” (Mod Accrual – state/local)!

Capitalization Policy: assets on balance sheet are capital assets (not expenses).

Debt Proceeds: provide capital to the organization but are also a liability since it has to be repaid. (does not impact operating statement but is on the balance sheet**). The interest on the debt is an expense on the operating statement. The principal repayment is not seen on the operating statement but reduces assets (cash) on the **BS.

***Major Difference: Net position = Assets – Liabilities; reflects the “residual equity” of the gov’t, not amounts available to shareholders.

Question 6

Current Financial Resources (Modified Accrual)

Answer 6

Current Financial Resources (Modified Accrual)

• Objective: determine if there are sufficient current financial resources available to pay for services.

An investment in capital assets, goods, or services affects the operating statement, NOT the balance sheet, since it involves the consumption of financial resources.

Issuance of Debt: results in an inflow of financial resources, so the operating statement** is impacted. The repayment of debt–both principal and interest—requires use of financial resources (**operating statement).

• LT Liabilities do not require current financial resources and are NOT reflected on the financial statement.Thus, a liability for a claim incurred during the year that is not due during the year is NOT recognized.However, when a claim is due during subsequent years, it IS recognized.
  
  • Deferred Revenue = Deferred inflows
  • Deferred Liabilities = Deferred outflows

Question 7

Major Differences

Answer 7

Major Differences

• Transactions involving:
  
  • Capital Assets
    
    • Economic Resources (Accrual) = NO effect on operating statement
    • Current Financial Resources (MA) =
      
      • transactions involving capital assets are recorded as “expenditures” on operating statement.
  • LT Debt:
    
    • Economic Resources (Accrual) = (BUSINESS Type Activites)
      
      • Focuses on the consumption of all resources
      • Focuses on LONG TERM, on matching revenues and expenses
      • NO effect on operating statement
      • LT obligations other than debt = expenses & liabilities when obligation is incurred
• Current Financial Resources (MA) = (GOVERNMENTAL Activities = State & Local only)
  
  • Focuses on the acquisition and use of cash and other financial resources
  • Focuses on SHORT TERM, only on resource inflows and outflows
  • receipt of LT Debt is a “Other Financing Source”; payment of LT Debt is an “Expenditure” on operating statement à no impact on BS except cash.
  • LT obligations other than debt = ONLY reported in period when current financial resources are used.

Question 8

Basis of Accounting (timing of transactions)

Answer 8

*Basis of Accounting (timing of transactions)

Basis of Accounting refers to “the period” in which a transaction should be recorded.

• Cash Accounting: (simple) cash in/cash out.
  
  • State and Local governments use.
  • Does not provide complete picture of financial position (if invoices are sent or property received without payment, no entry is recorded until “cash” is transferred)
• Accrual Accounting: revenues are reported when “earned” and expenses are reported when “incurred”.
  
  • ALL governments use.
  • Advance payments are liabilities (deferred revenue), when goods are delivered recognize revenue.
  • Tax/Grant revenue reported when due to government (“earned”)
  • A prepaid expense is an asset until it is incurred
  • An inventory item is an asset until it is consumed
• Modified Accrual Accounting: established to address the need to ensure sufficient financial resources available to provide services.
  
  • Used by State and Local governments ONLY
  • Revenues are recognized when they are both “measurable” and “available”
    
    • Measurable: Amount can be determined
    • Available: Resources have been received or will be received within 60 days (prop taxes) or depending on the government’s availability period (in financial statement notes)
  • Expenditures are recognized when a fund liability is incurred (services have been provided, including services on claims in prior periods).Claims that do not require “current” financial resources are not recognized until the liability is incurred (compensated absences, claims, post employment benefits)
  • DIFFERENCES between Accrual and MA:
    
    • MA -> even if revenues are earned, they must also be “measurable” and “available” in current period.
    • MA -> Inventory items require “consumption method”… inventory is an asset until consumed, amounts consumed are reported as an expenditure.
    • MA -> Prepaid items may be assets and report them as expenditures when consumed.
    • MA -> NO LOSSES are recorded on sale of assets.
    • MA -> if Property Tax not received within 60 days of end of year,
      
      • (dr) Prop Tax Rev & (cr) Def Rev
    • Inv: Consumption methodàcapitalized (B/S)
    • Inv: Purchases method à expense (Statement of Net Cost)

Question 9

Fiscal Accountability (2 aspects)

Answer 9

*Fiscal Accountability (2 aspects)

1. Fund Accounting: all governments use funds to ensure accountability over segregated resources (short term focus). State and Local gov’ts use funds to a greater extent. Federal gov’t focus is on appropriations.

General Fund: most important fund, used by all governments. Federal level à income and excise taxes go into this fund and are used to purchase capital assets.

1. Appropriation Accounting: enacted by the legislative branch (legal document) to set spending limits. Appropriations are made from “funds”.

Question 10

Exchange and Non-Exchange Transactions

Answer 10

*Exchange and Nonexchange Transactions

Exchange Transactions: both parties to the exchange benefit equally (toll roads, utilities, hospitals, park admission)

Exchange-like Transactions: (license or permit) both parties benefit, but the benefit may not be equal.

Accrual -> revenue is recognized at the time the exchange takes place (receivable if not received)

Modified Accrual -> revenue recognized at time of exchange, IF revenue is available during current period. (receivable if not received)

Cash -> revenue is recognized when cash payment received. (no receivables)

Question 11

Non-Exchange Transaction

Answer 11

Nonexchange Transaction: most revenue comes from nonexchange transactions (taxes, fines, grants, donations).

Accrual -> receivable and revenue recognized when exchange takes place.

Mod Accrual -> Revenue recognized IF resources are available (cash in hand by end of availability period defined in financial statement notes).

Cash -> revenue is recognized when cash payment received. (no receivables)

Question 12

General Accounting Principles

Answer 12

General Accounting Principles

Allowance Accounts: allowance for doubtful accounts (on taxes, etc) should be made if both conditions are met:

1. It is “probable” that receivables will not be collected
2. The amount is “reasonably estimated”.

Allowance should be recorded even if uncollectable receivables cannot be identified by:

• % of Receivables Method:end balance of receivables x historical % of bad debts
• % of Sales Method:total sales x historical % of bad debts

Question 13

Valuing Inventory

Answer 13

Valuing Inventory:

• FIFO: First items purchased are the first items consumed (most accurate BS reflection) (rising prices = highest value of inventory and lowest COGS)
• LIFO: Most recent items charged to COGS (rising prices = lowest inventory value and highest COGS)
  
  • Not allowed by most governments
• Average Cost

Question 14

Reporting Entity

Answer 14

Reporting Entity:

• FASAB says these organizations are NOT part of the Federal Gov’t:Federal Reserve, bail out entities, gov’t sponsored enterprises.

Question 15

Reporting Entity Criteria

Answer 15

Reporting Entity Criteria:

1. Inclusion in the federal budget section entitled “Federal Programs by Agency and Account” is conclusive criteria.
2. If not, use indicative criteria.