Section 1, Chapter 4 - General Principles

Question 1

Why do organizations need accounting?

Answer 1

To pay bill, pay salaries, have a record of who paid their taxes, if it is exceeding its budget, and so forth

Question 2

What are the different types of accounts where financial records are kept?

Answer 2

• assets
• Liabilities
• Equity (private sector) or net position/fund balance (government)
• Revenues, additions, or an inflow of resources
• ## Expenses, deductions, expenditures, and sometimes outflow of resources

Question 3

What are assets? Examples?

Answer 3

• What organization owns
• Resources the government controls
  Example: cash, accounts receivable and inventories

Question 4

What are liabilities? Examples?

Answer 4

• What the organization owes others
• The amount in organization will have to use its resources to settle

Example: accounts payable, accrued leave and bonds payable

Question 5

What are revenues/additions/inflows of resources? What are some examples?

Answer 5

What the organization took in

Example: taxes, sales of goods and other user charges

Question 6

What are expenses/deductions/expenditures/an outflow of resources? What are some examples?

Answer 6

• what an organization spent

Examples: salaries, interest expense, and depreciation expense

Question 7

What is the charts of accounts?

Answer 7

A list of all the account names and numbers

Question 8

What is the general ledger?

Answer 8

My name given to the collection of the accounts with the dollar balances

Question 9

What is double entry bookkeeping?

Answer 9

• Recording two aspects of a transaction
• One with a debit entry and one with a credit entry

Question 10

How is accuracy obtained in double entry accounting?

Answer 10

Assuming the total of the debit entries is the same as the total of the credit entries 

Question 11

What are debit balances in double entry bookkeeping?

Answer 11

Assets and expenses/expenditure

Question 12

What are liabilities in double entry bookkeeping?

Answer 12

Liabilities, revenues, and equity

Question 13

What should be done to increase an asset or expense/expenditure account, or decrease a liability or revenue account

Answer 13

Make a debit entry

Question 14

What should be done to increase a liability or revenue account, or decrease an asset or expense/expenditure account?

Answer 14

Make a credit entry

Question 15

What is an accounting transaction?

Answer 15

Recording in the financial records of an event that has financial consequences (salary, receiving a tax payment, Barwin were paying the interest on the borrowing, interesting expense has been incurred by the borrower, but not paid)

Question 16

Where are debits and credits recorded on the T account?

Answer 16

Debits are recorded on the left and credits on the right

Question 17

Where are transactions first recorded?

Answer 17

In other records and other means called “the original entries” and are made in “books of original entry”

The totals of the original entries are transferred to the accounts contained in the general ledger

Question 18

What are Journal entries used for?

Answer 18

• another way to make an original entry
• used for recording infrequent transactions such as adjustments that need to be made to the financial records before issuing the financial statements

Question 19

What is an example of a journal entry for recording $10,000 in receipts of taxes?

Answer 19

Cash $10,000
Tax Revenue $10,000

Question 20

Where are journal entries posted?

Answer 20

The general leddger

Question 21

What is an auditors assessment of internal controls over financial reporting when manually created journal entries are the predominant source of information for a ledger?

Answer 21

The controls are considered not to be effective because too much information may be aggregated or not recorded or dependent on a single persons work

Stronger internal controls over financial reporting require less manual entries to report transactions

Question 22

What is the general ledger?

Answer 22

• an internal collection of the balances for each of an organization’s accounts
• the financial transactions are originally recorded and then transferred to the general ledger

Question 23

How is an organization’s financial results and results reported?

Answer 23

Financial statements

Question 24

What is a trial balance?

Answer 24

• a table listing all of an entity’s accounts and balances
• balances are debit and credit columns
• debit and credit column should equal

Question 25

What is an out of balance trial balance and how can it be corrected?

Answer 25

One or more accounts were incorrectly posted to either general ledger or trial balance

The errors can be identified and corrected before the financial statements are prepared

Question 26

What are some examples of entries that would not have been made as original entries?

Answer 26

• depreciation expense
• Salaries that have been earned, but not yet paid to employees
• Entries necessary to recognize and record bills that have been received, but not yet processed
• Entries to correct errors that were made

Question 27

What is the last step in using the trial balance?

Answer 27

Preparing two, fundamental financial statements

1. The first statement presents the revenue and expense balances on the Adjusted Trial Balance in the form of an operating statement ((known in some organizations, but not the government as a profit and loss statement or income statement)
2. The second statement presents the asset, liability and net position (or fund balance) balances on the Adjusted Trial Balance in the form of a position statement (balance sheet or statement of net position)

Question 28

What are the methods of accounting?

Answer 28

• Cash accounting
• Accrual accounting

Question 29

What is cash accounting?

Answer 29

• The simplest way to measure operating results (similar to a checkbook)
• Each time cash is received, and entries is made reflecting deposit
• When a check is written, an entries made reflecting the payment.
• at the end of the period, the accountant can prepare a report
• The cash position of the entity is the balance in the checkbook

Question 30

How do you determine the net cash receipts and payments when using cash accounting?

Answer 30

Simply add up all the deposits made during the year and subtract the payments

Question 31

What’s the problem with cash basis accounting?

Answer 31

• it doesn’t provide a complete picture of the revenue earned or expenses incurred but not reported by the organization
• if the accountant has sent invoices to the purchasers that have not been paid by the end of the year, this is not reflected on the BS
• if there are goods that have been received but the invoice has not, the amount payable is also not reflected on the BS
• it can be misleading

Question 32

How can cash basis be misleading?

Answer 32

• an entity received a bill prior to end of the year for $60 but only has $40 available in the account. there’s not sufficient cash to make the payment so the bill is held until sufficient cash is available to make payment.
• the accounting report would show a $40 at the end of the year making the entity look like it’s doing well when it owes bills
• an advanced order has been received and deposit made but BS doesn’t show goods/services to be provided to that customer

Question 33

What is accrual accounting?

Answer 33

• concerned about measuring cash flows
• determines the appropriate period to reflect a transaction even if the transaction did not result in a flow of cash
• attempts to match the inflow and outflows to the proper period

Question 34

In accrual accounting, when are revenues and expenses reported?

Answer 34

• revenues are reported in the period they’re earned
• expenses are reported in the period they’re incurred.

Question 35

Who uses accrual accounting?

Answer 35

• private businesses to determine how the business performed during the operating year and report its financial position as of the end of the year (compare its costs of production to its charges for good and services)
• all levels of government

Question 36

What are the three categories of funds that governments record accounting transaction?

Answer 36

1. Governmental
2. Proprietary
3. Fiduciary

Question 37

What type of accounting is used for governmental funds?

Answer 37

Modified accrual basis of accounting

Question 38

When are proprietary funds used?

Answer 38

• used to account for activities internal to the government which require charges to other funds to recover costs (known as internal service funds) OR
• used when the government attempts to operate certain activities like a business by having users of goods/services pay for cost

Question 39

What type of accounting is used for propriety funds?

Answer 39

Accrual accounting to reflect the financial position and results of operation like private businesses do

Revenues are recognized when earned and expenses when incurred

Question 40

What are some activities typically in internal service funds?

Answer 40

• technology
• self-insurance
• motor pool
• tort claim management costs

Question 41

Where are net surplus or deficits of the internal service funds closed to annually?

Answer 41

The governmental activities on the government-wide statements

Question 42

What is held in the fiduciary funds (fiduciary activities)?

Answer 42

• pension and other post-employment benefit trusts funds
• investment trust funds
• private purpose trust funds
• funds held in custody on behalf of others as a fiduciary

Question 43

What type of accounting is used to reflect the fiduciary net position and changes in fiduciary net position?

Answer 43

Accrual accounting

Question 44

How are the following accounts prevented on the government wide statements:
- Governmental funds and internal service funds
- Proprietary funds
- Fiduciary activities

Answer 44

• Governmental funds, and the closure of internal service funds usually to government activities. Reconciliations are presented between government funds in the government, wide financial statements as part of government activities.
• proprietary have reconciled adjustments to the business type activities, especially internal service funds. Customers are business activities.
• Fiduciary activities are not presented in government wide, financial statements

Question 45

What is prepared by the federal government to answer detailed questions about specific agencies or programs?

Answer 45

Financial statements, not the annual financial report

The annual financial report is intended to meet the needs of citizens and citizen intermediaries

Question 46

What is the major source of funding for federal agencies?

Answer 46

Appropriations made by Congress

Question 47

What information does agency financial statements provide?

Answer 47

• The full cost of major programs within an agency
• budgetary resources provided to an agency and their program end status (example obligations)
• Information about program performance to the degrees

Question 48

Do appropriations align with programs and reveal the full cost of the activities covered under the appropriation?

Answer 48

Appropriations often do not align with programs, and sometimes the appropriations do not reveal the full cost of the activities covered under the appropriation

Financial accounting is not constrained by the appropriation structure and seeks to match the full cost of activities to the programs supported by the activities

Question 49

What is recognition of transactions and events?

Answer 49

The process of formally recording, or incorporating an item into financial statements as an asset, liability, revenue, expense, or expenditure

Question 50

What must accountants consider in deciding how to report a particular transaction?

Answer 50

They must consider both of the measurement focus and basis of accounting

What is the reporting objective for this transaction?

Question 51

What is GASB position about reporting objectives for governmental and business-type activities and transactions?

Answer 51

There is a different reporting objective for governmental and business type activities. Transactions associated with government activities have a different reporting objective than transactions associated with business type activities

Thus, a different measurement focus and basis of accounting is required

Question 52

Under current GAAP, what measurement and basis of accounting for governmental funds is required?

Answer 52

Governmental funds utilize the current financial resources measurement focus, and the modified basis of accounting for recognizing transactions and events

Question 53

Under current GAAP, what measurement and basis of accounting for business type activities is required?

Answer 53

Business type activities use the economic resources measurement focus, and the accrual basis of accounting

Question 54

Do state local and federal agencies account for the execution of the budget?

Answer 54

Yes

Virtually all government accounting systems are designed to incorporate budgetary control

Question 55

What basis of accounting do governments use to prepare the financial statements after the end of the fiscal year by adjusting entries to records maintained?

Answer 55

Budgetary basis of accounting

Question 56

What standards are established regarding the budgetary basis of accounting?

Answer 56

• no independent standards have been established
• A mix of legislative guidance (federal credit reform act of 1990)
• regulatory guidance (OMB circular A11 and A136)

Question 57

For many state and local governments, what is the budgetary basis of accounting?

Answer 57

• Cash basis
• others may use the cash basis with some modification for transactions in the pipeline

Question 58

What does the federal budget track?

Answer 58

• Obligations
• Expenditures

Question 59

What kind of system is the federal budget?

Answer 59

It is primarily, but not entirely for cash basis system

Question 60

What does the measurement focus refer to?

Answer 60

“What” is measured in recognition of transactions and events

Question 61

What do measurement focuses are used to measure transactions of government entities?

Answer 61

• economic resources
• Current financial resources

Question 62

What is the use of measurement focus predicated on?

Answer 62

It’s predicated on the reporting objective for a particular fund, organizational unit, or an entity as a whole

Question 63

What policy mandates the measurement that should be used for external reporting purposes?

Answer 63

Generally accepted accounting principles

Question 64

What does the economic resources measurement focus recognize?

Answer 64

The economic effect of transactions on all resources, whether financial or capital, regardless of when they will be received or dispersed in cash

Question 65

How are economic resources defined?

Answer 65

• all resources, both cash and other financial resources
• all other assets that because of their nature cannot be used to pay current due bills
• All liabilities of the entity, regardless of when they must be or will be paid

Question 66

What must be reported when using the economic resources of measurement focus?

Answer 66

• all types of assets, including land, buildings, and inventory
• All types of liabilities of entity, regardless of when they have to be, or will be paid

Question 67

What do principles does economic resources measurement focus use?

Answer 67

• capital assets are recognized and depreciated
• Debt issuance are recorded as liabilities

Question 68

When is the economic resources measurement focus used?

Answer 68

When the reporting objective is to match revenues and expenses, resulting from the delivery of services and determine the net operating income and change in assets of operation during the reporting period

Question 69

How are capital assets recorded, using the economic resources measurement focus?

Answer 69

They recorded as assets when purchased or constructed, not as expenses

Question 70

How do capital assets affect the financial position of the entity when the economic resources measurement focus is used?

Answer 70

• The purchase of assets do not impact the operating statement
• it affects the financial position of the entity
• the entity has exchanged one asset (cash) for another (capital asset)
• assets have finite useful lives longer than the reporting. So a portion of the investment cost is allocated to the period, and considered an expense on the operating statement (depreciation)

Question 71

How does depreciation differ from amortization? How do they work?

Answer 71

• depreciation is allocation of a capital asset
• amortization is allocation of an intangible asset

Question 72

Where are depreciation and amortization cost reported?

Answer 72

They assign part of the cost of a capital asset to each other reporting periods that the asset provides useful service.

Question 73

What method of depreciation or amortization of assets do governments use?

Answer 73

Straight line method, so the capital asset is consumed equally over its useful life

For example, if a capital asset is valued at $100,000, and as useful life of 10 years, depreciation is $10,000 a year ($100,000 divided by 10 years)

Question 74

What is the decision as to what is a capital asset and what is an expense based on?

Answer 74

The capitalization policy established by the government

Assets placed on the position statement are considered capitalized

Question 75

Using economic resources measurement, focus, how does debt, issuance impact statements?

Answer 75

It’s liability of the organization since it must be paid so it impacts the posit statement not the operating statement

Question 76

Using an economic resources, measurement, focus, how is debt issuance recorded?

Answer 76

The organization received an asset (cash) and has assumed a liability (long-term debt)

• interest on the debt which is the cost of borrowing money is recorded as an expense on the operating statement since interest accrues during the operating Period.
• The amount used to pay the principal reduces the liability, so it is not recorded in the operating statement (the government uses asset/cash to reduce that liability)

Question 77

What is one major difference between government and commercial model of statements?

Answer 77

Assets minus liabilities equals position/fund balance of the government.

The amount provided by or available to do distribution to stockholders

Question 78

What is the emphasis of the current financial resources measurement focus?

Answer 78

Emphasis is on resources that can be used to provide the goods and services during the reporting period

It’s closely related to the budgetary process in government

Question 79

What process is used to decide how to allocate scares resources?

Answer 79

Budget process

Question 80

Who uses the current financial resources measurement focus?

Answer 80

It’s only used in state and local governments in reporting for government funds

It’s not used by the federal government

Question 81

How does the purchase of capital assets affect the statements when using the current financial resources measurement focus?

Answer 81

The decision is made to use resources, they are not available for other purposes, so a purchase of capital assets affect, the operating statement, and the position statement since it involves the consumption of financial resources

Question 82

How does the issuance of debt affect the statements when using the current financial resources measurement focus?

Answer 82

Since the issuance results in an inflow of financial resources, the operating statement is impacted

The repayment of debt (principal and interest) requires the use of financial resources, and is also reflected on the operating statement

Question 83

When using the current financial resources, measurement focus, what are current financial resources?

Answer 83

• Cash, and claims to or against cash, such as receivables and payables
• transactions have occurred by year end, and are expected to result in cash receipt or disbursement within a specified period after year end.
• Financial resources received prior to the end of this period are considered current

Question 84

What is the objective of the current financial resources measurement focus?

Answer 84

• to determine if there are sufficient current financial resources, available to pay for goods and services
• Not to revenues to expenditures and determine debt income or loss. There’s no ability to match revenues to expenditures, since most revenues are generated from taxes and other revenues, which are not earned such as grants.

Question 85

What does the current financial resources measurement focus rely on?

Answer 85

The measurement of revenues to identify the amount that has or will become available to pay for services

Question 86

What are long-term liabilities when you the current financial resources measurement focus? How are they recorded?

Answer 86

• They do not require the use of current financial resources during the reporting period
• they are not reflected in the financial statements as liabilities or expenditures unless matured, but unpaid, as of reporting period
• settlement of a claim would be recognized as an expenditure on the when the payment is made
• a Liability for a claim incurred during the year requires no payment until beyond the year and any accrual period is not recognized on the position statement.

Question 87

What are the major differences between current financial resources and economic resources?

Answer 87

Current financial resources:
- Focus on the acquisition and use cash and other financial resources
- Focus on the short term
- Focus on resource inflows and outflows

Economic resources:
- Focus on the acquisition and consumption of all resources
- Focus on the long-term
- Focus on matching revenue to expenses based on period of time

Question 88

What are two major differences between the economic resources and the current financial resources measurement focuses?

Answer 88

1. The recording of transactions involving capital assets, and long-term debt
2. Long-term obligations other than debt, such as compensated absences, and claims and judgments, which do not require the use of financial resources

Question 89

How is the recording of capital assets and long-term debt different between the economic resources and the current financial resources measurement focus?

Answer 89

• under economic resources, they have no effect on the operating statement
• Under the current financial resources measurement focus, Transactions involving capital assets are reported as expenditures; transactions involving the receipt of long-term debt are reported as other financing resources while transactions involving the payment of principal on long-term deck are reported as expenditures. Except for cash, there is no impact on the position, statement from transactions involving assets and long-term debt transactions using the current financial resources method

Question 90

How does the recording of long-term obligations other than dead, such as compensated absences and claims and judgments differ with using the economic resources versus the current financial resources measurement focus?

Answer 90

• under economic resources, they would be reported as expenses and liabilities when the obligation is incurred
• Under current financial resources, transaction is reported in the period when current financial resources are used

Question 91

What does basis of accounting refer to?

Answer 91

The timing of transactions— when they are recognized in the accounting process

The selection of the basis of accounting determines which period is impacted in the financial statements for reporting assets, liabilities, revenues, and expenditures/expenses

Question 92

What are the three bases of accounting that are used by the government?

Answer 92

1. Accrual
2. Modified accrual
3. Cash

Question 93

Who uses each basis of accounting?

Answer 93

• most governments use accrual basis
• only states and local governments use the modified accrual basis
• cash basis is primarily used by smaller state and local governments, and for prepare statements of cash flow
• many governments use the cash basis for budgeting with a variation to incorporate encumbrances and obligations, which also affect the use of budgetary resources

Question 94

Which policy mandates the basis of accounting to be used for each circumstance?

Answer 94

Generally accepted accounting principles

Question 95

What are some aspects of cash basis of accounting?

Answer 95

• reflects only the inflows and outflows of cash
• a running balance is maintained like a checkbook
• entries are made when cash is received and when it is disbursed (unlike accrual basis, where transactions are entered based on underlying transaction)

Question 96

When are governments required to prepare a separate statement of cash flows?

Answer 96

When they use the accrual basis of accounting and economic resources measurement focus

Question 97

Which basis of accounting has been traditionally used for budgeting

Answer 97

Cash basis, although several governments have converted to either the accrual or modified accrual basis for budget preparation

For budgetary purposes, cash basis is modified through the use of encumbrances or obligations, which reflect the future use of financial resources

Question 98

How can an auditor render in opinion, on financial statements, prepared using the cash basis?

Answer 98

By using a special purpose framework as the basis for the independent auditors report

The report is modified, showing the users of the financial statements at the special purpose framework is a basis of accounting, other than GAAP.

Question 99

What must be done at year end if government reports transactions on a cash basis?

Answer 99

They just make adjustments at year end to prepare FS on the accrual or modified accrual bases

Question 100

How is the accrual basis of accounting defined in the governmental environment?

Answer 100

The recording of the financial effects on a government of transactions and other events and circumstances that have cash consequences for the government in the periods in which the underlying transactions, events, and circumstances occur, rather than only in the periods in which cash is received or paid by the government

Question 101

When do governments use accrual basis of accounting?

Answer 101

• to account for operations financed by assessing user changes that are intended to recover the costs of providing services, as well as reporting on the government as a whole
• also appropriate for those instances where the governing body has decided that periodic determination of revenues earned, expenses incurred, and/or net income is relevant for capital maintenance, public policy, management control, accountability, or other purposes

Question 102

What principles are for accrual basis of accounting?

Answer 102

• revenue is reported when it’s earned
• tax and grant revenue are reported when due to the government
• revenue received prior to being earned, or due to the gov, is deferred
• a liability is reported when it’s incurred
• an expense is reported when it’s incurred
• capital assets are consumed over useful lives
• a prepaid expense is an asset until it’s incurred
• an inventory item is an asset until it’s consumed

Question 103

Why is modified is the modified basis of accounting used?

Answer 103

• The accrual basis of accounting cannot address the influence of the budget in a government’s activities to ensure the government has significant resources available to continue to provide services
• Modified basis of accounting was established and is used to address this influence

Question 104

Who uses the modified accrual basis of accounting? And why?

Answer 104

It’s used exclusively by state and local governments to blend the characteristics of a accrual accounting with the concept of current available resources

Question 105

When are revenues and other financial resource increments recognized under modified accrual basis of accounting?

Answer 105

When they becomes susceptible to accrual (when they become both measurable and available to finance expenditures of the current period)

Question 106

What is the purpose of recognizing revenues in the modified or cruel basis of accounting?

Answer 106

To recognize revenue in the current reporting period if it was, or will be, collected in time to finance expenditures incurred during the current reporting period, including any related short term liabilities, such as payables

Question 107

What does ”measurable” mean for revenue under the modified accrual basis of accounting?

Answer 107

That amount can be determined

Question 108

What does ”available” mean for revenue under the modified accrual basis of accounting?

Answer 108

The resources have been received, or will be received sufficiently soon after the end of the fiscal year in order to pay the liabilities of the current fiscal year

Except for property taxes, which are considered available if they are received within 60 days after the end of the current, it is up to the government determine availability period for revenue recognition.

Question 109

What availability period are governments encouraged to use for revenues?

Answer 109

• the sane availability period for all revenues
• periods longer than 60 days can be used in certain circumstances such as in states that allow longer accruals for Medicaid expenditures or for expenditure driven grants

Question 110

When are expenditures recognized under the modified accrual basis of accounting?

Answer 110

When a fund liability is incurred (goods or services have been provided, including services on claims incurred in prior periods)

Question 111

When are claims and judgments that do not require the of current financial resources, recognized under modified a basis of accounting?

Answer 111

• not recognized when the liability is incurred
• Recognized in future period when current financial resources are used for payment of the claims or judgements

Question 112

What do claims and judgment transactions include?

Answer 112

• Compensated absences
• Claims and judgments
• Liabilities for environmental cleanup
• Post employment benefits

Question 113

What are the major differences between the accrual basis of accounting and the modified accrual basis of accounting?

Answer 113

• reporting a revenues, assets and long-term obligations
• under the accrual basis, revenues are recorded when earned
• under the modified a accrual basis, they must be miserable and available to finance expenditures of the current period

Question 114

Under the modified accrual basis of accounting, what is done with revenues that are not received by the end of the availability period? How is this different under the accrual basis?

Answer 114

• They are deferred
• They are reported as revenue in the period they become available
• under the accrual basis, revenue is only deferred if it has not been earned or due to the government
• Deferred in flow of financial resources for lack of availability is a major difference between the accrual basis of accounting in the modified cruel basis of accounting

Question 115

Under the modified accrual basis of accounting, when are expenditures for inventory items recorded?

Answer 115

• when purchased
• under modified accrual, the consumption method may be used

Question 116

How is inventory reported under the consumption method?

Answer 116

• as an asset until it’s consumed
• the amounts consumed are then reported as an expense

Question 117

How are prepaid items reported?

Answer 117

• normally as expenses when paid
• however the government may report a prepaid item as an asset and report the expenditure when it is consumed

Question 118

What do financial statements for governmental operations financed by taxes and other general liabilities focus on?

Answer 118

• fiscal accountability rather than on operational accountability
• reporting the flows and balances of current financial resources used to support government activities in compliance with budgetary and other legal requirements
• on the amounts available for appropriation rather than on operating results and financial position from an economic perspective

Question 119

What are government financial systems designed to do?

Answer 119

To demonstrate fiscal accountability- the raising and use of resources in accordance with legal requirements

Question 120

What are two ways that the accounting systems provide fiscal accountability?

Answer 120

1. Encompassing fund accounting
2. Encompassing appropriation accounting

Question 121

What are funds?

Answer 121

• fiscal and accounting entities that are a unique method to assure accountability for the resources that have been raised
• all governments use them but greater extent by state and local since accounting takes place at the fund level (federal gov focuses on the appropriation)

Question 122

Why are funds necessary?

Answer 122

• public policy, laws, or persons providing monies often require the segregation of resources to carry out public purposes
• it’s how accountability can be maintained over resources that need to be apportioned for legal purposes
  Ex: gas tax is segregated by the fed gov for specific use by state/local gov for highway-related purposes

Question 123

What are accounting aggregated funds based on?

Answer 123

Certain characteristics

Question 124

What is a common aggregate fund among all govs

Answer 124

General Fund

Question 125

What is the most important fund of government?

Answer 125

General Fund (often referred to as the default fund)

**there must be legal authority for resources to be deposited into another fund

Question 126

What is the general fund used for at the federal?

Answer 126

• deposit income taxes and excise taxes (to provide services provided by the federal government, including defense, education, human services, labor, and commerce)
• Used to purchase or construct capital assets used by federal agencies

Question 127

What is the general fund used for at the state level?

Answer 127

To provide human services, funding for education, public protection, health, recreation, and administration

Question 128

What is the general fund used for at the local level?

Answer 128

For administration, public safety, public services, health and development

Question 129

What is financial reporting at the fund level designed to do?

Answer 129

• Demonstrate fiscal accountability
• reports detail how much was raised for each fund and how the resources were expended
• residual balances may be available for future use

Question 130

What is an appropriation?

Answer 130

• legal document
• sets spending limits
• Governments have procedures that allow for adjustments to appropriations as needed
• governments have procedures that determine what happens to appropriations that have not been spent or obligated by the end of the year — these procedures very among governments

Question 131

What is the major reporting requirement for all governments involving the status of appropriations?

Answer 131

• The original amount
• Adjustments
• Expenditures and encumbrances or obligations

Internal controls are designed to ensure that prospective spending stays within available balances

Question 132

What is the last step in the budget process?

Answer 132

The enactment of an appropriation

Appropriations are enacted by the ledge of slate of branch of most governments

Question 133

Who signs appropriation into law at the federal, state, and local level

Answer 133

• Federal: Congress passes legislation that is signed into law by the president setting forth the appropriation for the forthcoming fiscal year
• state: legislative body performs similar to federal and governor signs, the measure into law
• local: the city council, town council, board of commissioners, or other governing body passes legislation

Question 134

What are some examples of exchange transactions in the federal government, state, and local?

Answer 134

• Federal: the department of interior charges for admission to national parks
• State and local: governments require fees for recreational activities. They also have toll roads, such as turnpikes; and operate utilities, such as water, sewer, and electric and hospitals

Transactions result in an exchange

Question 135

What is an exchange-like transaction? What are some examples?

Answer 135

• The government sells the right to engage in a controlled activity
• Example: issuance of a license or permit. An individual is required to have a drivers license to operate a motor vehicle. They pay money and receive a license to drive. A person wishing to build a house is required to obtain a permit

Question 136

What is the accounting distinction between exchange, and exchange like transactions in the federal government?

Answer 136

While exchange like transactions occur in the federal government, there is no accounting distinction between exchange, and exchange like transactions

Question 137

For exchange transactions, when is revenue, recognized using the accrual basis for accounting; modified accrual basis of accounting; and cash basis of accounting?

Answer 137

1. Accrual: revenue is recognized at the time the exchange takes place.
2. Modified accrual: revenue is recognized when the exchange takes place, provided the revenue is available within the specified period
3. Cash: revenue is recognized when payment is received.

Question 138

For exchange transactions, how is it recorded if the payment has not been received at the time of the transaction using the accrual basis for accounting; modified accrual basis of accounting; and cash basis of accounting?

Answer 138

1. Accrual and modified accrual: if payment has not been received at the time, the transaction takes place, a receivable is recognized
2. cash: there is no receivable recognition

Question 139

What types of revenues come from non-exchange transactions?

Answer 139

• Taxes, fines, etc.
• The receipt of Grant, awards and donations

There is no direct exchange between the government and the taxpayer

Question 140

What is revenue and receivable recognition based on non-exchange transactions?

Answer 140

It’s based on the type of tax imposed

• Tax imposed on an exchange
• tax Imposed on basis, other than an exchange
• revenues from fines
• Grant awards/grantee agencies
• Donations

Question 141

How is the revenue and receivable from tax imposed on an exchange recognized on: 1. The accrual basis.; 2. The modified accrual basis; 3. Cash basis?

Answer 141

1. Accrual: a receivable and revenue would be recognized when the underline exchange takes place. For example, if government, taxes income, then, in accrual of income tax would be appropriate when the income to be taxed is earned by the taxpayer through an exchange transaction.
2. Modified accrual: revenue is recognized only if the resources are available.
3. Cash: revenue is recognized only when cash is received; a receivable would never be recognized.

Question 142

When is revenue recognized, if tax is imposed on the basis other than an exchange?

Answer 142

• revenue is recognized when the government has established a legal claim
• For property taxes, government property, taxes, owned at a point in time and has legal claim when it places a lien on the property
• Forest state taxes, the claim is established when the estate is settled
• Under the modified basis, the revenue must be available to be recognized

Question 143

When can revenues from fines be recognized?

Answer 143

When the government can establish illegal claim

An individual who receives a speeding ticket has a period of time to contest the ticket. Once that period expires, the government has a legal claim.

Question 144

When is Grant award revenue recognized by the recipient agency? When is the liability and expense/expenditure recognized by the grantor agency?

Answer 144

-recipient: recognizes revenue when it has met all eligibility criteria associated with the award. When there is no eligibility criteria, then revenue is recognized when the grant is awarded.
- grantor: liability and an expenditure/expense is recognized when the recipient meets the eligibility requirements

Question 145

When are donations recognized?

Answer 145

When all eligibility requirements have been met. If there are no eligibility requirements, revenue may be recognized when an award is made. However, typically the revenue is not recognized until it is received.

Question 146

What accounting in principles apply regardless of the MFBA and level of government?

Answer 146

• Adjustments for allowance accounts
• Method for valuing inventory
• Determination of the financial reporting entity

Question 147

What conditions must be met to record an allowance for doubtful accounts?

Answer 147

1. It is probable that receivables recorded at the financial statement date will not be collected
2. The uncollectible amount can be reasonably estimated.

Question 148

What are the three methods that an allowance for doubtful accounts can be recorded

Answer 148

1. Equal to the amount of specified identified receivables that are not likely to be collected.
2. Percent of receivables method. The ending balance of receivables is multiplied by the historical percentage of bad debts to arrive at the amount to be estimated as the accumulated bad debt
3. Percent of receivables method. The total revenues for the period are multiplied by the historical percentage of bad debts to arrive at the amount to be considered uncollectible for the period

Question 149

What are the methods of valuing inventory in the government?

Answer 149

1. Average cost.
2. First in first out cost (FIFO)
3. Last in first out cost (LIFO)

Question 150

What is impacted by the valuation method used for inventory?

Answer 150

• it will have an impact on the amount of inventory reported on the position statement
• It will have an impact on the amount of inventory reported as consumed on the operating statement

Question 151

What is the formula for goods available?

Answer 151

beginning balance
+ purchases
= good available

Question 152

What is the formula for cost of goods consumed?

Answer 152

Beginning balance
+ purchases
= goods available
- ending balance
= cost of goods consumed

Question 153

How does the FIFO method affect the position statement?

Answer 153

It provides the most recent cost for the position statement accounts And that’s produces an inventory position, statement account that approximates current cost

Question 154

Using the FIFO method, what is the cost of goods consumed when the element ending inventory is 15 items. 10 items have a unit price of $16 for a value of $160 and five have a unit price of $14 for a value of $70.

Answer 154

The ending balance is $230 and the cost of goods consumed is $290

Question 155

During periods of rising prices, what method results in the highest value of inventory, and lowest cost of goods consumed?

Answer 155

The FIFO method

Question 156

What is the FIFO methodology and what is it assume?

Answer 156

• retains the latest purchases in inventory
• It assumes that inventory is used in the same order as it was purchased (the first items purchased are the first to be consumed)

Question 157

What is the LIFO methodology?

Answer 157

• The latest inventory purchases provide the basis for cost of expense/expenditures in the earliest purchases are used to value the posit statement amounts
• Results in the most recent purchases being charged to the cost of sales

Question 158

How does LIFO method affect the position, statement and expenses/expenditures?

Answer 158

• The most recent purchases are charged to the cost of sales
• Results in older historical cost for the position statement thus the position statement will consist of old cost that may not reflect the current value of the assets
• Recognizes a current price for expenses/expenditures

Question 159

During a period of rising prices, what valuation method results in the lowest value of inventory, and the highest cost of sales?

Answer 159

LIFO, since the older items remained in inventory

Question 160

How is the average cost method calculated?

Answer 160

• Calculating a single cost based on the average price during the fiscal period
• at the time of each purchase, the number of units purchased in the dollar amount of the purchases are added to inventory
• The total value of inventory is divided by the total number of units in inventory in an average cost is determined for the unit in inventory

Question 161

When is the average cost method generally applied?

Answer 161

• When a periodic inventory system is used
• Primarily for goods that are fungible, such as gasoline, salt, and food commodities

Question 162

How does the average cost method affect expenses/expenditures and the position statement?

Answer 162

• It is a blended price for inventory

Question 163

What is a claim?

Answer 163

A demand for payment of damages or policy benefit (for insured risks) due to an unforeseen event, such as destruction or damage of property and related deaths or injuries

A judgment is the adjudication of a claim through action of a court or other legal body

Question 164

What conditions must be met for claim losses to be recognized, and reported in the financial statements?

Answer 164

1. Information available before the financial statements are issued indicates that is probable an asset has been impaired, or a liability has been incurred, at the date of the financial statements
2. The amount of the loss can be reasonably estimated.

Question 165

What are incurred but not reported (IBNR) amount recorded?

Answer 165

The claim expenditures/expenses will also include incurred, but not reported amounts, particularly for governments. This assume the risk for health and other benefit programs for current employees.

Question 166

If it is only possible (as opposed to probable) that an asset has been impaired, or a liability has been incurred at the date of the financial statements, and the amount of the loss can be reasonably estimated, what should be recorded in the financial statements?

Answer 166

• Contingency is still exist and should be disclosed in the notes to the financial statements
• The disclosure should indicate the nature of the possible loss (or the range of the loss) or state that an estimate cannot be made

Question 167

What should be recorded when the probability of a loss is remote?

Answer 167

Generally, no disclosure is required

Question 168

Which of the following items should be depreciated?
- capital assets
- In exhaustible capital assets such as Land
- Infrastructure assets using the modified approach
- Federal stewardship assets

Answer 168

• capital assets should be depreciated over their useful lives
• In exhaustible assets are not depreciated
• Infrastructure assets using the modified approach are not depreciated
• Federal Stewartship assets are not depreciated

Question 169

What method of depreciation should be used for assets?

Answer 169

Governments may use any established depreciation method that is systematic and rational, given the nature of the asset

Depreciation may be based on the estimated use of life of a class of assets, a network of assets, and network, subsystem or individual assets

Question 170

What sources can governments use to estimate useful lives of assets for depreciation?

Answer 170

• Guidelines obtained from professional or industry organizations
• Information for comparable assets from other government or internal information
• Records of the agency

Question 171

What is included in the cost of the asset when calculating depreciation?

Answer 171

The purchase price and all costs needed to put the asset into its intended use, including:
- shipping costs
- Legal costs
- Permit and licenses
- Advertising
- Ground preparation
- Development of plans and specifications
- Initial equipment cost for building or similar facility
- Testing
- Any other cost that might’ve incurred

Question 172

What is the disposal value of the asset?

Answer 172

• this is estimated
• the amount is subtracted from the cost, when determining the total amount to be charged to depreciation expense over the life of asset
• At the end of the useful life of the asset, after all depreciation expense has been charged to accumulated depreciation, the disposal value is the amount that remain on the governments records, until the asset is eliminated from the accounting records
• It can be estimated

Question 173

What is the most common depreciation method used in the government?

Answer 173

Straight line depreciation

However, governments may also use composite methods to calculate depreciation expense. This refers to depreciating a group of of similar assets (roads) or similar assets of the same class (roads and bridges)