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GOVERNMENTAL ACCOUNTING:
   BASIC PRINCIPLES AND
    THE GENERAL FUND
      LEVEL OF TIME
      DIFFICULTY (MINUTES)
REVIEW QUESTIONS
EXERCISES
      24-1 Revenue recognition                Simple 5
      24-2 Revenue recognition                Simple 5
      24-3 Revenue recognition                Simple 5
      24-4 Interfund transactions: Preparing journal entries         Simple 10
 24-5 Preparation of a General Fund’s operating statement from year-end
             trial balance            Moderate        15
      24-6 Recording the budget               Simple 10
      24-7 Budgetary control                  Simple 5
      24-8 Presentation of financial statements: Expenditures and encumbrances           Simple 10
      24-9 Preparing budgetary comparison statements from selected data           Moderate      15

PROBLEMS
 24-1 General Fund: Preparing transaction and closing entries—
             Fundamentals             Simple 30
 24-2 General Fund: Preparing financial statements from
             preclosing trial balance          Moderate        30
 24-3 General Fund: Preparing transaction and closing entries and
             an operating statement            Moderate        40
 24-4 COMPREHENSIVE: Preparing transaction and
             closing entries and a budgetary comparison statement
             (several interfund transactions)          Moderate       60
 24-5 COMPREHENSIVE: Preparing transaction and closing entries and
             a budgetary comparison statement                  Moderate      70
 24-6 General Fund: Reconstructing transactions and closing entries;
             preparing a budgetary comparison statement               Moderate    70
 24-7 General Fund: Reconstructing transactions and preparing
             closing entries and an operating statement               Moderate    70
 24-8 CHALLENGER: Preparing adjusting and closing entries;
             preparing balance sheet and budgetary comparison statement—
             Nongeneral Fund transactions improperly recorded in
             General Fund             Complex          80
24-2 • ADVANCED ACCOUNTING: Concepts and Practice

                                          THINKING CRITICALLY 
CASES
        24-1      Did they submit a balanced budget?                 Simple 10
          24-2    Modified accrual basis of accounting               Simple 5
          24-3    What is it?             Simple 5
          24-4    Accruing for vested sick leave               Simple 5

FINANCIAL ANALYSIS PROBLEM
           24-1 Developing financial statements without referring to the chapter material         Moderate
                60
                                                                                         24-2     The social
security ―trust‖ fund: Real or Imaginary—Will a consolidated
perspective reveal the truth                                                                      Simple 15

CHAPTER ETHICS QUESTION
  Telling it like it is or is not?          Simple

                                           ASSIGNMENT MATERIAL
Review Questions
          1.       The National Council on Governmental Accounting (NCGA) was the predecessor organization to
the Governmental Accounting Standards Board (GASB). Prior to being dissolved in 1984, the NCGA developed,
promulgated, and interpreted principles of accounting, financial reporting, and related financial management
activities for governmental units in the United States and Canada. NCGA pronouncements remain in force unless
modified by pronouncements of the GASB. The GFOA (formerly the MFOA) was the sponsoring organization of
the NCGA.
          2.       GASB pronouncements take precedence over FASB pronouncements with respect to state and
local governmental entities. If the accounting treatment for an item is not dealt with in a GASB pronouncement,
however, an existing FASB pronouncement dealing with the item will not apply unless the GASB so designates.
          3.       GAAFR (the ―blue book‖) is not an official pronouncement of the GASB but a GFOA publication.
It is classified as an ―other source of GAAP‖ and would be at Level 4 in the GAAP hierarchy set forth in
Statement of Auditing Standard No. 69, ―The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles.‖
          4.       No. Compliance with the basic principles set forth in the GASB codification is necessary if
applicable law requires compliance, which is quite common.
          5.       The public sector is different from the private sector because of (a) the absence of the profit
motive, (b) various legal requirements of an accounting nature, (c) the diversity of operations, and (d) the use of
fund accounting.
          6.       For governmental-type activities, the accounts Unreserved Fund Balance and Fund Balance
Reserved for xxxxx are used. For proprietary-type activities, the accounts Contributed Capital and Retained
Earnings are used.
          7.       The relationship between revenues and expenditures is a financing one rather than a causative
one as in the private sector. In other words, costs and expenses are incurred in the private sector to generate
revenues. In the public sector, expenditures are incurred to provide services—not to raise revenues.
          8.       Fund accounting involves accounting for certain operations separately from other operations.
Each such separately accounted for operation is called a fund. Each fund is a fiscal and accounting entity with a
self-balancing set of accounts.
          9.       Measurement focus refers to what flow is being measured in the operating statement.
                                         Governmental Accounting: Basic Principles and the General Fund           • 24-3

           10.      The alternative measurement focuses are (a) cash flows, (b) current financial resources (two
variations exist: liabilities to be paid versus liabilities incurred), (c) total financial resources (two variations exist:
liabilities to be paid versus liabilities incurred), and (d) economic resources.
           11.      For governmental-type activities, the measurement focus is on current financial resources. For
proprietary-type activities, the measurement focus is on economic resources.
           12.      Interperiod equity is a concept that addresses whether current year citizens receive services for
which future year citizens will have to pay.
           13.      Basis of accounting refers to the time at which an item is recognized in the financial statements.
           14.      The two major reporting deficiencies that currently exist are that (a) the use of the modified
accrual basis of accounting does not achieve a measure of interperiod equity and (b) pension accounting costs are
based on the manner of paying the costs (an entirely separate issue from when the costs were incurred).
 15. The following eleven types of funds are recommended by the GASB codification: (1) Governmental
       Funds—General Fund, Special Revenue Funds, Capital Projects Funds, Debt Service Funds, and Permanent
       Funds, (2) Proprietary Funds—Enterprise Funds and Internal Service Funds; and (3) Fiduciary Funds—
       Agency Funds, Pension Trust Funds, Private-Purpose Trust Funds, and Investment Trust Funds.
 16. No. General fixed assets and general long-term liabilities are accounted for in a separate general ledger.
       Although this general ledger is self-balancing , it is not a fund (it does not have cash as an asset and therefore
       does not record receipts or pay liabilities).
 17. Capital assets accounted for in proprietary funds and trust funds are depreciated in those funds. For
       governmental funds, general capital assets are depreciated in the government-wide statements.
 18. Yes. The modified accrual basis of accounting (used by governmental funds in the fund-based
       statements) is in accordance with GAAP in the governmental sector. GAAP embrace the use of accounting
       principles that are applicable in the circumstances.
           19.      Budgetary accounting refers to recording certain data in the general ledger to monitor and
control spending.
20.                 The two major categories of interfund inactivities are exchange transactions (which are
reciprocal in nature) and nonexchange transactions (nonreciprocal in nature). The two types of exchange
transactions are (a) interfund loans and (b) services provided or used). The two types of nonexchange
transactions are (a) transfers and (b) reimbursements.
           21.      In governmental funds, interfund transfers are classified under the OTHER FINANCING
SOURCES AND USES CATEGORY. In proprietary funds, however, interfund transfers are reported on a
separate line below operating income or loss.
           22.      The difference between an interfund transfer and an interfund service is that an exchange
for equal values occurs in the latter but not the former.
           23.      An encumbrance is a commitment for which part of an appropriation has been earmarked or
reserved. Such commitments are in the form of purchase orders and contracts. When goods are received and
services are rendered, the encumbrances cease and the related items are recorded as expenditures. In the broad
sense, an expenditure is the actual use of financial resources. Encumbrances may be thought of as ―expenditures
to be.‖

E 24-1 (Estimated time: 10 minute)
ESTIMATED REVENUES        500,000
  ESTIMATED TRANSFER IN           65,000
        APPROPRIATIONS                   450,000
        APPROPRIATIONS—TRANSFERS OUT (30,000 + $5,000)                                                   35,000
        BUDGETARY FUND BALANCE                   80,000

E 24-2 (Estimated time: 5 minutes)
$4,000 ($33,000 – $27,000 – $2,000)
24-4 • ADVANCED ACCOUNTING: Concepts and Practice

E 24-3 (Estimated time: 10 minutes)
............................................................................................................................. 1.(an interfund service
used):
Expenditures                        11,000
                 Due to Water Enterprise Fund                                                   11,000
    2. ................................................................................... (an interfund transfer):
Other Financing Uses—Transfer Out                                    22,000
              Cash                                       22,000
    3. ................................................................................... (an interfund transfer):
Other Financing Uses—Transfer Out                                    33,000
              Cash                                       33,000
    4. ................................................................................... (an interfund transfer):
Other Financing Uses—Transfer Out                                    44,000
              Cash                                       44,000
    5. ......................................................................................... (an interfund loan):
Loan from Convention Center Enterprise Fund                                                  55,000
              Cash                                       55,000
    6. ......................................................................... (an interfund reimbursement):
Cash                 66,000
              Expenditures                                           66,000

E 24-4 (Estimated time: 5 minutes)
Job Development Grant. Most governmental units use approximately 60 days as the cut-off point in determining
whether revenues are ―available‖ to use to pay current period liabilities. Because the grant is not expected to be
disbursed until May 2006, it should not be accrued at 12/31/05.
    Property Taxes. The amount to be reported for revenues for 2005 is $775,000 ($700,000 collected plus
$75,000 expected to be collected within 60 days.)

E 24-5 (Estimated time: 5 minutes)
Property Taxes Receivable               3,000
                             a
  Revenues              3,000
           Deferred Revenues                    6,000
     To reflect the overpayment of taxes as deferred revenues.
a
Assumes Revenues of $6,000 was recognized when the $6,000 collection occurred.

E 24-6 (Estimated time: 5 minutes)
Requirement 1:
Deferred Revenues                  300,000
           Revenues                         300,000
    To recognize that portion of the deferred revenues expected to be ―available‖
      to pay liabilities of the current period ($150,000 remains in the Deferred
      Revenues account).
Requirement 2:
The amount to be reported for property tax revenues for the fiscal year ended 6/30/05 is $830,000 ($530,000
collected during the year plus $300,000 expected to be collected within 60 days).
                                               Governmental Accounting: Basic Principles and the General Fund        • 24-5

E 24-7 (Estimated time: 15 minutes)
                                              Borrowsville Township
                       Statement of Revenues, Expenditures, and Changes in Fund Balance
                                     for the Fiscal Year Ended June 30, 2006

Revenues                $650,000
Expenditures ($600,000 + $10,000)             (610,000)
 Excess of Revenues over Expenditures                 $ 40,000
Other financing sources (uses):
 Bond proceeds                  100,000
   Transfers in                 15,000
 Transfers out ($50,000 + $80,000 + $70,000           (200,000)
  Deficiency of Revenues and Other Financing Sources over Expenditures and
   Other Financing Uses                 $(45,000)
  Fund Balance (in total), 7/1/05                     200,000
Fund Balance (in total), 6/30/06              $155,000 a
a
In the published balance sheet, $25,000 of this balance is presented as being reserved for encumbrances
outstanding.

E 24-8 (Estimated time: 10 minutes)
                                                                                                GAAP Basis of Comparison
                                                   Variance--
                                                  Favorable
                              Budget              Actual (Unfavorable)
Expenditures                  $902,000            $860,000      $42,000


E 24-9 (Estimated time: 15 minutes)

Variance--
                                                     Favorable
                             Budget                    Actual                (Unfavorable)
Revenues                      $500,000                 $503,000              $ 3,000
Expenditures......................................................................... 480,000      473,000        7,000
 Excess of Revenues over Expenditures ................................ $ 20,000                   $ 30,000      $10,000
Fund Balance—1/1/06........................................................           100,000      100,000      ______
Fund Balance—12/31/06................................................... $120,000                 $130,000      $10,000
24-6 • ADVANCED ACCOUNTING: Concepts and Practice

E 24-10 (Estimated time: 15 minutes)

Entry to record the budget (not required):
 ESTIMATED REVENUES ($711,000 + $90,000)           801,000
        ESTIMATED TRANSFER IN              60,000
          APPROPRIATIONS                   800,000
                 APPROPRIATIONS—TRANSFERS OUT                     40,000
               BUDGETARY FUND BALANCE                      21,000

Entry to reverse the budget that was recorded:
 APPROPRIATIONS              800,000
APPROPRIATIONS—TRANSFERS OUT                      40,000
BUDGETARY FUND BALANCE                     21,000
                 ESTIMATED REVENUES                      801,000
          ESTIMATED TRANSFER IN                          60,000
Entry to close the actual nominal accounts:

 Revenues ($707,000 + $90,000)               797,000
       Other Financing Sources—Transfers In                  60,000
        Expenditures (includes $66,000 purchase of gas)                        808,000
        Other Financing Uses—Transfers Out                            40,000
        Unreserved Fund Balance                      9,000

Entries to close encumbrances outstanding at 12/31/06 and reserve a portion
 of the unreserved fund balance:

 BUDGETARY FUND BALANCE RESERVED FOR ENCUMBRANCES                                        33,000
      ENCUMBRANCES            33,000
 Unreserved Fund Balance            33,000
         Fund Balance Reserved for Encumbrances                       33,000
                                      Governmental Accounting: Basic Principles and the General Fund     • 24-7

                                                 PROBLEMS


                                                  CASES 

C 24-1 (Estimated time: 10 minutes)
Requirement 1:
In our opinion, the city did not submit a balanced budget. The reporting of certain liabilities in the GLTDAG—
rather than in the General Fund’s operating statement when the liabilities were incurred—merely serves as a
sleight-of-hand manner for governmental units to easily circumvent the spirit and intent of the balanced-budget
laws. Only by recording all liabilities in the General Fund when they are incurred can it be determined whether the
city is spending beyond its means.
24-8 • ADVANCED ACCOUNTING: Concepts and Practice

C 24-1 (continued)
Requirement 2:
The city is shifting the burden to future-year citizens because it will fund the liability over 30 years. If the
$3,000,000 were funded over 10 years (the remaining average working life of its employees), however, an
interperiod equity problem would not exist.

C 24-2 (Estimated time: 5 minutes)
The following points should be brought out:
         1.       The city is using governmental GAAP. From that perspective, the financial statements are not
misstated.
         2.       Because the modified accrual basis of accounting enables governments to masquerade whether
they are spending beyond their means, the modified accrual basis produces misleading results. The problem occurs
because certain liabilities are not recorded in the General Fund when incurred—only when they are to be
liquidated. This delayed recognition of liabilities and the related expenditures in the General Fund causes the
problem.

C 24-3 (Estimated time: 5 minutes)
Requirement 1:
The General Fund should decrease its Legal Expenditures account by $2,000. In turn, the Airport Enterprise Fund
should increase its Legal Expenditures account by $2,000.

Requirement 2:
This item is a ―reimbursement,‖ a type of interfund.

C 24-4 (Estimated time: 5 minutes)
Requirement 1:
The accrued liability at 12/31/06 for vested sick leave should be $1,000 ($52,000/52 weeks = $1,000).
    In addition, the GASB Codification (Section C60.106 [GAS 16, para. 11]) requires that an additional liability
be accrued for salary-related payments associated with the payment of a compensated absence . Such
payments include the city’s share of social security and medicare taxes and might include, for example, the city’s
contribution to its pension plan.

Requirement 2:
The accrued liability at 12/31/06 for vested sick leave should be $1,100. It must be based on the new salary level.

                                FINANCIAL ANALYSIS PROBLEM 

FAP 24-1 (Estimated time: 60 minutes)
Requirement 1:
The key issues follow:
        (1)     Whether the accrual basis of accounting should be used.
                                        Governmental Accounting: Basic Principles and the General Fund       • 24-9

FAP 24-1 (continued)
Requirement 1: (continued)
(2)               Whether fund accounting should be used. If students have not read the chapter (or referred to it
in detail as they were instructed not to do), they may very well account for all the transactions in a single general
ledger (the opposite of fund accounting). Many practitioners are of the opinion that fund accounting, while useful
for internal control and internal reporting purposes, is of limited usefulness and is more confusing than nonfund
accounting. In this regard, they would abolish fund accounting (except for Enterprise Funds and Pension Funds).
      (3) Whether fixed assets should be depreciated (the City Hall in the case).
      (4) Whether infrastructure improvements (the sidewalks in this case) should be reported as assets.

Requirement 2:
Almost all students will draw from commercial accounting and prepare a balance sheet that reflects all
transactions. We suggest that you steer students in this direction initially.
    A balance sheet for which all transactions are accounted for in a single general ledger (no separate funds or
account groups) follows:

                                               City of Twin Hills
                                                 Balance Sheet
                                               December 31, 2005
                   ASSETS                                          LIABILITIES
Cash           $ 80,000       Accounts/vouchers payable             $ 12,000
Property tax receivables           70,000        Accrued salaries         43,000
Allowance for uncollectibles             (10,000)       Accrued interest        35,000
Supplies inventory           20,000       7% Bonds payable            960,000
Buildings             1,000,000       Total Liabilities             $1,050,000
Accumulated depreciation             (10,000)               FUND BALANCE
                       Fund Balance             $ 100,000
  Total Assets               $1,150,000     Total Liab. & Fund Balance          $1,150,000
Requirement 3:
Students most likely will draw from commercial accounting and prepare a statement of revenues and expenses
(costs of providing services), which should be accompanied by a statement of cash flows (as in commercial ac -
counting). Without referring to the text (as instructed not to do), very few students could be expected to come up
with a statement of revenues and expenditures (including the other financing sources and uses section, a section
necessitated because of the use of fund accounting).
    We suggest discussing, presenting, and comparing a statement of revenues and expenses to a statement of
revenues and expenditures. It might be interesting to see how many students favor each type of operating
statement. (For simplicity, we suggest omitting any discussion of incorporating changes in equity.) A key point is
that the use of fund accounting and account groups complicates the financial reporting with regard to: (a) fixed
assets, (b) principal repayments on debt, (c) interest payments on debt, and (d) depreciation of fixed assets.

Requirement 4:
We now present a statement of revenues and expenses (along with the accompanying statement of cash flows)
for discussion purposes. After discussing this statement as a possible operating statement, we suggest that you
cover the statement of revenues and expenditures.
24-10 • ADVANCED ACCOUNTING: Concepts and Practice

FAP 24-1 (continued)
Requirement 4: (continued)
                                                      City of Twin Hills
                                             Statement of Revenues and Expenses
                                            For the Year Ended December 31, 2005
Revenues:
Property taxes ..................................................................................................................     $ 640,000
Operating Expenses:
  Salaries
                                                                                                                                    $(343,000)
   Infrastructure improvements (sidewalks)
                                                                                                                                      (60,000)
   Supplies consumed
                                                                                                                                      (57,000)
Depreciation expense ($1,000,000 × 1/50 × ½ yr.) ....................................................                                   (10,000)
  Total Operating Expense .............................................................................................               $(470,000)
Excess of Revenues over Operating Expense                                   $ 170,000
  Interest expense             (70,000)
Excess of Revenues over Operating Expense and Interest Expense ...................                                                    $ 100,000

                                                     City of Twin Hills
                                                  Statement of Cash Flows
                                           For the Year Ended December 31, 2005
                                         (using the commercial accounting format)

Operations:
 Property taxes collected
                                                                                                                                $ 580,000
   Salaries
                                                                                                                                     (300,000)
   Supplies
                                                                                                                                      (65,000)
   Infrastructure improvements (sidewalks)
                                                                                                                                        (60,000)
Interest.............................................................................................................................     (35,000)
  Cash Flow from Operations ................................................................................... $ 120,000
Financing:
   Bond proceeds receipts
                                                                                                                                    $ 1,000,000
Bond principal repayments ............................................................................................                     (40,000)
  Cash Flow from Financing                                         $ 960,000
Investing:
Capital additions (new city hall).................................................................................... $(1,000,000)
  Cash Flow from Investing ....................................................................................... $(1,000,000)
Increase in Cash ........................................................................................................... $ 80,000

For comparative purposes, we now show the presently used statement of revenues and
expenditures (omitting the inclusion of the opening and ending fund balances at the bottom of the
statement for simplicity).
                                              Governmental Accounting: Basic Principles and the General Fund                       • 24-11

FAP 24-1 (continued)
Requirement 4: (continued)
                                                  City of Twin Hills
                                        Statement of Revenues and Expenditures
                                        For the Year Ended December 31, 2005
Revenues:
Property taxes .................................................................................................................... $640,000
Expenditures:
  Salaries
                                                                                                                                   $343,000
Supplies consumed ............................................................................................................ 57,000
                          $400,000
   Excess of Revenues over Expenditures
                                                                                                                                   $240,000
Other Financing Uses:
  Transfer out to Debt Service Fund ($40,000 + $70,000)
                                                                                                                                   (110,000)
Transfer out to Capital Projects Fund (for sidewalk improvements) ........................... (60,000)
Excess of Revenues over Expenditures and Other Financing Uses ...................... $ 70,000
T accounts for certain of the accounts follow:
Cash
   Property Tax Collections                         $580,000
                     $ 35,000                       7/1/05 Interest payment
                     40,000                         12/31/05 Principle payment
                     65,000                         Payment for supplies
                     60,000                         Payment for sidewalks
                     300,000                        Payment of salaries
              $ 80,000

Accrued Salaries
                                     $ 23,000      Unpaid wages
                               4,000 Vacation pay
                               16,000       Sick leave
                               $ 43,000


Salaries Expenses/Expenditures
Salaries paid       $300,000
  Salaries unpaid         23,000
  Vacation pay            4,000
  Sick leave          16,000
              $343,000


FAP 24-2
See FAP 1-1 in Chapter 1’s Solution Manual.

				
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