Governmental
Accounting
and Reporting
Governmental Accounting and Reporting
Copyright © 2019 by
DELTACPE LLC
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Course Description
This course on accounting for governmental entities is intended to be used by anyone who would like to gain knowledge of accounting and financial reporting currently recommended for state and local governmental units.
The course provides an overview of (1) the fundamental concepts underlying state and local governmental accounting and reporting, (2) the importance of budgetary accounting in government, and (3) the recognition rules and journal entries related to governmental financing. It also describes (1) the accounts and journal entries related to transactions specific to governmental entities, (2) the process of defining the governmental reporting entity, (3) the components of the comprehensive annual financial report (CAFR), (4) the reporting requirements for government- wide and fund-based financial statements, and (5) other required information in the CAFR.
Field of Study Accounting
Level of Knowledge Basic to Intermediate
Prerequisite None
Advanced Preparation None
Table of Contents
Chapter 1: Governmental Accounting: An Overview ...1
Learning Objectives ...1
Characteristics of Nonbusiness Entities ...2
Differences between Governmental and Private Sector Accounting ...3
Background of Governmental Accounting ...4
Major Concepts of Governmental Accounting ...5
Chapter 1 Review Questions - Section 1 ... 13
Financial Reporting of Governmental Entities ... 14
Chapter 1 Review Questions – Section 2 ... 27
Budgetary Aspects of Governmental Operations... 29
Accounting for Expenditures ... 31
Accounting for Fixed Assets... 41
Long-Term Debt and Capital Leases ... 43
Lease Accounting ... 43
Investments ... 45
Interfund Activities ... 47
Overview of Accounting and Financial Reporting for the General Fund ... 50
Comprehensive Illustration of Accounting for the General Fund ... 52
Chapter Summary ... 65
Chapter 1 Review Questions – Section 3 ... 67
Chapter 2: Special Funds and Financial Reporting ... 69
Learning Objectives ... 69
Governmental Funds Worksheets ... 73
Special Revenue Funds ... 73
Capital Projects Funds ... 77
Debt Service Funds ... 82
Chapter 2 Review Questions – Section 1 ... 88
Permanent Funds ... 89
Governmental Funds Financial Statements ... 90
Proprietary Funds ... 94
Enterprise Funds ... 95
Chapter 2 Review Questions – Section 2 ... 102
Internal Service Funds ... 104
Fiduciary Funds ... 112
Trust Funds ... 117
Agency Funds ... 121
The Government Reporting Model ... 123
Additional Considerations ... 139
Chapter Summary ... 148
Chapter 2 Review Questions – Section 3 ... 149
Appendix: Four Major Issues of the Government Reporting Model ... 151
Glossary ... 154
Index ... 173
Review Question Answers ... 174
Chapter 1:
Governmental Accounting: An Overview
Learning Objectives
After studying this chapter, you will be able to:
1. Identify the basic differences between governmental and private sector accounting.
2. Recognize major concepts of governmental accounting.
3. Identify basic concepts for financial reporting in governmental accounting.
4. Recognize the differences between the various governmental fund types.
Nonbusiness organizations, the collective term used by the FASB to refer to governmental units as well as to
colleges and universities, hospitals, voluntary health and welfare organizations, and all other nonprofit
organizations, account for at least 40 percent of the GDP of the U. S. Activities financed by expenditures of
governmental and nonprofit entities affect the safety, health, and general well-being of everyone; almost
everyone contributes a portion of the resources which finance the expenditures. Since each of us is vitally
affected it is important that we be able to read intelligently the financial reports of governmental and nonprofit
entities. Accounting and financial reporting principles which have been developed by authoritative bodies for use
by governmental and nonprofit entities are explained in this course.
Characteristics of Nonbusiness Entities
The term nonbusiness itself suggests to the reader that entities in this classification exist for reasons other than the attempt to earn net income for owners or investors. Indeed, a nonbusiness entity has no "owners" in the sense that businesses do. Persons and organizations who contribute resources to establish a nonbusiness entity do so without the expectation of receiving a financial "return on investment," or, even, a return of investment.
The typical reason for the organization of a nonbusiness entity is to render services to a group of constituents. In the usual case, administrators of a nonbusiness organization attempt to determine in advance the outflows of resources needed to provide services during a given time period, then attempt to secure an inflow of resources needed to support the desired outflow. This approach of nonbusiness organizations is contrary to that of businesses which incur expenses in the expectation of generating revenues.
Some entities in the nonbusiness category may operate under very detailed and specific legal restrictions as to the sources of financial resources they may utilize, the amounts they may raise from each source, and the uses they may make of the proceeds from each source-this is particularly true of state and local governmental units.
Other entities in the nonbusiness sector are about as free as business enterprises from legal restriction as to the sources and uses of financial resources, but all entities are subject to some degree of regulation.
In summary, three characteristics distinguish nonbusiness organizations.
1. Nonbusiness organizations have transactions that are infrequent in businesses, such as grants and contributions.
2. Nonbusiness organizations have no single indicator of performance such as net income.
3. Nonbusiness organizations report net position rather than equity.
Short Quizzes
Indicate whether each of the following is true or false.
1. Governmental entities and other types of nonprofit organizations are collectively referred to as
"nonbusiness organizations" by the FASB.
2. Nonbusiness organizations are relatively unimportant in the United States economy, as compared with business organizations.
3. NFPOs, other than governmental units, may have owners or investors just as business organizations do.
4. The typical reason for the organization of a nonbusiness entity is to render services to a group of constituents.
5. Governmental units are subject to a greater degree of legal constraint as to the sources of financial
resources they may utilize, and the uses they may make of the proceeds of each source, than is generally
true of business organizations.
Answers
1. True. The phrase nonbusiness organizations was originated by the FASB as a collective phrase to include all governmental units and all other types of NFPOs.
2. False. Nonbusiness organizations in the U.S. account for at least 40 percent of the GDP.
3. False. It is a characteristic of all nonbusiness organizations that they do not have owners in the same sense that business organizations do. However, individuals, financial institutions, and mutual funds may invest in the bonds or other debt instruments of nonbusiness organizations just as they do in the debt, or equity, instruments of businesses.
4. True. Usually the services rendered to constituents are those no business organization exists to offer, or exists to offer as advantageously.
5. True. All entities are subject to some degree of regulation, but governmental units typically are subject to more detailed regulation as to sources and uses of financial resources than are business organizations or other types of nonprofit entities.
Differences between Governmental and Private Sector Accounting
Governmental entities have operating objectives different from those of commercial entities; therefore, governmental accounting is different from accounting for commercial enterprises.
Governmental accounting differs from corporate financial accounting primarily because governments lack a profit motive and must focus on accountability to the public. The major differences between governmental and for-profit entities are as follows:
1. Governmental accounting must recognize that governmental units collect resources and make expenditures to fulfill societal needs. Society expects governmental units to develop and maintain an infrastructure of highways, streets, and sewer and sanitation systems, as well as to provide public protection, recreation, and cultural services.
2. Except for some proprietary activities such as utilities, governmental entities do not have a general profit motive. Police and fire departments do not have a profit motive; instead these units must be evaluated on their abilities to provide for society's needs.
3. Governmental operations have legal authorization for their existence, conduct revenue-raising through
the power of taxation, and have mandated expenditures they must make to provide their services. The
governmental accounting system must make it possible to determine and demonstrate compliance with
finance-related legal and contractual provisions. Governmental units are subject to extensive regulatory
oversight through laws, grant restrictions, bond indentures, and a variety of other legal constraints.
4. Governmental entities use comprehensive budgetary accounting, which serves as a significant control mechanism and provides the basis for comparing actual operations against budgeted amounts. The budget is a legally established statutory control vehicle.
5. The primary emphasis in governmental fund accounting is to measure and report on management's stewardship of the financial resources committed to the objectives of the governmental unit.
Accountability for the flow of financial resources is a chief objective of governmental accounting. The managers of the governmental unit must be able to show that they are in compliance with the many legal regulations governing its operations.
6. Governmental entities typically are required to establish separate funds to carry out their various missions. Each fund is an independent accounting and fiscal entity and is responsible for using its own resources to accomplish its specific responsibilities.
7. Many fund entities do not record fixed assets or long-term debt in their funds. These fund entities record the purchase of assets such as equipment and buildings as expenditures of the period. A separate record of the fixed assets and long-term debt is maintained within the governmental unit.
8. An important objective of governmental financial reporting is accountability. Governments must be able to explain and justify to citizens and to other governments the raising and using of public resources. A key element of accountability is interperiod equity in which it is determined if current-year revenues are sufficient to pay for services provided during that year, or if future taxpayers will be required to assume burdens for services previously provided or deficits created in prior years.
Background of Governmental Accounting
Although the Financial Accounting Standards Board (FASB) is considered, in the United States, to be the one authoritative source of statements on financial accounting standards for business organizations, authoritative statements of accounting and financial reporting principles deemed appropriate for use by state and local governmental units are found in the American Institute of Certified Public Accountants (AICPA) audit guide, Audits of State and Local Governmental Units. The audit guide, originally published in 1974, has been amended from time to time by AICPA Statements of Position. The AICPA publications are based, with minor modifications, upon publications of the National Council on Governmental Accounting (NCGA).
In 1984, the Financial Accounting Foundation (FAF), the fully independent panel that oversees the FASB, created the Governmental Accounting Standards Board (GASB) to establish GAAP for state and local governments in the U.S. On November 30, 1989, the trustees of the FAF reaffirmed the GASB as the standard setter for state and local governments. Thus, after November 30, 1989, FASB pronouncements are not effective for state and local governments unless adopted by the GASB.
GASB Statements have the highest level of authority for state and local governments.
In GASB Statement No. 1, Authoritative Status of NCGA Pronouncements and AICPA Industry Audit Guide (GASB
1), released in July 1984, the GASB stated that all NCGA statements and interpretations issued and in effect on
GASB published a codification of the existing GAAP for state and local governments entitled Codification of Governmental Accounting and Financial Reporting Standards. The first section of the codification is virtually identical to NCGA 1 as amended by subsequent NCGA statements. Section 2 presents the financial reporting issues for governmental entities. Sections 3 and 4 present specific balance sheet and operating statement topics. The GASB continues to publish updated codifications periodically. The codification is an authoritative source for accounting and financial reporting principles for governmental units. The GASB has issued 90 Statements, 6 Interpretations, and 6 Concepts Statements as of December 2018.
The world of governmental accounting underwent a monumental change in 1999 with the release of GASB Statement No. 34. Previously, all state and local governments were required to report detailed fund-level information in their general-purpose financial statements. The typical governmental financial statement was thus a series of columns marching across the page, each containing obscure, specialized information for a certain group of funds. This format made it difficult for the average voter to get a comprehensive picture of where the money was coming from and where it was going.
Note: One of the awkward aspects of the old reporting regime was the use of account groups, so called because they did not exactly qualify as funds. They were simply areas where long-lived assets and long-term debt were parked in the absence of a conceptually sound place to put them in statements focused on current resources. This was obviously an extremely unsatisfying practice, which are long gone now.
GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments), issued in 1999 brought a new level of clarity to state and local government reporting.
Governments now produce two separate sets of financial statements, one containing detailed fund information and the other providing a high-level picture of the government as a whole. This standard also required several footnote and schedule disclosures that increase the transparency of governmental reporting.
Accounting for governmental entities is given the general name of fund accounting to distinguish it from accounting for commercial entities. This chapter first presents an overview of fund accounting, including accounting for typical transactions and providing required financial statements for a governmental entity. A comprehensive illustration is presented of accounting and financial reporting for the general fund, typically the most important fund of most governmental entities. Chapter 2 presents the accounting for the remaining funds of a governmental entity and the required financial statements for a governmental entity. The comprehensive illustration provides integrated examples of the governmental accounting and financial reporting concepts that are discussed in the first part of this chapter.
Major Concepts of Governmental Accounting
Governmental accounting is different from commercial accounting. Governmental entities use a fund-based
accounting system in which some of the funds use a modified-accrual accounting method as opposed to the
accrual method used by commercial entities. Also, the financial statements of governmental entities have a
foundation in the individual funds but aggregate to a government-wide level. The following section discusses the
major concepts for governmental accounting.
Elements of Financial Statements
The GASB’s Concepts Statement No. 4, Elements of Financial Statements, published in 2007, that defined each of the seven elements of financial statements of state and local governments. Each definition uses the central focus of a resource, which is an item having a present capacity to provide, directly or indirectly, services for the governmental entity. This present service capacity may be in the form of direct provision of services as well as those items having the ability to affect cash flows in the future.
The five elements of a statement of financial condition are
1. Assets are resources with present service capacity that the entity presently controls.
2. Liabilities are present obligations to sacrifice resources that the entity has little or no discretion to avoid.
3. A deferred outflow of resources is a consumption of net position that is applicable to a future reporting period.
4. A deferred inflow of resources is an acquisition of net position that is applicable to a future reporting period.
5. Net position is the residual of all other elements presented in a statement of financial condition.
The two elements of the resource flows statements are
1. An outflow of resources is a consumption of net position that is applicable to the current reporting period.
2. An inflow of resources is an acquisition of position that is applicable to the current reporting period.
Note: As a result of GASB Statement No. 63, the statement of financial position for state and local governments will refer to net position rather than net assets.
The central focus of present service capacity for defining the elements of governmental financial statements is different from the focus used by the FASB in its Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements.
The FASB developed its definitions of the elements of financial statements based on the usefulness of financial reporting information to investors and creditors in making economic decisions for allocating scarce resources among alternative uses. The GASB followed that its concepts statement provides a framework that will enhance consistency in setting future governmental accounting standards and serve as guidance for preparers and auditors when evaluating transactions that are not explicitly included in existing governmental accounting standards.
Expendability of Resources versus Capital Maintenance Objectives
of the entities. In commercial, profit-seeking enterprises, the measurement focus is on the flow of all economic resources of the firm. The accrual method of accounting is used to match the revenues and expenses during a period, with the purpose of measuring profitability. The company's balance sheet contains both current and noncurrent assets and liabilities, and the change in retained earnings reflects the company's ability to maintain its capital investment.
In contrast, the measurement focus for the governmental funds of a government entity is on changes in current financial resources available to provide services to the public in accordance with the government entity's legally adopted budget. The modified accrual method of accounting is used to measure the revenues that are available to finance current expenditures and the expenditures made during the period. The balance sheet reports only current assets, current liabilities, and a fund balance. Operating authorization for a fiscal period's transactions is initiated by the passage of a budget by the legislative governing body. Managers of governmental units must be fiscally accountable to show that resources are expended in compliance with the legal and financial restrictions placed on the governmental entity by its legislative body.
Definitions and Types of Funds
Because all governmental units (and almost all other not-for-profit organizations (NFPOs) receive financial resources which may be used only in accord with restrictions established by law or by agreements with donors or grantors, their accounting systems must enable their officials to demonstrate compliance with the restrictions.
This need led to the development of the fund accounting concept, which is so basic that the term fund accounting is often used to denote the kind of accounting recommended for state and local governmental units and by nonprofit entities.
The word fund has a special technical meaning in the nonbusiness sector. The NCGA defines the term as follows:
A fund is defined as a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities, or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations.
The dual meaning of fund should be noted. A fund is an accounting entity; it is also a fiscal entity created, in most instances, by operation of law. The term law is used in its most general sense. The accounting and financial reporting of state and local governmental units may be prescribed (or circumscribed) by state constitutions, state statutes, bond indentures, agreements with employees, provisions of grants from federal or other governmental agencies, and agreements with individuals or private organizations which have donated assets to be used for specified purposes. Local governmental units are also bound by administrative regulations of agencies of higher jurisdictions, and by ordinances and resolutions enacted by the legislative component of the local unit. Public schools, colleges and universities, hospitals, voluntary health and welfare organizations, and other nonprofit organizations generally have fewer categories of legal restrictions than do governmental units, but do have grants and gifts restricted by donors, agreements with employees and creditors, and in some cases, governmental appropriations, which indicate the desirability of fund accounting.
The operations of a governmental unit also must be broken down into periodic reporting intervals of fiscal years
because the management of these public operations may change as a result of elections or new appointments.
Thus, governmental accounting must recognize the many different purposes, the different sources of revenue, the mandated expenditures, and the fiscal periodicity of the governmental unit. To accomplish the objectives of the governmental unit, the unit establishes a variety of funds as fiscal and accounting entities of the governmental unit. A fund is a separate accounting group with accounts to record the transactions and prepare the financial statements of a defined part of the governmental entity that is responsible for specific activities or objectives.
Each fund records those transactions affecting its assets, related liabilities, and residual fund balance.
Different funds are established for the specific functions that a government must provide. Most funds obtain resources from taxes on property, income, or commercial sales; they also may obtain resources as grants from other governmental agencies, from fines or licenses, and from charges for services. Each fund must make its expenditures in accordance with its specified purposes. For example, a fund established for fire protection cannot be used to provide school buses for the local school. The fire department may make expenditures only as directly related to its function of providing fire protection.
Each governmental fund has its own asset and liability accounts and its own revenue and expenditures accounts.
The term expenditures refers to decreases in net financial resources available under the current financial resources measurement focus. Expenditures are made in accordance with the budget established by the government unit's governing body, and the internal control structure of a vouchers payable system is generally used prior to payments to external vendors. Upon receipt and acceptance of the goods or services from the external vendor, the journal entry to recognize the approved expenditure is a debit to expenditures and a credit to vouchers payable. The increase in the payables decreases the net financial resources available. The payment of the vouchers payable must then be approved by the government's governing body.
Separate fund-based financial statements must be prepared for each fiscal period. In this manner, governing bodies or other interested parties may assess the fiscal and operating performance of each fund in fulfillment of the specific purposes for which each fund was established.
Governmental accounting systems are established on a fund basis in three major categories: governmental, proprietary, and fiduciary. Exhibit 1 presents an overview of each of the funds and provides a brief description of the types of activities accounted for in each fund.
Governmental Funds
Five types of governmental funds are used to provide basic governmental services to the public. These are (1) general fund, (2) special revenue funds, (3) capital projects funds, (4) debt service funds, and (5) permanent funds (see Exhibit 1). The number of governmental funds maintained by the governmental entity is based on its legal and operating requirements. Each governmental entity creates only one general fund, but it may create more than one of each of the other types of governmental funds based on the entity's specific needs. For example, some governmental entities establish a separate capital projects fund for each major capital project.
Proprietary Funds
Some activities of a governmental unit, such as the operation of a public swimming pool or a municipal water
costs in these operations through a system of user charges. The two types of proprietary funds typically used by governmental entities are enterprise funds and internal service funds (see Exhibit 1).
Enterprise funds are used to account for operations similar to those of private businesses. This rendition of services by the enterprise fund to the general fund is presumably at prices equivalent to external exchange values and is classified as an interfund service provided and used. The result is revenue to the seller and an expenditure to the buyer, a governmental fund. Unpaid amounts are interfund receivables or payables. The entry is to debit expenditures control and credit due to enterprise fund.
Internal Service Funds differ from Enterprise Funds because Internal Service Funds provide goods and services primarily to other government agencies. Accounting and reporting for a proprietary fund are similar to accounting for a commercial operation. Both use the accrual basis of accounting like commercial businesses. The financial statements of proprietary funds focus on determination of operating income, changes in net position (or cost recovery), financial position, and cash flows. A proprietary fund accounts for the business-type functions of a government. Users of the financial statements for proprietary funds may find profitability information to be valuable. The statement of net position of each proprietary fund reports all assets, including long-term capital assets, and all liabilities, including long-term liabilities. Two types of funds are classified by the NCGA as proprietary funds:
a) Internal Service Funds. Internal service funds are established by governmental units as a means of providing services to other funds or departments of the same unit, or to other governmental units, on a cost-reimbursement basis. Examples include centralized IT operations, central motor pools and garages, centralized risk-financing activities, and central stores.
b) Enterprise Funds. Enterprise funds are operated to provide electric, water, gas, or other services to the general public on a user-charge basis. Except for ownership, they bear a close resemblance to investor-owned utility or other service enterprises. Enterprise funds are also used to account for activities for which the governmental body desires periodic computation of revenues earned, costs incurred, or net income.
Fiduciary Funds
Four types of fiduciary funds are provided for a governmental unit. Three are trust funds that account for financial resources maintained in trust by the government. These three are pension and other employee benefit trust funds, investment trust funds, and private-purpose trust funds. The fourth fiduciary fund, agency funds, is used to account for resources held by the government solely in a custodial capacity (see Exhibit 1). Note that the permanent fund, which is a governmental fund, includes resources that are legally restricted so that the governmental entity must maintain the principal and can use only the earnings from the fund's resources to benefit the government's programs for all of its citizens. The private-purpose trust funds include trusts under which the principal may or may not be expendable but for which the trust agreement specifies the principal, if expendable, and the earnings may be used only for the benefit of specific individuals, organizations, or other governments. Chapter 2 presents examples of fiduciary funds.
Short Quizzes
Indicate whether each of the following statements is true or false.
1. Fund accounting is a term used to describe an accounting concept which is common throughout all governmental and other nonprofit entities.
2. One of the principal characteristics which distinguishes accounting for state and local governmental units from accounting for business organizations are the use of fund accounting.
3. The word fund in the term fund accounting is used in the same sense as it is ordinarily used in financial accounting for businesses.
4. A fund is an accounting entity; it is also a fiscal entity.
5. A fiscal entity is a group of assets, together with all related liabilities and residual equities, which is set aside by special regulations, restrictions, or limitations for the purpose of carrying on specific activities or attaining certain objectives.
6. An accounting entity is a self-balancing set of accounts.
Answers
1. True. Fund accounting is often used to denote the kind of accounting recommended for governmental and nonprofit entities.
2. True. Fund accounting was developed in recognition of the fact that governmental units operate under many more legal constraints as to the sources and uses of financial resources than do business organizations.
3. False. The word fund in financial accounting may have several different meanings, none of which are the same as the technical definition.
4. True. A fund must be both a fiscal entity and an accounting entity.
5. True. This definition is taken from the definition of fund.
6. True. This definition is taken from the definition of fund.
Exhibit 1 Fund Structure Governmental Fund Types
1. General fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services provided by the executive, legislative, and judicial operations of the governmental entity.
2. Special revenue fund Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Includes resources and expenditures for operations, such as public libraries, when a separate tax is levied for their support.
3. Capital projects fund Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. This fund is in existence only during the acquisition or construction of the facilities and is closed once the project is completed.
4. Debt service fund Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. This fund is used for servicing the long- term debt of the government.
5. Permanent fund Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental programs that benefit the government or its citizenry.
Proprietary Fund Types
6. Enterprise fund Accounts for operations of governmental units that charge for services provided to the general public. Includes those activities financed in a manner similar to private business enterprises where the intent of the governing body is to recover the costs of providing goods or services to the general public on a continuing basis through user charges. Also includes those operations that the governing body intends to operate at a profit. Examples include sports arenas, municipal electric utilities, and municipal bus companies.
7. Internal service fund Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. The services are usually provided on a cost-reimbursement basis and are offered only to other governmental agencies, not the general public. Examples are municipal motor vehicle pools, city print shops, and central purchasing operations.
Fiduciary Fund Types and Similar Component Units 8. Pension (and other
employee benefit) trust fund
Accounts for resources required to be held in trust for the members and beneficiaries of pension plans, other post-employment benefit plans, or other employee benefit plans.
9. Investment trust fund Accounts for the external portion of investment pools reported by the sponsoring government.
10. Private-purpose trust fund
Accounts for all other trust arrangements under which the fund's resources are to be used to benefit specific individuals, private organizations, or other governments, as specified in the trust agreement.
11. Agency fund Accounts for assets held by a governmental unit in an agency capacity for
employees or for other governmental units. An example is the city employees'
payroll withholding for health insurance premiums.
Short Quizzes
Indicate whether each of the following statements is true or false.
1. The seven types of funds recommended by the NCGA are classified as either governmental funds or proprietary funds.
2. The general fixed assets group and the general long-term debt group are accounting entities, but not fiscal entities; therefore, they are not funds.
3. General funds, special revenue funds, and permanent funds are the only NCGA fund types which are classified as governmental funds.
4. Governmental funds focus upon the flow of resources, rather than upon income determination.
5. The proprietary fund designation indicates that the funds operate in a manner similar to investor-owned enterprises.
Answers
1. False. The eleven fund types are classified in three categories: governmental funds, proprietary funds, and fiduciary funds.
2. True. A fund is both a fiscal entity and an accounting entity.
3. False. In addition to the three types listed, capital projects funds and debt service funds are also classified as governmental funds.
4. True. Governmental funds focus upon the flow of revenues and expenditure not upon the matching of revenues and expenses as a business does.
5. True. The proprietary fund designation indicates that the funds operate in a manner similar to investor-
owned enterprises.
Chapter 1 Review Questions - Section 1
1. Fund accounting is used by governmental units with resources that must be ____________
A. Composed of cash or cash equivalents.
B. Incorporated into combined or combining financial statements.
C. Segregated for the purpose of carrying on specific activities or attaining certain objectives.
D. Segregated physically according to various objectives.
2. What is the focus of accounting and reporting for proprietary funds of governmental units?
A. Determination of operating income B. Project completion
C. Current financial resources D. Adherence to the budget
3. A governmental unit could use which of the following types of funds?
A. Fiduciary but not Proprietary
B. Fiduciary and Proprietary
C. Proprietary but not Fiduciary
D. Neither Fiduciary nor Proprietary
Financial Reporting of Governmental Entities
A governmental unit may have a variety of boards, commissions, authorities, or other component units under its control. The financial statements of a governmental entity are presented for the reporting entity, which consists of:
1. The primary government such as a state government, a general-purpose local government, or a special-purpose local government that has a separately elected government body.
2. Component units, which are legally separate organizations for which the primary unit has financial accountability.
3. Other organizations that have a significant relationship with the primary government and need to be included in the primary government's financial statements to avoid misleading or incomplete financial representations.
GASB Statement No. 14, The Financial Reporting Entity (GASB 14), states that financial accountability exists for those component units if the primary government unit appoints a majority of an organization's governing body and
(a) is able to impose its will on the organization, or
(b) possesses a financial benefit or assumes a financial burden for the organization.
The governmental financial reporting model is specified in GASB Statement No. 34, Basic Financial Statements—
and Management's Discussion and Analysis—for State and Local Governments (GASB 34). Exhibit 2 presents the names of the financial statements and the other major information specified by GASB 34. The reporting model has two integrated levels of financial statements.
1. The first level is the fund-based financial statements because governments continue to use fund-based accounting to record transactions in accordance with the legal or budgetary requirements established by their governing body. These fund-based financial statements demonstrate fiscal accountability of the management of each of the funds.
2. The second level is the government-wide financial statements. After preparing the fund-based financial statements, the government prepares reconciliation schedules to go from the governmental fund financial statements to the government-wide financial statements. In addition to the governmental funds, the reporting entity includes other funds in the government-wide financial statements, such as proprietary funds.
The government entity's capital assets, such as buildings and equipment, and long-term debt also are included in the government-wide financial statements. The government-wide financial statements demonstrate the operational accountability of the management of the governmental unit as a whole. Government-wide financial statements exclude the fiduciary funds.
This chapter and the first part of Chapter 2 focus on the fund-based financial statements. After completing our
discussion of each fund type in the next chapter, the government-wide financial statements are presented.
Fund-Based Financial Statements: Governmental Funds
Two financial statements are required for the governmental funds: (1) balance sheet and (2) statement of revenues, expenditures, and changes in fund balance.
Exhibit 2
The Government Reporting Model
1. Independent auditors' report
2. Management's Discussion and Analysis (required supplementary information) 3. Government-wide financial statements
a. Statement of Net Position b. Statement of Activities 4. Fund-based financial statements
a. Governmental funds
(1)
Balance Sheet
(2)
Statement of Revenues, Expenditures, and Changes in Fund Balances
(3)
Reconciliation Schedules (of each of the two governmental fund-based statements to their related government-wide financial statements, either at the bottom of each of the two fund- based financial statements or in an accompanying schedule)
b. Proprietary funds
(1)
Statement of Net Position
(2)
Statement of Revenues, Expenses, and Changes in Fund Net Position
(3)
Statement of Cash Flows c. Fiduciary funds
(1)
Statement of Fiduciary Net Position
(2)
