Ch 6 G & NFP Proprietary Funds: Questions

Proprietary Funds Q5 The city water department purchased equipment used in the water treatment plant. The equipment would be reported: Multiple Choice 1. as a capital asset in the Government-Wide Statement of Net Position. 2. as a capital expenditure in the Proprietary Fund Statement of revenues, expenditures and changes in net position. 3. both of the above. 4. neither of the above.

1

Proprietary Funds Which of the following financial statements are NOT required for proprietary funds? Choose the correct answer. 1.Statement of Retained Earnings 2. Statement of Revenues, Expenses and Changes in Net Fund Position 3. Statement of Cash Flows 4. Statement of Net Position

1

Enterprise funds: Choose all that apply. 1. need operating profits for working capital, expansion and debt retirement 2. may use profits to support general government expenditures 3. may not be established with the intent to operate at a significant profit

1, 2

Which of the following statements regarding enterprise funds are true? Choose all that apply. 1. Construction activities of a governmental enterprise are accounted for within the enterprise fund 2. Debt service of a governmental enterprise are accounted for within a special debt service fund. 3. Budgetary accounts are always used. 4. The reports of enterprise funds are self-contained.

1, 4

Proprietary Funds Q2 The categories of Net Position for a proprietary fund are classified within which of the following categories? Multiple Choice 1. Non-spendable Net Position and Spendable Net Position. 2. Net Investment in Capital Assets, Restricted Net Position and Unrestricted Net Position. 3. Committed Net Position, Assigned Net Position and Unassigned Net Position. 4. Restricted Fund balance, Committed Fund balance, Assigned Fund Balance, and Non-spendable Fund Balance.

2

Proprietary Funds Q4 Activities that produce goods or services to be provided to other departments or other governmental units would most commonly be reported in which fund? Multiple Choice 1. Enterprise fund. 2. Internal service fund. 3. Agency fund. 4. Special revenue fund.

2

Proprietary Funds Q8 Interfund services provided to the General Fund by an internal service fund are recognized by the internal service fund as: Multiple Choice 1. Transfers In. 2. Revenue. 3. Expenditures. 4. Increases in Fund Balance.

2

Proprietary Funds What category of funds charge users enough to at least cover the cost of providing the good or service? 1. Special Revenue 2. Proprietary 3. Fiduciary 4. General

2

Construction Work in Progress Choose all that apply. 1. excludes interest on construction bonds 2. is subject to depreciation 3. can include payroll costs 4. includes materials and supplies

2, 3

Proprietary Funds Proprietary funds Choose all that apply. 1. Do not record capital assets used in fund operations. 2. Use the economic resources measurement focus. 3. Use the accrual basis of accounting. 4. Record long-term debt serviced from fund revenues.

2,3,4

Proprietary Funds Q1 Which financial statements are required for a proprietary fund? Multiple Choice 1. Income statement, Statement of Net Position and Statement of Cash Flows. 2. Statement of Revenues, Expenses and Changes in Fund Balance, Statement of Net Position and Statement of Cash Flows. 3. Statement of Revenues, Expenses and Changes in Fund Net Position, Statement of Net Position, and Statement of Cash Flows. 4.Statement of Revenues, Expenses and Changes in Fund Net Position and Statement of Net Position.

3

Proprietary Funds Q10 Net Position: Net Investment in Capital Assets is calculated as: Multiple Choice 1. (Capital Assets - Accumulated Depreciation). 2. (Capital Assets - Accumulated Depreciation) + the balance of debt issued to finance capital assets. 3. (Capital Assets - Accumulated Depreciation) - the balance of debt issued to finance capital assets. 4. (Capital Assets - Accumulated Depreciation) - long-term debt.

3

Proprietary Funds Q6 Enterprise funds must be used in which of the following circumstances? Multiple Choice 1. When the activities are expected to make a profit to be used to fund other government programs. 2. When services are provided to other governmental units for a fee. 3. When debt is backed solely by fees and charges. 4. Revenue sources are restricted by city ordinance or law.

3

Proprietary Funds Q3 In addition to Cash Flows from Operating Activities, the Statement of Cash Flows for a proprietary fund would include which of the following? Multiple Choice 1. Cash Flows from investing and financing activities. 2. Cash Flows from capital and related financing, and investing activities. 3. Cash Flows from investing, fiduciary and capital related financing activities. 4. Cash Flows from investing, capital and related financing and noncapital related financing activities.

4

Proprietary Funds Q7 Why might it be desirable for an enterprise fund to operate at a surplus? Multiple Choice 1. Establish adequate working capital. 2. Provide for expansion of physical facilities. 3. Retire debt. 4. All of the above.

4

Proprietary Funds Q9 The journal entry to write off an uncollectible account receivable by a city water department would include: Multiple Choice . 1. A debit to Bad Debt Expense. 2. A credit to Allowance for Uncollectible Accounts. 3. Both of the above would be included in the journal entry. 4. Neither of the above would be included in the journal entry.

4

Proprietary Funds __ may be prepared for proprietary funds to facilitate management of fund activities, but GASB standards do not require budget-actual reporting.

Budgets

Proprietary Funds __ used in fund operations and long-term debt serviced from fund revenues are recorded in the accounts of each proprietary fund. Depreciation on capital assets is recognized as an expense, and accruals and deferrals common to business accounting are recorded in proprietary funds.

Capital assets

Proprietary Funds Funds used to report activities in which users are charged a fee for goods or services. They are appropriate when individuals or businesses external to the government are the predominant users.

Enterprise Fund

Proprietary Funds Funds used to report activities that provide goods and services to other funds, departments, or agencies on a cost-reimbursement basis. They are used when the government is the predominant user of the goods or services.

Internal Service Fund

Proprietary Funds __ is computed as capital assets less accumulated depreciation minus the balance of any debt associated with the acquisition of capital assets. Unrestricted Net Position is the residual account for any net resources that are not classified in either of the other two categories.

Net Investment in Capital Assets

Proprietary Funds The category __ is calculated using end of period balances in capital assets, accumulated depreciation, and debt. Borrowings for operations (if any) would not be subtracted here. In most cases, internal service funds will not have __. Unrestricted Net Position is the residual balance calculated after the other two categories.

Net Investment in Capital Assets, Restricted Net Position

Proprietary Funds Recall that the net position of governmental funds is termed Fund Balance and is classified within five categories. In contrast, the excess of assets over liabilities of proprietary funds is termed Net Position and classified within three categories: 1. __ 2. __ 3. __

Net Investment in Capital Assets, Restricted Net Position, Unrestricted Net Position

Proprietary Funds Three financial statements are required for proprietary funds: a Statement of __ (or Balance Sheet); a Statement of Revenues, Expenses, and Changes in Fund Net Position; and a Statement of Cash Flows. As is true for governmental funds, enterprise funds are reported by major fund, with __ funds presented in a separate column. However, __ funds are combined and reported in a single column.

Net Position, nonmajor, internal service

Proprietary Funds Comparison between governments is difficult when:

Only one government uses internal service funds.

Proprietary Funds __ use the economic resources measurement focus and the accrual basis of accounting. Because revenues and expenses (not expenditures) are recognized on the accrual basis, financial statements of proprietary funds are similar in many respects to those of business organizations.

Proprietary funds

Proprietary Funds __ is defined as net resources whose use is restricted by external parties (creditors, grantors, or other governments) or by internally imposed laws.

Restricted Net Position

Proprietary Funds True or false: GASB standards do not require budget-actual reporting for proprietary funds.

True

Proprietary Funds __ is the residual account for any net resources that are not classified in either of the other two categories.

Unrestricted Net Position

Proprietary Funds The use of __ accounting permits financial statement users to observe whether proprietary funds are operated at a profit or a loss. The __ basis of accounting requires revenues to be recognized when earned and expenses to be recognized when goods and services are used.

accrual, accrual

Proprietary Funds INTERNAL SERVICE FUNDS Net position (fund equity) is reported in three categories: (1) net investment in __; (2) __; and (3) __.

capital assets, restricted, unrestricted

Services provided to the public are accounted for in __ funds.

enterprise

Proprietary Funds All of the funds discussed in previous chapters (General, special revenue, capital projects, debt service, and permanent) are classified as governmental funds. They exist to raise revenue and other resources to provide services or acquire facilities to aid in the provision of public services. Funds discussed in previous chapters record only current financial resources and liabilities that will be settled with current financial resources. Capital assets and long-term debt are not reported in __, but are presented in government-wide statements. Governmental funds recognize encumbrances and expenditures, not expenses.

governmental funds

Proprietary Funds Services provided to other govenment departments are accounted for in __ __ funds.

internal service

Proprietary Funds Establishment and Operation of Internal Service Funds Departments and units expected to purchase goods and services from internal service funds should include in their budgets the anticipated outlays for goods and services. During the year, as supplies are issued or services are rendered, the __ records operating revenues (Charges for Services is an account title commonly used instead of Sales). Since the customer is another department of the government, a journal entry to record the purchase is recorded at the same time the internal service fund records revenue. If the other fund is a governmental fund, the purchase is recorded as an expenditure.

internal service fund

Proprietary Funds Two types of funds are classified as proprietary funds: __and __. Internal service funds provide services to other government departments and charge those departments for the services received. Enterprise funds provide services to the public.

internal service funds, enterprise funds

Proprietary Funds Establishment and Operation of Internal Service Funds Because internal service funds are established to improve the __, they should be operated and accounted for on a businesslike basis. For example, assume that administrators request the establishment of a fund for the purchasing, warehousing, and issuing of supplies used by a number of funds and departments. A budget should be prepared for the internal service fund (but not recorded in the accounts) to demonstrate that fund management has realistic plans to generate sufficient revenues to cover the cost of goods issued and such other expenses, including depreciation, that the governing body intends fund operations to recover.

management of resources

Proprietary Funds As we discussed in Chapter 1, if the accounting treatment for a given transaction is not specified by a GASB pronouncement, a government may use __sources for guidance, including FASB standards dealing with similar events.

nonauthoritative

Proprietary Funds Establishment and Operation of Internal Service Funds Periodically and at year-end, an __ should be prepared for each internal service fund to compare revenues and related expenses; these operating statements, called Statements of Revenues, Expenses, and Changes in Fund Net Position, are similar to income statements prepared for investor-owned businesses.

operating statement

Proprietary Funds INTERNAL SERVICE FUNDS As governments become more complex, efficiency can be improved if services used by several departments or funds or even by several governmental units are combined in a single department. Purchasing, printing services, garages, janitorial services, and risk management activities are common examples. Activities that produce goods or services to be provided to __ on a cost-reimbursement basis are accounted for by __. Internal service funds recognize revenues and expenses on the accrual basis. They report capital assets used in their operations and long-term debt to be serviced from revenues generated from their operations, as well as for all current assets and current liabilities.

other departments, internal service funds

Funds that are used to account for activities similar to those engaged in by commercial businesses are called __ funds.

proprietary

Proprietary Funds A second fund classification, __, describes funds that are used to account for activities similar to those often engaged in by commercial businesses. That is, users of goods or services are charged amounts at least sufficient to cover the costs of providing the goods or services. Thus, in the pure case, proprietary funds are self-supporting.

proprietary funds

Proprietary Funds Because __ use the accrual basis of accounting, governments historically used FASB standards to provide guidance in accrual-based financial statements for items not specifically covered by GASB statements. Recently the GASB clarified this practice by incorporating specific FASB standards into the GASB codification. Among the more common topics incorporated from FASB standards are the following: 1. Error corrections and changes in accounting principles and estimates 2. Contingencies 3. Extraordinary items 4. Capital and operating leases 5. Current asset and liability classification 6. Capitalization of interest costs 7. The equity method for investments in common stock

proprietary funds

Proprietary Funds Establishment and Operation of Internal Service Funds The establishment of an internal service fund is normally subject to legislative approval. The original allocation of resources to the fund may be derived from a transfer of assets of another fund, such as the General Fund or an enterprise fund, intended as a __ not to be repaid or as a loan that is in the nature of a long-term __ to be repaid by the internal service fund over a period of years.

transfer, advance