Governmental Chapter Four Self-Study Questions
Explain why some transactions for governmental activities at the government-wide level are reported differently than transactions for the General Fund. Give some examples of transactions that would be recorded in the general journals of (a) only the General Fund, (b) only governmental activities at the government-wide level, and (c) both.
Under the GASB financial reporting model, governmental activities are reported on a long-term perspective at the government-wide level using the economic resources measurement focus and the accrual basis of accounting, similar to business accounting. This means that both current and noncurrent assets and liabilities, as well as deferred inflows and outflows of resources, are reported on the statement of net position. Revenues, expenses, and other financing sources and uses recognized on the accrual basis, are reported on the statement of activities. Conversely, the General Fund reports on a short-term perspective using the current financial resources measurement focus and the modified accrual basis of accounting. Therefore, the General Fund reports only current assets, current liabilities, and deferred inflows and outflows of resources. Revenues and expenditures and other financing sources and uses, recognized on the modified accrual basis, are reported on the statement of revenues, expenditures, and changes in fund balances. Examples of transactions or events that are recorded only in the General Fund general journal include budgetary entries and encumbrance transactions. Examples of transactions that are recorded only in the governmental activities general journal include depreciation expense on general capital assets and accrual of interest on long-term debt (as discussed in Chapter 6). Purchases of goods and services, salaries and wages, and most revenue items are examples of transactions that are recorded in both the General Fund general journal and the governmental activities journal.
If the General Fund of a certain city needs $6,720,000 of revenue from property taxes to finance estimated expenditures of the next fiscal year and historical experience indicates that 4 percent of the gross levy will not be collected, what should be the amount of the gross levy for property taxes? Show all computations in good form.
$6,720,000=gross levy-(.04 X gross levy) $6,720,000 = (1 - .04) X gross levy $6,720,000 = .96 X gross levy gross levy = $6,720,000/.96 = $7,000,000.
The computer department of a certain city, a General Fund department, charges other funds for data processing services. At the end of the fiscal year, the General Fund is owed $5,000 by the City Library Fund (a special revenue fund) and $8,000 by the City Electric Fund (an enterprise fund) for service billed but still unpaid. How would these interfund receivables and payables be reported in the Governmental Activities column of the government-wide statement of net position?
Because activities of the General Fund and City Library Fund are both reported in the Governmental Activities column at the government-wide level, the $5,000 receivable by the General Fund and payable by the City Library Fund are off-setting and are not reported at the government-wide level. However, since activities of the City Electric Fund are reported in the Business-type Activities column at the government-wide level, the $8,000 balance owed is a receivable of one column (Governmental Activities) and a payable of another column (Business-type Activities). The amounts are reported as a single line item in the Assets section of the statement of net position called Internal Balances, reporting $8,000 in the Governmental Activities column and ($8,000) in the Business-type Activities column.
When preparing the statement or schedule of revenues, expenditures, and changes in fund balance on the budgetary basis, how are encumbrances outstanding at year end treated if they will be honored in the upcoming year?
In the statement or schedule of revenues, expenditures, and changes in fund balance prepared on the budgetary basis, any encumbrances outstanding at year end are added to expenditures in the budgetary basis column. By including any amounts encumbered that are expected to be honored with expenditures, both committed and spent amounts from the year are compared to the current year's budget. Allowing encumbrances to remain outstanding prevents them from being dishonored or reappropriated to a future period. The change in encumbrances outstanding at the beginning and end of the year will have to be added or subtracted from the excess of revenues over expenditures to arrive at a change in fund balance that articulates to the statement of revenues, expenditures, and changes in fund balance.
How does a permanent fund differ from public-purpose trusts that are reported in special revenue funds? How does it differ from private-purpose trust funds?
Permanent funds and special revenue funds are both governmental fund types. If a public-purpose trust requires that the principal amount of the contribution not be expended, but that earnings on the principal (as defined in the trust agreement or by law) can be expended for a specified purpose, the trust must be accounted for in a permanent fund. On the other hand, if the public-purpose trust permits both the principal of the contribution and all earnings to be expended for the specified purpose, then a special revenue fund is used. If a trust provides benefit to an external party, organization, or other government, it is a private-purpose trust and must be recorded in a private-purpose trust fund—a fiduciary fund type.
In many cases, property taxes comprise a significant source of revenue and cash receipts for a government. If property tax cash collections typically occur during one or two collection periods, how do governments manage working capital needs?
Since cash inflows to governments often do not occur on a consistent basis, many governments borrow money on a short-term basis. The taxing power of the government is ample security for short-term debt, thus banks customarily meet the working capital needs of a government by issuing a tax anticipation note from the government.
During a recession citizens and governments see a substantial decline in the value of homes. How might this decline in value impact the a government's gross property tax levy?
Since property tax levies are based on assessed/market values of property, when property values decline and no change in levy rate is made, tax collections will fall, sometimes dramatically. Since this impairs the government's ability to function, the government may be forced to raise the property tax levy in order to stabilize the amount of taxes collected. However, in many cases, a government's taxing authority has limits.
Name the four classes of nonexchange transactions defined by GASB standards and explain the revenue and expenditure/expense recognition rules applicable to each class.
The four classes of nonexchange transactions are (1) derived tax revenues, (2) imposed nonexchange revenues, (3) government-mandated nonexchange transactions, and (4) voluntary nonexchange transactions. For derived tax revenues, such as sales and similar taxes, revenues should be recognized when the underlying exchange (e.g., sale of goods or services) has occurred. Revenues for imposed nonexchange revenues should be recognized when resources are required to be used or the first period that use is permitted. For both government-mandated and voluntary transactions, revenues (and expenses or expenditures for the other party) should be recognized in the period when all eligibility requirements, such as meeting matching requirements, have been met, unless received (or paid) in advance of use in a following period. If cash is received in advance of eligibility requirements having been met, the receipt should be reported as a liability. Resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred inflow of resources by the recipient.
Explain why some governments may account for inventories of supplies using the purchases method in the General Fund and the consumption method at the government-wide level? How would the amount reported for expenditures in the General Fund compare with the amount of expenses reported at the government-wide level if the two methods of inventory accounting are used?
The purchases method is consistent with the modified accrual basis of accounting as an expenditure is recognized for the full cost of supplies when purchased, regardless of the amount used during the year. The consumption method is consistent with the accrual basis of accounting as an expenditure or expense is recognized for the cost of supplies used during the year. Some governments may choose to use the purchases method in the General Fund, since it is more consistent with the modified accrual basis used for budgeting. At the government-wide level, GASB standards require the use of accrual accounting. The purchases method would therefore be inappropriate at the government-wide level.
How does accounting in a governmental fund for the purchase of supplies from an outside vendor differ from the purchase of supplies from an internal service fund?
When recording a purchase from either an internal service fund or an external vendor, a governmental fund will use encumbrance accounting. When goods are received, the encumbrance will be reversed, and an expenditure will be recorded. The primary difference, from the perspective of the governmental fund, is the amount recorded. Purchases from outside vendors are recorded at the purchase price; while purchases from an internal service fund are recorded at the cost to the government as a whole.
