1. Which of the following best describes government-wide statements?

a. combined on a full accrual basisb. combined on a modified accrual basisc. consolidated on a full accrual basis (yes it's consolidated and interfund transfers are eliminated)d. consolidated on a modified accrual basis

2. How many government-wide statements is a major city (e.g., New York, Chicago) required to prepare?

a. twob. threec. fourd. six

3. The net assets section of a government-wide statement of net assets would typically not have a separate category to show amounts invested in

a. capital assetsb. unrestricted assetsc. restricted assetsd. current assets

4. Which of the following funds would not be incorporated into the government-wide statements?

a. enterprise fundsb. permanent fundsc. internal service fundsd. fiduciary funds (yes fiduciary is not belong to government it's belong to trust on behalf its beneficiaries)

5. Which of the following funds is least likely to be separately reported in the governmental funds balance sheet?

a. a general fundb. a nonmajor special revenue fundc. a major capital projects fundd. a major permanent fund

6. Which of the following items is least likely to be reported on Midlake County’s governmental funds balance sheet?

a. the county courthouse (illustrations only reported a)b. amounts due the internal service fundc. amounts due from other governmentsd. amounts invested in federal securities

7. How should a fund balance amount resulting from a city council’s formal action to acquire audiovisual equipment for the city high school be classified in a governmental funds balance sheet?

a. nonspendable fund balanceb. committed fund balancec. unassigned fund balanced. restricted fund balance

8. The year-end balance of inventory should be reported in a governmental funds statement as an asset and

a. assigned fund balanceb. nonspendable fund balancec. restricted fund balanced. unrestricted fund balance

9. Which of the following would not be shown as a revenue of the function ‘‘public safety’’ on Millburg Township’s government-wide statement of activities?

a. a grant from the federal government to acquire radar equipmentb. amounts charged to local funeral homes to provide police escortsc. an appropriation from the town council to pay police officers (appropriation never been in the wide statement, should be elimiate on the closing entries)d. fees charged to the surrounding county to provide services outside of township limits

10. Which of the following would most likely be reported among restricted net assets on a city’s government-wide statement of net assets?

a. the balance in the city’s debt service fund (debt service fund established to finance longterm debt never been in the statement)b. the amount owed to city employees for services rendered since they received their last paychecksc. the actuarial liability of the city’s pension fundd. the cost, less accumulated depreciation, of the city’s highway system

4. In what key ways does the format of the government-wide statement of activities differfrom that of a traditional income statement?

Unlike a business income statement, the aim of the statement of activities is to show the net cost of each of the government’s main functions and programs. The net cost is the amount of functional or program expenses that must be covered by taxes and other general revenues, in contrast to fees and charges of the function or program itself. Accordingly, the statement has several columns. The first shows the expenses of each function or program. Other columns show revenues that are directly attributable to them (the program revenues). The difference between the direct revenues and expenses is the net cost of the function or program — the amount that must be funded by taxpayers or other sources. The funding sources are then

presented in a separate section (in a column below the net cost of all functions and programs).

5. What are the three categories of fund statements?

The three categories of fund statements are governmental funds, proprietary funds, and fiduciary funds.

Governmental-type funds – These funds are used to account for general governmental activities (the day-to-day operating activities), and resources that are restricted as to use. The General Fund accounts for all activities for which no other fund is specified. In effect, it accounts for the day-to-day operating activities of government. Special Revenue Funds account for resources dedicated by law to a specific purpose. The other Governmental-type funds are the Capital Projects, Debt Service, and Permanent Funds. They use the current financial resources measurement focus and the modified accrual basis of accounting.

Proprietary-type funds – These funds are used to account for a government’s business type activities, involving the sale of services or products that are paid for by user charges. Enterprise Funds are used to account for activities that provide services or products to the general public. Internal Service Funds provide for activities that sell services or products within the government. They use the economic resources measurement focus and the accrual basis of accounting.

Fiduciary-type funds – These funds are used to account for resources held by the government in a trustee or agency capacity and that therefore cannot be used to support the government’s own programs. Pension Trust Funds account for pension benefits to government employees. Agency Funds account for resources held, generally for a short period of time, for others in an agency capacity. Other Fiduciary Funds are Investment Trust Funds and Private-Purpose Trust Funds. These funds generally use the economic resources measurement focus and the accrual basis of accounting.

6. What is a committed fund balance in a governmental funds balance sheet? How does it differfrom a restricted fund balance?

Committed Fund Balance The net assets (assets minus liabilities) of a fund that can be used only for the specific purposes determined by the government’s highest level of decision-making authority.

Restricted Fund Balance The net assets (assets minus liabilities) of a fund that are constrained to specific purposes by their providers, constitutional provisions, or by enabling legislation.

7. What are internal service funds? Why are they classified differently in government-wide thanin fund statements?

Internal service funds are used to account for activities in which one government department provides services to others on a cost-reimbursement basis. Internal service activities are operated on a business-like basis. Hence they are classified as proprietary funds and are reported as such on fund statements. However, because the internal service departments typically provide services to departments that are considered governmental (e.g., police, fire, and recreation), they are generally included in the governmental, rather than the business-type, activities column of the government-wide statements.

3-3

Even at this early stage of the course, it is possible to reconstruct journal entries from a balance sheet. The Sherill Utility District was recently established. Its balance sheet after one year is presentedon the next page. Note the following additional information:

a. The general fund received all of its revenue—$150 million—from taxes (all collected). It hadoperating expenditures, excluding transfers toother funds, of $100 million (all paid for).

b. The general fund transferred $20 million to thedebt service fund. Of this, $15 million was torepay the principal on bonds outstanding;$5 million was for interest.

c. The district issued $130 million in bonds tofinance construction of plant and equipment.Of this, it expended $40 million.

1. Prepare journal entries to summarize all transactions in which the district engaged. You neednot make closing entries. Do not be concerned as to the specific titles of accounts to be debitedor credited (e.g., whether a transfer from one fund to another should be called a ‘‘transfer,’’an ‘‘expense,’’ or an ‘‘expenditure,’’ or whether proceeds from bonds should be called ‘‘bondproceeds’’ or ‘‘revenues’’).

2. Comment on how the district’s government wide (full accrual) statement of net assetswould differ from the balance sheet presented.Sherill Utility DistrictBalance Sheet as of End of Year 1(in millions)GeneralFund

CapitalProjectsFundDebtServiceFund TotalsAssets:Cash $30 $ 30Investments $90 $20 110Total assets $30 $90 $20 $140Liabilities andfund balances:Fund balances $30 $90 $20 $140

1.

General fund

Cash  $150Revenues from taxes $150

To record revenues

Expenditures $100Cash  $100

To record expenditures

Transfer to debt service fund $ 20Cash  $ 20

To record transfer to debt service fund

Capital projects fund

Cash  $130Proceeds from bonds $130

To record issue of bonds

Expenditures for construction $ 40Cash  $ 40

To record amounts spent on construction

Investments $ 90Cash  $ 90

To record the investment of the cash

Debt service fund

Cash  $ 20Transfer from general fund $ 20

To record transfer from general fund

Investments $ 20Cash  $ 20

To record the investment of the cash

2. The government-wide statements would differ in that:

the funds would be consolidated; there would be only one column the $40 million expended to construct plant and equipment would be reported as assets the $130 million of bonds issued would be reported as liabilities

3-5Consolidated balances are not substitutes for individual fund balance sheets.The combined governmental funds balance sheet of the town of Paris is presented on the facingpage.Per schedules included in the notes to thefinancial statements, the town had $1,450 of capitalassets (net of accumulated depreciation) and $1,315in long-term liabilities associated with the capitalassets.1. Recast the balance sheets in the form of asingle consolidated, full accrual balance sheet.2. Put yourself in the place of an analyst. Thetown mayor presents you with the consolidatedbalance sheet. He asserts that the town’sfinancial position is excellent, as measured bythe exceedingly ‘‘healthy’’ fund balance. Basedon the combined balance sheet that shows theindividual fund types, why might you be skepticalof his claim?3. Comment on why a consolidated balance sheetis no substitute for a combined balance sheetthat reports upon major funds.

Town of ParisCombined Balance SheetGeneralFundSpecialRevenue

FundCapitalProjectsFundDebtServiceFundPermanent(Endowment)Fund TotalsAssets:Cash $ 38 $ 20 $ 35 $340 $ 10 $ 443Investments 105 60 480 136 960 1,741Due from other funds — 120 46 39 — 205Total assets $143 $200 $561 $515 $970 $2,389Liabilities and fundbalances:Accounts payable $ 8 – – – – $ 8Due to other funds 205 – – – – 205Fund balances (70) $200 $561 $515 $970 2,176Total liabilities andfund balances$143 $200 $561 $515 $970 $2,389

1.Town of Paris

Statement of Net Assets(in millions)

AssetsCash $ 443Investments 1,741Capital assets (net of accumulated depreciation) 1,450 Total assets $3,634

Liabilities and Net Assets

Accounts payable $ 8Bonds payable 1,315Net assets Invested in capital assets, net of related debt $ 135 Unrestricted — General (70) Restricted — Special revenues 200 Restricted — Capital projects 561 Restricted — Debt service 515 Restricted — Endowment (permanent funds) 970 2,311 Total liabilities and net assets $3,634

2. The unrestricted net assets — those which can be used to meet normal operating expenditures — appear rather small. Indeed, were it not for the addition of the net investment in capital assets (fixed assets less bonds payable) they would be negative. Moreover, the unrestricted general fund owes $205 — an amount not shown on the consolidated statement of net assets — to other funds. Thus, it appears that the town is borrowing from restricted funds to meet its operating costs. The largest fund balance, that of the permanent endowment fund, accounts for nearly half of the fund balances reported. By the very nature of a permanent fund, only the interest, not the principal, is available for expenditures.

3. Consolidated, government-wide, statements of net assets usually do not offer enough detail to allow the user to distinguish between restricted and unrestricted resources. Hence, there is also a need for individual fund statements.

3-6Exploring Vero Beach’s financial report Refer to the financial statements of the City ofVero Beach that are included in this chapter.

1. Per the government-wide statement of activities, how much did the city incur in expense forpublic safety? Of this amount, how much had to be covered from general tax and otherunrestricted revenues?

2. Per the governmental funds statement of revenues, expenditures, and changes in fund balances, how much did the city incur in expenditures for public safety? How do youaccount for the difference between this amount and your response to question 1?

3. Per the government-wide statement of activities, what was the ending balance in net assetsassociated with governmental activities? Is this consistent with the government-wide statementof net assets?

4. How much was transferred (net) from businesstype to governmental activities during the year?

5. How much in taxes did the city direct to the support of business-type activities?

6. Vero Beach’s statements include a schedule (Table 3-6) that reconciles its statement ofrevenues, expenditures, and changes in fund balances of governmental funds to thegovernment-wide statement of activities. However, the city’s statements do not includea corresponding reconciliation of the statement of revenues, expenses, and changesin fund net assets of proprietary funds to the government-wide statement of activities.Why not?

7. As noted in the text, government-wide statements are on a full accrual basis, so the statementof activities includes charges for depreciation. How much did Vero Beach charge for depreciation on capital assets used during the year for governmental activities?

8. How much of the city’s governmental activities assets are classified as capital? Howmuch of the city’s governmental activities liabilities were used to finance those capitalassets?

9. Almost 90% of the total amount of capital assets reported in the government-widestatement of net assets are devoted to business-type activities. What is the most likely explanation of why the proportion of assets directed to business-type activities is somuch greater than that devoted to governmental activities?

1. The city expended $8,094,139 on public safety. However, $157,792 thousand was covered by charges for services and $10,144 was covered by capital grants and contributions. Hence, $7,926,203 was left to be covered from general tax and other unrestricted revenues.

2. Per the governmental funds statements, the city incurred $7,928,561 in public safety expenditures ($7,065,511from the general fund and $863,050 from other governmental

funds). The difference between this and the $8,094,139 per the government-wide statement of activities is almost certainly attributable to the difference in the basis of accounting — full accrual in the statement of activities (including depreciation expense); modified accrual in the funds statements.

3. The ending balance in net assets per the government-wide statement of activities was $41,740,631 — an amount consistent with that reported on the government-wide statement of net assets.

4. Per the statement of activities, a net amount of $1.8 million was transferred from business-type activities to governmental activities ($3.5 million transferred to governmental activities less $1.7 million received from governmental activities).

5. The city did not direct any taxes to business-type activities. This is not surprising since business-type activities are typically expected to be self-supporting.

6. In the government-wide statements, governmental activities are accounted for on a full accrual basis; in the fund statements they are accounted for on a modified accrual basis. A reconciliation is required to account for the differences. By contrast, in both the government-wide and the fund statements, business-type activities are accounted for on a full accrual basis. Therefore, a reconciliation generally is not needed.

7. Per the reconciliation of the statement of revenues, expenditures, and changes in fund balances of governmental funds to the statement of activities (Table 3–6), the government incurred $1,675,647 in depreciation charges for governmental activities.

8. Per the government-wide statement of net assets, $36,420,664 of the governmental activities assets are capital and $20,349,914 of net assets are invested in capital assets, net of related debt. Therefore, $16,070,750 of governmental activities liabilities ($36,420,664 less $20,349,914) are associated with the capital assets.

9. It is common in many governments for the capital assets of business-type activities to far exceed those of the governmental activities mainly because business-type activities include the operation of utilities, which are capital intensive. For example, as is shown in the statement of net assets for proprietary funds, Vero Beach operates an electric system and a water and sewer system, which together account for almost two-thirds of the city's capital assets.