CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS

CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS;BUDGETARY ACCOUNTING

OUTLINE

Number Topic Type/Task Status(re: 13/e)

Questions:3-1 GASBS 34 Reporting Model Explain New3-2 Statement of activities format Describe New3-3 Direct and indirect expenses Define 3-1

revised3-4 Program and general revenue Distinguish 3-2

revised3-5 Fund equity vs. net assets Define and

compareSame

3-6 Real accounts and budgetary accounts

Distinguish Same

3-7 Expenditure classifications - examples

Classify Same

3-8 Revenue classifications Classify Same3-9 Budgets - GAAP basis Explain Same3-10 Public school systems Explain Same

Cases:3-1 Revenue and expense/expenditure

classificationInternet, examine, describe

New

3-2 Budgetary comparison schedule Internet, examine, describe

New

3-3 Charter schools (public school academies)

Internet, explain

Same

Exercises/Problems:3-1 CAFR Examine 3-1,

revised

3-1

3-2 Various Multiple Choice

Revised

3-3 Johnson City—budgets Journal Entries

3-3 revised

3-4 Johnson City—appropriations (cont’d)

Journal Entries

3-4 revised

3-5 GF trial balance and closing entries

Calculate 3-5 revised

3-6 Subsidiary ledgers Calculate 3-6 revised

3-7 Appropriations, encumbrances, expenditures

Calculate Same

3-8 Recording budget and operating transactions

Journal entries; Calculate

New

3-9 Government-wide statement of activities

Prepare 3-8 revised

3-2

CHAPTER 3:GOVERNMENTAL OPERATING STATEMENT ACCOUNTS; BUDGETARY ACCOUNTING

Answers to Questions

3-1. Whereas the governmental fund financial statements report current financial resources information intended to help users assess short-term fiscal accountability, the Governmental Activities column of the government-wide financial statements helps users assess long-term operational accountability by reporting financial information using the economic resources measurement focus and accrual basis of accounting—similar to the focus and basis used for business financial statements. The government-wide financial statements are one of the principal innovations of the GASBS34 reporting model.

3-2. Using the net (expense) or revenue format, sometimes referred to as the “cost of services” approach, identifies the extent to which each function or program is self-supporting from fees and intergovernmental aid, or must be subsidized by general revenues of the government.

3-3. Direct expenses are those specifically associated with a function or program. Indirect expenses are those that are not directly linked to an identifiable function or program. Depreciation expense is reported as a direct expense when itrelates to capital assets that are clearly identified with afunction or program because it captures a real cost of usingcapital assets to provide that service function or program. Even depreciation expense for infrastructure assets should be reported as a direct expense of the public works or transportation function, if that is the function responsiblefor those assets. Interest on general long-term liabilities is an indirect expense and should be reported as a separate line item before total governmental activities because it generally is incurred to support a broad array of governmentfunctions and programs.

3-3

3-4. a. General revenues.b. Program revenues.c. Program revenues.d. Program revenues.e. Program revenues.f. General revenues.g. General revenues.

3-5. Fund equity is the arithmetic difference between the amount of financial resources and amount of liabilities recorded inthe fund. For governmental funds, fund equity is partitioned between reserved fund balance accounts and unreserved fund balance accounts. At the government-wide level, the counterpart to fund equity is net assets (assets minus liabilities), which is partitioned between unrestricted and restricted net assets and invested in capital assets, net of related debt.

3-4

Ch. 3, Answers, 3-5 (Cont’d)

The operating statement accounts (revenues, expenditures, and other financing sources/uses) and budgetary accounts (estimated revenues, appropriations, encumbrances, and estimated other financing sources/uses) of governmental funds are all closed to(unreserved) fund balance at year-end. For governmental activities, revenues and expenses are closed to unrestrictednet assets, unless they are restricted.

3-6. Definitions of these terms are given in the Glossary of the text. Below are briefer statements:

a. Expenditures and Encumbrances are both charges against appropriations. An encumbrance is a charge for an estimated amount at the time goods are ordered; an expenditure is a charge for an actual amount at the time the goods are received (accrual and modified accrual basis) or paid (cash basis). These accounts are used inthe governmental funds because those funds utilize budgetary accounting.

b. Revenues are increases in net assets of the government as a whole or of a fund other than from interfund transfers or debt issue proceeds, recognized at the time the increase is earned (accrual basis), available for use (modified accrual basis) or received in cash (cash basis). Estimated revenues are amounts expected to be available for use or received under enabling legislation during a budget period. Estimated Revenues is a budgetary account representing the expected amountof revenues to be realized from various sources.

c. Encumbrances is defined in a above. Reserve for Encumbrancesis a balance sheet account representing the amount segregated from Fund Balance for expected liabilities resulting from purchase orders and contracts issued and

3-5

will be reported in the governmental funds balance sheet.

d. Reserve for Encumbrances is defined in c above. The Fund Balance of a governmental fund is the excess of fund assets over fund liabilities, appropriations, and reserves; in short, the assets available for appropriation [defined in e below] in governmental funds.

e. Expenditures is defined in a above. An Appropriation is an authorization by the legislative branch for administrators to incur expenditures for specified purposes not to exceed specified amounts. Usually the authorization is for a limited time. Appropriations is a budgetary account.

f. Expenditures, defined in a above, represent outflow of current financial resources for asset acquisition as well as for salaries, supplies for immediate consumption, travel, etc.—whatever is specified in the appropriations and is the term used in fund financial statements. Expenses, in governmental accounting as wellas business accounting, are expired costs; the full cost of services or goods

3-6

Ch. 3, Answers (Cont'd)

consumed in providing services to citizens and others. Expenses are found in the government-wide financial statements as well as in the proprietary financial statements.

3-7. a. Organization unit f. Both character and objectb. Function g. Programc. Activity h. Functiond. Activity i. Organization unite. Object j. Object

3-8. a. Taxes e. Intergovernmental revenue

b. Charges for services f.Miscellaneous revenuesc. Licenses and permits g. Charges for servicesd. Fines and forfeits h. Licenses and permits

3-9. In order for budget to actual comparisons to be meaningful, actual revenues and expenditures must be reported in the same manner as the budgeted amounts. Actual revenues and expenditures reported in the statement of revenues, expenditures, and changes in fund balances should be on the GAAP basis. GASB standards identify several possible types of differences between GAAP and budgetary financial accounting. These include basis, timing, perspective, and entity. GASBS 34 requires that reconciliation of the differences between amounts reported in the GAAP basis operating statement and those reported in the budgetary comparison schedule, either on the face of the budgetary comparison schedule or on a separate page.

3-10. Public school systems are expected to follow the classification system specified by the National Center for Education Statistics (NCES), as refined or mandated by a state education oversight body. The NCES system combines the GASB expenditure classification structure into nine categories, most of which are necessary for adequate

3-7

internal management and comparable financial reporting across schools.

The NCES revenue classification scheme also groups classifications into numerous categories, but are generally classified by fund, source, and project/reporting code. The NCES expenditure and revenue dimensions should be compared with the corresponding GASB expenditure and revenue classifications described in this chapter. GASB standards require that expenditures be classified by fund, function orprogram, organization unit, activity, character, and object and that revenues be classified by fund and source. Comparison of the NCES and GASB classification show that they are generally compatible, but the NCES classification structure is considerably more detailed to meet the unique reporting needs of public school systems.

Solutions to Cases

3-1. Students should easily be able to locate a city’s Web site, then explore the Finance Department (or comparable name) link and look for links to financial reports.

3-8

Ch. 3, Solutions, Case 3-1 (Cont’d)

Alternatively, a number of cities have links to their CAFRs from the “GASB 34” link of the GASB Web site (www.gasb.org).Responses to each of the questions in this case will depend on how a particular city classifies its revenues and expenses/expenditures.

a. Occasionally, one may find a city that classifies its program revenues and direct expenses by program, but functional classifications, similar to those described inthis chapter, are much more common. In most cases, all function or program line items on the statement of activities will report a net expense, with numbers in parentheses.

b. On the statement of revenues, expenditures, and changes in fund balances, revenues and expenditures are reported in separate columns for the General Fund and other major governmental funds. Information for all nonmajor governmental funds is reported in aggregate in a single column. Students will likely find that the revenues reported on this statement are classified by source (taxes, licenses and permits, charges for services, etc.). Some cities will report a different amount for tax revenues on their statement of activities than on their statement of revenues, expenditures, and changes infund balances because all tax revenues levied for the year will be reported on the former statement, while those that will not be collected during the current fiscal year or within 60 days thereafter will be reportedas deferred taxes on the latter statement.

c. Expenditures will generally be classified by function on the statement of revenues, expenditures, and changes in fund balances and, infrequently, by program. Students are almost certain to find different amounts reported forexpenses on the statement of activities and expenditures on statement of revenues, expenditures, and changes in fund balances. Among other explanations, expenses exclude outlays for capitalized assets, but include

3-9

http://www.gasb.org/

depreciation expense; expenditures include capital outlays but exclude depreciation expense. Generally, expenses and expenditures will not be the same amounts for the reasons just explained.

3-2. Again the responses to individual questions will depend on the practices of the particular city selected. Some generalexpectations are described for each question below. a. Typically more detail is provided for revenues and

expenditures in the budgetary comparison schedule, thoughnot always. The reason for including more detail in the budgetary comparison schedule, both for revenues and expenditures, is to better match the level of detail usedin the budget document. For revenues, cities often report budget and actual information for subclasses of sources, such as various types of taxes. For expenditures, cities sometimes report budget and actual information for organization units and objects.

b. Students will probably find that actual revenues on the budgetary comparison schedule agree in amount with those reported on the GAAP operating statement. If a difference is noted between these amounts, it is likely attributable to revenues being recognized on a cash basisfor budgetary purposes, rather than modified accrual.

c. Some students will discover that actual expenditures on the budgetary comparison schedule differ from those reported on the GAAP operating statement. The explanation given in most of these cases will be that expenditures on the budgetary comparison schedule also include encumbrances outstanding at year-end.

3-10

Ch. 3, Solutions, Case 3-2 (Cont’d)

d. If actual revenues and/or expenditures are prepared on a non-GAAP budgetary basis, the budgetary comparison schedule should indicate such, either in the schedule heading or the Actual column heading.

e. Although a variance column is not required by GASB standards, it is difficult to imagine a city not providing one as a service to financial report users.

3-3. In most states, charter schools (or public school academies)are considered public schools receiving public funds. Consequently, these schools should follow GASB standards in order to ensure that financial statements conform to generally accepted accounting principles. Generally, these schools are small and may only have need for a General Fund and a special revenue fund for their food service program. The revenue and expense classification scheme described in the Appendix to Chapter 3, based on NCES guidance, is an appropriate starting place for building a chart of accounts and an accounting information system. Budgetary accounting is required by GAAP.

The U.S. Charter Schools website (www.uscharterschools.org )provides valuable guidance in developing systems of financial and operational accountability for those who are new to charter schools, as well as links to other resources.Students should check their own state’s Department of Education (or comparable agency) for other guidance for traditional pre-K through 12 schools. The Michigan Association of Public School Academies also provides resources for charter schools and their accountants (www.charterschools.org ).

Solutions to Exercises and Problems

3-1. Each student should have a different governmental annual report, so will have different answers to the questions in

3-11

http://www.charterschools.org/

http://www.uscharterschools.org/

this exercise. Some time spent in class to allow students toreport on their own answers and to get an idea of the range of answers of other students is useful.

3-2. 1. c. 6. c.2. d. 7. c.3. a. 8. b.4. c. 9. c.5. a. 10. b.

3-12

Chapter 3, Solutions (Cont’d)

3-3. JOHNSON CITY

a. Estimated revenues total—coming year $

9,300,000

Appropriations total—coming year 9,600,000

Therefore, fund balance at the end of

the current year must be at least $

300,000

or the fund would be thrown into a deficit.

General Ledger Subsidiary Ledger

Debits Credits Debits Credits

b. ESTIMATED REVENUES 9,300,000

FUND BALANCE 300,000

APPROPRIATIONS 9,600,000

Estimated Revenues Ledger:

TAXES 6,000,000

LICENSES AND PERMITS 800,000

FINES AND FORFEITS 500,000

INTERGOVERNMENTAL REVENUES 2,000,000

Appropriations Ledger:

GENERAL GOVERNMENT 1,900,000

3-13

PUBLIC SAFETY

4,000,000

HEALTH AND WELFARE 1,800,000

PUBLIC WORKS

1,900,000

3-14

Ch. 3, Solutions (Cont’d)

3-4.



a. ENCUMBRANCES2008 650,000

RESERVE FOR

ENCUMBRANCES2008 650,000

Encumbrances Ledger:

GENERAL GOVERNMENT 100,000

PUBLIC SAFETY 400,000

PUBLIC WORKS 150,000

b. Purchase orders issued by a governmental fund have the

effect of using all or a portion of one or more

appropriations for that fund. Issuance of purchase orders

or other commitment documents is a step in the expenditure

of an appropriation; administrators may be subject to legal

penalties if they expend more resources than were

appropriated. Recording encumbrances helps administrators

avoid overexpending appropriations.

The same legal issues do not exist in business

organizations, although a well-managed business should

certainly keep track of outstanding purchase orders and

contracts to have a clear understanding of what transactions

are in process that will result in the acquisition of

3-15

assets, the incurring of expenses, and the incurring of

liabilities.

3-16

Ch. 3, Solutions (Cont'd)

3-5.a. Fund Balance at 6-30-2008 after all closing entries is

$114,.

Closing Journal Entries at 6-30-2008:Debits Credits

(1) APPROPRIATIONS 1,551,600

FUND BALANCE 4,600

ESTIMATED REVENUES 1,556,200

(2) REVENUES 1,457,300

FUND BALANCE 3,700

EXPENDITURES 1,349,000

ENCUMBRANCES 112,000

Journal Entry at 7-1-2007 to record the budget for the 2008 fiscal year:

ESTIMATED REVENUES 1,556,200


FUND BALANCE 4,600

FUND BALANCE

?? Balance at 6-30-2007

4,600 To record FY 2008 budget

122,500 Pre-closing balance at 6-30-2008(1) 4,600

3-17

(2) 3,700

114,200 Post-closing balance at 6-30-2008

b. Fund Balance at 6-30-2007, the beginning of the FY 2008, was$117,900 ($122,500 – 4,600).


3-6.

a. $14,980,000 (the sum of the amounts presently in the

Estimated Revenues column of the subsidiary ledgers).

b. $15,000,000 (the sum of the 01/01 entries in the Estimated

Revenues column)

c. 1. Yes

2. 02/28 (45 6 folio entry to Property Taxes)

3. $20,000

4. Decreased

d. $12,080,000 (the sum of the amounts in the Revenues column)

e. Property tax revenue is being accrued; revenue from the

other three sources is being recognized when the cash is

3-18

received; that is, when it is first measurable and available

according to the modified accrual basis of accounting.

3-19


3-7.a. $62,200. The refund of prior year expenditure and the

refund on P.O. 350 do not add to appropriation

authoritythe former is generally reported as revenue of

the current year; the latter is a reduction of expenditures

from this year's appropriation. Similarly, the cost of

stationery transferred to the Town Water Utility is a

reimbursement of expenditures from this year's

appropriation. The unauthorized transfer of $46,000 from

Office Supplies to Personal Services should be disregarded.

b. None. The outstanding purchase orders, #378 and #385, are

not for office supplies but for office equipment and should

not have been charged to this appropriation.

Clerical errors in recording the encumbrance for #356, the

encumbrance credit for #350, and the erroneous charge of

#380 to this appropriation and failure to credit

Encumbrances when #380 was filled do not affect the

computation of the correct answer to b, although they would

need to be corrected in the account—if the "comparison" is a

subsidiary ledger account.

c. $1,110 (#350, $605; #356, $420; #370, $425; less $330 and

$10 considered reimbursements of this year's expenditures of

this appropriation).

3-20

d. $61,090 ($62,200 - $1,110).

3-21


3-8.



a. ESTIMATED REVENUES 2,700,000

FUND BALANCE 50,000


Estimated Revenues Ledger:

TAXES 1,900,000



INTERGOVERNMENTAL

REVENUES 200,000

Appropriations Ledger:

GENERAL GOVERNMENT

500,000

PUBLIC SAFETY

1,600,000

PUBLIC WORKS 350,000

PARKS AND RECREATION 150,000

MISCELLANEOUS 50,000

b.

1. CASH 43,000

REVENUES 43,000

3-22

Revenues Ledger:



3-23

Ch. 3, Solutions, 3-8 (Cont'd)

2. ENCUMBRANCES—2008 29,900

RESERVE FOR

ENCUMBRANCES—2008 29,900




PUBLIC WORKS 6,100


MISCELLANEOUS 900

3. RESERVE FOR



EXPENDITURES—2008 29,200

CASH 29,200




PUBLIC WORKS 5,900


MISCELLANEOUS 900

Expenditures Ledger:



PUBLIC WORKS 6,100


3-24

MISCELLANEOUS 900

3-25


c. CALCULATION OF BUDGETED BUT UNREALIZED REVENUES

AS OF JULY 31, 2007

UNREALIZED

SOURCE BUDGETED ACTUAL REVENUE

PROPERTY TAXES $1,900,000 $ -0- $1,900,000

LICENSES AND PERMITS 350,000 31,000 319,000

FINES AND FORFEITS 250,000 12,000 238,000

INTERGOVERNMENTAL 200,000 -0- 200,000

TOTAL $2,700,000 $43,000 $2,657,000

3-26


d. CALCULATION OF AVAILABLE APPROPRIATIONS, AS OF JULY 31, 2007

AVAILABLE

APPROPRIATIONS ENCUMBRANCES EXPENDITURES APPROPRIATIONS

GENERAL GOVERNMENT $ 500,000 $ -0- $ 7,300 $ 492,700

PUBLIC SAFETY 1,600,000 600 10,800 1,588,600

PUBLIC WORKS 350,000 200 6,100 343,700

PARKS AND RECREATION 150,000 -0- 4,100 145,900

MISCELLANEOUS 50,000 -0- 900 49,100

TOTAL $2,650,000 $800 $29,200 $2,620,000

3-27


3-9.City of Nokomis

Statement of Activities (partial)For the Year Ended December 31, 2008

Net (Expense)Revenue and

Changes in NetAssets

Program Revenues

ExpensesChargesfor

Services

OperatingGrants

CapitalGrants

GovernmentalActivities

Functions/ProgramsPrimary GovernmentGeneral government $

9,571$ 3,146 $ 843 $ (5,582)

Public safety 34,844 1,198 1,307 $ 62 (32,277)Health and sanitation 6,738 5,612 (1,126)Culture and recreation 11,532 3,995 2,450 (5,087)Interest on long-term debt

6,06 8

_______ ______

____ (6,068)

Total governmental activities

$ 68,753 $ 13,951 $4,600 $ 62 (50,140)

General revenues:Property taxes 56,300Unrestricted grants and 1,200

3-28

contributionsInvestment earnings 1,958Special item—gain on sale of park land

2,653

Total general revenues and special items

62,111

Change in net assets 11,971Net assets—July 1, 2007

126,673

Net assets—June 30, 2008

$ 138,644

3-29

CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS

Documents

Transcript of CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS