Principles of Accounting and Financial Reporting for State and Local Governments

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For each of the following descriptive phrases, indicate the type of fund from the list above that best matches by placing the appropriate letter in the blank space next to the phrase.

FALSE

At the government-wide level, activities are classified as governmental or business-type.

FALSE

There is a similarity among these pairs of terms; however, they are not a one-to-one match. For example, activities and funds may use different measurement focuses and bases of accounting; and the internal service fund is a proprietary fund, but most often will be reported along with governmental activities, not business-type activities.

TRUE

This is consistent with the discussion in Chapter 2.

FALSE

While it is true that only major funds are reported in separate columns of the fund financial statements mentioned, funds that do not meet the 10 percent and 5 percent criteria may also be reported as major if government managers feel they are of significant importance to financial statement users.

FALSE

The definition provided describes current financial resources, not economic resources. Governmental type funds report on the inflows and outflows of current financial resources; proprietary and fiduciary funds report on the inflows and outflows of economic resources.

FALSE

Under the modified accrual basis of accounting, governmental funds account for current assets and liabilities but not long-term assets or liabilities.

TRUE

Funds are classified as governmental, proprietary, and fiduciary.

FALSE

The first four fund types are correct. Internal service funds are not governmental funds but rather are included in the proprietary funds category. However, financial information for internal service funds is typically reported in the governmental activities column of the government-wide financial statements.

TRUE

Using an economic resources measurement focus and the accrual basis of accounting contributes to operational accountability by helping assess the cost of government operations. Such information, when combined with nonfinancial information about service outputs and outcomes, facilitates assessment of operational accountability.

FALSE

Proprietary and fiduciary funds report their capital assets in their respective statement of net position. Capital assets used by or acquired by governmental funds, however, are called general capital assets and are not reported in the balance sheet of governmental funds. Rather, general capital assets are reported in the Governmental Activities column of the government-wide financial statements.

FALSE

The Budgeting and Budgetary Control principle requires the accounting system to provide the basis for budgetary control, as described in the Appendix to Chapter 2. The Budgetary Reporting principle also requires that budgetary comparisons be presented as required supplementary information (RSI) for the General Fund and each major special revenue fund that has a legally adopted annual budget. Thus, to utilize budgetary accounts and include budgetary comparisons in financial statements is to be in conformity with GAAP.

TRUE

In addition to government-wide statements, governments must also present three sets of fund financial statements – one set for each of the three fund categories: governmental, proprietary, and fiduciary.

FALSE

When revenues are legally restricted by external resource providers or committed by enabling legislation for particular operating purposes, such as the operation of a library or maintenance of roads and bridges, a special revenue fund is created.

TRUE

When revenues are legally restricted by external resource providers or committed by enabling legislation for particular operating purposes, such as the operation of a library or maintenance of roads and bridges, a special revenue fund is created.

TRUE

This definition is consistent with that found in Chapter 2.

FALSE

Under the modified accrual basis of accounting, expenditures are recorded in governmental funds, but expenses are not.

For each of the following descriptive phrases, indicate the type of fund from the list above that best matches by placing the appropriate letter in the blank space next to the phrase.

1. A, 2. B, 3. C, 4. C, 5. B

Measurement focus describes what is measured; that is, the nature of the resources, claims against resources, and flows of resources that are measured and reported by a fund or activity. The basis of accounting describes when things are measured. The economic resources measurement focus reports on the balances and flows of both current and noncurrent assets and liabilities, whereas the current financial resources focus reports only on the balances and flows of current assets and liabilities. The accrual basis of accounting recognizes revenues when earned and expenses when incurred, where the modified accrual basis recognizes revenues when measurable and available for current spending and expenditures when a current liability has been incurred. Governmental funds use the current financial resources measurement focus, and proprietary and fiduciary funds use the economic resources measurement focus. Governmental funds use the modified accrual basis of accounting. Proprietary and fiduciary funds use the accrual basis of accounting. Governmental and business-type activities at the government-wide level report on net assets and activities using the economic resources measurement focus and the accrual basis of accounting.

Governmental activities are those core governmental services, together with general administrative support. Examples include public safety, public works (e.g., road and bridge maintenance), parks and recreation, cultural, and social services. Business-type activities are those that are self-supporting through user charges for services they receive, although operating subsidies from general tax revenues are not uncommon. Typical examples include public utilities, such as water and sewer, transportation systems, golf courses, and swimming pools. Fiduciary activities are those in which the government acts in a fiduciary capacity, either as an agent or trustee, for parties outside the government. Examples include trust funds that benefit individuals and organizations outside of the government.

The CAFR is recommended by the Annual Financial Reports principle, but not required. The CAFR is comprised of three sections: (1) introductory section, (2) financial section, and (3) statistical section. All activities of the primary government and its component units should be included in the reporting entity covered by the CAFR. The minimum financial reporting requirements include (1) MD&A, (2) basic financial statements, and (3) required supplementary information other than the MD&A.