Chapter 16

CHAPTER 16
ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS

(PART ONE)
Chapter Outline
I.
Statement Number 34 of the GASB has radically altered and expanded the financial
reporting of state and local government units.
A. User needs for governmental financial information are so diverse that two entirely
different and separate sets of financial statements must now be issued when a
government applies GASB 34.
B. Fund-based financial statements are designed to present information about major
funds. This approach stresses accountability over financial resources.
a. For governmental funds, all current financial resources and claims to those financial
resources are presented using modified accrual accounting for timing purposes.
b. For proprietary funds and fiduciary funds, all economic resources are reported using
accrual accounting for timing purposes.
C. Government-wide financial statements (a statement of net assets and a statement of
activities) are designed to present an overview of the government as a whole.
a. In these statements, all economic resources are measured using accrual
accounting for timing purposes.
b. The governmental funds and most of the internal service funds are combined and
reported as governmental activities.
c. The enterprise funds and any remaining internal service funds are combined and
reported as business-type activities.
d. Because the government does not have control over the use of the assets reported
in the fiduciary funds, they are excluded from the government-wide financial
statements.
II. For internal purposes, governmental accounting records its individual activities within selfbalancing sets of accounts known as funds.
A. Governmental funds account for activities where service to the public is the main
emphasis.
a. General fund
b. Special revenue funds
c. Capital projects funds
d. Debt service funds
e. Permanent funds
B. Proprietary funds account for activities of the government where a user charge is
assessed.
a. Enterprise funds
b. Internal service funds
C. Fiduciary funds account for assets held in a trustee capacity for external parties.
a. Investment trust funds
b. Private-purpose trust funds
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c.
d.
Pension trust funds

Agency funds
III. Governmental accounting has traditionally stressed establishing control over financial
resources.
A. Budgetary entries are recorded for a number of the activities within the governmental
funds.
a. The entry goes on at the start of the year and is then reversed off the books at the
end.
b. The initial and amended budget are reported along with actual figures for the period
as required supplemental information. As an alternative, this information can be
shown as a separate statement within the fund-based financial statements.
B. Financial commitments (such as contracts and purchase orders) are also recorded as
encumbrances.
a. These entries help avoid overspending of allocated resources.
b. The encumbrances are removed from the records when the commitment becomes
a liability.
IV. In government-wide financial statements, the acquisition of a capital asset is reported as a
capital asset and incurring a expense is reported as an expense. However, for the
governmental funds, on the fund-based financial statements, the reduction of financial
resources that results from the purchase of a capital asset, incurrence of an expense, or
payment of a long-term debt is reported as an expenditure.
A. On the fund-based statements, supplies and prepaid items can be reported by either
the consumption method or the purchases method.
B. On the government-wide financial statements, the recording of the acquisition of
infrastructure items such as bridges and sidewalks will be required under GASB 34.
However, governments have extra time to capitalize previously acquired infrastructure
assets.
V. Revenue recognition is based on the type of revenue that is being reported.
A. Derived tax revenues such as income taxes and sales taxes are recognized when the
underlying event occurs.
B. Imposed nonexchange transactions such as fines and penalties are recognized when
the resources are required to be used or in the first period when use is permitted.
C. Government-mandated nonexchange transactions such as a government grant to fulfill
a legally required objective are recognized when all eligibility requirements have been
met.
D. Voluntary nonexchange transactions such as most grants and gifts are recognized
when all eligibility requirements have been met.
VI. Governments often raise significant amounts of financial resources by issuing long-term
bonds.
A. In the government-wide financial statements, the debt is simply recorded.
B. In the fund-based financial statements for the governmental funds, the inflow of
financial resources is reported as an other financing source. Payment of the debt is
shown as an expenditure. Long-term debts are not shown in the fund-based financial
statements for the governmental funds.
Learning Objectives
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Having completed Chapter Sixteen of the textbook, Accounting for State and Local
Governments (Part One), students should be able to fulfill each of the following learning
objectives:
1. Understand that GASB 34 has created two separate sets of financial statements to be
created by a state or local government unit.
2. Identify a wide variety of users of government financial statements and discuss their
specific information needs.
3. Explain the overall differences between government-wide financial statements and fundbased financial statements.
4. Identify the three major classifications of funds and each of the individual fund types within
those classifications.
5. Describe the content of both government-wide financial statements and fund-based
financial statements for the governmental funds.
6. Explain the structure and reason for budgetary entries and the subsequent reporting of that
information.
7. Explain the structure and reason for recording encumbrances and the subsequent
reporting of that information.
8. Describe the reporting of money spent to obtain capital assets on both fund-based financial
statements and government-wide financial statements.
9. Discuss the historical method of reporting infrastructure assets and the current reporting
under GASB 34.
10. Identify the four types of revenue to be reported by a government and when each type of
revenue should be recognized.
11. Describe the accounting that is utilized for the issuance of a long-term liability within both
the fund-based financial statements and the government-wide financial statements.
12. Describe the types of transfers that can occur within a government and indicate the
appropriate reporting for each type.
Answer to Discussion Question

Is it an Asset or a Liability?
Some students seem to believe that the unique features of government financial reporting are
more arbitrary than substantive. To them, accounting is accounting and the specific type of
reporting entity should not be an important consideration. Thus, this case is placed early in the
coverage of governmental accounting to point out that these entities do not necessarily view
transactions in the same manner as a for-profit business. Examination of the construction of a
high school is an excellent example of the accounting problems created by a governments
unique perspective. The decision to build this facility virtually assures the government that it
will incur significant cash outflows for years to come. Whereas a business constructs a
building in hopes of generating cash inflows, government officials are aware that the
maintenance, heating, etc. of the school will far outweigh any direct cash inflows. Hence,
Mautzs question is it an asset or a liabilityis not easy to answer. GASB 34 solves this
issue in a very unique way. In the fund-based financial statements, construction costs are
reported as an expenditure whereas, in the government-wide financial statements, the high
school would be reported as a capital asset. The reduction in financial resources is reflected in
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one statement but the cost of construction is still shown as an asset in the other set of
statements.
Prior to class discussion, students can be encouraged to read Mautzs entire article as
additional background information. In class, students can be encouraged to discuss whether
showing this high school in two such different ways is misleading or actually provides the
information needed. Students should be asked their opinion as to the benefit of having two
completely different sets of financial statements. A quality, in-depth discussion can certainly
result from the article described here.
Answers to Questions
1. User needs are often complex and contradictory. Specific procedures in the governmental
reporting process are an outgrowth of those needs. GASB Concepts Statement No.1,
Objectives of Financial Reporting, has identified three primary user groups: citizenry,
legislative and oversight bodies, and investors and creditors. The needs of these users
are broad and no single set of financial statements and principles can satisfy all
expectations. The satisfaction of diverse user needs is a constant focus of governmental
accounting. This has lead to the dual-perspective model of GASB No. 34 requiring two
distinctive types of financial statements.
2. Accountability and control have been a constant goal of governmental accounting.
Governmental accounting provides the citizenry of a democracy a method for evaluating
the governmental actions of raising and allocating resources. Elected and appointed
officials have authority over the publics money. They should be held accountable for
generating and using cash wisely in meeting current needs. Accounting shoud be helpful in
evaluating these officials on their honesty, wisdom, and stewardship.
3. GASB Statement No.34 has refined the reporting of governmental activities by providing
information about the government as a whole. Focusing on individual accountability does
not meet all user needs. Reporting under GASB No. 34 still focuses on current financial
resources, but provides an additional focus on all assets and all liabilities, thus meeting
broader user needs.
4. Two financial statements make up the government-wide financial statements: The
Statement of Net Assets and The Statement of Activities. There are a number of fundbased financial statements. The two fundamental financial statements covered here in
Chapter 16 were the Balance Sheet and the Statement of Revenues, Expenditures, and
Changes in Fund Balances.
5. In fund-based accounting, governmental funds use the current resources measurement
focus and the modified accrual basis for the timing of revenue and expense recognition.
The current financial resources focus includes only current assets and the liabilities to be
paid out of these current assets. The modified accrual basis recognizes revenues when
they become available and measurable and expenditures when they cause a reduction in
current financial resources.
Proprietary and Fiduciary funds generally use the economic resources measurement focus
and the accrual basis for the timing of revenue and expense recognition. The economic
resources measurement focus includes all capital and other noncurrent assets as well as
long-term liabilities in the Statement of Activities.
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6. Government-wide financial statements use the economic resources measurement focus

and accrual accounting for the timing of revenue and expense recognition similar to forprofit organizations. This economic resources measurement focus includes all capital
assets and long-term liabilities.
7. Current financial resources are primarily cash, investments, and receivables. These items
are expected to be used to meet the current period government needs. This category also
can include inventories and prepaid expenses.
8. Liabilities are recognized under the current financial resources basis when a claim against
current financial resources is created.
9. Governmental Funds: Account for activities with a service orientation
a. General Fund
b. Special Revenue Fund
c. Capital Projects Fund
d. Debt Service Fund
e. Permanent Fund
Proprietary Funds: Account for functions that are financed (at least in part) by user
charges.
a. Enterprise Fund
b. Internal Service Fund
Fiduciary Funds: Account for monies held by the government in a trustee capacity.
a. Investment Trust Fund
b. Private-Purpose Trust Fund
c. Pension Trust Fund
d. Agency Fund
10. The following fund types fall within the governmental funds classification:
a. The General Fund is used to account for ongoing activities such as public safety and
sanitation. More specifically, the General Fund records any functions that do not fall
under one of the other fund types.
b. Special Revenue Funds account for financial resources that have been restricted as to
expenditure for a specified operating purpose. Money can come from sources such as
grants, taxes, and gifts.
c. Capital Projects Funds account for monies (and their eventual expenditure) to be used
in acquiring or constructing government facilities or other fixed assets.
d. Debt Service Funds account for the accumulation of resources that will be used to pay
the principal and interest of long-term debts incurred by the service activities.
e. Permanent Funds account for assets contributed to the government by an external
donor with the stipulation that the principal cannot be spent but any income can be
used within the government, often for a designated purpose.
11. The following fund types fall within the proprietary funds classification:
a. An Enterprise Fund accounts for any governmental activity that is financed in whole or
in part by outside user charges, such as a subway system.
b. An Internal Service Fund is used to record any activity that provides service to other
departments or agencies within the government on a cost-reimbursement basis. A
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motor pool or a centralized computer operation can be accounted for as Internal

Service Funds because they only exist to serve the other functions of government.
12. Fiduciary Funds: Account for monies held by the government in a trustee capacity.
a. Investment Trust Fund. Accounts for the outside portion of investment pools where the
reporting government has accepted funds from other governments resulting in a larger
investment and hopefully a higher return.
b. Private-Purpose Trust Fund. Accounts for money held in a trustee capacity, for
example, money confiscated from illegal operations.
c. Pension Trust Fund. Accounts for the employee retirement system.
d. Agency Fund. Accounts for resources held by the government as an agent for
individuals, private organizations, or other government units.
13. In government-wide financial statements, financial figures are shown as either
governmental activities or business-type activities. All governmental funds and most
internal service funds appear in the governmental acitivities. All of the enterprise funds and
any remaining internal service funds are lumped into the business-type activities. Fiduciary
funds are not shown in the government-wide financial statements.
14. In fund-based financial statements, for the governmental funds, a separate column must
be shown for (a) the General Fund, (b) any other fund that qualifies as major, and (c) all
other funds as a whole in a single column.
15. The physical recording of a budget is viewed as a method of expressing public policy and
financial intent, providing a financial plan for the period. The budget establishes spending
limitations, which enhances financial planning and control. The adoption of the budget for
each activity anticipates the inflow of financing resources and approved expenditure levels.
Subsequently, comparisons can be draw between actual and budgeted figures at any time
during the fiscal period thus evaluating performance.
16. Comparisons between the original budget, the final budget, and actual figures must be
reported in the required supplemental information presented after the notes to the financial
information. Alternatively, the information can be presented as a separate statement
within the governments fund-based financial statements.
17. An encumbrance is the recording of a purchase commitment (such as a contract or an
order). The encumbrance entry is recorded at the time the commitment is made prior to
incurring a liability. This supports the spending control emphasis of the fund-based
financial statements. Reviewing the Expenditures account and the Encumbrances
balance provides the total amount of current financial resources spent and committed.
Thus, the chances of an over-commitment of resources is decreased. The encumbrance is
removed when this commitment becomes a legal liability. Until then, no liability has been
incurred so encumbrances are not included in government-wide financial statements.
18. Encumbrances (purchase commitments) that remain outstanding at the end of a fiscal
period are reported within the Equity section as a reserved fund balance. No liability is
reported; instead, the need to hold resources to satisfy the eventual cost of the
commitment is disclosed.
19. Expenditures include outflows or reductions of net current financial resources from the
acquisition of goods or services (or the payment of a long-term liability) and should be
recognized in the fiscal period in which the fund liability is incurred and is measurable.
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Modified accrual based accounting recognizes expenditures when a claim against the
current financial resources is incurred. Fund-based accounting for the governmental funds
records expenditures instead of expenses and capital assets.
20. Expenditures include outflows or reductions of current financial resources from the
acquisition of goods or services (or the payment of a long-term liability) and should be
recognized in the fiscal period in which the fund liability is incurred and is measurable.
Modified accrual based accounting recognizes expenditures when a claim against current
financial resources is incurred.
21. Within the governmental funds, fund-based financial statements focus on expenditures
rather than expenses. Expenditures and transfers should be recorded when the liability is
incurred. Therefore, the entire cost of capital assets is treated as an expenditure.
Government-wide financial statements treat capital assets similar to for-profit organizations.
Buildings, machines, and other capital assets are capitalized and expensed over their
useful lives.
22. Traditionally the purchase method has been used. The purchase of supplies and other
prepaid expenses are recorded immediately as expenditures. Another method is the
consumption method, which is similar to for-profit organization. Supplies and prepayments
are recorded as assets when acquired. As they are then consumed, they are recorded as
expenditures matching them with the appropriate fiscal period.
23. The four classifications of revenues that a state or local government can recognize are:
a. Derived tax revenues. A tax assessment is imposed because an underlying exchange
takes place. For example revenues are recognized on a sales tax where a sale occurs
and a tax is imposed.
b. Imposed nonexchange revenues. An assessment is imposed but no underlying
transaction takes place. Examples include property taxes and fines or penalties that
are levied. Revenues are recognized in the period when resources are required to be
used or the first period that use is permitted.
c. Government-mandated nonexchange transactions. Monies are provided from one
government to another to help pay for required programs. Examples include grants
from the federal government to a city that must only be used for a mandated legal
requirement. Revenues are recognized when all eligibility requirements have been
met.
d. Voluntary nonexchange transactions. Monies conveyed willingly to a state or local
government by an individual, another government, or an organization usually for a
specific purpose but without legally mandated requirements. Revenues are recognized
when all eligibility requirements have been met. An example would be money donated
to the city for parks.
24. A receivable is not recorded for property taxes until the demand for money represents an
enforceable legal claim, which is normally specified by state law. Many governments
encourage the early payment of property taxes (by sending out bills early or by giving some
type of a cash discount). Thus, cash can actually be reported before the government even
records the initial receivable.
The revenue from the property tax should be reported in the period in which it is supposed
to be used or the first period in which it can be used. For example, property taxes assessed
to finance the government's costs in 2005 should be reported as revenue in 2005.
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Because the receivable and the revenue recognition are split, it is possible to record the
receivable (or the cash, if collected early) before the revenue. In that case, a Deferred
Revenue account is established.
25. No revenues are recognized in either set of financial statements because the proceeds of
bonds must be paid back. In fund-based financial statements, Cash would be debited and
Other Financing Resources would be credited because no revenue has been earned. For
example, if the bonds were issued for a construction project, the entry would be recorded
in the Capital Project Fund. Payments of both interest and debt are recorded when they
become due, becoming a claim on current financial resources. An Expenditure account is
recognized for the debt and related interest and is usually shown in the Debt Service Fund.
In government-wide financial statements, the cash and debt are both increased and
payment of debt would be similar to for-profit financial statements.
26. A special assessment is an improvement to property made by the government, which is
paid for in part or in whole by the owners of the property being benefited. Adding curbing
and sidewalks to a local street is an example of a special assessment if the residents of
that street are required to pay a portion of the cost. Typically, the government places a lien
on the property to insure payment.
The accounting for special assessment projects depends on the liability of the government.
If the government is in no way liable for the work done and any debt incurred, an Agency
Fund is used to account for the monetary inflows and outflows. The government is simply
serving as a conduit to get the project completed and the debt paid.
If the government is responsible (even secondarily responsible) for the cost of the project,
a more elaborate method of accounting is necessary. In the government-wide financial
statements the debt and the infrastructure asset are recorded as in for-profit accounting.
The taxes are assessed and collected and used to pay the debt.
The infrastructure asset and long-term debt are not recorded in the fund-based financial
statements. Instead, the expenditures for the work are recorded in a Capital Projects Fund
while cash collected from citizens is recorded as revenue in the Debt Service Fund.
27. In fund based financial statements, interfund transactions are recorded in both funds
simultaneously at the time of authorization. For example, monetary transfers from the
General Fund to another fund such as the Debt Service Fund would be recorded in both
funds.
The recipient records this transfer as an Other Financing Source and the party making
the transfer records an Other Financing Use.
28. Intra-activity transactions occur within governmental-type funds, and within enterprise
funds, so that they do not affect the overall governmental or business activity balances.
This includes transactions between governmental funds and related internal service funds.
Therefore, they are not reported on government-wide financial statements.
Inter-activity transactions occur between governmental funds and enterprise funds so that
they affect the overall governmental and business activity balances. Therefore, they are
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reported in both columns on government-wide financial statements and are then offset in
the total column.
29. An internal exchange transaction is a transfer within the government that is recorded as if
the transaction had actually occurred with an outside party. Such transactions occur
between one of the governments activities and an internal service or enterprise fund.
These exchanges are reported as revenues and as either expenditures or expenses. An
example would be a payment from a police department to the citys motor pool for vehicle
maintenance. This exchange would be included by both departments in the fund-based
financial statements as if it were a transaction with an outside party. On government-wide
financial statements, any such transactions between a government activity and a related
internal service fund would be considered an intra-activity transaction because both fund
types are classified as government activities and, therefore, there would be no impact on
overall figures.
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Answers to Problems
1.
2.
3.
4.
5.
6.
7.
8.
9.
10. C
11. B
12. C
13. B
14. B
15. C
16. A
17. C
18. C
19. B
20. A
21. C
22. D
23. C
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24. D
25. A
26. B
27. D
28. C
29.
Beginning of Year-Recording of budget

GENERAL FUND
Estimated Revenues Control......................................... 1,000,000
Estimated Other Financing SourcesBond Proceeds 400,000
Appropriations Control.............................................
Appropriations-Other Financing UsesOperating
Transfers Out........................................................
(Budgetary) Fund Balance........................................
900,000
300,000
200,000
End of Year-Removal of budget

GENERAL FUND
Appropriations Control............................................. 900,000
Appropriations-Other Financing UsesOperating
Transfers Out........................................................ 300,000
(Budgetary) Fund Balance........................................ 200,000
Estimated Revenues Control..............................
1,000,000
Estimated Other Financing SourcesBond Proceeds
400,000
30.
GOVERNMENT-WIDE FINANCIAL STATEMENTS

GOVERNMENT ACTIVITIES
Computer
Vouchers (or Accounts) Payable
Vouchers (or Accounts) Payable
Cash
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89,400
89,400
89,400
89,400

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FUND-BASED FINANCIAL STATEMENTS

GENERAL FUND
Encumbrances Control
Fund BalanceReserved for Encumbrances
31.
88,000
88,000

88,000
Expenditures Control
Vouchers Payable
89,400
Vouchers Payable
Cash
89,400
88,000
89,400
89,400

GOVERNMENT ACTIVITIES (Intra-activity transfer not reported)
Issuance of Bonds
Cash
830,000
Bonds Payable
830,000
Completion of Construction
Buildings
Cash
920,000
920,000

To Record Transfer
GENERAL FUND
Other Financing UsesTransfers Out
Cash
90,000
90,000
CAPITAL PROJECTS FUND

Cash
Other Financing SourcesTransfers In
90,000
90,000
Sale of Bonds
Cash
Other Financing SourcesBond Proceeds
830,000
Completion of Construction
Expenditures
Cash
920,000
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32.

a. General Fund
Estimated Revenues Control
Estimated Other Financing Sources Control
(Budgetary) Fund Balance
Appropriations Control
b. Capital Projects Fund
Cash
c. General Fund
Encumbrances
d. General Fund
Encumbrances
Vouchers Payable
e. General Fund
Vouchers Payable
Cash
f. General Fund
Other Financing UsesTransfers OutCapital Projects
Due to Capital Projects Fund (Special Assessment)
Capital Projects Fund
Due from General Fund
Other Financing SourcesTransfers InGeneral Fund
g. General Fund
Other Financing UsesTransfers OutMotor Pool
Cash
Internal Service Fund
Cash
Other Financing SourcesTransfers InGeneral Fund
32.
h. General Fund
Property Taxes Receivable
RevenuesProperty Taxes
Allowance for Uncollectible Taxes
(continued)
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i. The following entries are made on the assumption that the appropriate
payment of the supplement is an eligibility requirement for the grant.
Special Revenue Fund
Cash
Deferred Revenue
j. ExpendituresSalaries
Cash
Deferred Revenue
RevenuesGrant
a. No entry
b. Governmental Activities
Cash
Bonds Payable
c. No entry
d. Governmental Activities
Equipment
Vouchers Payable
e. Governmental Activities
Vouchers Payable
Cash
f. No entry
g. No entry (assuming the internal service fund is treated as a
governmental activity so that this is an intra-activity transaction)
h. Governmental Activities
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32.
(continued)
i. Governmental Activities
Cash
Deferred Revenues
j. Governmental Activities
ExpensePublic Safety
Cash
Deferred Revenue
Revenue
33.

a. General Fund
b. General Fund
Expenditures (or Supplies)
Due to Internal Service Fund
94,000
1,200
1,200

Cash
Other Financing SourcesBonds Proceeds
d. General Fund
Swimming Pool
Cash
e. General Fund
Expenditures
Vouchers Payable
f. General Fund
Cash
700,000
700,000
20,000
20,000
94,000
94,000
96,000
96,000
32,000
32,000

Cash
33.
94,000
32,000
32,000
(continued)
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g. Special Revenue Fund

Cash
Deferred Revenues
30,000
h. Special Revenue Fund

Deferred Revenues
Revenues
5,000
30,000
5,000
Expenditures
Cash
5,000
5,000

a. No entry
b. No entry (Assuming print shop is a governmental activity.)
Governmental Activities
c. Cash
Bonds Payable
Governmental Activities
d. Transfers OutSwimming Pool
Cash
700,000
700,000
20,000
20,000
Business Type Activities

Cash
Transfers InGeneral Fund
20,000
EquipmentTrucks
Vouchers or Accounts Payable
96,000
20,000
96,000
f. No entry
g. Governmental Activities
Cash
Deferred Revenues
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30,000

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33.
(continued)
h. Governmental Activities
ExpensePublic Service
Cash
5,000
5,000
Deferred Revenues
Revenues
34.
5,000
5,000

a. Capital Projects Fund
Cash
Other Financing SourcesBonds Proceeds
300,000

Encumbrances
Fund BalanceReserved For Encumbrances
400,000
c. General Fund
Cash
300,000
400,000
20,000
20,000
Debt Service Fund

Cash
20,000
d. General Fund
Encumbrances
11,800
Expenditures ControlMachinery and Equipment

Vouchers Payable
20,000
11,800
12,000
12,000
e. General Fund
Inventory of Supplies
Cash
2,000
f. Special Revenue Fund

Cash
Deferred Revenues
5,000
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34.
(continued)
g. General Fund
Taxes Receivable
Revenues Control
Allowance for Uncollectible Current Taxes
600,000
576,000
24,000

a. Governmental Activities
Cash
Bonds Payable
300,000
300,000
b. No entry
c. No entry
Machinery and Equipment
Vouchers or Accounts Payable
12,000
12,000
Inventory of Supplies
Cash
2,000
f. Governmental Activities
Cash
Deferred Revenues
5,000
2,000
5,000
g. Governmental Activities
Taxes Receivable
Revenues Control
Allowance for Uncollectible Current Taxes
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576,000
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35.
a. As the Appropriations account balance in the General Fund shows a

total of $171,000, that amount of money has been authorized for
expenditure during this fiscal period. Thus, only that total can be
expended or committed. To date, a total of $119,000 has been spent or
committed ($110,000 of expenditures and $9,000 in encumbrances).
The remaining $52,000 is still available. The assumption made here is
that the other financing uses do not fall under the heading of
appropriations.
b. The governmental funds are all designed to monitor current financial
resources and their inflows and outflows. Therefore, the Capital
Projects Fund records expenditures made in relation to the acquisition
and construction of fixed assets. Capital assets are recorded directly
in government-wide financial statements.
c. The Appropriations balance represents the amount that government
officials have authorized to be spent on a particular construction
project.
d. To alert readers to the commitment, a year-end reclassification entry is
made to reduce the Fund BalanceUnreserved, Undesignated in
order to report a Fund Balance-Reserved for Encumbrances.
e. The most likely explanation for the zero balance in the Fund BalanceUnreserved, Undesignated is that this capital project was begun during
the current year, and thus, no closing entries have, as of yet, been
made.
f. Two possible reasons can be put forth for the $150,000 Other Financing
Sources balance. First, a bond may have been sold. Since the debt
itself is not recorded in the fund-based financial statements, the
governmental fund must record the receipt by means of an Other
Financing Sources designation. Second, the $150,000 may have come
from an interfund transfer. An operating transfer is not considered
revenue by the recipient and is, therefore, recorded as an Other
Financing Source.
g. The Debt Service Fund is utilized to accumulate money to pay off the
principal and interest of any long-term liability incurred by the
governmental funds. The debt itself is maintained in the governmentwide financial statements. Payment of the debt and interest is made
from the Debt Service Fund and recorded as an expenditure.
Irwin/McGraw-Hill

16-19
35.
(continued)
h. Special assessment projects are undertaken by a government to benefit
particular properties with the owners bearing part (or all) of the cost.
Curbing, as an example, or the installation of lights usually are special
assessment projects. If the government has no responsibility for the
costs, recording of all financial resources inflows and outflows is made
in an Agency Fund. However, if the government does have some
responsibility (if, for example, the government is secondarily liable for
any debts incurred), the construction is recorded in a Capital Projects
Fund. Thus, the receivable balance shown here would indicate that this
project is being recorded in this manner. Collection will be made from
the citizens being benefited; the money will be used in paying for the
construction.
i. The purchase method is apparently being used to record materials and
supplies. In this approach, such acquisitions are recorded as
expenditures when liabilities are initially incurred. Subsequently, at the
end of the year, any materials or supplies that remain are entered into
the records as assets with an offsetting amount shown as a Fund
Balance Reserved for Inventory of Supplies. This designation
indicates that the government is reporting an asset that is not free to be
spent for future expenditures.
j. Budgetary entries are optional for Debt Service Funds but are rarely
used. Expenditure levels (for principal and interest) are set
contractually by the debt indenture. Thus, additional fiscal control is
not obtained by the inclusion of budgetary amounts.
36.
a. Estimated Revenues
Appropriations
Budgetary Fund Balance
$232,000
225,000
$ 7,000
Since estimated revenues exceed the appropriations, a surplus is

anticipated which is mirrored through a credit balance in the Budgetary
Fund Balance account.
b. Initially, all of the school supplies are recorded in an asset account such
as Inventory of Supplies. As the supplies are used, the cost is
reclassified into an Expenditures account.
36.
c. When the balance sheet is produced, a Reserved Fund Balance amount

will be reported to indicate that current financial resources must be held
to pay off this commitment when it eventually becomes an actual
liability.
(continued)
d. FUND-BASED FINANCIAL STATEMENTS
Irwin/McGraw-Hill
16-20

Solutions Manual
General Fund
Encumbrances
Vouchers Payable
111,000
120,000
120,000
e. General Fund
Cash
33,000
33,000
Debt Service Fund

Cash
f. REVENUES:
Government grant appropriately expended
Property taxes to be received
Business licenses and parking meters
Total revenues
g. EXPENDITURES:
Salary for police officers
Rent on equipment
City hall acquisition
Salary for ambulance drivers
Supplies (60% of $16,000)
Ambulance acquisition
School bus acquisition
Total expenditures
33,000
33,000
$ 24,000
190,000
14,000
$228,000
$ 21,000
3,000
1,044,000
24,000
9,600
120,000
40,000
$1,261,600
h. FUND-BASED FINANCIAL STATEMENTS

Cash
Other Financing Sources
Irwin/McGraw-Hill
111,000
300,000
300,000

16-21
37.

a. General Fund
Estimated Revenues Control
Appropriations Control
Estimated Other Financing Uses
Operating Transfers
Budgetary Fund Balance
834,000
540,000
242,000
52,000

8,000,000

Cash
Other Financing Sources Control
8,000,000
d. Capital Projects Fund

8,000,000
8,000,000
8,000,000
8,000,000
Contracts Payable
8,000,000
Contracts Payable
Cash
8,000,000
e. General Fund
Other Financing Uses Control
Cash
8,000,000
8,000,000
1,000,000
1,000,000
Debt Service Fund

Cash
Other Financing Resources
f. Debt Service Fund
Expenditures ControlBonds
Expenditures ControlInterest
Cash
g. General Fund
Revenues Control
Irwin/McGraw-Hill
16-22
1,000,000
1,000,000
900,000
100,000
1,000,000
800,000
768,000
32,000

Solutions Manual
37.
(continued)
h. Special Revenue Fund
Cash
Revenues Control
120,000
120,000
i. Permanent Fund
Investments
Fund BalanceReserved for
Park Beautification
300,000
300,000

a. No entry
b. No entry
c. Governmental Activities
Cash
Bonds Payable
8,000,000
Buildings
Cash
8,000,000
8,000,000
8,000,000
e. No entry
f. Governmental Activities
Bonds Payable
Interest Expense
Cash
g. Governmental Activites
Proprety Taxes Receivable
Revenues Control
900,000
100,000
1,000,000
800,000
768,000
32,000
h. This entry is made in the Governmental Activities unless the toll road is
reported as an Enterprise Fund in which case it is recorded as a
Business-type activity.
Cash
120,000
RevenuesReserved for Highway Maintenance
Irwin/McGraw-Hill
120,000

16-23
37.
(continued)
i. Government Activities
Investments
RevenuesDonations
300,000
300,000
38.
CITY OF JENNINGS
GENERAL FUND
Statement of Revenues, Expenditures, and Changes in Fund Balance
(Condensed)
Year Ending December 31, 2004
Revenues
$ 740,000
Expenditures
(510,000)
Excess (deficiency) of revenues over expenditures
$ 230,000
Other financing sources (uses):
Bond proceeds
$300,000
Transfers in
50,000
Transfers out
(470,000)
Total Other Financing Sources and Uses
Change in Fund Balance
Fund Balance, Beginning
Fund Balance, Ending
Irwin/McGraw-Hill
16-24
(120,000)
$110,000
170,000
$280,000

Solutions Manual
38.
(continued)
CITY OF JENNINGS
GENERAL FUND
Balance Sheet (condensed)
December 31, 2004
Assets
Cash
Investments
Taxes receivable
Due from Capital Projects Fund
Total Assets
$ 30,000
410,000
220,000
60,000
$720,000
Liabilities
Accounts payable
Vouchers payable
Contracts payable
Due to Debt Service Fund
Deferred revenues
Total Liabilities
$ 90,000
180,000
90,000
40,000
40,000
$440,000
Equity
Fund balances:
Unreserved, undesignated fund balance
Total Fund Balance
280,000
280,000
Total Liabilities and Fund Equity
$720,000
Irwin/McGraw-Hill

16-25
39.
The most difficult aspect of this problem is gathering the information for
both the fund-based financial statements and the government-wide
financial statements. One way to overcome this difficulty is to make the
journal entries for the transactions that are described in the question.
Government-wide financial statements:
1
Property Tax Receivable
Cash
General RevenuesProperty Taxes
80,000
320,000
2
Salary Expense
Rent Expense
Equipment
Land
Maintenance Expense
Cash
100,000
70,000
50,000
30,000
20,000
400,000
270,000
Depreciation Expense
Accumulated DepreciationEquipment
3
Building
Long-Term Liability
10,000
10,000
200,000
200,000
Neither depreciation nor interest is recognized here since this transaction

took place on the last day of the year.
4
Computers
Vouchers Payable
8,000
8,000
No depreciation is recognized since this transaction occurred on the last

day of the year.
5
Cash
Program RevenuesStudent Fees
Irwin/McGraw-Hill
16-26
3,000
3,000

Solutions Manual
39.
(continued)
Fund-based financial statements:
1
Cash
Deferred Revenues
80,000
320,000
370,000
30,000
The $30,000 is not viewed as a revenue in 2004 because it will not be

available within 60 days to pay claims against current financial resources.
2
ExpendituresSalaries
ExpendituresRent
ExpendituresEquipment
ExpendituresLand
ExpendituresMaintenance
Cash
100,000
70,000
50,000
30,000
20,000
270,000
3
No entry is made on the building acquisition since there was no impact on
current financial resources.
4
ExpendituresComputer
Vouchers Payable
4,000
4,000
The second computer is not included here because payment will not be
made within 60 days so there is no impact on current financial resources.
5
Cash
RevenuesStudent Fees
Irwin/McGraw-Hill
3,000
3,000

16-27
39.
(continued)
Part a
STATEMENT OF ACTIVITIES
Governmental
Activities
Direct Expenses Program Revenues (net expense)
Governmental Activities:
School System
$200,000
$3,000
General Revenues:
Property Taxes
Change in Net Assets
Beginning Net Assets
Ending Net Assets
$(197,000)
400,000
$ 203,000
-0$ 203,000
STATEMENT OF NET ASSETS

Governmental
Activities
Assets
Cash
Computers
Building
Equipment
Less: Accumulated Depreciation
Land
Total Assets
$53,000
80,000
8,000
200,000
$ 50,000
(10,000)
40,000
30,000
$411,000
Liabilities
Vouchers Payable
Long-Term Liabilities
$ 8,000
200,000
$208,000
Net Assets
Invested in capital assets, net of debt
Unrestricted
$ 78,000
125,000
$203,000
Irwin/McGraw-Hill
16-28

Solutions Manual
39.
(continued)
Part b
STATEMENT OF REVENUES, EXPENDITURES
AND CHANGES IN FUND BALANCE
General Fund
Revenues
Property Taxes
Student Fees
Total Revenues
$370,000
3,000
$373,000
Expenditures
Salaries
Rent
Equipment
Land
Maintenance
Computer
Total Expenditures
$100,000
70,000
50,000
30,000
20,000
4,000
$274,000
$ 99,000
Fund BalanceBeginning of Year

Fund BalanceEnd of Year
- 0$ 99,000
BALANCE SHEET
General Fund
Assets
Cash
Total Assets
Liabilities
Voucher Payable
Deferred Revenue
Total Liabilities
Fund Balance
Unreserved
Total Liabilities and Fund Balance
$ 53,000
80,000
$133,000
$
4,000
30,000
$ 34,000
$ 99,000
$133,000
Irwin/McGraw-Hill

16-29
40.
One way to approach this problem is to make the journal entries for the
transactions that are described as the basis for gathering the information
needed for the financial statement to be produced.
First, the journal entries are prepared based on producing fund-based
financial statements for the General Fund.
a.
Cash
Deferred Revenues
400,000
100,000
450,000
50,000
The $50,000 is not viewed as a revenue in 2004 because it will not be

available within 60 days to pay claims against current financial resources.
b.
ExpendituresPolice Cars
Cash
100,000
100,000
If previously recorded, an encumbrance would also have to be removed.

No depreciation is recorded on the police cars because fund-based
financial statements are being produced.
c.
Other Financing UsesTransfers Out 90,000
Cash
90,000
Because the statements being prepared here are only for the General Fund,
the entry for the Debt Service Fund is not included.
d.
Cash
200,000
200,000
No interest is accrued because it will not require the use of current

financial resources.
e.
Encumbrances
40,000
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16-30
40,000

Solutions Manual
40.
(continued)
f.
ExpendituresSalaries
Cash
Salary Payable
g.
Fund BalanceReserved for
Encumbrances
Encumbrances
40,000
30,000
10,000
40,000
40,000
ExpendituresComputer
41,000
Vouchers Payable
h.
ExpendituresSupplies
10,000
Cash
i.
Supplies
2,000
Fund BalanceReserved for Supplies
Irwin/McGraw-Hill
41,000
10,000
2,000

16-31
40.
(continued)

CITY OF LOST ANGEL
STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND
BALANCE
General Fund
Revenues
Property Taxes
$450,000
Total Revenues
$450,000
Expenditures
Police cars
$100,000
Salaries
40,000
Computer
41,000
Supplies
8,000
Total Expenditures
$189,000
Excess of revenues over expenditures
$261,000
Other Financing Sources (Uses)

Transfer to Debt Service Fund
Issued Long-Term Bond
$(90,000)
200,000
Net Other Financing Sources
$110,000
$371,000
Fund BalanceBeginning of Year

Fund BalanceEnd of Year
Irwin/McGraw-Hill
16-32
180,000
$551,000

Solutions Manual
41.
One way to approach this problem is to make the journal entries for the
transactions that are described as the basis for gathering the information
for the financial statement to be produced.
Here the journal entries are prepared based on the need to create
government-wide financial statements for the General Fund (a
governmental activity).
a.
Cash
Property Tax Revenue
b.
Police Cars
Cash
Accumulated Depreciation
400,000
100,000
500,000
100,000
100,000
5,000
5,000
c.
No entry is needed since there is no change in the total for the
governmental activities.
d.
Cash
Bonds Payable
Interest Expense
Interest Payable
200,000
200,000
10,000
10,000
e.
No entrythis is only a commitment.
f.
Salary Expense
Cash
Salary Payable
g.
Computer
Vouchers Payable
Accumulated Depreciation
Irwin/McGraw-Hill
40,000
30,000
10,000
41,000
41,000
4,100
4,100

16-33
41.
(continued)
h.
Supplies
Cash
i.
Supplies Expense
Supplies
10,000
10,000
8,000
8,000

CITY OF LOST ANGEL
STATEMENT OF NET ASSETS
Governmental
Activities
Assets
Cash
Supplies
Computers
Police Cars
$640,000
100,000
2,000
$ 41,000
(4,100)
100,000
(5,000)
Total Assets
36,900
95,000
$873,900
Liabilities
Vouchers Payable
Salary Payable
Interest Payable
Bonds Payable
$41,000
10,000
10,000
200,000
261,000
Net Assets
Invested in capital assets, net of debt
Unrestricted
$90,900
522,000
$612,900
The total net asset figure of $612,900 can be found by taking the opening
balance of $180,000 and then adding the revenues for the period and
subtracting the expenses.
Irwin/McGraw-Hill
16-34

Solutions Manual
42.
A. TrueThe initial approval of spending was $380,000 and that amount

should be recorded immediately. The budgetary entry debits Estimated
Revenues and credits Appropriations.
B. FalseThe budgetary information is normally presented as required
supplemental information. However, it can also be shown as a separate
statement within the fund-based financial statements. The government
has that choice.
C. TruePrior to GASB 34, only the final budget and the actual figures for
the period were reported. That was considered somewhat misleading
since the budget could be revised near the end of the year to establish
agreement. GASB 34 required the original budget also to be disclosed.
D. FalseA Budgetary Fund Balance account does have to be set up as
part of the budget entry to indicate that a surplus is anticipated.
However, an expected surplus requires a credit to the Fund Balance
rather than a debit.
E. FalseBudgetary information only relates to fund-based financial
statements and is ignored by the government-wide financial statements.
43.
A. FalseRevenue should be recognized when all eligibility requirements

have been met. Here, the eligibility requirements, if any, could have been
met during 2004. It is likely that the eligibility requirements have not
been met but that is certainly not necessarily the case.
B. FalseIf there are no eligibility requirements, the revenue should be
recognized immediately in December 2004 when the award is made.
C. FalseA grant is a government-mandated nonexchange transaction
when the award was made to help the government meet legal
requirements. That is not specified here. However, if the state
government had passed a law that all school children had to receive hot
lunches and had then furnished this grant to help meet that
requirement, it would have been a governinent-mandated nonexchange
transaction.
D. TrueThe cash is recognized but no revenue can be reported because
eligibility requirements have not yet been met. Thus, a deferred revenue
should be established for the amount received.
E. FalseRevenue recognition rules were set up by GASB Statement No.
33.
Irwin/McGraw-Hill

16-35
44.
A. TrueThe sidewalk is an infrastructure asset and, as such, the

reporting of the cost as an asset was not required prior to the adoption
of GASB 34.
B. TrueThe money received from the issuance of the bond creates an
other financing use and the money received from the citizens is viewed
as a type of tax revenue.
C. TrueIf there is no obligation, the government should record the cash
flows within an Agency Fund. An Agency Fund is one of the fiduciary
funds and, as such, is not reported at all in the government-wide
financial statements.
D. FalseIf the modified approach is utilized for infrastructure items, no
depreciation is recorded.
45.
A. FalseA transfer out will be shown in the governmental activities and a

transfer in will be reported in the business-type activities. Those two
figures will be netted together so that no overall impact is shown in the
total column for the government. However, both figures do appear in
their own separate columns.
B. TrueBecause only governmental activities are involved, the transfer
creates no difference in the overall total.
C. TrueThe General Fund reports the resource outflow as an other
financing use.
D. FalseThe General Fund will report the transfer out as an other
financing use and the column for "all other funds" will show the
transfer-in as an other financing source.
E. FalseThe General Fund does not show expenses in the fund-based
financial statements but rather expenditures.
Irwin/McGraw-Hill
16-36

Solutions Manual
46.
A. $40,000 increaseAccording to the preliminary information, the Capital

Projects Fund reported an increase in its fund balance for the year of
$40,000. However, both this revenue and the related expenditure were
recorded in that fund for this sidewalk. Because the government had no
obligation, these cash flows should have all been reported in the
Agency Fund. The auditing firm should remove both the revenue of $
10,000 and the expenditures of $10,000 from the Capital Projects Fund.
Because they are of the same amount but have an opposite effect on
current financial resources, this removal leaves the overall change in
the fund balance at $40,000.
B. $140,000 increaseAccording to the preliminary information, the overall
change in the net assets of the city on the government-wide financial
statements was a $150,000 increase. Here, a revenue of $10,000 was
reported within the government-wide statements. However, because the
city had no obligation, that revenue should have been in an Agency
Fund. Removing this revenue reduces the net asset increase from
$150,000 to $140,000.
47.
$10,000 increaseAccording to the preliminary information, the General

Fund reported an increase in its fund balance for the year of $30,000.
However, this particular $20,000 should have been reported as a debt since
it is due in 60 days rather than as an other financing revenue (which serves
as an increase in the fund balance). Reclassifying the $20,000 leaves the
overall increase in the fund balance for the period as only $ 10,000.
48.
A. $66,000 increaseAccording to the preliminary information, the General

Fund reported an increase in its fund balance for the year of $30,000.
However, the $9,000 revenue and $45,000 in expenditures were
erroneously recorded in that fund. Together, those transactions had
caused the fund to go down by a net of $36,000. Removing them both
will cause that change to increase from $30,000 to $66,000.
B. $150,000 increaseAccording to the preliminary information, the overall
statements was a $150,000 increase. An error has been made in that this
display was reported in the governmental activities (General Fund)
rather than the business-type activities (Enterprise Fund). That
increases one column and decreases the other by exactly the same
amount. So, moving the transactions does not change the overall
records for the government as a whole.
Irwin/McGraw-Hill

16-37
48.
(continued)
C. $54,000 increaseAccording to the preliminary information, the overall
change in the net assets of the Enterprise Fund on the fund-based
financial statements was a $60,000 increase. However, the art display
was not included as it should have been. Adding in the $9,000 revenue
and the $15,000 expense creates a $6,000 net reduction that drops the
positive change from $60,000 to $54,000.
49.
A. $42,000 increaseAccording to the preliminary information, the overall

statements was a $150,000 increase. The government, though, had
recognized a revenue for the amount received. The amount received
should have been $300,000 times 40% or $120,000. However, the
discount reduces that figure by $12,000 to $108,000. That money cannot
be spent until 2005 and, so, must be reported in 2004 as a deferred
revenue and not as a revenue. Removing this revenue reduces the
overall increase in net assets from $150,000 to $42,000.
B. $78,000 decreaseAccording to the preliminary information, the
General Fund reported an increase in its fund balance for the year of
$30,000. The government, though, had recognized a revenue for the
amount received. The amount received should have been $300,000
times 40% or $120,000. However, the discount reduces that figure by
$12,000 to $108,000. That money cannot be spent until 2005 and, so,
must be reported in 2004 as a deferred revenue and not as a revenue.
Removing this $108,000 revenue reduces the overall change in net
assets from an increase of $30,000 to a decrease of $78,000.
50.

statements was a $150,000 increase. However, as shown above in 49 A,
$108,000 was received that should have been recorded as a deferred
revenue until the period when it can be used (2005). Incorrectly, the city
recorded the $108,000 as a revenue. When removed, the increase in net
assets drops from $150,000 to $42,000. Recognition of the receivable
and the deferred revenue cause no change in net assets since one is an
asset and the other a liability.
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Solutions Manual
50.
(continued)
$30,000. However, as shown above, $108,000 was received that should
have been recorded as a deferred revenue until the period when it can
be used (2005). The city incorrectly recorded the $108,000 as a revenue.
When removed, the increase in net assets drops from an increase of
$30,000 to a decrease of $78,000. Recognition of the receivable and the
deferred revenue cause no change in net assets since one is an asset
and the other a liability.
51.
A. $290,000 decreaseAccording to the preliminary information, the

$30,000. However, $320,000 was recognized here as a revenue although
an eligibility requirement does remain (lowering air pollution by 25
percent). No revenue can be recognized until all eligibility requirements
have been met. Changing the $320,000 from a revenue to a deferred
revenue reduces the $30,000 increase in the fund balance to a $290,000
decrease.
overall change in the net assets of the city on the government-wide
financial statements was a $150,000 increase. However, $320,000 was
recognized here as a revenue although an eligibility requirement does
remain (lowering air pollution by 25 percent). No revenue can be
recognized until that time. Changing the $320,000 from a revenue to a
deferred revenue reduces the $150,000 increase in the fund balance to a
$170,000 decrease.
52.

statements was a $150,000 increase. Changing a revenue from a general
revenue to a program revenue does not affect the overall change in net
assets.
B. $90,000According to the preliminary information, the parks reported
net expenses of $100,000. Net expenses is computed as direct
expenses less any program revenues. The $10,000, though, should have
been a program revenue. If this revenue had been appropriately
included, net expenses would have only been $90,000 rather than
$100,000.
Irwin/McGraw-Hill

16-39
Develop Your Skills

Research Case 1
No textbook is ever going to cover all of the many areas discussed within
complex authoritative pronouncements. The subtle nuances of such rules can
only be experienced and appreciated through the study of the actual document.
The student needs to be aware of the extent of the official guidance that is
available and gain confidence by working directly with these pronouncements.
Here, an issue has been raised in connection with the handling of several unusual
transactions occurring after a government has adopted the provisions of GASB
34. In real life, no better method of resolving such questions exists than to
actually study the standard itself.
A review of the Contents of GASB 34 indicates that when working with
government-wide financial statements "Reporting Contributions to Term and
Permanent Endowments, Contributions to Permanent Fund Principal, Special and
Extraordinary Items, and Transfers" is covered in paragraph 53. Apparently,
additional information about "Special and Extraordinary Items" is to be found at
paragraphs 55-56.
For fund-based financial statements, "Special and Extraordinary Items" are
explained at paragraph 89.
Paragraph 53 indicates that a number of balances, including special and
extraordinary items, should be reported on the government-wide statement of
activities "separately from, but in the same manner as, general revenues. That is,
these sources of financing the net cost of the government's programs should be
reported at the bottom of the statement of activities to arrive at the all-inclusive
change in net assets for the period." Following that, in paragraph 54, an
illustration is presented of a statement of activities that shows the handling of
special items (but not extraordinary items).
Paragraph 55 then defines extraordinary items as "transactions or other events
that are both unusual in nature and infrequent in occurrence." The paragraph
directs the reader to APB Opinion No. 30 for further information on the exact
nature of the terms "unusual in nature" and "infrequent in occurrence."
Paragraph 56 defines special items as "significant transactions or other events
within the control of management that are either unusual in nature or infrequent
in occurrence."
Paragraph 89 provides instruction on the handling of these two items within
fund-based financial statements by first saying that the definitions are the same
here as for government-wide financial statements. The placement of these items,
though, "should be reported separately after 'other financing sources and uses."'
In this case, GASB 34 provides clear guidance as to the identity of these two
Irwin/McGraw-Hill
16-40

Solutions Manual
accounts as well as their placement in the financial statements. In practice,

accountants rarely refer to textbooks when official guidelines are available.
Students, therefore, need to become comfortable with locating the source of
authoritative information about a topic in order to become proficient at reading
and understanding the material provided.
Research Case 2
Here, the accountants and officials of the City of Danmark are looking for
assistance in classifying a revenue as either a program revenue (reported by a
specific activity) or a general revenue (shown for the government as a whole).
A study of GASB 34 provides extensive assistance in this case in paragraph 48
by spelling out that "program revenues derive directly from the program itself or
from parties outside the reporting government's taxpayers or citizenry, as a
whole; they reduce the cost of the function to be financed from the government's
general revenues. The statement of activities should separately report three
categories of program revenues: (a) charges for services, (b) program-specific
operating grants and contributions, and (c) program-specific capital grants and
contributions.
Examples of program revenues are then given that include:
Revenue collected for garbage collection.
Building permits.
A state grant for the sheriff s department to participate in a drug awareness
program.
Earnings on endowments if the money is restricted to a program
specifically identified in the endowment agreement
In contrast, general revenues are defined in the negative in paragraph 52: "all
revenues are general revenues unless they are required to be reported as
program revenues." Thus, if any revenue does not meet the specific definition of
a program revenue, it is automatically labeled as a general revenue. Taxes are
included in this category as well as any other revenues of the government that do
not meet the program revenue criteria.
Analysis Case 1
At this writing, state and municipal governments are just beginning to adopt
GASB 34. Therefore, financial reporting is in a transitional period between
application of the old method and the new. Over the next few years, more and
more "GASB 34" statements will become available. In fact, one excellent class
assignment is to have each student contact a city or county to get a current set of
financial statements to review during class. If some obtain "pre-GASB 34"
statements while others get "GASB 34" statements, interesting comparisons of
the presentations can be made.
In contrast to for-profit organizations, governments do not always place their
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financial statements on a website. For many, the costs involved is significant and,
perhaps, the demand for the information is not viewed as overwhelming. For this
assignment, the statements for the City of San Ramon, California are available at
the website indicated. A search of the Internet may well locate other posted
financial statements or later versions of the statements for this same city.
Here is a list of some of the information being provided by this city in its financial
statements for the fiscal year ending June 30, 2001, the statements currently
available on the Internet.
1) In an opinion for a state or local government, the extent of the independent
auditor's report is enlarged from that of a for-profit company as it also
mentions reports that are available about the government's internal control
procedures as well as its compliance with laws and regulations. This
information could be provided in the audit report or, as mentioned here,
through separate reports.
2) The government of this city has not yet adopted GASB 34. A brief look at the
balance sheet shows that each separate fund is being reported and no
government-wide statements appear.
3) For this year, "sales and other taxes" is the largest general revenue for the
government followed by property taxes.
4) During the year ending June 30, 2001, expenditures amounted to slightly over
$24.2 million for the General Fund. The largest categories were: general
government, public safety, and parks and community service.
5) As should have been expected, the General Fund only shows current financial
resources as its assets: cash and investments, various receivables, amounts
due from other funds, and prepaids and deposits.
6) Long-term liabilities are not shown in the General Fund because they do not
represent a claim on current financial resources.
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7) According to the statement of revenues, expenditures, and changes in fund

balance for the year ending June 30, 2001, the size of the General Fund fund
balance increased from just over $31 million at the beginning of the year to
almost $38 million by the end of the year.
Analysis Case 2
Students need to keep updating their education throughout their careers. One
method for doing this is to become familiar with the information available on the
GASB website. This assignment directs the students to look at any Exposure
Drafts currently being studied by the GASB for the possibility of becoming an
official statement. By looking at this site on a regular basis, the student can keep
up with all issues being studied as well as the authoritative evolution of
accounting pronouncements as new standards are produced.
At the time of this writing, two Exposure Drafts (EDs) are listed on the GASB
website. The first of these concerns the reporting of budgetary comparison
schedules. This ED is 30 pages in length and starts by discussing how any party
with an opinion or other comments to make should go about forwarding those
thoughts to the GASB for consideration. A summary of the issues addressed by
the ED is then presented followed by a list of the contents in the ED. As can be
seen, the actual proposed standard only takes up two paragraphs (2 and 3).
Background information is also provided as well as the Board's basis for its
conclusions and illustrations. From this, the accountant should be able to
ascertain the full impact of the possible new statement.
Thus, any party who wants to gain significant information about this proposed
change in the generally accepted accounting principles for state and local
governments can simply read the ED proposal directly off the Internet.
The second ED presented on the website at this time is titled: Accounting and
Financial Reporting for Impairment of Capital Assets and for Insurance
Recoveries. The impairment of asset question is one that has been much
discussed over the past few years by the FASB. Apparently, similar concerns
plague government accounting.
This GASB proposal is 53 pages in length and, consequently, can take a
significant amount of time to review in detail. However, any person who is
actively involved in the financial reporting of a state or local government is
probably willing to expend that much time and energy in order to be aware of
possible financial reporting changes and their consequences. The summary
included is helpful by indicating that the ED examines the possible indicators of
impairment, the test that should be performed to check for impairment, and the
specific methods to be used to measure impairment.
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It is important to remember, though, that both of these EDs may eventually be

rejected outright, accepted, or may undergo either slight or radical revisions. An
ED is a sign that an authoritative pronouncement is under serious consideration
but, over the decades, many proposals have gotten to this level without the
Board's being able to reach enough of a consensus to establish an authoritative
accounting principle.
Communication Case 1
Most accountants and accounting students understand that the GASB sets
official standards for the accounting and financial reporting to be carried out by
state and local government organizations. However, probably only a very small
portion of either of these two groups truly knows what the established mission of
the GASB actually is.
By looking at the site map on the GASB website, the student should be able to
locate the Mission Statement of this Board. According to the website,
"The mission of the Governmental Accounting Standards Board is to establish
and improve standards of state and local governmental accounting and financial
reporting that will:
Result in useful information for users of financial reports and
Guide and educate the public, including issuers, auditors, and users of
those financial reports."
Given the extensive (some would say "radical") changes created by GASB 34, a
comparison of its impact with the above mission statement is interesting. Clearly,
the Board must have felt that the changes made, especially the addition of
government-wide financial statements, did meet the goal of reporting that results
"in useful information for users of financial reports." The major purpose, it would
seem, of adding this entirely new layer of reporting was to help provide
information to users that would provide them with an completely new perspective
of the state or city.
However, whether this particular pronouncement will be successful in guiding
and educating "the public, including issuers, auditors, and users of those
financial reports" is difficult to ascertain. The pronouncement itself does provide
a wealth of information about the changes made, the purpose as well as the
justification. However, whether that information could be construed as helping to
guide and educate the public and other users might be difficult to establish.
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One interesting class exercise that can carried out with this mission statement is
to ask the students just what they thought the GASB could do to meet this last
part of their mission statement, the line that charges them to "guide and educate
the public, including issuers, auditors, and users of those financial reports."
Communication Case 2
Students do not always appreciate the amount of debate and compromise that
the FASB and GASB must usually go through to arrive at an official accounting
pronouncement. Because of their inexperience, students sometimes see the
creation of accounting standards as a quest for the one true right path. One way
of accounting is right and all other ways are necessarily wrong.
In practice, though, many possible "right" ways usually exist as potential
solutions to any accounting problem. Because of the public debate created by
many of these issues, the official bodies often receive numerous
recommendations whenever any new standard is discussed and proposed. The
Board has to study each of these and then arrive at the one approach that best
fits in with the members' conceptual understanding of accounting and reporting.
Furthermore, there are political ramifications to consider as the Board attempts
to arrive at a final solution that pacifies the qualms of all the various interested
parties.
However, the Board does help to explain its standards by presenting extensive
background information. This assignment is designed to give students the
opportunity of looking at some of the alternatives examined by the GASB prior to
establishing its Statement No. 34. The paragraphs assigned here present a
number of different approaches that were suggested by members of the public
and considered by the GASB. In all cases, individuals who had some interest in
government accounting felt that these alternatives were better solutions than the
dual system of government-wide financial statements and fund-based financial
statements mandated by GASB 34.
Many respondents preferred a single set of financial statements rather than

the dual approach finally chosen. However, GASB found that there was no
consensus that any one set of statements was preferable to this group or
provided the needed information by itself.
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Others simply felt that no significant change was necessary in government

accounting and that the system in use at that time (very similar to the new
fund-based financial statements) was adequate. The GASB justifies its
decision to move away from the previous model by stating (in paragraph
245) that "some of the information that today's users need surpasses the
capabilities of the previous reporting model, particularly for governmental
activities."
The suggestion was also made that the fund-based financial statements for
governmental funds not be based on measuring and reporting current
financial resources. Rather, each government would use the basis of
accounting utilized for budgetary purposes (such as a cash system or a
modified cash system). The logic of this argument was that these
fund-based financial statements are created to provide control and
financial accountability which is established by the budgetary process and
should, therefore, reconcile with the budget. GASB rejected this idea
because the wide variety of possible budgetary methods would eliminate
consistency and comparability.
Another solution was to leave the current model as it is but make

significant changes to it. Basically, GASB responded that one set of
statements could simply not expand to suit the wide array of user needs
that had arisen over the years.
Other suggestions encompassed trying to adapt the basis of accounting

utilized for the governmental funds to be more useful to a wider array of
financial statement users. In other words, significant changes were
recommended for this portion of the fund-based financial statements.
GASB indicated here that the Board felt that useful information was being
provided by the previous model which focused on current financial
resources and that such information should not be lost by the creation of a
new model.
Spreadsheet Case 1
This type of spreadsheet would appear to be very helpful in budget planning
because city officials could plug in various increase and decrease rates and see
the impact on the fund balance over time. There are a number of different ways
that a spreadsheet could be created to solve this particular problem. Here is one
possible approach:
Create Column Headings:
In Cell A4, enter label text "Year"
In Cell B4, enter label text "Revenue Change"
In Cell C4, enter label text "Revenues"
In Cell D4, enter label text "Expenditures Change"
In Cell E4, enter label text "Expenditures"
In Cell F4, enter label text "Ending Fund Balance"
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In Cell G4, enter label text "Projected Change in Revenue"

In Cell H4, enter label text "Projected Change in Expenditures"
Click and drag across Cells A4 to H4. Select Format, Cells, Alignment, and click
the "Wrap Text" box. Click OK. If needed, place the cursor on the line between the
Column Letters and drag the boundary on the right side of the column headings
until the columns are the width you want.
In Cell A5, enter label text "2003" for first year.
In Cell C5, enter Revenues of $1,400,000.
In Cell E5, enter Expenditures of $1,480,000.
In Cell F5, enter beginning Fund Balance of $400,000
In Cell G5, enter -2% for Projected Change in Revenue Per Year.
In Cell H5, enter +3% for Projected Change in Expenditures Per Year.
In Cell A6, enter label text "2004."
Perform Calculations:
In Cell B6, enter formula to calculate Revenue Change (Revenue times Projected
Revenue Change): =+C5*$G$5. Note here that adding the $ symbol to Column and
Row addresses creates an "absolute" reference which will remain static
throughout the spreadsheet.
In Cell C6, enter formula to adjust Revenues by Revenue Change: =+C5+B6
In Cell D6, enter formula to calculate Expenditures Change (Expenditures times
Projected Expenditures Change): =+E5*$H$5
In Cell E6, enter formula to change Expenditures by Expenditures Change:
=+E5+D6
In Cell F6, enter formula to calculate the new ending Fund Balance (initial Fund
Balance plus Revenue minus Expenditures): =+F5+C6-E6
Copy formulas to adjacent rows: Click and drag across Cells A6 through F6 and
release. Place cursor on Fill Handle (small black box in lower right corner of
selection box) and click and drag down through Row 8.
At that point, you should see that the city will have a negative fund balance of
$277,539 at the end of 2006.
Simply, by changing cells G5 and H5, the impact of any different level of rate
changes can be ascertained.
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For example, if revenues decrease 5% and expenditures decrease 3% each year,

changing those two cells will show that the fund balance will be a positive
$14,937 at the end of 2006. Or, by assuming revenues increase by 4% and
expenditures increase by 7%, the fund balance will be a negative $146,066 at the
end of 2006. Any other combination of changes can be examined in the same way.
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Chapter 16

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CHAPTER 16

ACCOUNTING FOR STATE AND LOCAL GOVERNMENTS

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Pension trust funds

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Answer to Discussion Question

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6. Government-wide financial statements use the economic resources measurement focus

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motor pool or a centralized computer operation can be accounted for as Internal

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Beginning of Year-Recording of budget

End of Year-Removal of budget

GOVERNMENT-WIDE FINANCIAL STATEMENTS

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FUND-BASED FINANCIAL STATEMENTS

Fund BalanceReserved for Encumbrances

GOVERNMENT-WIDE FINANCIAL STATEMENTS

FUND-BASED FINANCIAL STATEMENTS

CAPITAL PROJECTS FUND

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FUND-BASED FINANCIAL STATEMENTS

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FUND-BASED FINANCIAL STATEMENTS

c. Capital Projects Fund

Capital Projects Fund

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g. Special Revenue Fund

h. Special Revenue Fund

GOVERNMENT-WIDE FINANCIAL STATEMENTS

Business Type Activities

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FUND-BASED FINANCIAL STATEMENTS

b. Capital Projects Fund

Debt Service Fund

Expenditures ControlMachinery and Equipment

f. Special Revenue Fund

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GOVERNMENT-WIDE FINANCIAL STATEMENTS

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a. As the Appropriations account balance in the General Fund shows a

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Since estimated revenues exceed the appropriations, a surplus is

c. When the balance sheet is produced, a Reserved Fund Balance amount

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Debt Service Fund

h. FUND-BASED FINANCIAL STATEMENTS

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FUND-BASED FINANCIAL STATEMENTS

b. Capital Projects Fund

c. Capital Projects Fund

d. Capital Projects Fund

Debt Service Fund

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GOVERNMENT-WIDE FINANCIAL STATEMENTS

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Total Liabilities and Fund Equity