Accountancy 4365/7365

Exam 1 Study Guide Summer 2011

Exam 1 will cover Chapters 1-6 of the textbook. The exam may consist of multiple-choice questions, matching, and problems requiring the preparation of journal entries. You will not be asked to prepare any financial statements on the exam. In order to properly prepare for this exam, I recommend reading Chapters 1-6 in the textbook, reviewing the PowerPoint slides, and practicing the suggested homework problems assigned for each chapter. There are also a number of journal entry examples in the textbook that would be beneficial for you to review. Additionally, you should make sure you have a good understanding of the bold-faced terms from each chapter. Specific suggestions for what information to focus on in Chapters 1-6 are as follows:

Chapter 1
Understand what distinguishes governmental and not-for-profit entities from business organizations 1. Benefits are not proportional to resources provided 2. Lack of a profit motive 3. Absence of transferable ownership rights Be able to determine whether a not-for-profit organization should be considered a governmental entity 1. Public corporations and bodies corporate and politic 2. Other organizations with one or more of the following characteristics: 1. Popular election of officers or appointment of a controlling majority of the governing body by officials of another government 2. Potential dissolution by a government with net assets reverting to a government 3. Power to enact and enforce a tax levy 4. Guidance from the AICPA states that NPOs who meet any of the above characteristics are considered to be governmental entities. 5. Public corporations and bodies corporate and politic public hospital, public library, public college as opposed to private hospital, private library, or private college 3. Know the minimum financial reporting requirements for state and local governments (Illustration 1-3) 1. GASB standards recommend, but dont require, that each governmental entity prepare a CAFR. The minimum reporting requirements to meet generally accepted accounting principles (GAAP) were listed on the previous slide: MD&A, Basic Financial Statements, and RSI other

than MD&A. These items are included in the Financial Section, which we will look at in a few minutes. 4. Know the sections of the Comprehensive Annual Financial Report and what these sections consist of 1. Introductory Section 1. Title Page 2. Contents Page 3. Letter of Transmittal 4. Other Information (as desired by management) 2. Financial Section 1. Auditors Report 2. Managements Discussion and Analysis (MD&A) 3. Basic Financial Statements 4. Required Supplementary Information (RSI) Other Than MD&A 5. Combining and Individual Fund Financial Statements and Schedules 3. Statistical Section 1. Tables and charts showing the following: 2. Social and economic data 3. Financial trends 4. Fiscal capacity Bold faced words 1. Accountability 1. Being obliged to explain one's actions, to justify what one does; the requirement for government to answer to its citizenryto justify the raising of public resources and expenditure of those resources. Also, in the GASB's view, the obligation to report whether the government operated within appropriate legal constraints; whether resources were used efficiently, economically, and effectively; whether current-year revenues were sufficient to pay for the services provided in the current year; and whether the burden for services previously provided will be shifted to future taxpayers. 2. Basic financial statements 1. Term used in GASBS 34 to describe required government-wide and fund financial statements. 3. Comprehensive annual financial report (CAFR) 1. A government's annual report that contains three sections introductory, financial, and statistical. A CAFR provides financial information beyond the general purpose external financial statements and conforms to guidance in the GASB Codification 4. Federal Accounting Standards Advisory Board (FASAB) 1. The ninemember standards-setting body that recommends federal governmental accounting and financial reporting standards to the

U.S. Comptroller General, Secretary of the Treasury, and Director of the Office of Management and Budget. 5. Financial Accounting Standards Board (FASB) 1. The designated organization in the private sector for establishing standards of financial accounting and reporting since 1973. 6. Fiscal accountability 1. Current-period financial position and budgetary compliance reported in fund-type financial statements of governments. See also Financial Accountability. 7. Fund financial statements 1. A category of the basic financial statements that assist in assessing fiscal accountability. 8. General purpose governments 1. Governments that provide many categories of services to their residents, such as states, counties, municipalities, and townships. Typical services include public safety, road maintenance, and health and welfare. 9. Generally accepted accounting principles (GAAP) 1. The body of accounting and financial reporting standards, conventions, and practices that have authoritative support from standards-setting bodies such as the Governmental Accounting Standards Board and the Financial Accounting Standards Board, or for which a degree of consensus exists among accounting professionals at a given point in time. Generally accepted accounting principles are continually evolving as changes occur in the reporting environment. 10. Governmental Accounting Standards Board (GASB 1. )The independent agency established under the Financial Accounting Foundation in 1984 as the official body designated by the AICPA to set accounting and financial reporting standards for state and by the AICPA local governments. 11. Government-wide financial statements 1. Two statements prescribed by GASBS 34 designed to provide a highly aggregated overview of a government's net assets and results of financial activities. 12. Interperiod equity 1. A term coined by the Governmental Accounting Standards Board indicating the extent to which current-period revenues are adequate to pay for current-period services. 13. Major fund 1. Funds are classified as major if they are significantly large with respect to the whole government. A fund is "major" if (a) total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 10 percent of the corresponding total of assets, liabilities, revenues, or expenditures/expenses for all funds of that category or type (total

governmental or total enterprise funds), and (b) total assets, liabilities, revenues, or expenditures/expenses of the individual governmental fund or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds combined. 14. Management's Discussion and Analysis (MD&A) 1. Narrative information, in addition to the basic financial statements, in which management provides a brief, objective, and easily readable analysis of the governments financial performance for the year and its financial position at year-end. An MD&A is required by GASBS 34 for state and local governments and by FASABs SFFAC No. 3 for federal agencies. 15. Operational accountability 1. Information useful in assessing operating results and short- and long-term financial position and the cost of providing services from an economic perspective reported in entitywide financial statements. 16. Required supplementary information (RSI) 1. Information that is required by generally accepted accounting principles to be included with the audited annual financial statements, usually directly following the notes to the general purpose external financial statements. 17. Service efforts and accomplishments (SEA) 1. A conceptualization of the resources consumed (inputs), tasks performed (outputs), goals attained (outcomes), and the relationship among these items in providing services in selected areas (e.g., police protection, solid waste garbage collection, and elementary and secondary education). 18. Special purpose governments 1. Governments that provide only a single function or a limited number of functions, such as independent school districts and special districts. Formerly called limited purpose governments.

Chapter 2
1. Accrual basis a. The basis of accounting under which revenues are recorded when earned and expenditures (or expenses) are recorded as soon as they result in liabilities for benefits received, notwithstanding that the receipt of cash or the payment of cash may take place, in whole or in part, in another accounting period. See also Accrue and Levy. 2. Agency funds a. Funds consisting of resources received and held by the government as an agent for others; for example, taxes collected and held by a municipality for a school district. Note: Sometimes resources held by a government for other

organizations are handled through an agency fund known as a pass-through agency fund 3. Available a. Collectible within the current period or soon enough thereafter to be used to pay liabilities of the current period. 4. Blended presentation a. The method of reporting the financial data of a component unit in a manner similar to that in which the financial data of the primary government are presented. Under this method the component unit data are usually combined with the appropriate fund types of the primary government and reported in the same columns as the data for the primary government except General Funds. See Discrete Presentation. 5. Business-type activities a. Commercial-type activities of a government, such as public utilities (e.g., electric, water, gas, and sewer utilities), transportation systems, toll roads, toll bridges, hospitals, parking garages and lots, liquor stores, golf courses, and swimming pools. 6. Capital projects funds a. A fund created to account for all resources to be used for the construction or acquisition of designated capital assets by a government except those financed by proprietary or fiduciary funds. 7. Component units a. Separate governments, agencies, or not-for-profit corporations that, pursuant to the criteria in the GASB Codification, Section 2100, are combined with other component units to constitute the reporting entity (q.v.). 8. Current financial resources a. Cash or items expected to be converted into cash during the current period or soon enough thereafter to pay current period liabilities. 9. Debt service funds a. A fund established to finance and account for the payment of interest and principal on all tax-supported debt, serial and term, including that payable from special assessments. 10. Discrete presentation a. The method of reporting financial data of component units in a column(s) separate from the financial data of the primary government. 11. Economic resources measurement focus a. Attention on measuring the total economic resources that flow in and out of the government rather than on measuring current financial resources only. 12. Enterprise funds a. A fund established to finance and account for the acquisition, operation, and maintenance of governmental facilities and services that are entirely or predominantly self-supporting by user charges; or for when the governing body of the government has decided periodic determination of revenues earned, expenses incurred, and/or net income is appropriate.

Governmentally owned utilities and hospitals are ordinarily accounted for by enterprise funds. 13. Expenditure a. An expenditure is recorded when liabilities are incurred pursuant to authority given in an appropriation (q.v.). If the accounts are kept on the accrual basis (q.v.) or the modified accrual basis (q.v.), this term designates the cost of goods delivered or services rendered, whether paid or unpaid, including expenses, provision for debt retirement not reported as a liability of the fund from which retired, and capital outlays. When the accounts are kept on the cash basis (q.v.), the term designates only actual cash disbursements for these purposes. Note: Encumbrances are not expenditures. 14. Expense a. A charge incurred, whether paid or unpaid, for operation, maintenance, interest, and other charges presumed to benefit the current fiscal period. 15. Fiduciary activities a. Activities in which the government acts in a fiduciary capacity either as an agent or trustee for parties outside the government, for example in the collection of taxes or amounts bequeathed from private citizens, as well as assets held for employee pension plans. 16. Fund a. A fiscal and accounting entity with a self balancing set of accounts recording cash and other financial resources together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations. 17. Fund balances a. The portion of fund equity (q.v.) available for appropriation. 18. Fund equity a. The excess of fund assets and resources over fund liabilities. A portion of the equity of a governmental fund may be reserved (q.v.) or designated (q.v.); the remainder is referred to as fund balance. 19. General Fund a. A fund used to account for all transactions of a government that are not accounted for in another fund. Note: The General Fund is used to account for the ordinary operations of a government that are financed from taxes and other general revenues. 20. Governmental activities a. Core governmental services, such as protection of life and property (e.g., police and fire protection), public works (e.g., streets and highways, bridges, and public buildings), parks and recreation facilities and programs, and cultural and social services. Also includes general administrative support, such as data processing, finance, and personnel. 21. Governmental funds

a. A generic classification used by the GASB to refer to all funds other than proprietary and fiduciary funds. The General Fund, special revenue funds, capital projects funds, debt service funds, and permanent funds are the types of funds referred to as governmental funds. 22. Internal service funds a. Funds established to finance and account for services and commodities furnished by a designated department or agency to other departments and agencies within a single government or to other governments. Amounts expended by the fund are restored thereto either from operating earnings or by transfers from other funds, so that the original fund capital is kept intact. Formerly called a working capital fund or intragovernmental service fund. 23. Investment trust funds a. Funds used to account for the assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants. 24. Major funds a. Funds are classified as major if they are significantly large with respect to the whole government. A fund is "major" if (a) total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 10 percent of the corresponding total of assets, liabilities, revenues, or expenditures/expenses for all funds of that category or type (total governmental or total enterprise funds), and (b) total assets, liabilities, revenues, or expenditures/expenses of the individual governmental fund or enterprise fund are at least 5 percent of the corresponding total for all governmental and enterprise funds combined. 25. Modified accrual basis a. Under the modified accrual basis of accounting, required for use by governmental funds (q.v.), revenues are recognized in the period in which they become available and measurable, and expenditures are recognized at the time a liability is incurred pursuant to appropriation authority. 26. Pension trust funds a. The organizations that collect retirement and other employee benefit contributions from government employers and employees, manage assets, and make payments to qualified retirants, beneficiaries, and disabled employees. 27. Permanent funds a. Governmental-type funds used to account for public-purpose trusts for which the earnings are expendable for a specified purpose, but the principal amount is not expendable (i.e., an endowment). 28. Primary government a. A state government or general purpose local government. Also, a specialpurpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments. 29. Private-purpose trust funds a. Funds that account for contributions received under a trust agreement in which the investment income of an endowment is intended to benefit an external individual, organization, or government.

30. Proprietary funds a. Sometimes referred to as income determination, business-like, or commercial-type funds of a state or local government. Examples are enterprise funds and internal service funds. 31. Reporting entity a. The primary government and all related component units, if any, combined in accordance with GASB Codification Section 2100 constitute the governmental reporting entity. 32. Special revenue funds a. Funds used to account for revenues from specific taxes or other earmarked revenue sources that by law are designated to finance particular functions or activities of government. After the fund is established, it usually continues year after year until discontinued or revised by proper legislative authority. An example is a motor fuel tax fund used to finance highway and road construction. In Chapter 2, you will learn about the different types of funds used by governmental entities. Activites of Government o Governmental Activities o Business-Type Activities o Fiduciary Activities The following two sets of basic financial statements are required: o Government-Wide Financial Statements (Illustrations 1-4, 1-5, and 2-1) Present financial information using the accrual basis of accounting and the economic resources measurement focus (i.e., similar to forprofit companies) Report the primary governments financial information in two columns (Governmental Activities and Business-Type Activities) Internal Service Fund information is usually reported in the Governmental Activities column Fiduciary activities are not reported at all in the Government-Wide Financial Statements o Fund Financial Statements (Illustrations 1-6 through 1-13 and 2-1) Two financial statements for Governmental Funds A category used for all funds other than those considered to be Proprietary Funds or Fiduciary Funds o Types General Fund Only one per governmental entity Used to account for most general government operating activities Special Revenue Funds

Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose Accounting and budgeting is usually identical to that of the General Fund Capital Projects Funds Used to account for financial resources segregated, or set aside, to pay for construction or acquisition of long-lived capital assets Debt Service Funds Used when required by law or by policy to account for financial resources earmarked for a specified operating purpose Accounting and budgeting is usually identical to that of the General Fund Permanent Funds Used to account for resources provided by a public-purpose trust The principal is not expendable (i.e., an endowment) Earnings are expendable for a specified public purpose only Three financial statements for Proprietary Funds Often referred to as business-like or business-type funds. o Internal Service Funds Used to account for activities in which goods or services are provided to other departments of the same government or to other governments for a charge Typically reported as Governmental Activities in the Government-Wide Financial Statements, because the activities primarily benefit the government itself Examples include central purchasing, central computing, and printing o Enterpr ise Funds Used to account for activities in which goods or services are provided to the general public for a charge

Enterprise Funds are reported as BusinessType Activities in the Government-Wide Financial Statements Examples include electric and water utilities, airports, golf courses, parking garages, transportation systems, and liquor stores Two financial statements for Fiduciary Funds Any fund held by a governmental unit in a fiduciary capacity (agent or trustee) for an external party o Agency Funds Used to account for financial resources in which the government is acting in an agency capacity Accounting is simple: Assets = Liabilities No revenue, expense, or fund equity accounts are used Examples are tax agency funds, special assessment debt service funds, and passthrough agency funds o Investment Trust Funds Used to account for external investment pools in which the assets are held for other external governments along with funds of the sponsoring government The assets, liabilities, net assets, and changes in net assets corresponding to the equity of the external participants are reported in these funds. o Private-Purpose Trust Funds Used to account for nonexpendable financial resources in which the government is acting in a trustee capacity Created to benefit private individuals Accounting is virtually identical to that of an Enterprise Fund o Pension Trust Funds Used to account for financial resources in which the government is acting in a trustee capacity for the employees of the government to provide retirement benefits Follow business-type accounting practices o Illustration 2-3 provides a great summary of the characteristics of each fund type. Understand the measurement focus and basis of accounting concepts Modified Accrual Basis

1. Revenues are recognized when measurable and available 2. Expenditures are recognized when incurred Accrual Basis (or Full Accrual Basis) 1. Revenues are recognized when earned 2. Expenses are recognized when incurred Economic Resources Measurement Focus 1. Report on the determination of financial position, net income, and cash flows (i.e., capital maintenance) 2. Used to assess operational accountability Current Financial Resources Measurement Focus 1. Report on the inflows and outflows of current financial resources (cash or other items expected to be converted into cash during the current period) 2. Used to assess fiscal accountability

Know what a governmental financial reporting entity consists of 1. primary government is: 1. A state government, 2. A general-purpose local government (e.g., city, town, county, etc.), or a 3. Special-purpose government that has a separately elected governing body, is legally separate, and is fiscally independent of other state or local governments. 2. The component units of the primary government 1. A component unit is: 2. A legally separate organization for which the elected officials of a primary government are financially accountable Know the characteristics of each fund type (Illustration 2-2)

AND

Think about different fund types like different savings accounts. Lets say your parents give you a certain amount of money each month for college expenses (tuition and books). And lets also say that you have a job. The money you make from your job goes towards apartment expenses (rent, utilities, telephone), groceries, gas, and extracurricular activities. If you wanted to segregate your money to make sure you had money set aside to cover each of those expenses, you could set up separate savings accounts. You might set up one savings account for your college expenses, and all the money your parents give you gets deposited directly into this account. That way, you don't accidentally spend that money on other things like groceries or extracurricular activities. Then you might set up another savings account to set aside money from your job that needs to cover your apartment expenses, groceries, and gas. Finally, you might set up a third savings account to set aside any leftover money that can be used for extracurricular activities and other miscellaneous expenses. Now, I realize you probably wouldn't really set up three different savings accounts like I have suggested above. This is just an example to try to help you understand the purpose of a governmental entity setting up different funds. Each fund is like a separate savings account for the governmental entity. The purpose of having different funds is to segregate money, so the governmental entity can make sure the money they receive from various resources is spent on what it was intended to be used for. Each fund has its own set of books which a governmental entity must record journal entries into, and trial balances and financial statements are then prepared for each individual fund. It is equally important for you to understand that there are two sets of financial statements that must be prepared for governmental entities. These two sets of financial statements are essentially presenting the same financial information, but in different ways. The government-wide financial statements are like a for-profit company's consolidated financial statements that provide a picture of how efficiently and how effectively the governmental entity is performing overall. The fund financial statements are like the individual subsidiary financial statements of a for-profit company. These financial statements are used to ensure the government is staying within the budget and complying with the applicable laws and regulations for each individual fund.

Chapter 3
1. Activity a. A specific and distinguishable line of work performed by one or more organizational components of a government for the purpose of accomplishing a function for which the government is responsible. For example, food inspection is an activity performed in the discharge of the health function. See also Function, Subfunction, and Subactivity. 2. Ad valorem property taxes a. In proportion to value. A basis for levy of taxes on property. 3. Allotment a. A part of an appropriation (or, in federal usage, parts of an apportionment) that may be encumbered (obligated) or expended during an allotment period. 4. Appropriation

a. Authorizations granted by a legislative body to incur liabilities for purposes specified in the Appropriation Act (q.v.). Note: An appropriation is usually limited in amount and as to the time when it may be expended. See, however, Indeterminate Appropriation. 5. Budgetary accounts a. Those accounts that reflect budgetary operations and condition, such as estimated revenues, appropriations, and encumbrances, as distinguished from proprietary accounts. See also Proprietary Accounts. 6. Character a. A basis for distinguishing expenditures according to the periods they are presumed to benefit. See also Character Classification. 7. Direct expenses a. Those expenses that can be charged directly as a part of the cost of a product or service or of a department or operating unit as distinguished from overhead and other indirect costs that must be prorated among several products or services, departments, or operating units. 8. Encumbrances a. Accounts used to record the estimated amount of purchase orders, contracts, or salary commitments chargeable to an appropriation. The account is credited when goods or services are received and the actual expenditure of the appropriation is known. 9. Estimated other financing sources a. Amounts of financial resources estimated to be received or accrued during a period by a governmental or similar type fund from interfund transfers or from the proceeds of noncurrent debt issuance. 10. Estimated other financing uses a. Amounts of financial resources estimated to be disbursed or accrued during a period by a governmental or similar type fund for transfer to other funds. 11. Estimated revenues a. For revenue accounts kept on an accrual basis (q.v.), this term designates the amount of revenue estimated to accrue during a given period regardless of whether or not it is all to be collected during the period. For revenue accounts kept on a cash basis (q.v.), the term designates the amount of revenue estimated to be collected during a given period. Under the modified accrual basis (q.v.), estimated revenues are those that are measurable and available. See also Revenue, Cash Basis, Accrual Basis, and Modified Accrual Basis. 12. Extraordinary items a. Unusual and infrequent material gains or losses. 13. Functions a. A group of related activities aimed at accomplishing a major service or regulatory responsibility for which a government is responsible. For example, public health is a function. See also Subfunction, Activity, Character, and Object. 14. General revenues

a. Revenues that are not directly linked to any specific function or do not produce a net revenue. 15. Indirect expenses a. Those expenses that are not directly linked to an identifiable function or program. 16. Object a. A basis for distinguishing expenditures by the article purchased or the service obtained (as distinguished from the results obtained from expenditures). Examples are personal services, contractual services, materials, and supplies. 17. Organization unit a. Units or departments within an entity, such as police department or city attorney department. 18. Other financing sources a. An operating statement classification in which financial inflows other than revenues are reported, for example, proceeds of long-term debt and transfers in. 19. Other financing uses a. An operating statement classification in which financial outflows other than expenditures are reported, for example, transfers out. 20. Penalty a. A legally mandated addition to a tax on the day it became delinquent (generally, the day after the day the tax is due). 21. Program revenues a. Revenues linked to a specific function or program and reported separately from general revenues on the government-wide statement of activities. 22. Programs a. Activities, operations, or organizational units grouped together because they share purposes or objectives. 23. Property assessment a. A process by which each parcel of taxable real and personal property owned by each taxpayer is assigned a valuation. 24. Special items a. Operating statement items that are either unusual or infrequent and are within management control. 25. Taxable property a. All property except that which is exempt from taxation; examples of exempt property are property owned by governments and property used by some religious and charitable organizations. Understand the difference between direct and indirect expenses and the difference between program revenues and general revenues 1. Expenses should be reported by function or program 1. Direct Expenses: Those directly associated with a function or program

2. Indirect Expenses: Those that are not directly linked to an identifiable function 2. Revenues should be distinguished between 1. Program Revenues: Reported in the program/functions section of the statement 2. General Revenues: Not directly linked to any program/function, these are reported in a separate section Know what types of transactions would be classified as Other Financing Sources and Other Financing Uses in the financial statements 1. Other Financing Sources (OFS) represent operating transfers in from other funds and proceeds of long-term borrowing 2. Other Financing Uses (OFU) represent operating transfers out to other funds

In Chapter 3, you need to have a good understanding of the 5 budgetary accounts: Estimated Revenues, Estimated Other Financing Sources (OFS), Appropriations, Encumbrances, and Estimated Other Financing Uses (OFU). Estimated Revenues, Estimated Other Financing Sources, and Encumbrances are debited when recording budgetary entries to these accounts. Appropriations and Estimated Other Financing Uses are credited when recording budgetary entries to these accounts. There are only 3 times you should make journal entries to Estimated Revenues, Estimated OFS, Appropriations, and Estimated OFU: (1) At the beginning of the year to record the approved budget, (2) During the year if there are any amendments to the budget, and (3) At the end of the year to close the budgetary accounts. Encumbrances is the only budgetary account that you will make entries to throughout the year as goods/services are ordered and received or as contracts are signed and fulfilled. Please make sure you understand that Other Financing Sources is a special type of revenue account used in governmental accounting to record the proceeds of bonds or cash transferred into a fund from another fund (that will not be re-paid), and Other Financing Uses is a special type of expenditure account used in governmental accounting to record cash transferred out of one fund and into another (that will not be re-paid).

Know the budgetary accounts and review Illustration 3-3 and Illustration 3-4 Be able to record the original budget at the beginning of a fiscal year, record amendments to the budget, and close budget accounts at the end of the fiscal year

Chapter 4
Review and have a good understanding of the journal entries shown in Chapter 4 of the textbook in the Illustrative Journal Entries section and the Accounting for Property Taxes section Know what makes a governmental funds interim financial statements different from its year-end financial statements (Note: You will not be asked to prepare interim or year-end financial statements for this exam) Understand the purpose for using a special revenue fund 1. Special Revenue Funds are created when revenues are received that are earmarked for a specific operating purpose 1. Examples include: 1. Motor fuel taxes earmarked for streets, roads, and bridges

2. Federal grant money given to operate a counseling program for troubled youths 2. Accounting, budgeting, and financial reporting are essentially the same as for the General Fund Understand the different types of interfund activity 1. Transactions between two funds that are similar to those involving the government and an external entity 1. Example: Billing from a citys Water Utility Fund (an Enterprise Fund) to the Citys General Fund for the Fire Departments utilities 2. The funds recognize a revenue and expenditure, respectively, rather than operating transfers in and operating transfers out 3. These transactions are eliminated prior to preparing the Government-Wide Financial Statements Interfund Loans 1. Loans made from one fund to another with the intent that they are to be repaid. 2. Classified as Interfund Loans Receivable-Current (or Interfund Loans Payable-Current) if the intent is to repay during the current year. 3. Classified as Interfund Loans Receivable-Noncurrent (or Interfund Loans Payable-Noncurrent) if the loan is not intended to be repaid during the current year. Interfund Transfers 1. Nonreciprocal activity in which money is transferred between funds with no intention of repayment. 2. Classified as Other Financing Sources (a revenue account) or Other Financing Uses (an expenditure account) Know what would be accounted for in a permanent fund (Note: You will not be asked to prepare any journal entries for permanent funds for this exam) 1. Permanent Funds are used to account for contributions received under trust agreements in which only the earnings are expendable (the principal amount is not expendable) 2. The earnings are specifically intended to be used to meet a public-purpose (i.e., to benefit a government program or function or the citizenry as a whole, rather than an external individual, organization, or government Understand the difference between exchange and non-exchange transactions and know the classes and timing of recognition for non-exchange transactions (Illustration A4-1) 1. Exchange transactions 1. Transactions in which each party receives value essentially equal to the value given 2. Example: One party sells goods or services which another party buys 3. Recognize the revenue when it is earned and the expense/expenditure when it is incurred

4. Exchange-like transactions are those in which the values exchanged may be related but not quite equal 2. NonExchange Transactions 1. External events in which a government gives/receives value without directly receiving/giving equal value in exchange 2. Revenue recognition depends on time requirements - the period in which the resources are required to be used (or may be used) 3. In some cases, revenue recognition may be delayed until program eligibility requirements are met 4. Purpose restrictions are reported as Reserved Fund Balance or Restricted Net Assets Classes of Non-exchange transactions 1. Derived Tax Revenues 1. e.g., income taxes and sales taxes 2. Imposed Nonexchange Revenues 1. e.g., property taxes and fines and penalties 3. Government-Mandated Nonexchange Transactions 1. e.g., certain services funded by a higher level of government 4. Voluntary Nonexchange Transactions 1. e.g., grants and entitlements from higher levels of government and certain private donations Revenue of Non-exchange transactions 1. Derived Tax Revenues 1. Recognize revenue in the period in which the underlying exchange occurs. 2. Imposed Nonexchange Revenues 1. Recognize revenue when there is an enforceable legal claim, or in the period for which levied in the case of property taxes. 3. Government-Mandated Nonexchange Transactions 1. Recognize revenue when all eligibility requirements have been met. If cash is received before eligibility requirements have been met, Deferred Revenues would be credited. 4. Voluntary Nonexchange Transactions 1. Same as above

Chapter 5
1. Arbitrage rebate a. Required repayment to the federal government arising from the arbitrage rules that prohibit the government from investing bond proceeds at interest rates higher than that applicable to the entity's tax-exempt debt. 2. Asset impairment a. A significant, unexpected decline in the service utility of a capital asset (q.v.). 3. Bond anticipation notes a. Short-term interest-bearing notes issued by a government in anticipation of bonds to be issued at a later date. The notes are retired from proceeds of the bond issue to which they are related. See also Interim Borrowing.

4. Capital improvements fund a. A fund to accumulate revenues from current taxes levied for major repairs and maintenance to capital assets of a nature not specified at the time the revenues are levied. Appropriations of this fund are made in accord with state law at the time specific projects become necessary. 5. Capital leases a. A lease that substantively transfers the benefits and risks of ownership of property to the lessee. Any lease that meets certain criteria specified in applicable accounting and reporting standards is a capital lease. See also Operating Lease. 6. Capital projects funds a. A fund created to account for all resources to be used for the construction or acquisition of designated capital assets by a government except those financed by proprietary or fiduciary funds. 7. Force account construction a. The determination of the cost of construction of buildings and improvements by some agency of the government. 8. General capital assets a. Those capital assets of a government that are not recognized by a proprietary or fiduciary fund. 9. Historical cost a. The amount paid or liability incurred by an accounting entity to acquire an asset and make it ready to render the services for which it was acquired. 10. Infrastructure assets a. Roads, bridges, curbs and gutters, streets, sidewalks, drainage systems, and lighting systems installed for the common good. See also Improvements. 11. Intangible assets a. Capital assets that lack physical substance, have a useful life of more than one reporting period, and are nonfinancial in nature. 12. Interfund transfers a. Amounts transferred from one fund to another. 13. Modified approach a. An approach that allows the government to elect not to depreciate certain eligible infrastructure assets provided certain requirements are met. 14. Operating leases a. A rental-type lease in which the risks and benefits of ownership are substantively retained by the lessor, and thus do not meet the criteria defined in applicable accounting and reporting standards for a capital lease (q.v.). 15. Special assessments a. A compulsory levy made against certain properties to defray part or all of the cost of a specific improvement or service that is presumed to be a general benefit to the public and of special benefit to such properties. Review Illustration 5-1 to understand how general capital assets are recorded 1. General Capital Assets are:

1. Capitalized in the Governmental Activities accounts at the Government-Wide level 2. Depreciated at the Government-Wide level 3. Debited to Expenditures accounts in the appropriate Governmental Funds Know what the required disclosures are for each major class of capital assets 1. Major Classes 1. Land 2. Buildings 3. Improvements other than buildings 4. Machinery and Equipment 5. Construction Work in Progress 6. Infrastructure (e.g., streets, bridges) 2. Required Disclosures 1. Capitalization policy 2. Policy for estimating useful lives of assets 3. Beginning and end of year balances, including accumulated depreciation 4. Acquisitions during the year 5. Sales or other dispositions during the year 6. Depreciation expense for the current period 7. Why collections (e.g., works of art or historical treasures) are not capitalized Know what two requirements must be met to allow a government to use the modified approach for its infrastructure assets, and know what the minimum documentation is that a government is required to provide to continue using the modified approach 1. The government can elect not to depreciate certain eligible infrastructure assets if: 2. An asset management system is in place that includes 1. An up-to-date inventory of eligible assets, 2. Condition assessments of the assets and summary of results using a measurement scale, 3. Estimates each year of the annual amount needed to maintain and preserve the assets at the established condition level 3. The government documents that these assets are being preserved at or above established levels of condition 4. Understand the purpose for using a capital projects fund 1. Two types of capital projects: 1. General (public benefit) 1. Examples: public buildings; roads, highways and bridges; park improvements; etc. 2. Special assessment (private benefit) 1. Deemed to benefit citizens in a specified district 1. Examples: street improvements, curbs, sidewalks, street lighting, sewage, etc.

Review and have a good understanding of the journal entries shown in Chapter 5 of the textbook in the Illustrative Entries section and the Illustrative Transactions Capital Projects Funds section

Chapter 6
Know where general long-term liabilities are recorded 1. All General Long-Term Liabilities are reported in the Governmental Activities column of the Government-Wide Statement of Net Assets. 1. They are NOT reported as liabilities of Governmental Funds in the fund financial statements. 2. A Debt Service Fund may be established to account for the principal and interest payments on General Long-Term Liabilities. Know what the required disclosures are for debt Understand the terms debt limit and debt margin and be able to compute the debt limit and legal debt margin 1. Debt Limit 1. A ceiling on the amount of debt a governmental entity is allowed to take on 2. Typically defined as a statutory percentage of assessed valuation or some other valuation of taxable property 2. Debt Margin 1. The difference between the debt limit and the amount of debt outstanding subject to the limit 2. Self-supporting debt being repaid from user charges (i.e., water or sewer charges) is typically not subject to the limit 3. Usually only net debt (total debt minus cash available for principal repayment in a Debt Service Fund) is subject to the limit Understand the difference between serial bonds and term bonds, and know the 4 different types of serial bonds 1. Serial Bonds - Principal matures in annual installments, For regular serial bonds, resources raised each year approximate debt service requirements; thus, investments will be minimal. However, any idle cash balances should be invested. For deferred serial bonds, some resources are likely to be raised and invested during the years before the first principal payment becomes due. Advantage: Self-amortizing, no sinking fund needed 1. Regular Serial Bonds 1. The total principal is repayable in a specified number of equal annual installments over the life of the issue 2. Deferred Serial Bonds 1. The first installment is delayed for a period of more than one year after the date of the issue, but installments are due on a regular basis thereafter 3. Annuity Serial Bonds

1. The amount of annual principal repayments is scheduled to increase each year by approximately the same amount interest payments decrease 4. Irregular Serial Bonds 1. The pattern of repayment does not fit into any of the other three serial bond categories listed above 2. Term Bonds - Principal matures in one lump-sum amount at the end of the bond term. Not used as frequently for financing as serial bonds. Disadvantages: Usually requires a sinking fund and therefore, investment management, and involves more complex accounting than serial bonds Review the journal entry examples shown in Chapter 6 of the textbook for regular serial bonds and term bonds

You will learn that we do not record capital assets in governmental funds. Capital assets that have been acquired or constructed with governmental fund money should immediately be recorded as an expenditure in governmental funds (at the fund level). This is because capital assets are long-term in nature, and we only focus on the short-term with our governmental funds. However, we do have to record such capital assets at the government-wide level in Governmental Activities. So when a capital asset has been acquired or constructed with governmental fund money, we would typically debit an expenditure account at the governmental fund level, while we would debit a capital asset account (building, equipment, etc.) at the government-wide level.