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Chapter 2
Fund Accounting
Questions for Review and Discussion
1. In governmental accounting, a fund is a fiscal and accounting entity with a self-
balancing set of accounts used to account for an organization’s resources and claims
against those resources. In business accounting, by contrast, funds generally refer
either to working capital (current assets less current liabilities) or to selected
components of working capital.
2. The accounting equation as applied in government accounting and not-for-profit
accounting is essentially the same as that applied in business accounting. The
primary difference is that in business, assets = liabilities + owner’s equity, whereas
in government and not-for-profit entities, since there are no “owners” as the term is
used in business, assets = liabilities + fund balance.
3. Nonspendable fund balance includes amounts that are not in spendable form or are
required to be maintained intact. Restricted fund balance includes amounts
constrained to specific purposes by their providers, through constitutional provisions,
or by enabling legislation. Committed fund balance includes amounts constrained to
specific purposes determined by the highest decision-making authority of the
government itself. Assigned fund balance includes amounts a government intends to
use for a specific purpose.
4. GASB in 2007 in Concepts Statement No. 4 Elements of Financial Statements
provided definitions and explanations of seven key elements that comprise basic
financial statements—five relating to financial position (assets, liabilities, deferred
outflow of resources, deferred inflow of resources and net position) and two relating
to resource flows. These elements as defined by GASB are: “Assetsare resources
with present service capacity that the government presently
controls.”“Liabilitiesare present obligations to sacrifice resources that the
government has little or no discretion to avoid.” “A deferred outflow of resourcesis
the consumption of net assets by the government that is applicable to a future
reporting period.” “A deferred inflow of resourcesis the acquisition of net assets by
the government that is applicable to a future reporting period.” “Net positionis the
residual of all other elements presented in a statement of financial position; that is
the assets and deferred outflows less the liabilities and deferred inflows.” “An
outflow of resourcesis a consumption of net assets by the government that is
applicable to the reporting period.” An inflow of resourcesis an acquisition of net
assets by the government that is applicable to the reporting period.
5. Governments establish funds neither to account for specific functions nor to divide
evenly their resources. Instead, they create funds mainly to promote control and
accountability over restricted resources. The general fund of the city is probably
larger than all of the special revenue funds combined because most of the city’s
assets are unrestricted and the unrestricted assets can be aggregated in a single fund.
6. There are no capital projects reported in the capital projects fund and generally no
long-term debts reported in the debt service fund because these funds are maintained
to account for the resources that will be used to construct or acquire capital assets or
to pay the interest and principal on long-term debts. These resources are set apart
from other resources because they can only be used for their specified purposes.
7. The presence of long-lived assets and long-term debt on the balance sheets of
enterprise and internal service funds indicates that the assets and debts are within
the funds’ measurement focus. It thereby implies that the funds are on a full accrual
basis.
8. Proprietary funds are used to account for business-type activities and they adhere to
business-type accounting principles. They typically charge for the goods or services
they provide and need data on the full cost (including depreciation) of services
provided so that they can establish prices. Governmental funds, by contrast, are
accounted for on a modified accrual basis. They receive their revenues from taxes,
grants and other sources that are not necessarily tied to cost of service.
9. Fiduciary fundsare used to account for resources held by the government as either a
trustee (a party that administers property for a beneficiary) or an agent (one who
acts on behalf of another). The two main types are trust funds and agency funds.
Trust funds are used to account for assets that the government holds for the benefit
of parties other than the government itself. Agency funds are used to account for
assets (e.g., taxes collected by one government on behalf of another) that a
government holds temporarily for other parties.
10. Permanent funds are a type of trust fund, but they benefit the government itself,
rather than outside parties. Therefore, they are considered governmental funds, not
fiduciary funds. However, like fiduciary funds, only the income of a permanent
fund, not the principal, may be spent. The principal must remain permanently
intact.
11. The financial statements must be prepared from a government-wide and a funds
perspective. The government-wide financial statements are consolidated and are on
a full accrual basis. The funds perspective statements are combined. The
governmental funds are accounted for on a modified accrual basis; the proprietary
funds on a full accrual basis.
12. An agency fund is used to account for assets held on behalf of other governments,
funds or individuals, usually for a short period, such as a year. Custodial in nature,
agency funds have only assets and liabilities, no revenues and expenditures.
13. A CAFR is a government’s Comprehensive Annual Financial Report. Its main
components are an introductory section (that includes a letter of transmittal and a
GFOA (Government Finance Officers Association) Certificate of Achievement for
Excellence in Financial Reporting (if received), a financial section (that includes
management’s discussion and analysis, the financial statements, notes to the
financial statements and required supplementary information) and a statistical
section (that includes economic, demographic and financial data).
14. Temporarily restricted resources are those that must be used for a specific purpose
(e.g., to support donor-designated programs or activities) or cannot be spent until
some time in the future (e.g., when a donor makes good on a pledge).
Permanentlyrestricted resources are typically endowments, only the income from
which can be spent. Unrestricted funds, of course, are not subject to restrictions.
The restrictions are based on donor mandates. Hence, restrictions imposed by other
parties (e.g., creditors) are not taken into account for purposes of resource
classification. These guidelines apply to not-for-profits, not governments and are
based on FASB rather than GASB pronouncements.
Exercises
EX 2-1
1. j
2. g
3. a
4. h
5. a
6. b
7. a
8. i
9. a
10. f
EX 2-2
1. a
2. c
3. d
4. d
5. c
6. a
7. a
8. b
9. c
10. b
11. a
12. b
EX 2-3
a. Focus on cash
(1)
No entry necessary — no cash involved.
(2)
Cash $ 300,000
Contribution revenues $ 300,000
To record the partial collection of the note
(3)
Building acquisition expenditure $ 120,000
Cash $ 120,000
To record the cash paid to acquire the building
(4)
No entry necessary — no cash involved
Focus on cash plus current financial resources
(1)
Note receivable $1,000,000
Contribution revenue $1,000,000
To record the note received
(2)
Cash $ 300,000
Note receivable $ 300,000
To record the partial collection of the note
(3)
Building acquisition expenditure $ 120,000
Cash $ 120,000
To record the cash paid to acquire the building (No recognition is given to the long-term
note or to the building, a long-term asset.)
(4)
Wage expense $ 4,000
Wages payable $ 4,000
To record the wages earned by employees, but not yet paid.
Focus on all economic resources
(1)
Note receivable $1,000,000
Contribution revenue $1,000,000
To record the note received
(2)
Cash $ 300,000
Note receivable $ 300,000
To record the partial collection of the note
(3)
Building $ 600,000
Cash $ 120,000
Mortgage note payable 480,000
To record the acquisition of the building
Depreciation expense $ 20,000
Accumulated depreciation $ 20,000
To record depreciation on the building
(4)
Wage expense $ 4,000
Wages payable $ 4,000
To record the wages earned by employees, but not yet paid
b.
Statement of Revenue and Expenses
Current All
Financial Economic
Cash Resources Resources
Contribution revenue $300,000 $1,000,000 $1,000,000
Building acquisition
expense (or depreciation) 120,000 120,000 $ 20,000
Wage expense 0 4,000 4,000
Total expenses 120,000 124,000 24,000
Excess of revenues over expenses $180,000 $ 876,000 $ 976,000
Balance Sheet
Current All
Financial Economic
Cash Resources Resources
Assets
Cash $180,000 $ 180,000 $ 180,000
Note receivable 700,000 700,000
Building (less accumulated depreciation) 580,000
Total assets $180,000 $ 880,000 $1,460,000
Liabilities and fund balance
Wages payable $ 4,000 $ 4,000
Mortgage note payable 480,000
Fund balance $180,000 $ 876,000 976,000
Total liabilities and fund balance $180,000 $ 880,000 $1,460,000
EX 2-4
1. Journal entries in general fund (in millions)
(1)
Cash $20.0
Proceeds from borrowing $20.0
To record the issuance of bonds
(2)
Expenditure for land $ 4.0
Cash $ 4.0
To record the purchase of land
(3)
Cash $ 1.0
Proceeds from sale of land $ 1.0
To record sale of land
(4)
Repayment of bonds (expenditure) $ 2.0
Cash $ 2.0
To record repayment of bonds
(5)
Legal claims (expenditure) $ 3.0
Cash $ 3.0
To record payment of judgment
2. Modified accrual statements
Special District
Balance Sheet
Cash $12
Fund Balance $12
Special District
Statement of Revenues, Expenditures and Changes in Fund Balance
Revenues and other financing sources
Bond proceeds $20
Proceeds from sale of land 1
Total revenues and other financing sources 21
Expenditures and other financing uses
Repayment of bonds 2
Acquisition of land 4
Legal claims 3
Total expenditures and other financing sources 9
Excess of revenues and other financing sources
over expenditures and other financing uses $12
3. The balance sheet fails to capture key long-term assets and long-term obligations.
But, of course, it is not intended to do so. Instead, it is intended to indicate the
current financial resources available to meet current obligations.
4. Similarly, the statement of revenues, expenditures and other financing sources does
not measure the cost of services (e.g., it recognizes borrowings as an increase in
fund balance and the full cost of acquiring fixed assets as a decrease). It is not
designed to do so. Instead it is designed to report on flows of current financial
resources — net assets that are likely of great interest to the district’s governing
body, managers and constituents.
EX 2-5
a. Journal entries
(1)
Cash $160,000
Contribution revenues $160,000
To record contribution revenue (general fund)
Cash $ 40,000
Contribution revenues $ 40,000
To record contribution revenue (building fund)
(2)
Operating expenses $130,000
Cash $120,000
Accounts payable 10,000
To record operating expenditures (general fund)
(3)
Cash $ 3,000
Interest revenue $ 3,000
To record interest revenue (building fund)
(4)
Transfer to building fund $ 17,000
Cash $ 17,000
To record transfer-out to building fund (general fund)
Cash $ 17,000
Transfer-in from general fund $ 17,000
To record transfer-in from general fund (building fund)
(5)
Expenses for architectural services $ 12,000
Cash $ 12,000
To record fees paid to architect (building fund)
b. Financial Statements
Society for Ethical Teachings
Statement of Revenues, Expenses and Other Changes in Fund Balance
General Building
Fund Fund
Revenues
Contribution revenue $160,000 $ 40,000
Interest 3,000
Total revenues 160,000 43,000
Expenses
Operating expenses 130,000
Architecture services 12,000
Excess of revenues over expenses 30,000 31,000
Transfers from (to) other funds (17,000) 17,000
Increase in fund balance $ 13,000 $ 48,000
Society for Ethical Teachings
Balance Sheet
General Building
Fund Fund
Assets
Cash $ 23,000 $ 48,000
Liabilities and fund balance
Accounts payable $ 10,000
Fund balance 13,000 $ 48,000
Total liabilities and fund balance $ 23,000 $ 48,000
EX 2-6
a. 8
b. 2
c. 7
d. 5
e. 4
f. 3
g. 1
h. 6
Continuing Problem
The solution to the continuing problem is based on the CAFR for the City of Austin,
Texas, for the year-ended September 30, 2014.
The 2014 CAFR can be found at:
https://assets.austintexas.gov/financeonline/downloads/cafr/cafr2014.pdf
City of Austin CAFR FY 2014
1 The three main sections of the CAFR are the introductory section, the financial
section (the main section) and the statistical section.
2. Introductory section
a. The city was awarded the GFOA Certificate of Achievement in year 2013. This
indicates that the report of the previous year met the GFOA’s standards of
accounting and reporting. The City management believes that this 2014 CAFR
conforms to the Certificate of Achievement program requirements, and will be
submitting it to the GFOA for their review. (p. ix/xi)
b. Key topics addressed in the letter of transmittal include: (p. i-ix)
Overview of City government, economic conditions and outlook
Major initiatives and achievements, including:
PRIDE initiatives to become best-managed city in the country (through public
service & engagement, responsibility & accountability, innovation &
sustainability, diversity & inclusion, and ethics & integrity)
Energy efficiency in recognition Austin Energy’s continued leadership and
achievement in the delivery of energy efficiency services to its customers
Innovation through the Austin Finance Online program to enhance financial
transparency
Others, including:
Financial policies
Long-term financial planning
Internal control and budgetary control
Awards
Acknowledgements
3. Financial section
3a. Deloitte &Touche LLP performed audit of the 2014 CAFR
3b. The entity received an unqualified audit opinion (page 1, Financial section).
3c. The MD&A section is included. It addresses the following:
Financial highlights
Overview of the financial statements
Financial analysis of the government-wide statements
Financial analysis of the fund level statements
Other information includes: General fund budgetary highlights; capital assets;
debt administration; economic factors and next year’s budget and rates; request
for information.
3d. Yes, the report does provide a reconciliation between total governmental net
assets per the government-wide statement of net position and total governmental
fund balances per the governmental funds balance sheet. Primary reconciled
items (reported in government-wide statements but are not reported in the funds):
Capital assets used in governmental activities (not financial resources) that are not
reported in the funds
Other long-term assets and certain revenues that are not available as current-
period resources and are not reported in the funds statements
Long-term liabilities, which are not payable in the current period, reported on the
government-wide statements but not on the funds statements.
Internal service fund assets and liabilitiesreported on the government-wide
statements but not on the funds statements
3e. The major governmental fund maintained by the entity is the General Fund (p.20).
The Fund structure does not conform to the city’s organizational structure(as set
forth in the organizational chart included in the introductory section of the report).
3f. The “required supplementary information” is included. It provides information on
budget amendments, reconciliation of GAAP basis and Budget Basis amounts,
retirement plans, budget and actual comparisons (pp.110-112).
3g. “Combining statements” are included. These present financial statements and
schedules, by fund type, for the general and nonmajor governmental and enterprise
funds. (pp. 113-185)
3h. “Supplemental information” are also included. It features various schedules, such
as (pp.191-199)
schedule of revenues, expenditures, and changes in fund balances-budget and actual-
budget basis
enterprise related grants
schedule of general obligation bonds authorized and unissued
schedule of revenue bonds authorized, deauthorized and unissued
4a. Theestimated population for City of Austin in 2014 is 878,002 (p. 219)
4b. The first three majors employers are State government, the University of Texas at
Austin and Dell Computer Corporation respectively. (p. 220)
4c. The statistical section serves as the informative part of the financial report,
providing readers with reports and schedules on the city of Austin. Some
information includes (pp. 201-226):
Program Revenues by Function/Program
Fund Balances-Governmental Funds
Tax Revenues by source
Property tax levies and collections, principal taxpayers
Assessed Taxable Property value by class
City sales tax
Ratios of Outstanding Debt by Type
Principal Employers
Airport statistics
Economic growth trend
Problems
P. 2-1
a.
(1)
Cash $100,000
Revenues from grants $100,000
To record revenues
(2)
Expenditures—computers $ 10,000
Cash $ 10,000
To record expenditure for purchase of five computers
(3)
Expenditures—wages $ 6,000
Cash $ 6,000
To record expenditure for payment of wages and salaries
(4)
Cash $ 24,000
Proceeds from borrowing $ 24,000
To record receipt of loan proceeds
(5)
Expenditures—automobile $ 24,000
Cash $ 24,000
To record the purchase of the automobile
(6)
Expenditures—interest $ 200
Cash $ 200
To record payment of interest on note
(7)
No entry is necessary. The computer is not reported as an asset in the general fund, so it
need not be removed from it.
b.
Entrepreneurs Consultants
Balance Sheet
General Fund
Asset: Cash $83,800
Fund balance $83,800
Entrepreneurs Consultants
Statement of Revenues, Expenditures and Other Changes in Fund Balances
Revenues:
Grants $100,000
Expenditures:
Acquisition of computers 10,000
Acquisition of automobile 24,000
Wages 6,000
Interest 200
Total expenditures 40,200
Excess of revenues over expenditures 59,800
Other changes in fund balance:
Proceeds of borrowing 24,000
Additions to fund balances $ 83,800
c.
Entrepreneurs Consultants
Statement of Net Position
Assets:
Cash $ 83,800
Computers $ 8,000
Automobile 24,000
32,000
Less: accumulated depreciation 6,400 25,600
Total assets $109,400
Liabilities and net position:
Note payable 24,000
Net position 85,400
