Chapter 2: Budgeting

Government and not-for-profit organizations establish their systems on a _____ basis.

fund

What is the accounting formula for fund accounting? What about funds for a non-profit?

• Assets + deferred outflows = liabilities + deferred inflows + fund balance

or alternatively, Assets +deferred outflows - liabilities - deferred inflows = fund balance (or net position)

• Funds for a non-profit would use Assets - liabilities = fund balance.

Governmental and not-for-profit entities customarily use ________ funds-that is, ____ fiscal and accounting entities-to account for their resources and activities.

several

What type of accrual basis is used in governments and not-for-profits?

Modified accrual basis → the residual amount is referred to as fund balance (compared to the full accrual basis → the residual amount is referred to as net position)

What is a deferred outflow of resources? What is a deferred inflow of resources?

Deferred outflow of resources: the consumption of net assets by the government that is applicable to a future reporting period.

Deferred inflow of resources: the acquisition of net assets by the government that is applicable to a future reporting period.

Governments and not-for-profits do not have owners, so the term owners’ equity is replaced by the terms fund balance or net position. true or false?

true

What is GASB Statement No.54?

Under GASB Statement No. 54, fund balance is reported using a hierarchy of classifications that reflects the degree to which a government is constrained in how it can use its resources. These classifications are based primarily on the level of restrictions or limitations placed on the spending of fund balance amounts.

Under GASB Statement No. 54, governmental fund balance information is reported in five different classifications. What are they?

• Non-spendable

• Restricted

• Committed

• Assigned

• Unassigned

Explain this fund balance classification: Restricted Fund Balance

• Amounts constrained to specific purposes by their providers:

  • Creditors, bondholders

  • Grant providers, contributors

  • Imposed by law through constitution or enabling legislation

    • (Enabling legislation authorizes the gov. to assess or mandate payments of resources)

Explain this fund balance classification: Committed Fund Balance

• Constraints are imposed by a formal action of the gov’s highest level of decision-making authority.

• These funds cannot be used for any other purpose unless the gov removes or changes the specified use by taking the same formal action that originally imposed the constraint.

• Includes contractual obligations for which existing resources in the fund have been specifically committed for use

• May also include “rainy day” or “stabilization funds”

Explain this fund balance classification: Unassigned Fund Balance

• Only the General Fund can report this positive Unassigned Fund Balance

• Includes amounts that are available for any purpose

• The residual classification of the General Fund

Why do governments and not-for-profits most commonly separate resources into funds?

to ensure that they adhere to restrictions placed on them by legislators, grantors, donors, or other outside parties

• to a lesser extent, governments and not-for-profits establish funds to account for certain activities- often those of a business type (ex: city running a golf course)

Each fund is a separate accounting entity. true or false?

true. think of funds as a separate set of books, separate bank account and/or a bucket of money for a very specific use.

_____________: this fund accounts for taxes and other unassigned resources.

general fund

________________: this fund accounts for financial resources that are restricted, committed, or assigned to expend

capital projects fund

__________________: This fund accounts for financial resources that are restricted, committed, or assigned to expenditures for principal and interest on its long-term debt. It may be viewed as a savings account (or sinking fund) for resources restricted either by the debt covenants (agreements) or by policies of the district itself.

debt service fund

____________: This fund accounts for state grants that are restricted for specific purposes.

special revenue fund

How can you tell if a fund is a major fund or a non-major fund?

A fund is considered major if it is large compared to other funds. Specifically, one of its key elements (assets, liabilities, revenues, or expenditures) must make up at least 10% of its fund category and at least 5% of all governmental and enterprise funds combined.

A government can classify as major any fund that it believes will be of special interest to financial statement users. True or false?

true

GASB Statement No. 34 model mandates that governments prepare two separate sets of financial statements. Does it have to be related or different? What are the two statements?

Both statements have to be related. The first is the government-wide statements (it concentrates on the government as a whole) and the second is the fund financial statements (it views the governmental entity as a collection of separate funds).

What are the main types of government’s funds? (Broad Categories of Activities)

• Governmental activities: Those financed predominantly through taxes and intergovernmental grants.

• Business-type activities: Those financed predominantly through user charges.

• Fiduciary activities: Those for which the government acts as a trustee or custodian for individuals, external organizations, or other governments.

_____________: This fund accounts for all resources that are not required to be accounted for in other funds.

general fund

_______________: These funds account for revenues that are restricted or committed to expenditure for specific purposes other than debt service or capital projects.

Special revenue funds

_____________: These funds are used to account for resources that are restricted, committed, or assigned for the payment of interest and principal on long-term debt.

Debt service funds

____________: these funds are used to account for resources that are restricted, committed, or assigned for capital outlays.

capital projects fund

________________: these funds are used to report resources that are legally restricted so that only earnings, not principal, may be used to support the government’s programs.

permanent funds

____________ funds are used to account for the ongoing business-type activities of a government. These funds are said to be nonexpendable (or revolving) funds (expected to “pay its own way” through customer charges).

Proprietary-type

_________________ funds may be characterized as expendable funds. Their resources are received from taxes, fees, or other sources, and then spent.

Governmental-type

Here are two types of proprietary funds:

• ____________ funds: used to account for business-type activities in which the government provides goods or services to the general public at large. Ex: utilities, golf courses, hospitals, etc.

• __________ funds: these funds are used to account for business-type activities in which the customers are other funds, departments, or agencies within the same governmental unit.

Enterprise funds

Internal service funds

_____________-type funds are used to account for resources held by the government in a capacity that are intended to benefit parties other than the government itself.

__________ funds are neither consolidated with nor even incorporated into government-wide statements.

A government may have any number of the other types of funds.

fiduciary

What are examples of fiduciary funds?

• Pension and other employee benefit trust funds: the fund reports assets accumulated to fund liabilities owed to current employees and retirees.

• Investment trust funds: Local governments are able to invest available cash into these pools and earn a return on their assets, and then they can withdraw the funds when needed.

• Private purpose trust funds: these funds represent activities not covered by pension, other employee benefit, or investment trust funds.

• Custodial funds: These funds are used to account for resources held temporarily by one government for another.

________________ fund is the most significant single fund maintained by all state and local government entities. it is used to account for all resources that are not legally or contractually restricted or arbitrarily set aside for specific activities.

general fund

All governments will have ______ general fund.

one

Portions of the general fund balance may be considered nonspendable and restricted, committed, or assigned for specific purposes. true or false?

true. Although the resources of the general fund are not subject to the types of restrictions that characterize other funds, they are not necessarily available for spending

Inasmuch as special revenue funds are, by nature, used to account for restricted resources, no portion of fund balance would be classified as “unassigned”. true or false?

true

What must the government do with any excess cash awaiting expenditure?

they must invest it for capital projects

Capital projects funds are used to account for the assets. true or false?

false. they are used to account for the resources set aside to purchase or construct capital assets.

Permanent funds are a type of ______ fund.

trust

Permanent funds are not classified and accounted as fiduciary-type funds. Why?

Because they are public, rather than private purpose, funds. They benefit the citizens at large or the government itself.

Per GASB Statement No. 54, the principal of the permanent fund is reported in the _________________ category of fund balance.

nonspendable

What type of fund is this describing: These funds are used to account for assets held by a government in a trust or custodial capacity for others. They are not included in the government-wide financial statements.

Fiduciary funds

Custodial funds are most commonly established to maintain control over:

• Taxes collected by one government for the benefit of another

• Special assessments collected to repay debt

• Refundable deposits

• Pass-through grants

• Amounts held for other governments in investment pools that do not meet certain GASB specified criteria

What are the required sections of an ACFR (Annual Comprehensive Financial Report)?

• Introductory section: This includes a letter of transmittal and general information on how the government is organized and who are its key elected and administrative officials.

• Financial section: This is the main body of the ACFR

• Statistical section: This contains current and historical data as to the jurisdiction’s demographics, economy, tax rates, outstanding debt, and other information that supplements the basic financial statements.

What does the main body of ACFR contains?

• Management’s discussion and analysis (MD&A)

• The basic financial statements

• Notes to the statements

• Required supplementary information

• Combining and individual fund financial statements (if required)

What are the minimum requirements for general-purpose financial statements?

• MD&A

• Government-wide and fund financial statements w/ notes to the financial statements

• Required supplementary information (other than MD&A)

The financial section includes up to how many primary statements and how many supplementary statements and schedules?

up to 10 primary statements and a dozen supplementary statements and schedules

What is the objective of the government-wide financial statements?

The objective is to present a fairly broad and consolidated view of the financial position of the governmental entity.

According to GAAP, what are the two required financial statements in government-wide statements?

1. Statement of net position (balance sheet)

2. Statement of activities (statement of revenues and expenses)

Government-wide statements are prepared on a modified accrual basis. True or false?

False. They are prepared on a full accrual basis

What are some funds listed on fund statements and which statements do they reflect?

• Governmental funds: balance sheet; statement of revenues, expenditures, and changes in fund balances and reconciliation schedules

• Proprietary funds: Balance sheet; statement of revenues, expenses, and changes; statement of cash flows

Do not-for-profit organizations have to employ fund accounting?

no, they do NOT need to employ fund accounting for purposes of internal accounting and administration. It is suggested but not required by FASB by non-profits.

What is included in the financial report of a not-for-profit entity?

The reports only need to consist of:

• A statement of position (balance sheet)

• A statement of activities (statement of revenues and expenses)

• A statement of cash flows

The FASB requires that not-for-profits classify their net assets into 2 categories based on the restrictions of _________: not restricted and restricted.

donors