Ch.

15Exercises

CHAPTER 15
UNDERSTANDING THE ISSUES
1. GASB Statement No. 34 stipulates a new reporting model that includes two separate, but related sets of financial statements. The first set, the fund financial statements, focuses on reporting activity as a collection of separate funds with a current working-capital focus that uses a modified accrual basis of accounting. The second set contains government-wide statements that concentrate on the government as a whole with an economic long-term focus using full accrual-basis accounting. The value of both perspectives is the retention of a near cash or working capital focus on funding government with a longer term focus that measures whether such services can continue without attention to condition of all capital assets and recognition of and planning for increased expenditures in future periods. Capital assets and long-term liabilities are not accounted for in the governmental funds but will be accounted for and reported in the government-wide financial statements. Thus, the working capital fund balance will be replaced with a long-term notion of net assetsbroken into unrestricted, restricted, and capital, net of related debt. 2. Separating activity into governmental, proprietary, and fiduciary funds allows for detailed reporting of resources and spending. Separating of activities also allows for a different measurement focus and basis of accounting depending on whether activities are general government or business-type activities. In addition, since the governmental activities are accounted for using a modified accrual basis of accounting in order to capture financial resource information, the account groups have served to record (i.e., list) the long-term capital assets and liabilities. Proponents of this model argue that information generated best serves the budgetplanning process and answers questions relating to how much resources are needed to pay for the current level of services. 3. Budgets are the legal authorization to raise revenue, incur long-term debt, and appropriate resources. Authorized expenditures are termed appropriations. Budgetary totals, including appropriations, are recorded in the general ledger as control accounts to allow for budgetary comparisons in the ledgers as well as to facilitate financial reporting of a budgetary comparison statement. 4. The advantage of reporting designations of the fund balance is improved communications of decisions made by the common council or town/village board that will impact the availability of resources for other purposes. While not restricted by external grantors or donors, these funds are internally designated for specific purposes, e.g., planned purchases, reduction of taxes, and improvements in services. 5. The encumbrance system is designed as an early indicator or an expected expenditure to prevent overspending and to plan for payment of an expected liability. It is an estimate of an expenditure that may or may not be realized by year-end but will require the use of existing or future financial resources. 6. The governmental funds are designed to capture financial resources information. Therefore, when a capital asset is acquired or sold, the resources (financial resources used or acquired) are recorded in the funds. The account groups are designed to provide information on the number and condition of these capital assets. The same is true for long-term liabilities. When debt is incurred, the cash is recorded in the fund to capture the inflow of financial resources. But the debt is recorded in the account group. When debt is repaid, the outflow of cash is recorded in the fund, and the debt is removed from the account group. Since the fund and account groups capture different information, making a journal entry only in the fund would adequately record flows of financial resources but not record the balances of long-term liabilities and/or capital assets. 7. (Appendix) The 13 basic principles of government accounting are found in GASB Statement No. 1 and in Codification of Governmental Accounting and Financial Reporting Standards. They form a 1

Ch. 15Exercises

model of fund accounting theory and help anchor the subsequent work of the GASB as detailed in Chapters 1517 of this text.