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CHAPTER 2 STATE AND LOCAL GOVERNMENT ACCOUNTING PRINCIPLES ANSWERS TO QUESTIONS Question 2-1 When consumers deal with unregulated private businesses operating in a competitive environment, there is a direct relationship between the producer of goods or services and the consumer. The consumer usually has a choice of goods or services available (alternative sources of supply) and is free to cast his or her "dollar vote" (demand) to that firm whose goods or services seem most suitable. The firms cannot force the public to accept the goods or services offered and those not deemed satisfactory by the consuming public will not prove profitable. As a result, the profit test/regulator device will force the less successful firms to modify their goods or services or go out of business. On the other hand, governments often provide goods or services on a "sole supplier" basis in an environment in which there is no market value measurement or profit test/regulator device since: 1. the goods or services are unique, or 2. the "customers" are receiving "free" (to them) goods or services. Too, the services offered by governments are often among the most essential to human life— police and fire protection, sanitation and other health-related services, education, etc.—and the taxing power of governments may permit an inefficient or ineffective government to operate indefinitely. Thus, other controls must be substituted for the open market profitability test where governments are concerned—and fund accounting and budgetary control have evolved to partially fulfill these control requirements. Question 2-2 The major accounting and other commonalities among the specific funds and non-fund accounts in these categories are: 1. Governmental Funds . All funds in this category are essentially working capital entities. They are accounted for on a "flows and balances of expendable financial resources" measurement focus—rather than on a net income measurement focus—and their operations are reported in the same operating statement format. 2. Proprietary Funds . All funds in this category are accounted for on a flow of economic resources (revenues and expenses) measurement focus and their accounting and financial reporting is similar to that of business enterprises. 3. Fiduciary Funds . The resources of all funds in this category are being managed in trust or held as an agent for the benefit of others and may not be used for governmental purposes. 1
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Question 2-3 A Special Revenue Fund is only required when its use is legally or contractually mandated. In other cases, the General Fund may be used to account for special revenue sources. (Governments typically account for most, if not all, major sources of restricted operating revenues in Special Revenue Funds, however.) A Debt Service Fund is required when its use is legally or contractually mandated to account for resources to be used to service general long-term liabilities or if resources are being accumulated for debt service payments of future years. Question 2-4
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This homework help was uploaded on 02/16/2008 for the course ACCT 401 taught by Professor Smith during the Spring '08 term at A.T. Still University.

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