153 Chapter 4 Solutions Manual - Chapter 4 Recognizing...

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Chapter 4 Recognizing Revenue in Governmental Funds Questions for Review and Discussion 1. Basis of accounting refers to when transactions and events are recognized. Measurement focus refers to what is being reported upon — that is, which assets and liabilities are being measured. Once one is selected, the other is automatically determined. What is reported upon (i.e., measurement focus) establishes when transactions and events are recognized (basis of accounting). For example, if net financial resources are focused upon, then revenues and expenditures would be recognized whenever there is an increase or decrease in net financial resources. 2. Per generally accepted practices of today, the measurement focus is on “determination of financial position and changes in financial position (sources, uses, and balance of financial resources).” Governmental funds are accounted for on a modified accrual basis . Financial resources include current financial resources — cash, and other items that can be expected to be transformed into cash in the normal course of operations. The other items include investments and receivables but not fixed assets. Current financial resources and the modified accrual basis of accounting is a compromise between a measurement focus and basis of accounting that would measure interperiod equity and one that would report upon budgetary compliance. Interperiod equity can best be reported upon by focusing on all economic resources and using a full accrual basis of accounting. Budgetary compliance can be reported on satisfactorily by focusing on the same resources as does the budget of the individual government. However, all governments do not budget on the same basis, so statements on a budget basis would not be readily comparable. 3. An exchange transaction is one in which each party gives and receives consideration of equal value. A nonexchange transaction is one in which one party gives or receives value without directly receiving or giving equivalent value in exchange. 4. The main categories of revenues per GASB Statement No. 33 are: Imposed nonexchange revenues . These are assessments imposed on individuals and business entities. The most prominent of these are property taxes and fines. Derived tax revenues . These are derived (i.e., result) from assessments on exchange transactions carried on by taxpayers. They include sales taxes (derived from sales transactions), and income and other taxes on earnings (derived from various income-producing commercial transactions). 4-1
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Government-mandated nonexchange transactions . These occur when a government at one level (e.g., the federal or a state government) provides resources to a government at another level (e.g., a local government or school district) and requires the recipient to use the resources for a specific purpose. For example, a state may grant funds to a county stipulating that the resources
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153 Chapter 4 Solutions Manual - Chapter 4 Recognizing...

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