Chap003 - Chapter 03 - Governmental Operating Statement...

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Unformatted text preview: Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS; BUDGETARY ACCOUNTING OUTLINE Number Topic Type/Task Status (re: 14/e) Questions: 3-1 3-2 3-3 3-4 3-5 3-6 3-7 3-8 3-9 3-10 GASBS 34 reporting model Statement of activities format Depreciation expense/direct expenses Program and general revenue Extraordinary compared with special items Expenditure classifications - examples Temporary and permanent accounts Revenue classifications Budgetary comparison schedules/statements Public school systems Explain Describe Define Distinguish Define and compare Classify Distinguish Classify Explain Explain New Same 3-3 revised Same New 3-7 3-6 Same New Same 3-3 Charter schools (public school academies) Internet, examine, describe Internet, examine, describe Internet, explain Same 3-2 Revenue and expense/expenditure classification Budgetary comparison schedule Cases: 3-1 Exercises/Problems: 3-1 CAFR 3-2 Various 3-3 3-4 3-5 3-5 3-6 3-7 3-8 Same Same Examine Multiple Choice 3-9 Village of Wymette City of Marion—recording budget City of Marion—recording encumbrances GF trial balance and closing entries Subsidiary ledgers Appropriations, encumbrances, expenditures Computerized accounting system—departmental budgetary comparison report Recording budget and operating transactions 3-10 Government-wide statement of activities 3-1 Same Some new items; rest are revised Explain and calculate New Journal Entries 3-3 revised Journal Entries 3-4 revised Calculate 3-5 revised Calculate Same Calculate Same Analyze and explain New Journal entries; Calculate Prepare 3-8 3-9 revised Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting CHAPTER 3: GOVERNMENTAL OPERATING STATEMENT ACCOUNTS; BUDGETARY ACCOUNTING Answers to Questions 3-1. The governmental fund financial statements report current financial resources information intended to help users assess current period fiscal accountability—whether revenues were raised only from authorized sources and expended for authorized purposes. As such, the governmental fund statements lack the mid- to long-term focus on economic resources and cost of services needed to assess operational accountability. 3-2. Using the net (expense) or revenue format, sometimes referred to as the “cost of services” approach, identifies the extent to which each function or program is self-supporting from fees and intergovernmental aid, or must be subsidized by general revenues of the government. 3-3. Depreciation expense is reported as a direct expense when it relates to capital assets that are clearly identified with a function or program because it captures a real cost of using capital assets to provide that service function or program. Even depreciation expense for infrastructure assets should be reported as a direct expense of the public works or transportation function, if that is the function responsible for those assets. 3-4. a. b. c. d. e. f. g. 3-5. Extraordinary items are those items (gains or losses) that are both unusual in nature and infrequent in occurrence. Special items are either unusual in nature or infrequent in occurrence, but not both. Special items also differ from extraordinary items in that they are within the control of management. Both types of items are reported as separate line items below General Revenues in the statement of activities. 3-6. a. b. c. d. e. General revenues. Program revenues. Program revenues. Program revenues. Program revenues. General revenues. General revenues. Organization unit Function Activity Activity Object f. g. h. i. j. Both character and object Program Function Organization unit Object 3-2 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Answers (Cont’d) 3-7. Definitions of these terms are given in the Glossary of the text. Below are briefer statements: a. Expenditures and Encumbrances are both charges against appropriations. An encumbrance is a charge for an estimated amount at the time goods are ordered; an expenditure is a charge for an actual amount at the time the goods are received (accrual and modified accrual basis) or paid (cash basis). Encumbrance accounting is used only in those funds where it is needed to achieve budgetary control over expenditures. b. Revenues are increases in net assets of the government as a whole or of a fund other than from interfund transfers or debt issue proceeds, recognized at the time the increase is earned (accrual basis), available for use (modified accrual basis) or received in cash (cash basis). Estimated revenues are amounts expected to be available for use or received under enabling legislation during a budget period. Estimated Revenues is a budgetary account representing the expected amount of revenues to be realized from various sources. c. The term encumbrances is defined in a above. Reserve for Encumbrances is a balance sheet account representing the amount segregated from fund balance for expected liabilities resulting from purchase orders and contracts issued. d. Reserve for Encumbrances is defined in c above. The Fund Balance of a governmental fund is the excess of fund assets over fund liabilities, appropriations, and reserves; in short, the assets available for appropriation [defined in e below] in governmental funds. e. Expenditures is defined in a above. An Appropriation is an authorization by the legislative branch for administrators to incur expenditures for specified purposes not to exceed specified amounts. Usually the authorization is for a limited time. Appropriations is a budgetary account. f. Expenditures, defined in a above, represent outflow of current financial resources for asset acquisition as well as for salaries, supplies for immediate consumption, travel, and so forth—whatever is specified in the appropriations. The term is used in fund financial statements. Expenses, in governmental accounting as well as business accounting, are expired costs; the full cost of services or goods consumed in providing services to citizens and others. Expenses are found in the government-wide financial statements as well as in the proprietary financial statements. 3-3 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Answers (Cont'd) 3-8. 3-9. a. b. c. d. Taxes Charges for services Licenses and permits Fines and forfeits e. f. g. h. Intergovernmental revenue Miscellaneous revenues Charges for services Licenses and permits Budgetary comparison schedules (or statements) must be provided for the General Fund and each major special revenue fund for which a budget is adopted. In order for budget to actual comparisons to be meaningful, actual revenues and expenditures must be reported in the same manner as the budgeted amounts. Actual revenues and expenditures reported in the statement of revenues, expenditures, and changes in fund balances should be on the GAAP basis. GASB standards identify several possible differences between GAAP and budgetary financial accounting. These include basis, timing, perspective, and entity. GASBS 34 requires that reconciliation of the differences between amounts reported in the GAAP basis operating statement and those reported in the budgetary comparison schedule, either on the face of the budgetary comparison schedule or on a separate page. 3-10. Public school systems are expected to follow the classification system specified by the National Center for Education Statistics (NCES), as refined or mandated by a state education oversight body. The NCES system combines the GASB expenditure classification structure into nine categories, most of which are necessary for adequate internal management and comparable financial reporting across schools. The NCES revenue classification scheme also groups classifications into numerous categories, but are generally classified by fund, source, and project/reporting code. The NCES expenditure and revenue dimensions should be compared with the corresponding GASB expenditure and revenue classifications described in this chapter. GASB standards require that expenditures be classified by fund, function or program, organization unit, activity, character, and object and that revenues be classified by fund and source. Comparison of the NCES and GASB classification show that they are generally compatible, but the NCES classification structure is considerably more detailed to meet the unique reporting needs of public school systems. Solutions to Cases 3-1. Students should easily be able to locate a city’s Web site, then explore the Finance Department (or comparable name) link and look for links to financial reports. Alternatively, a number of cities have links to their CAFRs from the “Project Pages/Statement 34” link of the GASB Web site ( Responses to each of the questions in this case will depend on how a particular city classifies its revenues and expenses/expenditures. 3-4 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, Case 3-1 (Cont’d) a. Occasionally, one may find a city that classifies its program revenues and direct expenses by program, but functional classifications, similar to those described in this chapter, are much more common. In most cases, all function or program line items on the statement of activities will report a net expense, with numbers in parentheses. b. On the statement of revenues, expenditures, and changes in fund balances, revenues and expenditures are reported in separate columns for the General Fund and other major governmental funds. Information for all nonmajor governmental funds is reported in aggregate in a single column. Students will likely find that the revenues reported on this statement are classified by source (taxes, licenses and permits, charges for services, etc.). Some cities will report a different amount for tax revenues on their statement of activities than on their statement of revenues, expenditures, and changes in fund balances because all tax revenues levied for the year will be reported on the former statement, while those that will not be collected during the current fiscal year or within 60 days thereafter will be reported as deferred taxes on the latter statement. c. Expenditures will generally be classified by function on the statement of revenues, expenditures, and changes in fund balances and, infrequently, by program. Students are almost certain to find different amounts reported for expenses on the statement of activities and expenditures on statement of revenues, expenditures, and changes in fund balances. Among other explanations, expenses exclude outlays for capitalized assets, but include depreciation expense; expenditures include capital outlays but exclude depreciation expense. Generally, expenses and expenditures will not be the same amounts for the reasons just explained. 3-2. Again the responses to individual questions will depend on the practices of the particular city selected. Some general expectations for each question include: a. Typically more detail is provided for revenues and expenditures in the budgetary comparison schedule, though not always. The reason for including more detail in the budgetary comparison schedule, both for revenues and expenditures, is to better match the level of detail used in the budget document. For revenues, cities often report budget and actual information for subclasses of sources, such as various types of taxes. For expenditures, cities sometimes report budget and actual information for organization units and objects. b. Students will probably find that actual revenues on the budgetary comparison schedule agree in amount with those reported on the GAAP operating statement. If a difference is noted between these amounts, it is likely attributable to revenues being recognized on a cash basis for budgetary purposes, rather than modified accrual. c. Some students will discover that actual expenditures on the budgetary comparison schedule differ from those reported on the GAAP operating statement. The explanation given in most of these cases will be that expenditures on the budgetary comparison schedule also include encumbrances outstanding at year-end. 3-5 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, Case 3-2 (Cont’d) d. If actual revenues and/or expenditures are prepared on a non-GAAP budgetary basis, the budgetary comparison schedule should indicate such, either in the schedule heading or the Actual column heading. e. Although a variance column is not required by GASB standards, it is difficult to imagine a city not providing a column showing the variance between actual and either the adopted or final budget amounts. 3-3. a. In most states, charter schools (or public school academies) are considered public schools receiving public funds. Consequently, these schools should follow GASB standards in order to ensure that financial statements conform to generally accepted accounting principles. Generally, these schools are small and may only have need for a General Fund and a special revenue fund for their food service program. The revenue and expense classification scheme described in the Appendix to Chapter 3, based on NCES guidance, is an appropriate starting place for building a chart of accounts and an accounting information system. Budgetary accounting is required by GAAP. b. Students should check their own state’s Department of Education (or comparable agency) for other guidance for traditional pre-K through 12 schools. The Michigan Association of Public School Academies also provides resources for charter schools and their accountants ( ). The U.S. Charter Schools website ( ) provides valuable guidance in developing systems of financial and operational accountability for those who are new to charter schools, as well as links to other resources. Solutions to Exercises and Problems 3-1. 3-2. Each student should have a different governmental annual report, so will have different answers to the questions in this exercise. Some time spent in class to allow students to report on their own answers and to get an idea of the range of answers of other students is useful. 1. 2. 3. 4. 5. d. b. c. a. a. 6. 7. 8. 9. 10. b. b. c. b. c. 3-6 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Chapter 3, Solutions (Cont’d) 3-3. a. The answer is no to both parts of the question. Subject to an ordinance or policy that requires a minimum end-of-year fund balance, any unreserved fund balance above that amount can be considered available for appropriation in the same manner as revenues and other financing sources. Consequently, if the sum of any excess fund balance and estimated revenues exceeds appropriations, then village officials would be in compliance with any balanced budget requirement. In fact, legislative bodies often budget the use of a portion of fund balance if it exceeds any minimum requirement established by law or policy. b. Fund Balance at 6-30-2010 after all closing entries will be $595,000, as shown below: FUND BALANCE $ 580,000 Balance as of 6-30-2009 3,190,000 To close revenues for the year (3,175,000) To close expenditures for the year $ 595,000 Balance as of 6-30-2010 Note: Estimated Revenues and Appropriations are closed to Budgetary Fund Balance by reversing the original budgetary entry. So the balance of Budgetary Fund Balance will be zero. 3-4. a. City of Marion Estimated revenues total—FY 2011 $ 4,650,000 Appropriations total—FY 2011 4,800,000 Therefore, fund balance at the end of FY 2010 must be at least $ or else the fund would be thrown into a deficit. 3-7 150,000 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-4 (Cont’d) General Ledger Debits b. ESTIMATED REVENUES Credits Subsidiary Ledger Debits Credits 4,650,000 BUDGETARY FUND BALANCE 150,000 APPROPRIATIONS 4,800,000 Estimated Revenues Ledger: TAXES 3,000,000 INTERGOVERNMENTAL REVENUES 1,000,000 LICENSES AND PERMITS 400,000 FINES AND FORFEITS 150,000 MISCELLANEOUS REVENUES 100,000 Appropriations Ledger: GENERAL GOVERNMENT 950,000 PUBLIC SAFETY 2,000,000 PUBLIC WORKS 950,000 HEALTH AND WELFARE 850,000 MISCELLANEOUS 50,000 3-8 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions (Cont'd) 3-5. General Ledger Debits a. ENCUMBRANCES2011 Credits Subsidiary Ledger Debits Credits 394,000 RESERVE FOR ENCUMBRANCES2011 394,000 Encumbrances Ledger: GENERAL GOVERNMENT 50,000 PUBLIC SAFETY 200,000 PUBLIC WORKS 75,000 HEALTH AND WELFARE 65,000 MISCELLANEOUS b. 4,000 Purchase orders issued by a governmental fund have the effect of using all or a portion of one or more appropriations for that fund. Issuance of purchase orders or other commitment documents is a step in the expenditure of an appropriation; administrators may be subject to legal penalties if they expend more resources than were appropriated. Recording encumbrances helps administrators avoid overexpending appropriations. The same legal issues do not exist in business organizations, although a well-managed business should certainly keep track of outstanding purchase orders and contracts to have a clear understanding of what transactions are in process that will result in the acquisition of assets, the incurring of expenses, and the incurring of liabilities. 3-9 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions (Cont'd) 3-6. a. $14,980,000 (the sum of the amounts presently in the Estimated Revenues column of the subsidiary ledgers). b. $15,000,000 (the sum of the 01/01 entries in the Estimated Revenues column) c. 1. Yes 2. 02/28 (45 6 folio entry to Property Taxes) 3. $20,000 4. Decreased d. $12,080,000 (the sum of the amounts in the Revenues column) e. Property tax revenue is being accrued; revenue from the other three sources is being recognized when the cash is received. That is, when it is first measurable and available according to the modified accrual basis of accounting. 3-10 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions (Cont'd) 3-7. a. $62,200. The refund of prior year expenditure and the refund on P.O. 350 do not add to appropriation authoritythe former is generally reported as revenue of the current year; the latter is a reduction of expenditures from this year's appropriation. Similarly, the cost of stationery transferred to the Town Water Utility is a reimbursement of expenditures from this year's appropriation. The unauthorized transfer of $46,000 from Office Supplies to Personal Services should be disregarded. b. None. The outstanding purchase orders, #378 and #385, are not for office supplies but for office equipment and should not have been charged to this appropriation. Clerical errors in recording the encumbrance for #356, the encumbrance credit for #350, and the erroneous charge of #380 to this appropriation and failure to credit Encumbrances when #380 was filled do not affect the computation of the correct answer to b, although they would need to be corrected in the account—if the "comparison" is a subsidiary ledger account. c. $1,110 (#350, $605; #356, $420; #370, $425; less $330 and $10 considered reimbursements of this year's expenditures of this appropriation). d. $61,090 ($62,200 - $1,110). 3-11 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions (Cont'd) 3-8. a. Apparently, Lincoln City uses a 10-digit account number structure having three segments. Presumably, the first segment is the fund code, with 01 representing the General Fund. As the heading implies, the second segment (divided into two sub-segments) is the organizational unit, with 0800 assigned to the Parks and Recreation Department. The zeros in the second sub-segment can be replaced with numbers representing activities within the department, such as parks, aquatic recreation, athletic facilities, administration, and so forth. The third segment represents the object of expenditure. This segment can be further subdivided to provide greater expenditure detail, such as 7120 for building materials, 7130 for maintenance supplies, and 7140 for office supplies. This account structure appears to meet the GASB’s expenditure classification requirements. b. Encumbrance control procedures are generally used only for purchases of goods and services for which there is delay between placing the order or contract and receipt of the goods or services. Recurring expenditure requirements such as payroll and utilities are fairly predictable, so encumbrance procedures are generally not necessary to adequately control these expenditures. Conferences and training are usually not “ordered” in advance in the sense of a purchase order or contract for future service. Even if conference registrations or airline reservations are made in advance, those are usually paid at the time of the registration or reservation and thus are actual, not estimated, expenditures. c. At the mid-point of FY2010, the Parks and Recreation Department has expended or encumbered the following percentages of its appropriations: Personnel Services 45.5% Materials and Supplies 62.5% Conferences and Training 37.5% Contractual Services 69.5% 3-12 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-8 (Cont'd) Utilities 51.1% Capital Outlay 43.1% Other 72.1% At first glance, it appears that the Materials and Supplies, Contractual Services, and Other accounts could expend their appropriations well before the end of the fiscal year. Additional information about normal seasonal usage patterns would be required, however, to confirm if the spending rate is too rapid for these accounts. Larger quantities of materials and supplies may be used every spring and early summer in preparing parks and recreation facilities for heavy summer use. Contractual services may have involved a larger than average service contract that was fulfilled early in the year and contracts may have been signed early in the year for services to be provided later in the year. Other is a miscellaneous category, albeit a large one, for which analysis of what it entails and expected spending rates would need to undertaken before any conclusions can be reached. d. It may appear that the Personnel Services, Conferences and Training, and Capital Outlay accounts could get by with lower appropriations. This is likely not the case, however, since departments typically have to defend their appropriation requests during the budgeting process. Parks and recreation departments often require more labor in the summer for grounds maintenance, swimming pool lifeguards, recreational activity instructors, and for other purposes. Consequently, personnel expenditures will likely be greater in the second half of the fiscal year. Similarly, many conferences are held in late summer and fall so it may be that department officers and staff will be attending conferences or training events later in the year. The relatively small budget authorization for capital outlay suggests that the purpose of the account is to acquire equipment. Late acquisition of equipment might reflect a strategy to hold off until it is known whether these monies might be needed for other purposes, or perhaps management is 3-13 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-8 (Cont'd) simply waiting for a good deal or the latest model of equipment to be released. e. Possible explanations for the observed over- and under-spending patterns have been provided in parts c and d. These explanations make it clear that one needs to analyze past spending patterns and evaluate specific spending plans within individual accounts before it can be determined whether spending patterns are unreasonable. Such analysis yields a budgeted spending rate to which the actual spending rate can be compared. 3--9. General Ledger Debits a. ESTIMATED REVENUES Credits Subsidiary Ledger Debits Credits 2,700,000 BUDGETARY FUND BALANCE 50,000 APPROPRIATIONS 2,650,000 Estimated Revenues Ledger: TAXES 1,900,000 LICENSES AND PERMITS 350,000 FINES AND FORFEITS 250,000 INTERGOVERNMENTAL REVENUES 200,000 Appropriations Ledger: GENERAL GOVERNMENT 500,000 PUBLIC SAFETY 1,600,000 PUBLIC WORKS 350,000 PARKS AND RECREATION 150,000 MISCELLANEOUS 50,000 3-14 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-9 (Cont'd) b. General Ledger Debits 1. CASH Credits Subsidiary Ledger Debits Credits 43,000 REVENUES 43,000 Revenues Ledger: LICENSES AND PERMITS FINES AND FORFEITS 2. 31,000 12,000 ENCUMBRANCES—2011 29,900 RESERVE FOR ENCUMBRANCES—2011 29,900 Encumbrances Ledger: GENERAL GOVERNMENT 7,400 PUBLIC SAFETY 11,300 PUBLIC WORKS 6,100 PARKS AND RECREATION 4,200 MISCELLANEOUS 3. 900 RESERVE FOR ENCUMBRANCES—2011 29,100 ENCUMBRANCES—2011 EXPENDITURES—2011 29,100 29,200 CASH 29,200 Encumbrances Ledger: GENERAL GOVERNMENT 7,400 PUBLIC SAFETY 10,700 PUBLIC WORKS 5,900 PARKS AND RECREATION 4,200 MISCELLANEOUS 900 3-15 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-9 (Cont'd) General Ledger Debits Subsidiary Ledger Credits Debits Credits Expenditures Ledger: GENERAL GOVERNMENT 7,300 PUBLIC SAFETY 10,800 PUBLIC WORKS 6,100 PARKS AND RECREATION 4,100 MISCELLANEOUS 900 c. CALCULATION OF BUDGETED BUT UNREALIZED REVENUES AS OF JULY 31, 2010 UNREALIZED SOURCE PROPERTY TAXES BUDGETED $1,900,000 ACTUAL REVENUE $ -0- $1,900,000 LICENSES AND PERMITS 350,000 31,000 319,000 FINES AND FORFEITS 250,000 12,000 238,000 INTERGOVERNMENTAL 200,000 -0- 200,000 $2,700,000 $43,000 $2,657,000 TOTAL 3-16 Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions, 3-9 (Cont'd) d. CALCULATION OF AVAILABLE APPROPRIATIONS, AS OF JULY 31, 2010 AVAILABLE APPROPRIATIONS ENCUMBRANCES $ 500,000 $ -0- $ 7,300 $ 492,700 PUBLIC SAFETY 1,600,000 600 10,800 1,588,600 PUBLIC WORKS 350,000 200 6,100 343,700 PARKS AND RECREATION 150,000 -0- 4,100 145,900 50,000 -0- 900 49,100 $2,650,000 $800 $29,200 $2,620,000 GENERAL GOVERNMENT MISCELLANEOUS TOTAL (See solution to 3-10 on next page) 3-17 EXPENDITURES APPROPRIATIONS Chapter 03 - Governmental Operating Statement Accounts; Budgetary Accounting Ch. 3, Solutions (Cont'd) 3-10. City of Kokomo Statement of Activities (partial) For the Year Ended December 31, 2011 Net (Expense) Revenue and Changes in Net Assets Expenses Functions/Programs Primary Government General government Public safety Health and sanitation Culture and recreation Interest on long-term debt Total governmental activities $ 9,571 34,844 6,738 12,352 6,068 $ 69,573 Program Revenues Charges for Operating Services Grants $ 3,146 1,198 5,612 3,995 _______ $ 13,951 $ 843 1,307 $ 62 2,450 ______ $4,600 ____ $ 62 General revenues: Property taxes Unrestricted grants and contributions Investment earnings Total general revenues Special item—gain on sale of park land Total general revenues and special items Change in net assets Net assets—July 1, 2010 Net assets—June 30, 2011 3-18 Capital Grants Governmental Activities $ (5,582) (32,277) (1,126) (5,907) (6,068) (50,960) 56,300 1,200 1,958 59,458 3,473 62,931 11,971 126,673 $ 138,644 ...
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This note was uploaded on 06/28/2011 for the course ACCOUNTING 639 taught by Professor Jim during the Spring '11 term at CUNY Queens.

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