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2011 F-8 Class Notes - 2011 Edition — Financial 8 Class...

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Unformatted text preview: 2011 Edition — Financial 8 Class Notes FINANCIAL8 class notes Financial 8 includes the following: GOVERNMENTAL ACCOUNTING OVERVIEW A. Governmental financial reporting is designed to demonstrate operational accountability for the entity as a whole and fiscal accountability for specific funds. Fiscal accountability generally relates to compliance with laws and fund requirements while operational accountability generally relates to economic performance. Standards for accounting are established by the Governmental Accounting Standards Board (GASB). The Government Accountability Office (GAO) governs audits under Generally Accepted Governmental Audit Standards (GAGAS), also referred to as the Yellow Book.. Funds are separate, independent self-balancing sets of accounts, similar to a "checkbook." The three major categories of funds are Governmental (GRASPP), Proprietary (SE) and Fiduciary (PAPI). Government-wide financial statements are prepared using the accrual method of accounting to permit an economic resources measurement focus. This method is essentially the same as used in "for profit" accounting and is covered in more detail in F9. Governmental funds use modified accrual basis of accounting and provide a current financial resources measurement focus. Revenues are recognized when measurable and available. Expenditures (not "expenses") are generally recognized when resources are spent. There are no non-current assets in governmental funds. The five governmental (GRASPP) funds are the General, Special Revenue, Debt Service, Capital Projects and Permanent funds. 1. Governmental fund balances are classified in one of five ways. 2. The following table lists the classifications in order limitation and the likely funds in which the classifications would be used. Special Debt Capital Classification General Revenue Service Projects Permanent Non-spendable x x Restricted x X x x Committed x x X Assigned X x — Proprietary (SE) funds use full accrual accounting and the economic resources measurement focus. The Internal Service and Enterprise Fund are the two proprietary funds. XXXX Fiduciary (Trust) funds use full accrual accounting and the economic resources measurement focus. The "PAPI" funds are Pension, Agency, Private Purpose and Investment Trust funds. 1 ©2010 DeVry/Becker Educational Development Corp. All rights reserved. 2011 Edition — Financial 8 Class Notes APPLICATIONS OF MODIFIED ACCRUAL ACCOUNTING A. B. Most governmental (GRASPP) funds record budgets, activity and encumbrances during the year and close them out at the end of each year. [BAE BAE] Recording a budget that is formally integrated with a government's accounting system involves journalizing budgeted transactions using the following accounts at the start of the year: Estimated revenues, appropriations and estimated other sources/uses. Natural account balances for budgetary accounting are the opposite of actual activity: Estimated revenues are "debits" and appropriations (estimated expenditures) are credits. Any excess, or projected surplus, is credited to budgetary fund balance. A projected shortfall, or deficit, would be debited to that account. This entry is closed at the end of the year. Revenue activity is recorded in the real accounts when it is measurable and available. "Available" is generally defined as collected within 60 days of year end. Real property taxes (imposed non-exchange revenues) are accrued when billed to property owners with related revenue recognition subject to measurable and available criteria. Sales taxes (derived tax revenues) are accrued if measurable and collected within sixty days after fiscal year-end (available) and are considered revenue. Expenditure activity is recorded as funds are spent or a current liability is incurred. Operating and capital expenditures are handled the same way. 1. Modified accrual accounting generally recognizes expenditures consistently with commercial accounting (when incurred). Interest expenditures, which are not accrued, are an important exception. 2. The current financial resources measurement focus changes how the expenditure is recognized. Non-current assets are not recognized. 3. Some current assets are recognized. Expenditures for supplies, (prepaid) insurance and inventory can be accounted for by the purchase method or consumption method. Transfers out to other funds, or interfund transfers, represent a use of financial resources, not an expenditure. Governmental expenditures are classified as function (program), organizational unit, activity, character or object class. Fixed assets purchased, constructed or leased are not capitalized; however, they are reported on the government-wide FIS (F9). Likewise, long-term debt is not recorded as debt in a governmental fund, it is an other financing source. LTD also goes to the government-wide FIS. Open purchase orders represent an encumbrance of a governmental fund. An encumbrance (debit) is set up with a credit to reserve for encumbrances, budgetary Fund balance when the order goes out. When the order is filled, the Encumbrance J/E is reversed for the amount originally recorded and the actual expenditure is recorded in a separate J/E. 1. Encumbrances are not identified on the face of a governmental fund's financial statements but may be disclosed. Governmental funds will prepare a balance sheet and a statement of revenues, expenditures, and changes in fund balance (not US). 2 ©2010 DeVry/Becker Educational Development Corp. All rights reserved. 2011 Edition — Financial 8 Class Notes III. GOVERNMENTAL FUNDS [MODIFIED ACCRUAL BASIS] — GRASPP A. B. There is only one general fund in a particular governmental entity. Special revenue funds contain funds "earmarked" for particular purposes. Special revenue funds are typically restricted or committed to specific purposes. Expendable trusts are special revenue funds; forfeiture accounts are special revenue funds. Debt service funds (DSF) pay for the principal and interest related to general obligation debt. This is debt incurred by governmental funds. Other (SE-PAPI) funds service their own debt. Capital projects funds are created for each project undenlvay for better accountability of resources budgeted for each project. Only projects for governmental funds are accounted for within a capital projects fund. These funds will use BAE-BAE accounting. Financing sources may be long-term debt issues, capital grants, government grants or special assessments charged to property owners benefited by the project. Permanent funds are legally restricted. Only income can be spent with the principal amounts "permanently" restricted from spending. IV. PROPRIETARY FUNDS [ACCRUAL BASIS] — SE A. Internal service funds serve other governmental units. The financial statements of an IS fund are the statement of net assets a statement of revenues, expenses and changes in net assets, and a statement of cash flows. Net assets are classified as unrestricted, restricted and invested in capital assets, net of related debt. Enterprise funds serve users that are expected to provide over 50% of the resources to fund the operation. The financial statements and net asset classifications of an enterprise fund are the same as those for an Internal service fund. The enterprise and internal service funds are distinguished by their customer: Enterprise funds serve external customers while internal service funds serve the government itself. V. FIDUCIARY FUNDS [ACCRUAL METHOD] — PAPI A. Pension trust funds account for government-sponsored pension and post-retirement plans. additions and deductions replace revenues and expenses as activity classifications in the statement of changes in fiduciary net assets. Agency trust funds are custodial funds. Their assets equal their liabilities and there is no fund balance. Private purpose trust funds, such as an escheat property fund, contain resources for the benefit of other parties or entities. Investment trust funds represent investments held on behalf of others and its assets are generally reported using fair value. 3 ©2010 DeVry/Becker Educational Development Corp. All rights reserved. ...
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