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Unformatted text preview: 1 Chapter 7 End of Chapter Material Solutions REVIEW QUESTIONS Q 7-1 The “cause and effect” relationship between the revenues and expenses of a proprietary fund refers to the fact that the expenses of these funds are incurred to generate revenues. Thus, in general, as the level of services provided by a proprietary fund increases and expenses increase, the total revenues received for the services will also increase. This is in contrast with a governmental-type fund where there is no relationship between expenditures and revenues (see Q7-2). Q 7-2 The revenues and expenditures of governmental-type funds are “independent” of each other because the expenditures relate to the level of services provided by the governmental unit. While the level of revenues should be sufficient to finance the expenditures, the providers of revenues do not generally receive services in proportion to the amount of revenue provided. Q 7-3 An Internal Service Fund should be used when a governmental unit can provide goods or services to other departments or governments at a lower cost or in a more convenient or dependable manner than if an outside organization were used. Q 7-4 A flexible budget is a budget in which the level of budgeted expenses is related to the level of operations as opposed to a pre-determined level independent of the level of operations. Q 7-5 The fund balance (net assets) section of a proprietary fund generally contains three sections:(1) invested in capital assets, net of related debt, (2) restricted net assets, and (3) unrestricted net assets. The fund equity section of a governmental-type fund usually contains a single account-- Fund balance. This fund balance account may be divided into amounts reserved for certain purposes and the amount unreserved. Q 7-6 Depreciation is recorded as an expense in proprietary funds because the economic resources measurement focus is used to measure revenues and expenses and the resulting net income. Thus, fixed assets used in the operations of the fund initially are recorded as assets and depreciated over their useful lives. In governmental-type funds, expenditures measure the use of liquid resources. The use of these resources is accounted for when the fixed assets are acquired or paid for, not when they are used in operating the governmental unit. Q 7-7 7-1 An Internal Service Fund is used when a governmental unit provides goods and/or services to departments or agencies within the governmental unit or to other governmental units. An Enterprise Fund is used when a governmental unit provides goods and/or services to consumers who are not part of the government. It is possible that other departments, agencies, etc. of the government may use these goods or services, but the factor that separates the use of an Enterprise Fund from the use of an Internal Service Fund is the presence of consumers outside the governmental unit....
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- Spring '11
- Revenue, Generally Accepted Accounting Principles, net assets