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10 - CHAPTER 10 UNDERSTANDING THE ISSUES 1 Separating...

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CHAPTER 10 UNDERSTANDING THE ISSUES 1. Separating activity into governmental, propriet- ary, and fiduciary funds allows for detailed re- porting of resources and spending. Separating of activities also allows for a different measurement focus and basis of accounting depending on whether activities are general government or business-type activities. In addi- tion, since the governmental activities are accounted for using a modified accrual basis of accounting in order to capture financial re- source information, the account groups have served to record (i.e., list) the long-term capital assets and liabilities. Proponents of this model argue that information generated best serves the budget-planning process and answers questions relating to how much resources are needed to pay for the current level of services. 2 . Budgets are the legal authorization to raise rev- enue, incur long-term debt, and appropriate re- sources. Authorized expenditures are termed appropriations. Budgetary totals are recorded in the general ledger as control accounts to allow for budgetary comparisons in the ledgers as well as to facilitate financial reporting of a budgetary comparison statement. 3. The advantage of reporting designations of the fund balance is improved communications of decisions made by the common council or town/village board that will impact the availabil- ity of resources for other purposes. While not restricted by external grantors or donors, these funds are internally designated for specific pur- poses, e.g., planned purchases, reduction of taxes, and improvements in services. 4. The encumbrance system is designed as an early indicator or an “expected expenditure” to prevent overspending and to plan for payment of an “expected liability.” It is an estimate of an expenditure that may or may not be realized by year-end but will require the use of existing or future financial resources. 5. Capital projects funds are used to account for the inflows and outflows of financial resources raised and expended to acquire major capital assets used by the general government. This accounting is in accordance with the flows of financial resources measurement focus adop- ted for governmental funds. Fixed assets ac- quired with proceeds from general obligation bonds are accounted for in the general fixed assets account group subsequent to acquisi- tion. 6. Revenues would be credited if resources were received from a source outside of the govern- mental unit that need not be repaid. An ex- ample is a property tax levy. If repayment is required, as in the case of a bond issue, the credit is to Other Financing Sources. The latter account is also used for amounts received from other funds of the same governmental unit if that unit had previously recorded the resources as revenue. The procedure prevents recogniz- ing the same resources twice as revenue.
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