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ACC410 Chapter 4

ACC410 Chapter 4 - E1C04 11:32:22 Page 64 CHAPTER 4...

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E1C04 03/29/2010 11:32:22 Page 64 C H A P T E R 4 Governmental Activities Revenues C HAPTER H IGHLIGHTS ± Why the fund statements focus on current financial resources and use the modified accrual basis of accounting ± Why the government-wide statements focus on economic resources and use the full accrual basis ± The key distinctions between the modified and full accrual bases of accounting ± Exchange versus nonexchange transactions ± How the ‘‘available’’ criterion affects revenue recognition ± Accounting for the principal types of revenues I n Chapter 3, we discussed the basic financial statements and other minimum financial reporting requirements for governments. In this chapter and the next six chapters, we examine the principal transactions that underlie the basic financial statements. This chapter and Chapter 5 address what are probably the most difficult issues in accounting for governmental activities—those supported primarily by taxes and inter- governmental revenues: ± When should revenues and expenditures be recognized in the governmental funds and in the government-wide statement of activities (governmental activities column)? ± How should the related assets and liabilities be measured? Although most of the fund-accounting examples in these two chapters affect the general fund, the discussion also applies to the other governmental funds (special revenue, capital projects, debt service, and permanent funds). In Chapter 9, we examine similar issues for business-type activities and the proprietary funds used to record their transactions. W HY AND HOW DO GOVERNMENTS USE THE MODIFIED ACCRUAL BASIS OF ACCOUNTING? ............................................................................................................. RATIONALE FOR THE MODIFIED ACCRUAL BASIS As discussed in Chapter 3, GASB Statement No. 34 requires two sets of financial statements to meet two key but potentially conflicting objectives of financial reporting: ± Providing information about interperiod equity (i.e., whether an entity’s current-year revenues were sufficient to pay for its current-year services) 64
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E1C04 03/29/2010 11:32:23 Page 65 ± Demonstrating whether the entity obtained and used its resources in accordance with its legally adopted budget The government-wide statements are consolidated and use the full accrual basis of accounting, thereby demonstrating whether current-year revenues were sufficient to pay for current-year services. The fund statements, by contrast, present governmental funds—the activities of which are generally governed by a legally adopted budget—on a modified accrual basis , thereby facilitating budgetary comparisons. The modified accrual basis is far more budget oriented than the full accrual basis in that the budgets of most governments focus on either cash or cash plus selected short-term financial resources. The budgetary measurement focus of governments is determined by applicable state or local laws. Except for governments that elect or are required to budget on a modified accrual basis, as defined by GAAP, the revenue and expenditure principles that
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