Interpret Changes in a Net Position Principles of Cost Analysis and Management

Terminal Learning Objective Action: Interpret Changes in a Net Position Over a Period of Time. Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Prepare Statement of Budgetary Resources Demonstrate Proprietary Reporting Prepare basic Proprietary Financial Statements

Two Types of Accounts Budgetary Accounts track budgetary activities and resources Appropriations, Obligations, Expenditures Proprietary Accounts track financial activities and resources Liabilities and Payment of Liabilities Assets and Payments Received Expenses and Revenues

Status of Budgetary Resources Budgetary Reporting Statement of Budgetary Resources Budgetary Resources consist of: Prior Year Unobligated Balance Current Year Appropriations Collections Expenditures + Open Obligations Unobligated Balance Appropriations & Other = Budgetary Resources = Status of Budgetary Resources

Statement of Budgetary Resources The fictional Training Appropriation Fund received appropriations of $2720 Purchase orders in the amount of $1280 were issued Goods received were $824 (estimated and actual) Task: Prepare the Statement of Budgetary Resources

Statement of Budgetary Resources (Cont.) Q1. What items represent the budgetary resources? A1. Appropriations of $2720 Q2. What items represent the status of budgetary resources? A2. The information here about how the budget was used. Purchase orders issued represent Obligations. Obligations of $1280 were incurred. Q3. How much are the expenditures? A3. Goods received represent expenditures. Of the purchase orders issued, $824 was actually received. Q4. How much was left outstanding? A4. 1280 - 824 = 456. $456 represents the open Obligations. Q5. What is the unobligated balance? A5. Appropriations of 2720 – Open obligations 456 – expenditures 824 = 1440

Statement of Budgetary Resources (Cont.) Budgetary Resources: Appropriations $2720 Status of budgetary resources: Obligations (unfilled orders) $456 Expended appropriations 824 Unobligated Balance 1440 Total $2720 The purpose of this report is to show that all budgetary resources are accounted for

LSA #1 Check on Learning Q1. What is the basic equation for the Statement of Budgetary Resources? A1. Q2. What items represent the Status of Budgetary Resources? A2. Q1. What is the basic equation for the Statement of Budgetary Resources? A1. Budgetary Resources = Status of Budgetary resources Q2. What items represent the Status of Budgetary Resources? A2. Open obligations, Expenditures, and Unobligated Balance

LSA #1 Summary During this block, we went over preparing the Statement of Budgetary Resources. We also discussed the statement of budgetary resources, its items and basic equation.

Proprietary Reporting Statement of Net Cost Costs – Earned Revenues = Net Cost Statement of Changes in Net Position Financing Sources – Net Cost = Change in Net Position Balance Sheet Assets = Liabilities + Net Position Uses the Accrual Basis of Accounting

Other Financing Sources Increase Net Position Prevent Revenues and Expenditures from being counted twice in the same entity Transfers of cash from other funds in the same government Unreimbursed services provided by another governmental segment or entity Cash inflows from long term borrowing

Proprietary vs. Budgetary The budgetary accounts use the budgetary basis: Once the goods are received, the budgetary accounting process is finished and the proprietary accounts take over Plan Order Receive Pay Consume Commitment  Obligation  Expenditure

Proprietary vs. Budgetary (Cont.) The proprietary accounts use the accrual basis: When goods are received  liability recorded When payment is made  liability satisfied When goods are consumed expense Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense

Lacy’s Proprietary Activities Lacy purchases supplies on account at the grocery store (she RECEIVES GOODS) The EXPENDITURE is the final activity in the budgetary accounts In the proprietary accounts: An asset is recorded: Supplies represent future benefit – they can be used to make and sell lemonade A liability is recorded: Lacy has an obligation to pay the bill in the future

Lacy’s Proprietary Activities (Cont.) When Lacy pays the grocery bill: In the proprietary accounts: Cash (an asset) decreases The liability is removed because Lacy has satisfied her obligation

Lacy’s Proprietary Activities (Cont.) When Lacy uses the supplies to make and sell lemonade In the proprietary accounts: Supplies (asset) decrease An expense is recorded Plan Order Receive Pay Consume Asset & Liability  Remove Liability  Expense

LSA #2 Check on Learning Q1. What activity ends the involvement of the budgetary accounts in the purchasing process? A1. Q2. What activity constitutes an expense in the proprietary accounts? A2. Q1. What activity ends the involvement of the budgetary accounts in the purchasing process? A1. The receipt of goods or services – the expenditure. Q2. What activity constitutes an expense in the proprietary accounts? A2. The consumption of goods or services.

LSA #2 Summary During this block, we discussed when the budgetary accounts end and the proprietary accounts begin. We also discussed what financial statements are created to record revenues and expenses correctly according to the accrual basis of accounting.

Statement of Net Cost Most federal agencies generate revenues that are insignificant in comparison to expenses Revenues are generally reimbursements for costs incurred on behalf of other federal agencies Expenses – Revenues = Net Cost

Statement of Net Cost (Cont.) Salaries and personnel costs for the fictional Training Appropriation Fund for the year were $398 Other expenses amounted to $40 Miscellaneous revenues of $186 were collected Task: Prepare the Statement of Net Cost

Statement of Net Cost (Cont.) Salaries and personnel costs $398 Other expenses 40 Total Costs $438 Less: Miscellaneous revenues 186 Net Cost $252 The purpose of this statement is to show the cost to the government of providing this program or service.

Statement of Change in Net Position Shows how the activities of the period affect the Net Position of the entity Net Position consists of: Cumulative Results of Operations + Unexpended Appropriations The changes in the two categories are calculated separately

Statement of Change in Net Position (Cont.) Cumulative Results of Operations: Unexpended Appropriations: Appropriations used + Other financing sources - Net Cost = Net Change + Beginning = Ending Appropriations received - Appropriations used = Net Change + Beginning = Ending

Statement of Change in Net Position (Cont.) Cumulative Results of Operations: Unexpended Appropriations: Appropriations used + Other financing sources - Net Cost = Net Change + Beginning = Ending Appropriations received - Appropriations used = Net Change + Beginning = Ending Proprietary activity Budgetary activity

Statement of Change in Net Position (Cont.) The fictional Training Appropriation Fund is a new entity, so beginning net position is zero Appropriations were $2720, and Expenditures were $824 ( (from Statement of Budgetary Resources) Net cost of operations is $252 (from Statement of Net Cost)

Statement of Change in Net Position (Cont.) Cumulative Results of Operations Unexpended Appropriations Appropriations -- $2720 Appropriations Used $824 (824) Less: Net Cost (252) Net change 572 1896 Add Beginning: -0- Ending: $572 $1896

Balance Sheet Similar to the Statement of Financial Position Assets = Liabilities + Net Position If Assets < Liabilities, Net position will be negative Net position = Unexpended appropriations + cumulative results of operations

Balance Sheet (Cont.) The fictional Training Appropriation Fund has $2600 in its balance with the Treasury Equipment (net of depreciation): $380 Liabilities: $512 From Statement of Change in Net Position: Cumulative results of operations: $572 Unexpended Appropriations: $1896 Task: Prepare the Balance Sheet

Balance Sheet (Cont.) Assets: Balance with the Treasury $2600 Equipment (net of depreciation) 380 Total Assets $2980 Liabilities and Net Position: Liabilities $512 Unexpended Appropriations 1896 Cumulative results of Operations 572 Total Liabilities and Net Position $2980 This statement lists the assets of the entity and shows how they were financed: (borrowing) (appropriations) (operations)

Why is it important to be familiar with External Reports? S1. External Reporting is the primary objective of most accounting systems S2. Cost accounting information is drawn from the same accounting system S3. Understanding the basis of the accounting data permits a meaningful translation to useful cost information

Issues with Budgetary Accounting Focus is on obligations and expenditures Ordering and receiving goods do not reflect actual use of resources 99.9% philosophy of financial management All of the money will be spent, yet does not necessarily reflect the true cost of operations

Governmental Reporting Spreadsheet Enter data to record budgetary activity

Governmental Reporting Spreadsheet (Cont.) Prepare the Statement of Budgetary Resources

Governmental Reporting Spreadsheet (Cont.) Budgetary Resources equal Status of Budgetary Resources

Governmental Reporting Spreadsheet (Cont.) Prepare Statement of Net Cost

Governmental Reporting Spreadsheet (Cont.) Net cost flows into the Statement of Change in Net Position, Cumulative Results of Operations

Governmental Reporting Spreadsheet (Cont.) The Statement of Change in Net Position shows changes in both Cumulative Results of Operations and Unexpended Appropriations

Governmental Reporting Spreadsheet (Cont.) The Balance Sheet shows Assets and Liabilities as well as the new balances in Unexpended Appropriations and Cumulative Results of Operations

LSA #3 Check on Learning Q1. Which statement shows the cost to the government of providing a particular program or service? A1. Q2. Which statement explains the changes in the Net Position of the entity? A2. Q1. Which statement shows the cost to the government of providing a particular program or service? A1. Statement of Net Cost Q2. Which statement explains the changes in the Net Position of the entity? A2. Statement of Change in Net Position

LSA #3 Summary During this block, we discussed how the Statement of Net Cost feeds into the Statement of Change in Net Position through the Cumulative Results of Operations. By solving for the Unexpended Appropriations, an entity can identify it’s budgetary and proprietary activities when the balance sheet has been completed.

Practical Exercise / Review

TLO Summary Action: Interpret Changes in a Net Position Over a Period of Time. Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international Learners): Prepare Statement of Budgetary Resources Demonstrate Proprietary Reporting Prepare basic Proprietary Financial Statements