Governmental Entities: Introduction and General Fund Accounting Chapter 17 Governmental Entities: Introduction and General Fund Accounting Note: Students sometimes like to print slides as “handouts” with 1, 2, 3, 4, 6, or 9 slides per page for taking notes in class. It is sometimes best to print them using the “pure black and white” option on the color/gray scale dropdown menu to avoid dark boxes that are not conducive to note taking. Be aware that many instructors will only cover a sub-set of the slides available in this file. Also note that we have removed slides containing solutions to group or individual in-class exercises. You may want to print some slides (such as worksheets or slides with a large quantity of calculations) as a full page slide to facilitate working the exercise in class.

Learning Objective 1 Understand and explain the basic differences between governmental and private sector accounting.

Overview Governmental entities have operating objectives different from those of commercial entities. As a result, governmental accounting is different from accounting for commercial enterprises. 3

Nature of governmental entities Overview Nature of governmental entities Collect resources and make expenditures to fulfil societal needs Absence of profit motive except for some activities Have legal authorization for their existence, conduct revenue-raising through the power of taxation, and have mandated expenditures they must make to provide their services Control mechanism – Use of comprehensive budgetary accounting 4

Nature of governmental entities Overview Nature of governmental entities Accountability for the flow of financial resources is a chief objective Typically are required to establish separate funds to carry out various missions; each fund is an independent accounting and fiscal entity Many fund entities do not record fixed assets or long-term debt in their funds An important objective of governmental financial reporting is accountability 5

History of Governmental Accounting Before 1984, directed by the Municipal Finance Officers Association (MFOA) In 1934, the first statement on local governmental accounting published In 1968, Governmental Accounting, Auditing, and Financial Reporting (GAAFR) was published The GAAFR is periodically updated to include the most recent governmental reporting standards 6

History of Governmental Accounting 1974 –The American Institute of Certified Public Accountants (AICPA) published an industry audit guide, in which it stated that “except as modified in this guide, they [GAAFR] constitute generally accepted accounting principles” March 1979 – The National Council on Governmental Accounting (NCGA) issued its Statement No. 1, “Governmental Accounting and Financial Reporting Principles” (NCGA 1) 7

History of Governmental Accounting 1984 – Governmental Accounting Standards Board (GASB) established GASB Statement No. 1 The GASB stated that all NCGA statements and interpretations issued and in effect on that date were accepted as generally accepted accounting principles for governmental accounting GASB Statement No. 34 Established government-wide financial statements to be prepared on the accrual basis of accounting and an array of fund-based financial statements 8

History of Governmental Accounting The GASB continues to issue new standards to meet the information needs of users of the financial reports of governmental units. Accounting for governmental entities is given the general name of fund accounting. 9

The Governmental Accounting Standards Board (GASB) Created in 1984 A sister organization to the FASB Establishes GAAP for state and local units No authority to establish GAAP for the federal government Seven members—simple majority vote needed (4 votes) 10

GAAFR: “The Blue Book” “Governmental Accounting, Auditing, and Financial Reporting” Published by the Government Finance Officers Association (GFOA). Neither prescribes nor authoritatively interprets GAAP for governmental units. Provides detailed guidance (many examples) for applying governmental GAAP. Widely used by governmental units.

Practice Quiz Question #1 Which of the following statements is correct? a. The GASB is responsible to set standards for governmental units and not-for-profit entities. b. The FASB was created in 1972 and sets standards for governmental units. c. The Blue Book contains financial accounting standards for privately held governmental agencies and companies. d. The GASB is responsible for setting standards for state and local governments but not the federal government.

Understand and explain major concepts of governmental accounting. Learning Objective 2 Understand and explain major concepts of governmental accounting.

Major Concepts of Governmental Accounting Elements of a Statement of Financial Condition Assets are resources with present service capacity that the entity presently controls. Liabilities are present obligations to sacrifice resources that the entity has little or no discretion to avoid. A deferred outflow of resources is a consumption of net assets that is applicable to a future reporting period. A deferred inflow of resources is an acquisition of net assets that is applicable to a future reporting period. Net position is the residual of all other elements presented in a statement of financial condition. 14

Major Concepts of Governmental Accounting Elements of a the resource flows statements An outflow of resources is a consumption of net assets that is applicable to the current reporting period An inflow of resources is an acquisition of net assets that is applicable to the current reporting period 15

Major Concepts of Governmental Accounting Expendability of resources versus capital maintenance objectives Commercial Enterprises Government Entities Measurement focus The flow of all economic resources Changes in current financial resources available to provide services to the public in accordance with the budget Method of accounting Accrual method Modified accrual method Balance sheet Contains both current and noncurrent assets and liabilities, and the change in retained earnings reflects the company’s ability to maintain its capital investment Reports only current assets, current liabilities, and a fund balance 16

Practice Quiz Question #2 Which of the following statements is true? Governmental units use the modified accrual basis of accounting and focus on the flow of all economic resources. Commercial enterprises use the modified accrual basis of accounting and focus on the flow of all economic resources. The balance sheets of governmental units contain long-term assets and liabilities. The balance sheets of commercial entities contain a fund balance.

Learning Objective 3 Understand and explain the differences between the various governmental fund types.

The Nature & Diversity of Governmental Activities The operations of governmental entities are classified into three categories: Governmental—these activities do not resemble commercial activities. Proprietary—these activities resemble commercial activities. Can measure profitability or capital maintenance. Fiduciary—holding and managing assets owned by others (e.g., pension assets). 19

Proprietary and Fiduciary-type Funds Use of Fund Accounting Fund Accounting Accounting for certain activities separately from all other operations. Fund definition: A fiscal and accounting entity with a self-balancing set of accounts (like a branch or a division of a commercial entity). The General Fund: The main and largest fund—records most routine transactions. The difference between a fund’s assets and liabilities is called: Governmental Funds Proprietary and Fiduciary-type Funds Fund Balance Net Assets 20

Major Concepts of Governmental Accounting Three Types of Funds Governmental Funds Used to provide basic governmental services to the public Each entity creates only one general fund, but it may create more than one of each of the other types of funds Proprietary Funds The objective is to recover the unit’s costs through user charges Fiduciary Funds 21

Major Concepts : Types of Funds Governmental Funds General Fund: Accounts for all activities not required to be accounted for in another fund. Special Revenue Fund: A clone of the General Fund. Capital Projects Funds Debt Service Funds Permanent Funds

Major Concepts : Types of Funds Proprietary Funds Enterprise Funds: Provides services primarily to nongovernmental users Examples: City-owned utilities or recreational facilities Internal Service Funds: Provides services solely to governmental departments.

Major Concepts : Types of Funds Fiduciary Funds Trust Funds Pension (and similar) Trust Funds Investment Trust Funds Private-Purpose Trust Funds (these activities do not benefit the government unit) Agency Funds

Major Concepts of Governmental Accounting Governmental Fund Types General fund Accounts for all financial resources except for those accounted for in another fund. Includes transactions for general governmental services provided by the executive, legislative, and judicial operations of the governmental entity. Special revenue fund Accounts for the proceeds of specific revenue sources that are restricted for specified purposes. Capital projects fund Accounts for financial resources for the acquisition or construction of major capital facilities that benefit many citizens, such as parks and municipal buildings. Debt service fund Accounts for the accumulation of resources for, and the payment of, general long-term debt principal and interest. Permanent fund Accounts for resources that are restricted such that only earnings, but not principal, may be used in support of governmental programs that benefit the government or its citizenry. 25

Major Concepts of Governmental Accounting Proprietary Fund Types Enterprise fund Accounts for operations of governmental units that charge for services provided to the general public. Internal service fund Accounts for the financing of goods or services provided by one department or agency to other departments or agencies of the governmental unit. Services are offered only to governmental agencies. Fiduciary Fund Types and Similar Component Units Pension (and other employee benefit) trust fund Accounts for resources required to be held in trust for the members and beneficiaries of pension plans, other post-employment benefit plans, or other EBPs. Investment trust fund Accounts for the external portion of investment pools reported by the sponsoring government. Private-purpose trust fund Accounts for all other trust arrangements under which the fund’s resources are to be used to benefit specific individuals, private organizations, or other governments. Agency fund Accounts for assets held by a governmental unit in an agency capacity for employees or for other governmental units. 26

Practice Quiz Question #3 The three major categories of governmental funds are: Governmental, commercial, and proprietary. Governmental, trust, and fiduciary. Enterprise, proprietary, and fiduciary . Governmental, proprietary, and fiduciary. Governmental Service, proprietary, and commercial

Learning Objective 4 Understand and explain basic concepts for financial reporting in governmental accounting.

Financial Reporting of Governmental Entities Governmental funds – financial statements Balance sheet Statement of revenues, expenditures and changes in fund balance The five governmental funds use the current financial resources measurement focus 29

Proprietary and Fiduciary-type Funds Fund Accounting Specific General Ledger Accounts Used defined by GASB 54: Governmental Funds Proprietary and Fiduciary-type Funds Fund Balance Net Assets Non-spendable Restricted Spendable: Limited Assigned Unassigned Unrestricted 30

Financial Reporting of Governmental Entities Balance Sheet for Governmental Funds Assets (financial resources available for current use; presented in order of liquidity)   $X,XXX   Total Assets Liabilities and Fund Balances: Liabilities (due and expected to be paid from current financial resources; presented in order of due date) $   XXX  Fund Balances   Nonspendable $  XX Spendable: Restricted XX Limited Assigned Unassigned       XX         XX Total Liabilities and Fund Balances 31

Financial Reporting of Governmental Entities Statement of revenues, expenditures, and changes in fund balance Often called the operating statement of the governmental funds Statement of Revenues, Expenditures, and Changes in Fund Balance Revenues (recognized when both measurable and available; presented   by source of revenue) $XX,XXX Expenditures (approved decreases in net financial resources; presented   by function and character) X,XXX Excess of Revenues over Expenditures $  XXX Other Financing Sources or Uses (other increases or decreases in net financial  resources available, such as bond issue proceeds and interfund transfers) XX Special Items and Extraordinary Items      (X) Net Change in Fund Balance $   XX Fund Balance—Beginning XXX Fund Balance—Ending (reconciles to total fund balance on balance sheet) $   XXX 32

Practice Quiz Question #4 Which of the following is true? a. The operating statements of governmental entities focus on revenues and expenses. b. The balance sheets of governmental entities focus on the normal accounting equation: Assets – Liabilities = Owner’s Equity. c. The operating statements of governmental entities focus on revenues and liabilities. The balance sheets of governmental entities focus a modified accounting equation: Assets – Liabilities = Fund Balance. All governmental fund balances are spendable.

of accounting between governmental and private sector accounting. Learning Objective 5 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting.

Measurement Focus And Basis Of Accounting (MFBA) What flows to measure for operations. Basis of Accounting When should transactions and events be recognized in the financial statements.

MFBA: Governmental Activities Measure flow: Current financial resources Basis of Accounting: Modified accrual basis of accounting Present a Statement of Revenues and Expenditures and Changes in Fund Balance - shows financial resources received and spent. - shows change in net financial resources available for spending in the near future.

MFBA: Current Financial Resources Cash, property tax receivables, prepaids, and supplies inventories. Claims against current financial resources: Wages, payroll taxes, payables to vendors, and liabilities expected to be paid in the near future (typically within 60 days after the year-end).

MFBA: Proprietary and Fiduciary Activities Measure flow: All economic resources Basis of Accounting: Accrual basis of accounting Present a Statement of Revenues and Expenses - shows the change in the economic condition Also present a Statement of Cash Flows

Measurement Focus and Basis of Accounting The modified accrual basis is used in funds that have a flow of current financial resources measurement focus The five governmental funds have this focus The accrual basis is used in funds that have a flow of economic resources measurement focus Proprietary funds and fiduciary funds have this focus The government-wide financial statements are based on the accrual basis 39

Measurement Focus and Basis of Accounting Modified Accrual Basis Funds Governmental funds General Fund Special Revenues Fund Capital Projects Funds Debt Service Funds Permanent Funds

Measurement Focus and Basis of Accounting Accrual Basis Funds Proprietary funds Enterprise Funds Internal Service Funds Fiduciary funds Trust Funds (3 types) Agency Funds The two propriety funds and the three trust funds have either a profitability or capital maintenance orientation.

Measurement Focus and Basis of Accounting Modified Accrual Basis Revenues: Recognize in period in which they become available and measurable. Available means: Collectible within the current period or soon enough thereafter to be used to pay current period liabilities. Expenditures: Recognize in the accounting period in which the liabilities are both measurable and incurred and are payable out of current financial resources. One exception exists for interest on general long- term liabilities.

Measurement Focus and Basis of Accounting Recognition of revenue: how revenues are recognized depends on the category Derived tax revenues, resulting from assessments on exchange transactions The asset is recognized when the underlying transaction occurs or resources are received, whichever comes first. Revenue recognition depends on the accounting basis used to measure the transaction. Imposed nonexchange revenues, resulting from assessments on nongovernmental entities, including individuals The asset is recognized when the government has an enforceable legal claim to the resources or the resources are received, whichever comes first. Revenue recognition is made in the period when use of the resources for current expenditures is first permitted or required, or at the time the asset is recorded if no time restriction on the fund’s use of the resources exists. 43

Measurement Focus and Basis of Accounting Recognition of revenue: how revenues are recognized depends on the category Imposed nonexchange revenues, resulting from assessments on nongovernmental entities, including individuals The asset is recognized when the government has an enforceable legal claim to the resources or the resources are received, whichever comes first. Revenue recognition is made in the period when use of the resources for current expenditures is first permitted or required, or at the time the asset is recorded if no time restriction on the fund’s use of the resources exists. Government-mandated nonexchange transactions, resulting from one governmental unit’s provision of resources to a governmental unit at another level and the requirement that the recipient use the resources for a specific purpose Voluntary nonexchange transactions, resulting from legislative or contractual agreements, other than exchanges 44

Practice Quiz Question #4 The modified accrual basis of accounting: a. recognizes revenues when earned and expenditures when incurred. b. recognizes revenues when they become available and measureable and expenditures when liabilities become measurable and incurred. c. recognizes revenues when earned and expenses when incurred d. recognizes revenues when they become available and measureable and expenditures when they become available and spendable.

Learning Objective 6 Understand and explain basic budgeting concepts in governmental accounting.

Budgetary Aspects of Governmental Operations Budgets Used in governmental accounting to assist in management control and to provide the legal authority to levy taxes, collect revenue, and make expenditures in accordance with the budget Types of budgets: Operating budgets Capital budgets 47

Budgetary Aspects of Governmental Operations Appropriation: The statutory authorization for spending a budgeted amount during a coming year. Annual Budgets for the General Fund and the Special Revenue Funds are always recorded in the general ledger for control purposes. Also done for Capital Projects Funds and Debt Service Funds if useful. Encumbrances: Commitments related to unperformed (executory) contracts for goods or services. Special general ledger accounts are used to record encumbrances—the purpose is to prevent spending more than has been appropriated. Budget entries have no effect on reported operations.

Introduction: Budget / Expenditure Process Budget—Recorded in the books CAPITAL LETTERS (legally binding) Expenditures Appropriation (authorization of the expenditure) Encumbrance (set aside or reserve part of the budgetary appropriation) Expenditure Disbursement

Budgetary Aspects of Governmental Operations Recording the Operating Budget Assume that at January 1, 20X1, the first day of the new fiscal period, the city council of Barb City approves the operating budget for the general fund, providing for $900,000 in revenue and $850,000 in expenditures. Approval of the budget provides the legal authority to levy the local property taxes and to appropriate resources for the expenditures. The entry made in the general fund’s accounting records on this date is as follows: January 1, 20X1 (1) ESTIMATED REVENUES CONTROL 900,000 APPROPRIATIONS CONTROL 850,000 BUDGETARY FUND BALANCE—UNASSIGNED 50,000 Record general fund budget for year. 50

Budgetary Aspects of Governmental Operations The ESTIMATED REVENUES CONTROL account is an anticipatory asset. The APPROPRIATIONS CONTROL account is an anticipatory liability. The excess of estimated revenues over anticipated expenditures is the budget surplus and is recorded to BUDGETARY FUND BALANCE—UNASSIGNED. Some approved budgets have budget deficits in which expected expenditures exceed anticipated revenue. These budgets are recorded with a debit to BUDGETARY FUND BALANCE—UNASSIGNED. 51

Example: Budget / Expenditure Process Assume the same budget from the previous example is approved for Angela City as of July 1, 20X1 : $900,000 in Revenues $850,000 in Appropriations In addition, assume a particular appropriation of $15,000 is approved for the purchase of a chipper machine, but that the actual list price turns out to be less than anticipated. As a result, only $14,000 is paid for the final voucher.

Example: Budget / Expenditure Process Expenditures Appropriation Authorization of the expenditure (Annual Budget) Person with authority (each expenditure authorized) Encumbrance ESTIMATED REVENUES CONTROL 900,000 APPROPRIATIONS CONTROL 850,000 BUDGETARY FUND BALANCE—UNASSIGNED 50,000 ENCUMBRANCES 15,000 BUDGETARY FUND BALANCE—ASSIGNED FOR ENC. 15,000

Example: Budget / Expenditure Process Expenditures Expenditure Disbursement BUDGETARY FUND BALANCE—ASSIGNED FOR ENC. 15,000 ENCUMBRANCES 15,000 Expenditures 14,000 Vouchers Payable 14,000 Vouchers Payable 14,000 Cash 14,000

Text Page 837 $850,000 APPROPRIATIONS Assume that Angela City approves the operating budget with $850,000 of expenditures on July 1, 20X1. As of November 18, 20X1, total expenditures to date amount to $400,000. In addition, assume that $30,000 of encumbrances are currently on the books. How much appropriating authority still remains for the year? Remaining Appropriating Ability (X) $30,000 ENCUMBRANCES $400,000 Expenditures X = $850,000 – ($30,000 + $400,000) = $420,000

Practice Quiz Question #4 Why to state and local governments record encumbrances? a. To ensure that the entity earns sufficient revenues to achieve profitability. b. To ensure that the entity does not spend more than has been appropriated. c. To ensure that all sub-entities within the organization are not encumbered. d. To ensure that the entity spends at least as much as has been appropriated.

Make calculations and record journal entries for the general fund. Learning Objective 7 Make calculations and record journal entries for the general fund.

Two methods for accounting for outstanding encumbrances at fiscal year end Should governmental units honor outstanding encumbrances from the previous year? They are not technically required to do so. In virtually all instances they re-budget and honor them. Option 1: Encumbrances lapse at year end At year end, outstanding encumbrances are closed and an amount is set aside in assigned fund balance. The encumbrance is re-established at the beginning of the new period to await the delivery of goods or services. Option 2: Encumbrances do not lapse at year end The encumbrance is not re-established in the new period. The entity awaits the delivery of goods or services to record the expenditure.

Comparison of Accounting for Lapsing and Nonlapsing Encumbrances at Year-End 59

Two Ways to Account for Supplies Inventories Consumption Method The preferred method—it parallels business practice. The use of inventory is treated as an outflow of resources. The expenditure = the amount “consumed” Purchases Method The acquisition of inventory is treated as an outflow of resources (debit Expenditures or Expenses). The expenditure = the amount “purchased”

Two Ways to Account for Supplies Inventories The specific method to follow depends on the governing unit’s policy and how inventory expenditures are included in the budget. Immaterial inventories need not be shown on the balance sheet If the inventory is material, it is presented as an asset on the balance sheet. An amount equal to the inventory also should be shown as a reservation of the fund balance, indicating that that amount is no longer expendable. 61

Accounting for Inventories 62

Inventory Example: Baker County, Iowa purchased $6,000 of supplies inventory on 7/1/X5, the first day of the fiscal year. Assume that the beginning inventory balance was $1,500 and that the county has a policy of initially recording all inventory purchases as expenditures and then adjusting the balances at the end of the accounting period based on the actual amount of inventory on hand per the physical count. Assume the actual inventory on hand on 6/30/X6 is $2,500. REQUIRED Assuming the purchase method, record the initial inventory purchase on 7/1/X5. Then, record the adjusting entry on 6/30/X6. Assuming the consumption method, record the initial inventory purchase on 7/1/X5. Then, record the adjusting entry on 6/30/X6.

Purchase Method To record the purchase of $6,000 of inventory on 7/1/X5. To adjust inventory and the non-spendable fund balance to the actual inventory balance per the physical count on 6/30/X6. Expenditure = Amount PURCHASED Expenditures Inventory Fund Balance—NS BB 1,500 1,500 BB EB 2,500 2,500 BB

Consumption Method To record the purchase of $6,000 of inventory on 7/1/X5. To adjust inventory balance per the physical count on 6/30/X6. To adjust non-spendable fund balance to the actual on 6/30/X6 Expenditures Inventory Fund Balance—NS 6,000 BB 1,500 1,500 BB EB 2,500 2,500 BB

Accounting for Expenditures Accounting for fixed assets Governmental funds: Recognized as an expenditure in the year the asset is acquired Proprietary funds: Account for acquisitions of capital assets in the same manner as commercial entities Works of art and historical treasures For the purposes of government-wide financial statements, governments should capitalize these assets at their historical costs at acquisition or at their fair values at the date of the contribution 66

Accounting for Expenditures Long-term debt and capital leases The governmental funds record the proceeds from a bond issue as a debit to Cash and a credit to Bond Issue Proceeds, an other-financing source. Bond issue proceeds are not revenue because the bonds must be repaid. Bonds are not reported on the governmental funds’ balance sheets but only on the government-wide financial statements. Capital leases are accounted for in a manner similar to long-term debt. 67

Accounting for Expenditures Investments GASB 31 established a general rule of fair market valuation for investments held by a government entity. Changes in the fair value of investments should be recognized as an element of investment income in the operating statement (or statement of activities) of each fund. GASB 40 requires footnote disclosures of the policies and the profiles of the government’s investment portfolios. 68

Group Exercise: Comprehensive General Fund Entries The City of Cottersen, Texas is a small town with a population of approximately 15,000. The city noted the following transactions during fiscal 20X8. REQUIRED Prepare General Fund journal entries only for these items. Prepare closing entries at 6/30/X8. Prepare a Statement of Revenues, Expenditures, and Changes in Fund Balance as of 6/30/X8. Provide a summary of the fund balance by category as of 6/30/X8.

Group Exercise: Requirement 1 (Journal Entries) The Cottersen city council approved the following budget: Estimated revenues $820,000 Authorized expenditures (including $65,000 reappropriated for encumbrances outstanding at 6/30/X7 that had lapsed) 720,000 Authorized transfers out to other funds ($35,000 and $20,000) 55,000 Estimated inflow from the discontinuance of the Auto Repair Internal Service Fund 25,000

Group Exercise: Requirement 1 (Journal Entries) The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 6/30/X8 ($11,000) is expected to be collected within 60 days.

Group Exercise: Requirement 1 (Journal Entries) The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 6/30/X8 ($11,000) is expected to be collected within 60 days. Property Taxes Receivable—Delinquent Allowance for Uncollectibles—Delinquent NRV = 11,000 BB 17,000 6,000 BB 12,000 Collected 5,000 Write off Given 5,000 1,000 Left over Close out

Group Exercise: Requirement 1 (Journal Entries) The city levied property taxes totaling $570,000. Of this amount, $10,000 was estimated to be uncollectible. Collections during the year totaled $525,000, of which $12,000 were associated with property taxes levied in the prior year that had been declared delinquent at the end of the prior year. All of the remaining property taxes receivable at the beginning of the current year, totaling $5,000, were written off as uncollectible. The net realizable amount at 6/30/X8 ($11,000) is expected to be collected within 60 days.

Group Exercise: Requirement 1 (Journal Entries) The estimated revenues for the year include a $44,000 entitlement from the federal government. During the year, the city received $50,000.

Group Exercise: Requirement 1 (Journal Entries) The City’s income taxes, sales taxes, permits, licenses, and other miscellaneous revenues totaled 225,000.

Group Exercise: Requirement 1 (Journal Entries) Encumbrances outstanding at the beginning of the year totaled $60,000. The goods and services related to these encumbrances were received along with invoices for $58,000.

Group Exercise: Requirement 1 (Journal Entries) Encumbrances outstanding at the beginning of the year totaled $60,000. The goods and services related to these encumbrances were received along with invoices for $58,000.

Group Exercise: Requirement 1 (Journal Entries) Purchase orders and contracts totaling $380,000 were entered into during the year. For $340,000 of this amount, invoices that totaled $336,000 for services and goods were received. The city generally allows encumbrances outstanding at year-end to laps but reappropriates the amounts in the following year to honor the encumbrances. Of the $336,000 invoiced, $75,000 relates to the acquisition of supplies inventory. The city uses the consumption method for accounting for supplies.

Group Exercise: Requirement 1 (Journal Entries) Purchase orders and contracts totaling $380,000 were entered into during the year. For $340,000 of this amount, invoices that totaled $336,000 for services and goods were received. The city generally allows encumbrances outstanding at year-end to laps but reappropriates the amounts in the following year to honor the encumbrances. Of the $336,000 invoiced, $75,000 relates to the acquisition of supplies inventory. The city uses the consumption method for accounting for supplies.

Group Exercise: Requirement 1 (Journal Entries) Payroll and other items not involving the use of purchase orders and contracts totaled $270,000. This amount does not include interfund billings. Cash disbursements (not including payments to other funds) totaled $750,000.

Group Exercise: Requirement 1 (Journal Entries) The Auto Repair internal service fund was discontinued as determined by the city council at the beginning of the year. The actual amount disbursed to the General Fund when the fund was discontinued was $22,000. A payment was made for $30,000 to the Electric Utility Enterprise Fund to make up its operating deficit, which had originally been estimated to be $35,000.

Group Exercise: Requirement 1 (Journal Entries) A $20,000 payment was made to a Capital Projects fund to cover a portion of street improvements (which was exactly the amount budgeted).

Group Exercise: Requirement 1 (Journal Entries) The Electric Utility Enterprise fund billed the city for a total of $28,000 for electricity used by the city and supplied by the Electric Utility. The cash disbursements throughout the year for periodic billings totaled $24,000.

Group Exercise: Requirement 1 (Journal Entries) The City disbursed $79,000 to the City Center for the Performing Arts Enterprise Fund as a loan. The repayment is expected in three years.

Group Exercise: Requirement 1 (Journal Entries) A physical count of the supplies inventory at year-end indicates that the balance decreased from $44,000 to $41,000 during the year.

Group Exercise: Requirement 2 (Closing Entries)

Group Exercise: Requirement 2 (Closing Entries)

Group Exercise: Requirement 2 (Statement of Revenues, Expenditures, and Changes in Fund Balance) Variance Favorable Budget Actual (Unfavorable) Revenues: Property taxes ($560,000 + $1,000) $570,000) $561,000) $(9,000)) Intergovernmental entitlement 44,000) 50,000) 6,000) Miscellaneous 206,000) 225,000) 19,000) Total Revenues $820,000) $836,000) $16,000) Expenditures: 720,000) 695,000) 25,000) Excess of Revenues over Expenditures $100,000) $141,000) $41,000) Other Financing Sources (Uses): Transfer in from Auto RepairInternal Service Fund $25,000) $22,000) $(3,000) Transfers Out— to Electric Utility Enterprise Fund (35,000) (30,000) 5,000) to Capital Projects Fund (20,000) (20,000) 0) Total Other Financing Sources (Uses) $(30,000) $(28,000) $2,000) Excess of Revenues over Expenditures and Other Financing Uses: $70,000) $113,000) $43,000) Fund Balance – 7/1/X7 200,000) 200,000) 0) Fund Balance – 6/30/X8 $270,000) $313,000) $43,000) ) Note: The large favorable variance is attributable primarily to encumbrances of $40,000 outstanding at year-end that will be reflected as expenditures in the following year and a decrease in supplies inventory of $3,000.

Group Exercise: Requirement 4 (Fund Balance Summary) Nonspendable: Supplies Inventory $ 41,000 Spendable: Assigned for Governmental Services 40,000 Unassigned 232,000 Total Fund Balance $313,000

Learning Objective 8 Make calculations and record journal entries for basic interfund activities.

Interfund Activities 91

Overview of Accounting and Financial Reporting for the General Fund 92

Overview of Accounting and Financial Reporting for the General Fund 93

Conclusion The End