1. Slide U9-1

2. Slide U9-2 Introduction to Fund Accounting Advanced Accounting, Fourth Edition 1717

3. Slide U9-3 1. 1.Distinguish between a nonbusiness organization and a profit-oriented enterprise. 2. 2.Explain the role of fund accounting. 3. 3.Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. 4. 4.Understand the classification of revenues and other resource inflows for fund accounting. 5. 5.Understand the classification of expenditures and other resource outflows for fund accounting. Learning Objectives

4. Slide U9-4 6. 6.Describe the critical events in the use of financial resources of an expendable fund. 7. 7.Explain how capital expenditures are recorded in an expendable fund. 8. 8.Understand the role of a general fund. 9. 9.Contrast the consumption and the purchases methods of accounting for inventories (and other prepaid items). Learning Objectives

5. Slide U9-5 Fund Accounting Accounting for nonbusiness organizations. Fund Accounting Nonbusiness Organizations Provide socially desirable service without regard to financial gain. Business Enterprises  Earn a return on investment.  Competitive market.  Liquidity concerns.

6. Slide U9-6 Five Major Classifications 1.Governmental units. 2.Hospitals and other health care providers. 3.Colleges and universities. 4.Voluntary health and welfare organizations. 5.Other nonbusiness organizations (trade associations, professional associations, museums, religious organizations, etc.) Classification of Nonbusiness Organizations

7. Slide U9-7 Distinctions Absence of primary goal to earn a profit. No equity interests. Seldom finance through user charges. Rely on political action or fund-raising campaigns. Income determination model generally not applicable. Restrictions or limitations on use of resources. Distinctions between Nonbusiness Organizations and Profit-Oriented Enterprises LO 1 Nonbusiness organizations versus profit-oriented enterprises.

8. Slide U9-8 LO 1 Nonbusiness organizations versus profit-oriented enterprises. Governmental Units 1.Federal units  Veterans hospitals 2. State units  State hospitals  State universities 3. Local governments  Country government  School districts  Municipalities  Port authorities Nongovernmental Units 1. Private colleges, universities, and community colleges 2. Private hospitals and voluntary health and welfare organizations 3. Other nongovernmental units  Private elementary schools  Professional organizations  Labor unions  Civic organizations  Trade associations Standards for Nonbusiness Organizations GASBFASB

9. Slide U9-9 LO 2 The role of fund accounting. Fund Accounting Fund Entity Classification Expendable – Basic fund accounting concepts. Proprietary – Business type activity. Fiduciary - Agent or trustee.

10. Slide U9-10 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Financial resources dedicated to a specified use. Examples - Capital Projects or Debt Service fund. Resources consist of cash and claims to cash. Resources - Claims against resources = Fund balance. Measurement focus is on flow of current financial resources. Expendable Fund Entities Accounting Model

11. Slide U9-11 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Classification usually applicable to nonbusiness organizations other than governmental units. “Restricted” refers to resources that bear a legal restriction as to use imposed by parties outside the organization. Restricted and Unrestricted Fund Entities

12. Slide U9-12 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Activities that are similar to business enterprises. Examples:  Electric or water utility by a municipality  Rental of real estate by religious organization. Focus on determination of net income, financial position, and cash flows. Proprietary Fund Entities

13. Slide U9-13 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Trust and Agency funds: Pension trust fund. Agency fund (resources of taxes, bonds, and other receipts held for individuals, outside organizations, and/or other funds). Fiduciary Fund Entities

14. Slide U9-14 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Approved resource flows are incorporated into annual budgets. Budgeted expenditures are referred to as appropriations. Approved budget may be recorded in the accounting records. Budgetary account integration is useful in the control and administration of fund resources. Budgetary Fund Entities (Governmental Funds)

15. Slide U9-15 LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting Basic Financial Statements Basis of Accounting Government-Wide  Nonfiduciary activities.  Short- and long-run information.  Economic resources measurement concept.  Accrual basis of accounting. Governmental Fund (expendable)  Current financial resources concept.  Modified accrual basis of accounting.  Revenues recognized when measurable and available.  Expenditures recorded when liability is incurred.

16. Slide U9-16 When used in fund accounting, the term “fund” usually refers to a.A sum of money designated for a special purpose. b.A liability to other governmental units. c.The equity of a municipality in its own assets. d.A fiscal and accounting entity having a set of self- balancing accounts. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

17. Slide U9-17 When used in fund accounting, the term “fund” usually refers to a.A sum of money designated for a special purpose. b.A liability to other governmental units. c.The equity of a municipality in its own assets. d.A fiscal and accounting entity having a set of self- balancing accounts. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

18. Slide U9-18 LO 4 Classification of revenues. Fund Accounting By Fund and Major Revenue Source Classification of Revenues Major Sources of Revenue Property taxes Income taxes Sales and excise taxes Gift and inheritance taxes Fines and penalties Gifts and donations Forfeits Licenses and permits Sales of property Charges for services Interest earned on loans and investments From federal, state, or local units: Grants Shared revenues Payments in lieu of taxes

19. Slide U9-19 Fund Accounting Debt issue proceeds are accounted for as “other financing sources.” Interfund operating transfers are accounted for as “other financing sources,” or “uses.” Other Financing Sources

20. Slide U9-20 Fund Accounting Revenue is ordinarily not recognized until it 1)can be objectively measured and 2)is available for expenditures of current period. Recognition of Revenue (Expendable Funds)

21. Slide U9-21 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property Taxes Income Tax and Sales Tax Fines and Forfeits Sales of Property Pledges Grants

22. Slide U9-22 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales Tax Fines and Forfeits Sales of Property Pledges Grants

23. Slide U9-23 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales TaxReturns are filed with payment Fines and Forfeits Sales of Property Pledges Grants

24. Slide U9-24 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales TaxReturns are filed with payment Fines and ForfeitsCollected Sales of Property Pledges Grants

25. Slide U9-25 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales TaxReturns are filed with payment Fines and ForfeitsCollected Sales of PropertyTime of sale Pledges Grants

26. Slide U9-26 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales TaxReturns are filed with payment Fines and ForfeitsCollected Sales of PropertyTime of sale PledgesTime of pledge Grants

27. Slide U9-27 Fund Accounting Revenue recognized when measurable and available. Recognition of Revenue (Expendable Funds) When Recognized? Property TaxesLevied Income Tax and Sales TaxReturns are filed with payment Fines and ForfeitsCollected Sales of PropertyTime of sale PledgesTime of pledge GrantsMay or may not at time authorized

28. Slide U9-28 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

29. Slide U9-29 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

30. Slide U9-30 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

31. Slide U9-31 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

32. Slide U9-32 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

33. Slide U9-33 Fund Accounting Function Character Activity Object Class Organizational Unit Classification of Expenditures and Other Resources Outflows LO 5 Classification of expenditures. Drug Control Public Safety Fire or Police Department Current Operating Supplies or Salaries Match

34. Slide U9-34 Fund Accounting Classified separately from expenditures for financial reporting purposes. Transfers to Other Funds LO 5 Classification of expenditures.

35. Slide U9-35 Appropriation EncumbranceExpenditure Fund Accounting LO 5 Classification of expenditures. Recognition of Expenditures Authorized to Spend Purchase Order or Contract Receipt of Goods Disbursement Payment Encumbrances and expenditures are classified on the same basis (by fund, function, organizational unit, activity, character, or object class) as appropriations.

36. Slide U9-36 Authority granted by a legislative body to make expenditures and to incur obligations during a fiscal year is the definition of an a.Appropriation. b.Authorization. c.Encumbrance. d.Expenditure. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

37. Slide U9-37 Authority granted by a legislative body to make expenditures and to incur obligations during a fiscal year is the definition of an a.Appropriation. b.Authorization. c.Encumbrance. d.Expenditure. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

38. Slide U9-38 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: (partial) Listed are transactions of the Town of Jackson. 1.A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. 2.The first monthly bill of $8,000 was received from the trash collector. 3.The $8,000 bill was paid. Required: Prepare the journal entries needed in the records of the General Fund for these transactions.

39. Slide U9-39 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. 1.

40. Slide U9-40 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 1. A contract was signed with an independent company to do the trash collecting for the year. The contract price was $96,000. Encumbrance 96,000 Reserve for Encumbrances96,000 1.

41. Slide U9-41 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. 2.

42. Slide U9-42 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. Expenditures8,000 Contracts payable8,000 Reserve for Encumbrances 8,000 Encumbrance 8,000 2.

43. Slide U9-43 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. Expenditures8,000 Contracts payable8,000 Reserve for Encumbrances 8,000 Encumbrance 8,000 2. 3.

44. Slide U9-44 Fund Accounting LO 5 Classification of expenditures. Exercise 17-3: 2. The first monthly bill of $8,000 was received from trash collector. 3. The $8,000 bill was paid. Expenditures8,000 Contracts payable8,000 Reserve for Encumbrances 8,000 Encumbrance 8,000 2. Contracts payable8,000 Cash8,000 3.

45. Slide U9-45 What type of account is used to earmark the fund balance to liquidate the contingent obligations of goods ordered but not yet received? a.Appropriations. b.Encumbrances. c.Obligations. d.Reserve for encumbrances. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

46. Slide U9-46 What type of account is used to earmark the fund balance to liquidate the contingent obligations of goods ordered but not yet received? a.Appropriations. b.Encumbrances. c.Obligations. d.Reserve for encumbrances. Question LO 3 Differences in applications of revenue, expense, and expenditures. Fund Accounting

47. Slide U9-47 Fund Accounting LO 7 Capital expenditures. Capital Expenditures (Expendable Fund) Treated as a current period expenditure. Middletown purchased a police car for $10,000. Expenditures 10,000 Cash 10,000

48. Slide U9-48 Fund Accounting Recording Budgeted and Actual Revenue and Expenditures Exercise 17-3: (partial) 1.A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. 2.Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3.Property taxes in the amount of $1,080,000 were collected. 4.Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. Required: Prepare required journal entries for General Fund.

49. Slide U9-49 Fund Accounting Exercise 17-3: 1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. 1.

50. Slide U9-50 Fund Accounting Exercise 17-3: 1. A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of $1,800,000 was passed by the town council. Estimated Revenues 1,950,000 Appropriations1,800,000 1. Unreserved Fund Balance150,000

51. Slide U9-51 Fund Accounting Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. 2.

52. Slide U9-52 Fund Accounting Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. Property Tax Receivable 1,150,000 Estimated Uncollectible Taxes35,000 2. Revenue1,115,000

53. Slide U9-53 Fund Accounting Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. Property Tax Receivable 1,150,000 Estimated Uncollectible Taxes35,000 2. Revenue1,115,000 3.

54. Slide U9-54 Fund Accounting Exercise 17-3: 2. Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible. 3. Property taxes of $1,080,000 were collected. Property Tax Receivable 1,150,000 Estimated Uncollectible Taxes35,000 2. Revenue1,115,000 Cash 1,080,000 Property Tax Receivable1,080,000 3.

55. Slide U9-55 Fund Accounting Exercise 17-3: 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. 4.

56. Slide U9-56 Fund Accounting Exercise 17-3: 4. Equipment costing $200,000 was purchased, and the old equipment was sold at for $24,000. Expenditures200,000 Cash200,000 4. Cash 24,000 Revenue24,000

57. Slide U9-57 Fund Accounting Exercise 17-5: The preclosing trial balance for the General Fund of the City of Springfield is presented below. Trial Balance for December 31, 2008: Cash $ 90,000 Certificates of Deposit 120,000 Property Taxes Receivable 175,000 Estimated Revenue 1,690,000 Expenditures 1,310,000 Expenditures—2007 32,000 Encumbrances 165,000 Estimated Uncollectible Taxes $ 51,000 Vouchers Payable 65,000 Unreserved Fund Balance 41,000 Reserve for Encumbrances 165,000 Reserve for Encumbrances—2007 35,000 Appropriations 1,550,000 Revenue 1,675,000 $3,582,000

58. Slide U9-58 Fund Accounting Exercise 17-5: Prepare closing entries.

59. Slide U9-59 Fund Accounting Exercise 17-5: Prepare closing entries. Revenue1,675,000 Unreserved Fund Balance 15,000 Estimated Revenue1,690,000

60. Slide U9-60 Fund Accounting Exercise 17-5: Prepare closing entries. Revenue1,675,000 Unreserved Fund Balance 15,000 Appropriations1,550,000 Expenditures1,310,000 Estimated Revenue1,690,000 Encumbrances165,000 Unreserved Fund Balance75,000

61. Slide U9-61 Fund Accounting Exercise 17-5: Prepare closing entries. Revenue1,675,000 Unreserved Fund Balance 15,000 Appropriations1,550,000 Expenditures1,310,000 Estimated Revenue1,690,000 Encumbrances165,000 Unreserved Fund Balance75,000 Reserve for Encumbrances – 200735,000 Expenditures – 200732,000 Unreserved Fund Balance 3,000

62. Slide U9-62 Fund Accounting – Comprehensive Illustration Problem 17-1: The general ledger trial balance of the General Fund of the City of Bedford on January 1, 2008, shows the following: Cash $100,000 Taxes Receivable 75,000 Allowance for Uncollectible Taxes $ 35,000 Unreserved Fund Balance 110,000 Reserve for Encumbrances—2007 30,000 Total $175,000 $175,000 Prepare journal entries to record the following activities and transactions for the General Fund during 2008. DebitCredit LO 8 Understand the general fund.

63. Slide U9-63 Fund Accounting Problem 17-1: 1. The City Council adopted a budget with estimated revenues of $1,560,000 and appropriated expenditures of $1,400,000. LO 8 Understand the general fund.

64. Slide U9-64 Fund Accounting Problem 17-1: 1. The City Council adopted a budget with estimated revenues of $1,560,000 and appropriated expenditures of $1,400,000. Estimated Revenue1,560,000 Appropriations1,400,000 Unreserved Fund Balance160,000 LO 8 Understand the general fund.

65. Slide U9-65 Fund Accounting Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund. LO 8 Understand the general fund.

66. Slide U9-66 Fund Accounting Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund. Due from Water Fund50,000 Transfer from Water Fund50,000 LO 8 Understand the general fund.

67. Slide U9-67 Fund Accounting Problem 17-1: 1. The budget authorized the transfer of $50,000 from the Water Fund to the General Fund. Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the Debt Service Fund. Due from Water Fund50,000 Transfer from Water Fund50,000 Transfer to Debt Service Fund80,000 Due to Debt Service Fund80,000 LO 8 Understand the general fund.

68. Slide U9-68 Fund Accounting Problem 17-1: 2. The annual property tax levy of 10% on assessed valuation ($11,000,000) is billed to property owners. Two percent is estimated to be uncollectible. LO 8 Understand the general fund.

69. Slide U9-69 Fund Accounting Problem 17-1: 2. The annual property tax levy of 10% on assessed valuation ($11,000,000) is billed to property owners. Two percent is estimated to be uncollectible. Property Tax Receivable 1,100,000 Revenue1,078,000 Allowance for Uncollectible Taxes22,000 LO 8 Understand the general fund.

70. Slide U9-70 Fund Accounting Problem 17-1: 3. Goods and services amounting to $1,150,000 were ordered during the year. 4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment. LO 8 Understand the general fund.

71. Slide U9-71 Fund Accounting Problem 17-1: 3. Goods and services amounting to $1,150,000 were ordered during the year. Encumbrances 1,150,000 Reserve for Encumbrances 1,150,000 4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment. LO 8 Understand the general fund.

72. Slide U9-72 Fund Accounting Problem 17-1: 3. Goods and services amounting to $1,150,000 were ordered during the year. Encumbrances 1,150,000 Reserve for Encumbrances 1,150,000 4. Invoices for all goods ordered in 2007 amounting to $29,000 were approved for payment. Expenditures – 2007 29,000 Vouchers Payable 29,000 LO 8 Understand the general fund.

73. Slide U9-73 Fund Accounting Problem 17-1: 5. Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund. LO 8 Understand the general fund.

74. Slide U9-74 Fund Accounting Problem 17-1: 5. Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund. Due to Debt Service Fund 80,000 Cash 80,000 LO 8 Understand the general fund.

75. Slide U9-75 Fund Accounting Problem 17-1: 6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above]. LO 8 Understand the general fund.

76. Slide U9-76 Fund Accounting Problem 17-1: 6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above]. Expenditures 1,155,000 Vouchers Payable 1,155,000 LO 8 Understand the general fund.

77. Slide U9-77 Fund Accounting Problem 17-1: 6. Invoices for goods received during the year totaled $1,155,000. These were encumbered [see (3) above]. Expenditures 1,155,000 Vouchers Payable 1,155,000 Reserve for Encumbrances 1,150,000 Encumbrances 1,150,000 LO 8 Understand the general fund.

78. Slide U9-78 Fund Accounting Problem 17-1: 7. Transfer of funds from the Water Company was received in lieu of taxes. 8. Taxes were collected from property owners in the amount of $1,050,000. LO 8 Understand the general fund.

79. Slide U9-79 Fund Accounting Problem 17-1: 7. Transfer of funds from the Water Company was received in lieu of taxes. Cash50,000 Due from Water Fund 50,000 8. Taxes were collected from property owners in the amount of $1,050,000. LO 8 Understand the general fund.

80. Slide U9-80 Fund Accounting Problem 17-1: 7. Transfer of funds from the Water Company was received in lieu of taxes. Cash50,000 Due from Water Fund 50,000 8. Taxes were collected from property owners in the amount of $1,050,000. Cash 1,050,000 Property Tax Receivable 1,050,000 LO 8 Understand the general fund.

81. Slide U9-81 LO 8 Understand the general fund. Fund Accounting Problem 17-1: 9. Past-due tax bills of $17,000 were charged off as uncollectible. 10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above]. * ($29,000 + $1,155,000)

82. Slide U9-82 LO 8 Understand the general fund. Fund Accounting Problem 17-1: 9. Past-due tax bills of $17,000 were charged off as uncollectible. Allowance for Uncollectible Taxes17,000 Property Tax Receivable17,000 10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above]. * ($29,000 + $1,155,000)

83. Slide U9-83 LO 8 Understand the general fund. Fund Accounting Problem 17-1: 9. Past-due tax bills of $17,000 were charged off as uncollectible. Allowance for Uncollectible Taxes17,000 Property Tax Receivable17,000 10. Checks in payment of invoices for goods ordered in 2007 and 2008 were issued [see items (4) and (6) above]. Vouchers Payable * 1,184,000 Cash 1,184,000 * ($29,000 + $1,155,000)

84. Slide U9-84 Fund Accounting Problem 17-1: 11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded. 12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000. LO 8 Understand the general fund.

85. Slide U9-85 Fund Accounting Problem 17-1: 11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded. 12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000. Cash455,000 Revenue 455,000 LO 8 Understand the general fund.

86. Slide U9-86 Fund Accounting Problem 17-1: 11. Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded. 12. Purchase order for two trash collection vehicle systems was issued. Bid price per system was $120,000. Encumbrances (2 x $120,000) 240,000 Reserve for Encumbrances 240,000 Cash455,000 Revenue 455,000 LO 8 Understand the general fund.

87. Slide U9-87 Fund Accounting Two Basic Statements (expendable fund entities) 1.Balance sheet 2.Statement of revenue, expenditures, and changes in fund balance Revenue classified by major sources. Expenditures classified by major functions. Comparative information presented for prior years. Statement comparing budgeted and actual should be prepared for budgetary fund entities. Financial Statements LO 8 Understand the general fund.

88. Slide U9-88 Reporting Inventory and Prepayments Two Methods 1.Consumption method 2.Purchases method Under GASB Statement No. 34, consumption method is consistent with the Government-wide approach. Purchases method is not acceptable. Both acceptable for fund purposes Inventory LO 9 Consumption and purchases Methods.

89. Slide U9-89 Reporting Inventory Assume $20,000 of beginning inventory, $50,000 is purchased, and ending inventory of $24,000. LO 9 Consumption and purchases Methods. When Purchased: Expenditures 50,000 Cash 50,000 End of Year: Inventory 4,000 Expenditures 4,000 Purchases Method When Purchased: Expenditures 50,000 Cash 50,000 End of Year: NO ENTRY Consumption Method

90. Slide U9-90 Reporting Inventory and Prepayments Purchases Method Material amounts of inventory should be disclosed by  Footnote or  Reporting asset with contra account (Reserve for Inventory). Reserve for Inventory LO 9 Consumption and purchases Methods. Consumption Method Reserve for inventory created debiting or crediting the “unreserved fund balance.”

91. Slide U9-91 Prepayments for items such as insurance or rent that cover more than one accounting period may also be reported using the consumption or purchases methods. Question Reporting Prepayments LO 9 Consumption and purchases Methods.

92. Slide U9-92 Prepayments for items such as insurance or rent that cover more than one accounting period may also be reported using the consumption or purchases methods. Question True Reporting Prepayments LO 9 Consumption and purchases Methods.

93. Slide U9-93 Copyright © 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. CopyrightCopyright

94. Slide U9-94

95. Slide U9-95 Introduction to Accounting For State and Local Governmental Units Advanced Accounting, Fourth Edition 1818

96. Slide U9-96 1. 1.Identify the issues involved in developing standards for nonprofit organizations. 2. 2.Describe the broad categories of government fund entities. 3. 3.Distinguish between a general fund and a special revenue fund. 4. 4.Explain the use of a capital projects fund. 5. 5.Describe the purpose of a debt service fund. 6. 6.Explain the use of a permanent fund. Learning Objectives

97. Slide U9-97 7. 7.Distinguish proprietary funds from government funds. 8. 8.Describe where capital assets and long-term obligations are reported in government financial statements. 9. 9.Describe the changes in reporting requirements under GASB Statement No. 34. 10. 10.Explain the benefits of government-wide statements. 11. 11.Describe the types of interfund activities. Learning Objectives

98. Slide U9-98 GASB’s Statement No. 34, issued June 1999, requires: Financial statements using government-wide approach. Statements emphasizing major funds. Management’s discussion and analysis (MD&A). GASB Statement No. 34 requires “full accrual” accounting for all government-wide statements (i.e., flow of economic resources approach). Governmental Accounting

99. Slide U9-99 GASB was established (1984):  Separate board under oversight of Financial Accounting Foundation (FAF).  Responsible for establishing financial and reporting standards for governments.  GASB endorsed prior statements and interpretations of the NCGA, as well as standards embodied in the 1974 AICPA Industry Audit Guide. History of Governmental Accounting Standards

100. Slide U9-100 Statement of net assetsGovernmental funds: Statement of activities Balance sheet Statement of revenues, expenditures, and changes in fund balances Reconciliation to government-wide statements Proprietary funds: Balance sheet or statement of net assets Statement of revenues, expenses, and changes in net assets Statement of cash flows—direct format Fiduciary funds: Statement net assets Statement of changes in net assets Reporting Model: Minimum Information Required Government-wideFund Financial Statements

101. Slide U9-101 History of Governmental Accounting Standards The GASB and the FASB each has primary responsibility for setting standards for entities under its jurisdiction. Pronouncements of one Board should not be mandatory for entities under the jurisdiction of the other Board. Hierarchy of Standards

102. Slide U9-102 Eleven Categories of Fund Entities Governmental Funds (expendable)— Focus on sources, use, and balances of current resources. 1.General Fund 2.Special Revenue Funds 3.Capital Projects Funds 4.Debt Service Funds 5.Permanent Funds The Structure of Governmental Accounting

103. Slide U9-103 Eleven Categories of Fund Entities Proprietary Funds (nonexpendable)— Focus on determination of operating income, changes in net assets, financial position, and cash flows. 6.Enterprise Funds 7.Internal Service Funds The Structure of Governmental Accounting

104. Slide U9-104 Eleven Categories of Fund Entities Fiduciary Funds Focus reports assets held in a trustee or agency capacity for others. 8.Pension Trust Funds 9.Investment Trust Funds 10.Private-Purpose Trust Funds 11.Agency Funds The Structure of Governmental Accounting

105. Slide U9-105 General Fund All revenues and expenditures of a governmental unit not accounted for in other governmental or proprietary funds. Governmental Fund Entities Special Revenue Fund Proceeds of specific revenue sources that are to be used to finance particular functions or activities of the governmental unit.

106. Slide U9-106 In special revenue funds, as in the general fund, the following steps are taken: 1.A budget is established. 2.Encumbrances are used. 3.Fixed assets are only reported on government-wide statement. 4.Depreciation is not recorded. 5.Long-term debt is only reported on government-wide statements. Governmental Fund Entities

107. Slide U9-107 Capital Projects Fund R esources to acquire or construct major capital facilities. Resources for the acquisition include 1)proceeds of long-term debt issues, 2)grants or payments from other governmental units, 3)funds from private sources, 4)transfers from other governmental funds, 5)special assessments, and 6)other sources. Governmental Fund Entities

108. Slide U9-108 Exercise 18-12: The town of Aberdeen authorized a fire station to be built at an estimated cost of $150,000. On January 1, 2008, 6% bonds with a par value of $150,000 were authorized and issued. Any difference between the par value of the bonds and the proceeds from their sale is transferred to the Debt Service Fund. The following transactions relating to the Capital Project Fund occurred during 2008. 1.Encumbrances were recorded in the amount of $150,000. 2.Proceeds from bond issue were received in amount of $155,000. 3.Premium on bond issue was transferred to the Debt Service Fund. 4.Contract billings of $150,000 were approved for payment on the completion of the fire station. 5.Contractor was paid except for retention of 5% of the contract. 6.Final contract price was paid. The nominal accounts were closed. Governmental Fund Entities – Capital Projects

109. Slide U9-109 Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events. Encumbrance 150,000 Reserve for Encumbrances150,000 2.Proceeds of $155,000 from bond issue were received. Cash 155,000 Bond Issue Proceeds 155,000 1.Encumbrances were recorded in the amount of $150,000. Governmental Fund Entities – Capital Projects

110. Slide U9-110 Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events. Transfer to Debt Service Fund 5,000 Cash5,000 3.Premium was transferred to the Debt Service Fund. Governmental Fund Entities – Capital Projects

111. Slide U9-111 Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events. Reserve for Encumbrances150,000 Encumbrances150,000 4.Contract billings of $150,000 were approved for payment on the completion of the fire station. Expenditures150,000 Contracts Payable 150,000 Governmental Fund Entities – Capital Projects

112. Slide U9-112 Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events. Contracts Payable150,000 Contracts Payable - Retained7,500 5.Contractor was paid except for retention of 5% of the contract. Cash142,500 Governmental Fund Entities – Capital Projects

113. Slide U9-113 Exercise 18-12: Prepare the journal entries necessary in the Capital Projects Fund to record the transactions and events. Contracts Payable - Retained 7,500 Cash7,500 6.Final contract price was paid. The nominal accounts were closed. Bond Issue Proceeds155,000 Transfer to Debt Service Fund 5,000 Unreserved Fund Balance150,000 Expenditures 150,000 Governmental Fund Entities – Capital Projects

114. Slide U9-114 Debt Service Fund R esources for, and the payment of, general long- term debt principal and interest. Financed by the following sources 1)General property tax 2)Sales tax or other specified tax revenues 3)Transfers of other fund revenues 4)Special assessments 5)Revenue from investment of debt service fund resources. Governmental Fund Entities There is no interest payable accrual on general obligation long-term debt.

115. Slide U9-115 Problem 18-1: On January 1, 2008, the City of Cape May authorized and issued $200,000 of 5%, three-year term bonds. Interest is payable annually on December 31. A debt service fund is established to accumulate the necessary resources to pay the annual interest on the bonds and to redeem the bonds when they mature. The required annual addition for principal and interest will be transferred annually to the debt service fund from the general fund. It is assumed that amounts received by the debt service fund for the payment of principal can be invested at an annual return of 8%. Governmental Fund Entities – Debt Service

116. Slide U9-116 Problem 18-1: Prepare a schedule to calculate the annual required additions and annual required earnings to repay the principal on the bonds assuming the first installment for principal and interest is transferred to the debt service fund from the general fund on Dec. 30, 2008. Governmental Fund Entities – Debt Service *61,067 = 200,000 / 3.2464

117. Slide U9-117 Required Additions 71,607 Required Earnings 4,929 Appropriations ($200,000  5%) 10,000 Fund Balance66,536 Problem 18-1: Prepare the journal entries to be recorded by the debt service fund as follows: 1.The 2009 budget entry. Governmental Fund Entities – Debt Service

118. Slide U9-118 Cash71,607 Transfer from General 71,607 2.The entry to record the annual transfer from the general fund. Expenditures - Interest 10,000 Cash 10,000 3.The entry to record the annual payment of interest. Governmental Fund Entities – Debt Service Problem 18-1: Prepare the journal entries to be recorded by the debt service fund as follows:

119. Slide U9-119 Cash4,929 Interest income 4,929 4.The entry to record $4,929 in interest income for 2009. Governmental Fund Entities – Debt Service Problem 18-1: Prepare the journal entries to be recorded by the debt service fund as follows:

120. Slide U9-120 Appropriations10,000 Expenditures 10,000 Interest Income4,929 Transfer from General Fund71,607 Required Additions71,607 Required Earnings4,929 5.The entry(s) to close the accounts at the end of 2009. Governmental Fund Entities – Debt Service Problem 18-1: Prepare the journal entries to be recorded by the debt service fund as follows:

121. Slide U9-121 Permanent Fund T wo types of Nonexpendable Trust funds: Principal must be retained intact but earnings may be expended. Principal and the earnings must be retained intact. Established as a result of a gift, a bequest, or some other action that requires the governmental unit to act in a fiduciary capacity. Governmental Fund Entities

122. Slide U9-122 Proprietary fund reporting focuses on determination of operating income, changes in net assets, financial position, and cash flows. Net Assets Approach: All changes in net assets are included somewhere in the “statement of activities.” Proprietary funds include: Enterprise Funds. Internal Service Funds. Proprietary Funds

123. Slide U9-123 Enterprise Funds Activity for which a fee is charged to external users for goods and services. Common examples: Public utilities (water or electricity) Airports Transportation systems Parking lots and garages Recreational facilities (swimming pools) Proprietary Funds

124. Slide U9-124 Enterprise Funds Resources may come from contributions or from the proceeds of long-term debt issues or both. Contributions may be obtained from  Other governmental units,  Resources of the General Fund  Property owners,  Subdivision developers, or  Customers. Proprietary Funds

125. Slide U9-125 Internal Service Funds Activity that provides goods or services to other funds, departments, or agencies of the primary governmental unit and its component units, or to other governments, on a cost reimbursement basis. Common examples: Central computer facilities, Central garages and motor pools, Central purchasing and stores departments, and Central printing departments. Proprietary Funds

126. Slide U9-126 Internal Service Funds Resources obtained from contributions from  Other funds,  Proceeds from sale of general obligation bonds, or  Long-term advances from other funds. Proprietary Funds

127. Slide U9-127 Trust and Agency Funds Fiduciary funds are used to report assets held in a trustee or agency capacity and therefore cannot be used to support the government’s own programs. Fiduciary funds include:  Pension trust funds,  Investment trust funds,  Private-purpose trust funds, and  Agency funds. Fiduciary Funds

128. Slide U9-128 The purchase of capital assets are recorded as an expenditure in the governmental fund statements. Proceeds from the issuance of long-term debt is recorded as Other Financing Sources in the governmental fund statements. Under GASB Statement No. 34, governments report all capital assets, including infrastructure assets, and unmatured general long-term debt on a government-wide basis and report depreciation expense as a charge to operations in each period. Capital Assets and Long-Term Debt

129. Slide U9-129 The following statements and disclosures are required: Governmental Fund Financial Statements Proprietary Fund Financial Statements Fiduciary Funds (and Similar Component Units) Financial Statements Government-wide Statements Combining Statements for Major Component Units External Reporting Requirements (GASB No. 34)

130. Slide U9-130 Governments are required only to report the major funds in separate columns, but have flexibility to report more funds separately if desired. Individual governmental funds and proprietary funds are major funds if the total assets, liabilities, revenues, or expenditure/expenses of that individual fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise funds) and at least 5% of the corresponding total for all governmental and enterprise funds combined. Government Fund-Based Reporting

131. Slide U9-131 Primary financial statements under GASB Statement No. 34 are prepared on a government-wide basis. Statements are prepared on the accrual basis using the flow of economic resources concept. These primary statements include: 1.The statement of net assets. 2.The statement of activities. Governmental-wide statement of cash flows is not required. Government-wide Reporting

132. Slide U9-132 Statement of Net Assets Prepared using the accrual basis. At a minimum, assets, liabilities, and net assets should be disclosed for each of the following categories: A. Primary Government 1. Government activities 2. Business-type activities 3. Total primary government activities B. Discretely Presented Component Units Government-wide Reporting

133. Slide U9-133 Statement of Activities Presented using a net cost format. Separates revenues into program revenues and general revenues. Expenses are reduced by program revenues resulting in “net (expense) revenue.” General revenues, extraordinary items and special items, and transfers are reported separately. Government-wide Reporting

134. Slide U9-134 Required by GASB Statement No. 34. Discussion should provide objective and readable analysis of the government’s financial activities. Should present both a short-term and a long-term analysis of the government’s activities. Should discuss the current-year results in comparison with the prior year. Focus is on the primary government (i.e., should distinguish between the primary government and component units). Management’s Discussion and Analysis (MD&A)

135. Slide U9-135 Service-type special assessments - Assessments levied against the benefited property owners for services  Street lighting, street cleaning, and snow plowing. Capital improvement special assessments - Assessments levied against the benefited property owners for capital improvements  Paving or widening of residential streets or the construction of sidewalks or storm sewers. Special Assessments

136. Slide U9-136 Interfund activity within governmental, proprietary, and fiduciary funds should be reported as follows: A.Reciprocal interfund activity 1. Interfund loans 2. Interfund services provided and used B. Nonreciprocal interfund activity 1. Interfund transfers 2. Interfund reimbursements Interfund Activity

137. Slide U9-137 Cash2,000,000 1.Bond proceeds of $1,000,000 were received to be used in constructing a firehouse. An equal amount is contributed from general revenues. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. Capital Projects Fund Bond issue proceeds1,000,000 Transfer from General Fund1,000,000 Transfer to Capital Projects1,000,000 Cash1,000,000 General Fund

138. Slide U9-138 Expenditures920,000 2. $800,000 of serial bonds matured. Interest of $120,000 was paid on these and other serial bonds outstanding. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. Debt Service Fund Cash920,000

139. Slide U9-139 Cash8,000 3. $8,000 was received as insurance proceeds from the accidental destruction of a police car costing $24,000. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. General Fund Revenue8,000

140. Slide U9-140 Transfer to Special Revenue120,000 4. $120,000 in expendable funds was transferred from the City Parks Endowment Fund to the City Parks Special Revenue Fund. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. Trust Fund Cash120,000 Special Revenue Fund Transfer from Trust Fund120,000

141. Slide U9-141 Cash40,000 5. Equipment purchased from general revenues at a cost of $200,000 was sold for $40,000. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. General Fund Revenue40,000

142. Slide U9-142 Due from General Fund800 6. The City Water Company (an enterprise fund) issued a bill for $800 for water provided to the street department’s street cleaner. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. Enterprise Fund Revenue800 Expenditures800 General Fund Due to Enterprise Fund800

143. Slide U9-143 Transfer to General Fund400,000 7. The City Water Company transferred $400,000 in excess funds to the General Fund. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Designate the fund in which each entry is recorded. Enterprise Fund Cash400,000 General Fund Transfer from Enterprise Fund400,000

144. Slide U9-144 Cash400,000 8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Internal Service Fund Contributions from General Fund120,000 Due to Special Revenue Fund80,000 Contributions from bonds200,000 Continued

145. Slide U9-145 Transfer to Internal Service120,000 8. A central motor pool was established by a contribution of $120,000 from the General Fund, a long-term loan of $80,000 from the City Parks Special Revenue Fund, and general obligation bond issue proceeds of $200,000. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). General Fund Cash120,000 Due from Internal Service fund80,000 Cash80,000 Special Revenue Fund

146. Slide U9-146 Due from General Fund10,000 9. The Motor Pool Fund billed the General Fund $10,000 and the City Parks Fund $4,000 for the use of motor vehicles. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Internal Servcie Fund Due from Special Revenue4,000 Expenditures10,000 Due to Internal Service10,000 General Fund Revenue14,000

147. Slide U9-147 Expenditures400,000 10. Special Assessment Bonds in the amount of $400,000 were retired. The city has indicated a willingness to guarantee the payment of principal. Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Debt Servcie Fund Cash400,000

148. Slide U9-148 11. Customers’ deposits of $8,000 for water meters were received by the City Water Company during the year. The monies are to be held in trust until the customers request that their services be disconnected and the final bills are collected. Cash8,000 Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Agency Fund Customer Deposit Agency Fund8,000

149. Slide U9-149 12. It is determined that the Service Fund will require an annual contribution of $60,000 and earnings of $6,000 in the current year to accumulate the amounts necessary to retire general obligation term bonds. Required additions60,000 Governmental Fund Journal Entries Problem 18-7: Prepare journal entries to record the following transactions in the proper fund(s). Debt Service Fund Retained earnings6,000 Unreserved fund balance66,000

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