Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-1
CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE
ACTIVITIES OF STATE AND LOCAL GOVERNMENTS
OUTLINE
Number
Topic
Type/Task
Status
(re: 16/e)
Questions:
7-1
Proprietary funds
Explain
New
7-2
Internal service and enterprise funds
Describe
7-1
7-3
Budgetary control of internal service funds
Explain
Same
7-4
Proprietary funds vs. for-profit reporting
Compare
New
7-5
Restricted assets of enterprise funds
Describe
Same
7-6
Components of net position
Describe, explain
Same
7-7
Internal service funds
Describe, explain
New
7-8
Reporting internal balances
Describe
New
7-9
Regulatory accounting
Describe, explain
Same
7-10
Segment information
Define
Same
Cases:
7-11
Internal service fund reporting
Assess
7-1 revised
7-12
Proprietary fund operating statement
Analyze
Exercise 7-9,
revised
7-13
City and County of Denver proprietary funds
Evaluate
New
7-14
Enterprise fund golf course management
Evaluate
7-4
Exercises/Problems:
7-15
Examine the CAFR
Examine
Same
7-16
Various
Multiple Choice
Items 3, 6,
and 8 are
new; 2, 4, and
9 are revised
7-17
Information Technology Internal Service Fund
JEs, FS
New
7-18
Central Garage ISF – City of Ashville
JEs, FS
7-4 revised
7-19
Tribute Aquatic Center Enterprise Fund
JEs, FS
New
7-20
Net position classifications
FS
7-5 revised
7-21
Town of Elizabeth Central Station Fund
JEs, FS, assess
Same
7-22
City of Bay Lake Water Utility Fund
JEs, FS
Same
7-23
Enterprise fund statement of cash flows
FS
7-10
7-24
Appendix – Solid Waste Enterprise Fund
FS
New
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-2
CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE
ACTIVITIES OF STATE AND LOCAL GOVERNMENTS
Answers to Questions
7-1. Proprietary funds are funds that are supported by user charges, and therefore require
reporting that illustrates whether user charges are covering costs. They are often
described as being operated more like a business than most governmental funds, and the
reporting is similar to that of for-profit organizations.
General Problem Information: Proprietary funds
Learning Objective: 7-1
Topic: Proprietary funds
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-2. Internal service funds and enterprise funds are presented in three proprietary fund
financial statements—a statement of net position; a statement of revenues, expenses and
changes in fund net position; and a statement of cash flows. Those enterprise funds
Ch. 7, 7–1 (Cont’d)
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-3
General Problem Information: Internal service and enterprise funds
Learning Objective: 7-2
Learning Objective: 7-3
Topic: Proprietary funds
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-3. Disagree. The main purchasers of the internal service fund’s services are the city’s
General Problem Information: Budgetary control of internal service funds
Learning Objective: 7-4
Learning Objective: 7-6
Topic: Special Topics Associated with Internal Service Funds
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-4. A proprietary fund prepares a statement of net position, a statement of revenues, expenses
and changes in fund net position, and a statement of cash flows. The statement of net
Ch. 7, 7–4 (Cont’d)
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-4
The statement of revenues, expenses, and changes in net position can be compared to a
for-profit organization’s income statement. One difference is that a for-profit
General Problem Information: Proprietary funds vs. for-profit reporting
Learning Objective: 7-3
Topic: Financial Reporting Requirements
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-5. Restricted assets are assets that have been segregated, pursuant to an agreement with an
external party or by law or regulation, for a specified purpose and therefore are not
General Problem Information: Restricted assets of enterprise funds
Learning Objective: 7-5
Learning Objective: 7-6
Topic: Restricted Assets
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-5
Ch. 7, 7–6 (Cont’d)
7-6. GASB Codification Section 2200.118-125 provides the following three components for
the classification of net position: net investment in capital assets, restricted, and
General Problem Information: Components of net position
Learning Objective: 7-3
Topic: Statement of Net Position
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-7. Since an internal service fund is basically operated on a business basis, the amount it
charges for goods and services should also be able to finance the replacement,
General Problem Information: Internal service funds
Learning Objective: 7-4
Learning Objective: 7-6
Topic: Internal Service Funds
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-6
Ch. 7, Answers (Cont’d)
7-8. GASB Standards require that activity between reporting units of a governmental unit
should be reported as internal balances. Although the internal balances do not meet the
General Problem Information: Reporting internal balances
Learning Objective: 7-3
Topic: Internal Service Funds
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
7-9. Regulatory accounting principles (RAP) are accounting principles established by any one
of a number of state and/or federal entities. An example of a federal entity that
General Problem Information: Regulatory accounting
Learning Objective: 7-6
Topic: Appendix: Regulatory accounting principles
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-7
Ch. 7, Answers (Cont’d)
7-10. A segment is an identifiable activity either within an enterprise fund or other stand alone
entity. Segment information consists of providing key operating and balance sheet
General Problem Information: Segment information
Learning Objective: 7-6
Topic: Appendix: Required Segment Information
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-8
Ch. 7, Solutions
Solutions to Cases
7-11. a. The financial statements suggest the Building Maintenance Fund is not being
recorded and reported in accordance with GASB standards for internal service
funds, as described in Chapter 7. In particular, there is no recognition of
equipment and/or building on the balance sheet (of which there should be at least
b. As manager of a city department you should want to know the full cost of the
Building Maintenance Fund’s operations. Such information would aid in
determining the appropriateness and fairness of the fund’s charges to departments.
Although the financial statements indicate that revenues (which in the given
statement improperly include transfers) exceed expenditures only slightly, the
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7-9
Ch. 7, Solutions, Case 7-11 (Cont’d)
It is also possible that some managers of city departments that use the services of
the Building Maintenance Fund may have little interest in the financial statements
General Problem Information: Internal Service Fund Reporting
Learning Objective: 7-4
Topic: Internal Service Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
7-12. Some of the errors noted in the Casper County statement include:
• A proprietary fund operating statement should be titled “Statement of Revenues,
Expenses, and Changes in Net Position”, and its format is as follows:
(1) Operating revenues (by major source).
reported as business-type activity.
• As noted above, GASB requires that operating and nonoperating revenues and
expenses be identified.
– Investment income would generally be considered nonoperating revenue.
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–10
General Problem Information: Proprietary fund operating statement
Learning Objective: 7-3
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
7-13. a. Yes, the City and County of Denver uses internal service funds. They are:
Central Services – to account for providing paper and printing goods and services to
departments of the city and other users on a cost reimbursement basis. Central
b. The City and County of Denver has two major enterprise funds. They are:
Wastewater Management – accounts for the city’s storm and sewer operations.
Ch. 7, Solutions, Case 7-13 (Cont’d)
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–11
d. Yes, the Denver Airport System has enough in restricted assets to satisfy the current
liabilities payable from restricted assets. Restricted assets total $315,377, while current
liabilities payable from restricted assets is $293,116.
g. Yes, some of the enterprise and internal service funds use capital and operating leases.
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–12
Ch. 7, Solutions, Case 7-13 (Cont’d)
i. The Worker’s Compensation Fund is an example of a risk-related insurance activity
accounted for in an internal service fund. The most significant reconciling item for this
General Problem Information: City and County of Denver proprietary funds
Learning Objective: 7-4
Learning Objective: 7-5
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
7-14. a. By definition, a General Fund is used to account and report all financial resources
not accounted for and reported in another fund (GASB Codification 1300.104);
whereas, business-type activities must be reported in an enterprise fund if GASB
Codification Section 1300.109 criteria are met. In this case, there is no evidence
b. This exercise is intended to have students consider the options provided. Their
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–13
General Problem Information: Enterprise fund golf course management
Learning Objective: 7-1
Learning Objective: 7-5
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–14
Solutions to Exercises and Problems
7-15. Since each student has a different annual report, no two answers to this exercise will be
General Problem Information: Examine the CAFR
Learning Objective: 7-2
Learning Objective: 7-3
Learning Objective: 7-4
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
7-16. 1. b. 6. c.
General Problem Information: Various
Learning Objective: 7-1
Learning Objective: 7-2
Learning Objective: 7-3
Learning Objective: 7-4
Learning Objective: 7-5
Topic: Various
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 07 – Accounting for the Business–type Activities of State and Local Governments
7–15
Ch. 7, Solutions (Cont’d)
7-17
WASHINGTON CITY
INFORMATION TECHNOLOGY FUND
GENERAL JOURNAL
(NOT REQUIRED)
Debits Credits
1. WAGE EXPENSE 53,500
2. OFFICE EXPENSES 3,700
CASH 3,700
3. MATERIALS AND SUPPLIES INVENTORY 8,400
ACCOUNTS PAYABLE 8,400