Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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period were reported. That was considered somewhat misleading since
the budget could be revised near the end of the year to establish
agreement. Now, the original budget must also be disclosed.
50. (10 Minutes) (The recording of grants)
A. False—This grant appears to be voluntary exchange transaction.
Revenue should be recognized when all eligibility requirements have
been met. Here, the eligibility requirements, if any, could have been met
during 2017. It is certainly possible that the eligibility requirements have
not been met but that is not necessarily the case.
D. True—Cash is recognized because it had been received but no revenue
is reported because all eligibility requirements have not yet been met.
Thus, unavailable revenue should be established for the amount
received.
51. (20 Minutes) (Impact of various government transactions)
a. Fund financial statements – the fund balance goes up by $6 million
because of the inflow of current financial resources.
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b. Fund financial statements – the fund balance goes down by $149,000
because of the outflow of current financial resources.
c. Fund financial statements – the fund balance goes down for the General
Fund by $17,000 because of the outflow of current financial resources.
amount.
e. Fund financial statements – the fund balance is not affected. The grant
is not recognized as revenue until all eligibility requirements have been
met. Because that does not appear to be the case here, the cash will go
up along with a liability for the amount being held that might have to be
returned.
Government-wide financial statements – the net position balance goes
up by $1 million because the sales were made in the current period.
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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g. Fund financial statements – the fund balance is not affected. Although
an encumbrance may be recorded to avoid spending more than the
appropriated amount, that entry has no impact on the total amount
reported for the fund balance. The commitment might change the way
remove current financial resources from this fund.
Government-wide financial statements – no impact occurs on the net
position balance of the governmental activities because this is an intra–
activity transfer from one Governmental Fund to another. There is no
net effect.
52. (12 Minutes) (The financial impact of fund transfers)
A. False—A transfer out will be shown by the governmental activities and a
transfer in will be reported by the business-type activities. Those two
figures will be netted together so that no overall impact is shown in the
total column for the government as a whole. However, both figures do
appear in their own separate columns.
column. This is an intra-activity transfer.
C. True—The General Fund reports the resource outflow as an other
financing use. Financial resources were reduced but it was not for an
expenditure. The transfer in is not recorded within the governmental
funds.
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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53. (15 Minutes) (Special assessment project)
A. Correct change in the fund balance is a $40,000 increase—According to
the information provided, the Capital Projects Fund reported an
increase in its fund balance for the year of $40,000. In arriving at that
figure, $10,000 in revenue and the related expenditure were both
recorded in that fund for this bus stop construction.
B. Correct change in net position is a $140,000 increase—According to the
information provided, the overall change in the net position of the city
reported on the government-wide financial statements was a $150,000
increase.
54. (5 Minutes) (Issuance of short-term note)
The correct change in the fund balance for 2017 is an increase of $10,000.
According to the information provided, the General Fund reported an
increase in its fund balance for the year of $30,000. However, the $20,000
55. (15 Minutes) (Reclassifying an activity as an enterprise fund)
A. The correct change in the fund balance for the General Fund is a
$66,000 increase. According to the information provided, the General
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
B. The correct change in the net position on the government-wide financial
statements is a $150,000 increase. According to the information
(General Fund) rather than in the business-type activities (Enterprise
Fund). Fixing that mistake decreases one column in the statement of net
position (the business-type activities) and increases the other (the
whole.
C. The correct change in the Enterprise Fund is a $54,000 increase.
According to the information provided, the overall change in net
position of the Enterprise Fund on the fund financial statements was a
$60,000 increase. However, the art display was not included as it should
have been. Even for fund financial statements, proprietary funds are
statements was $150,000. The government, though, has recognized
revenue for the amount received in the current period. The amount of
the assessment received is $300,000 times 40% or $120,000. However,
the discount reduces that figure by $12,000 (10 percent) to $108,000.
This money cannot be spent until 2018 and must be reported in 2017 as
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
B. The correct change in the fund balance reported for the General Fund is
a $78,000 decrease. According to the information provided, the General
Fund reported an increase in its fund balance for the year of $30,000.
57. (12 Minutes) (Property tax assessments)
A. The correct change in the net position reported in the government-wide
financial statements is a $42,000 increase. According to the
information provided, the overall change in the net position of the city
$30,000 to a decrease of $78,000. Recognition (and removal) of the
$180,000 receivable and the deferred revenue cause no change in net
position since one is an asset and the other a liability.
58. (12 Minutes) (Recording of grant money)
A. The correct change in the fund balance reported by the General Fund is
a $290,000 decrease. According to the information provided, the
General Fund reported an increase in its fund balance for the year of
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Education.
an eligibility requirement does remain (lowering air pollution by 25
percent). No part of this revenue can be recognized until all eligibility
requirements have been met. Changing the $320,000 from revenue to
unavailable revenue reduces the $30,000 increase in the fund balance to
a $290,000 decrease.
B. The correct change in the net position reported on the government-wide
financial statements is a $170,000 decrease. According to the
information provided, the change in net position of the city on
government-wide financial statements was a $150,000 increase.
However, $320,000 was recognized as revenue although an eligibility
requirement remains (lowering air pollution by 25 percent). No revenue
can be recognized until that time. Changing $320,000 from revenue to
unearned revenue reduces the $150,000 increase in the fund balance to
a $170,000 decrease. Depreciation of the machine is being handled
properly.
59. (8 Minutes) (Reporting of program revenues)
A. The correct change in the net position on the government-wide
statements is a $150,000 increase. According to the preliminary
information, the overall change in the net position of the city on the
government-wide financial statements was a $150,000 increase. Moving
expenses less program revenues. The $10,000, though, should have
been a program revenue. If this revenue had been appropriately
included, net expenses would have been $90,000 rather than $100,000.
Develop Your Skills
Research Case 1
No textbook is ever able to cover all of the many areas discussed within complex
authoritative pronouncements. The subtle nuances of such rules can only be
experienced and appreciated through the study of the official literature. Students
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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A review of the GASB Codification indicates that Section 2200 covers the
are both unusual in nature and infrequent in occurrence.” The paragraph directs
the reader to paragraphs 145 through 149 for further information on the exact
nature of the terms “unusual in nature” and “infrequent in occurrence.”
on to state that “significant transactions or other events that are either unusual or
infrequent but not within the control of management should be separately
identified within the appropriate revenue or expenditure category.”
In this case, the GASB Codification provides clear guidance as to the identity of
these two accounts as well as their placement in the financial statements. In
Research Case 2
Here, the accountants and officials of the City of Danmark are looking for
assistance in classifying a revenue as either a program revenue (reported directly
with a specific activity) or a general revenue (shown for the government as a
whole).
1. A search of the GASB Codification provides extensive assistance in this case.
Section 2200.136 spells out that “program revenues derive directly from the
2. Examples of program revenues are then given in Section 2200.137-139 that
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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include:
▪ Revenue collected for garbage collection.
▪ Building permits.
3. In contrast, general revenues are defined in the negative in Section 2200.140
as: “all revenues are general revenues unless they are required to be reported as
4. Sales taxes and property taxes are included in this category as well as any
other revenues of the government that do not meet the program revenue criteria.
Analysis Case
1) Here is the independent auditor’s report for the financial statements of Des
Moines, Iowa.
Independent Auditor’s Report
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these
financial statements in accordance with accounting principles generally accepted
in the United States of America; this includes the design, implementation, and
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
Auditor’s Responsibility
Our responsibility is to express opinions on these financial statements based on
our audit. We did not audit the financial statements of the discretely presented
component units, the Des Moines Airport Authority and the Des Moines Public
Library Foundation, which collectively represent 100 percent of the assets, net
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in
Opinions
In our opinion, based on our audit and the reports of other auditors, the financial
statements referred to above present fairly, in all material respects, the respective
financial position of the governmental activities, the business-type activities, the
aggregate discretely presented component units, each major fund, and the
aggregate remaining fund information of the City, as of June 30, 2015, and the
respective changes in financial position and, where applicable, cash flows thereof
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
for the year then ended in accordance with accounting principles generally
accepted in the United States of America.
Emphasis of Matter
As explained in Note 20 to the basic financial statements, the City adopted GASB
Statement No. 68, Accounting and Financial Reporting for Pensions and No. 71,
Other Matters
Required Supplementary Information
Accounting principles generally accepted in the United States of America require
that the management’s discussion and analysis on pages 5 through 22, other
postemployment benefit plan schedule on page 113, the budgetary comparison
information, although not a part of the basic financial statements, is required by
the Governmental Accounting Standards Board who considers it to be an
essential part of financial reporting for placing the basic financial statements in
an appropriate operational, economic or historical context. We have applied
certain limited procedures to the required supplementary information in
accordance with auditing standards generally accepted in the United States of
because the limited procedures do not provide us with sufficient evidence to
express an opinion or provide any assurance.
Other Information
Our audit was conducted for the purpose of forming opinions on the financial
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Governments and Nonprofit Organizations, listed in the table of contents as
supplementary information are presented for purposes of additional analysis and
are not a required part of the basic financial statements. Such information is the
responsibility of management and was derived from and relates directly to the
underlying accounting and other records used to prepare the basic financial
statements. Such information has been subjected to the auditing procedures
The accompanying introductory and statistical sections as listed in the table of
contents have not been subjected to the auditing procedures applied in the audit
of the basic financial statements, and accordingly, we do not express an opinion
or provide any assurance on them.
Other Reporting Required by Government Auditing Standards
In accordance with Government Auditing Standards, we have also issued our
report dated January 25, 2016 on our consideration of the City’s internal control
**
Many aspects of this independent auditor’s report look very much like an audit of
a for-profit entity. Other parts are different.
In an audit of a state or local government, the independent auditor’s report is
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
In addition, the mention here of the required supplementary information and other
information included with the financial statements is not typically found in the
2) A number of items are shown in order to reconcile the net changes in fund
balances for the governmental funds and the changes in net position. Here are
several of the larger reconciliation items for the City of Des Moines for the year
ended June 30, 2015.
Long-term receivables are not available to pay for current-period expenditures,
and therefore, are not reported in the funds; Due from component unit —
$30,190,400
3) The largest sources of general revenues for many cities are property taxes
and sales taxes. However, a wide variety of revenue sources are possible.
According to the statement of activities for the City of Des Moines for the year
levied for debt service of $27.8 million.
4) The amount of expenditures will vary widely based on the size of government.
Classifications usually include public safety, sanitation, and the like.
at $97.9 million.
5) According to the balance sheet for the governmental funds, the general fund
primarily shows current financial resources as its assets: cash and
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
shown for the general fund of the City of Des Moines were taxes receivable of
$57.8 million and cash and investments of $24.5 million.
6) Most governments will indicate in a note to their financial statements that
payables and receivables are viewed as available if collected within 60 days of
the end of the year. Other lengths of time, though, can be used. A note to the
7) This question focuses on interperiod equity: Is the government spending
more than it takes in so that future generations may have to suffer? Or, is the
Communication Case 1
Students need to continue updating their knowledge throughout their careers.
One method for doing this is to become familiar with the information available on
the GASB website. This assignment directs the students to look at any Current
Projects being studied by the GASB for the possibility of impacting generally
accepted accounting. By looking at this site on a regular basis, an accountant
Clicking on any one of the “Major Projects” and reading the information provided
is a way to help understand the evolutionary nature of financial accounting. To a
student, such readings might seem tedious and difficult—at least initially.
However, any person who is involved actively in the financial reporting of a state
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
Communication Case 2
Most accountants and accounting students understand that the GASB sets
official standards for the accounting and financial reporting to be carried out by
state and local governments. Probably only a small portion of either of these
groups truly knows what the established goals and mission of GASB actually are.
public-sector financial reporting.
“Mission
“To establish and improve standards of state and local governmental accounting
and financial reporting that will:
—Result in useful information for users of financial reports, and
Foundation’s Board of Trustees.
“Core Values
“Independence: The autonomy to pursue the best answer for all constituents, free
from undue influence or pressure.
“Integrity: Honest, ethical, and forthright behavior in relationships with all
constituents.
“Objectivity: Impartial decisions informed by credible research and thorough
Communication Case 3
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
Students do not always appreciate the amount of discussion, debate, and
compromise that FASB and GASB usually must go through to arrive at an official
necessarily wrong.
In practice, though, many possible “right” ways usually exist as potential
solutions to any accounting problem. Because of the public debate created by
many of these issues, authoritative bodies often receive numerous
recommendations whenever any new standard is being discussed. The Board has
opportunity of looking at some of the alternatives examined by GASB prior to
establishing Statement No. 34. This pronouncement was the revolutionary
standard that created the dual system of reporting government financial
statements. Probably no other statement has had such a significant impact on
the financial reporting of a state or local government.
The paragraphs assigned here present a number of different approaches that
were suggested by members of the public and considered by the GASB. In all
▪ Others simply felt that no significant change was necessary in government
accounting and that the system in use at that time (very similar to the
current fund financial statements) was adequate. GASB justifies its
decision to move away from the previous model by stating (in paragraph
245) that “some of the information that today’s users need surpasses the
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
financial resources. Rather, each government would use the basis of
accounting utilized for budgetary purposes (such as a cash system or a
modified cash system). This argument held that fund financial statements
▪ Another solution put forth was to leave the current model as it is but make
significant changes to it. Basically, GASB responded that one set of
statements could simply not expand to suit the wide array of user needs
that had arisen over the years.
▪ Other suggestions encompassed trying to adapt the basis of accounting
utilized for the governmental funds to be more useful to a wider array of
financial statement users. In other words, significant changes were
recommended for this portion of the fund financial statements. GASB
new model.
Communication Case 4
One of the truly significant additions to state and local government accounting
in recent years has been the requirement of the Management’s Discussion and
Analysis (MD&A). The MD&A is meant to be a discussion of the financial
information reported by the government in a verbal rather than purely
quantitative fashion. Students often do not understand the range of
information that can be uncovered within an MD&A. Here, the student can
read the MD&A for an actual city. The information that is provided is quite
extensive and often covers a wide range of subjects such as the following:
▪ An explanation of fund financial statements.
▪ An explanation of government-wide financial statements.
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
▪ The reporting of infrastructure assets that were acquired before the
creation of government-wide financial statements.
▪ Information about proprietary operations.
Excel Case 1
Creation of this type of spreadsheet would appear to be very helpful in budget
planning because city officials could plug in various increase and decrease rates
and see the impact on the fund balance over time. There are a number of different
ways that a spreadsheet could be created to solve this particular problem. Here is
one possible approach:
Create Column Headings:
In Cell A4, enter label text “Year”
In Cell B4, enter label text “Revenue Change”
In Cell C4, enter label text “Revenues”
In Cell H4, enter label text “Projected Change in Expenditures”
Click and drag across Cells A4 to H4. Select Format, Cells, Alignment, and click
the “Wrap Text” box. Click OK. If needed, place the cursor on the line between the
Column Letters and drag the boundary on the right side of the column headings
until the columns are the width you want.
In Cell A5, enter label text “2016” for first year.
Perform Calculations:
In Cell B6, enter formula to calculate Revenue Change (Revenue times Projected
In Cell D6, enter formula to calculate Expenditures Change (Expenditures times
Chapter 16 – Accounting for State and Local Governments (Part One) – Hoyle, Schaefer, Doupnik, 13e
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Education.
Projected Expenditures Change): =+E5*$H$5
In Cell E6, enter formula to change Expenditures by Expenditures Change:
=+E5+D6
In Cell F6, enter formula to calculate the new ending Fund Balance (initial Fund
At that point, you should see that the city will have a negative fund balance of
$277,539 at the end of 2019.
Simply, by changing cells G5 and H5, the impact of any different level of rate
changes can be ascertained.