Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-1
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL GOVERNMENTS
OUTLINE
Number
Topic
Type/Task
Status
(re: 17/e)
Questions:
2-1
Communicating financial information
Identify
9-1
2-2
Service activities categories
Identify
2-1
2-3
Reporting objectives
Compare
2-2
2-4
Modified accrual accounting
Explain
2-3
2-5
Fund categories
Identify
2-4
2-6
Purpose of funds
Explain
2-5
2-7
Deferred inflows and outflows of resources
Define
2-6
2-8
Expenses/Expenditures
Identify
2-7
2-9
Fund balance classifications
Identify
Same
2-10
Major fund criteria
Identify
Same
Cases:
2-11
Accounting and reporting principles
Analysis
Revised
2-12
Evaluation of basic financial statements
Evaluate
Same
2-13
Fund balance classifications
Describe
Same
2-14
Financial reporting model
Summarize
New
Exercises/Problems:
2-15
Examine the CAFR
Examine
2-14 revised
2-16
Various
Multiple Choice
2-15 items
11-15 are
new; other
items are
same
2-17
Matching fund types with fund categories
Classify
2-16
2-18
Matching government-wide and fund financial
Classify
2-17
reporting characteristics
2-19
Matching transactions with funds
Classify
2-18
2-20
Fund balance classifications
Analyze
2-19 revised
2-21
Determination of major funds
Analysis; calculate
2-20
2-22
Determination of major funds
Analysis; calculate
New
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-2
CHAPTER 2: PRINCIPLES OF ACCOUNTING AND FINANCIAL
REPORTING FOR STATE AND LOCAL GOVERNMENTS
Answers to Questions
2-1. GASB Concepts Statement No. 3 indicates that it is preferable to recognize an item on the
face of the financial statements if the item meets the definition of an element and can be
General Problem Information: Communicating financial information
Learning Objective: 2-1
Topic: Conceptual Framework—Providing Useful Financial Reports
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Easy
2-2. The three categories of broad service activities of a general purpose government are
General Problem Information: Service activities categories
Learning Objective: 2-2
Topic: Activities of Government
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Easy
2-3. The primary objective of government-wide financial reporting is to report on the
government’s operational accountability so that users can evaluate whether the
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-3
Ch. 2, Answers, Question 2-3 (Cont’d)
legal and budgetary restrictions. As can be seen from the objectives, the focus of the
General Problem Information: Reporting objectives
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
2-4. The modified accrual basis of accounting records revenues when they are measurable and
General Problem Information: Modified accrual accounting
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
2-5. The three categories of funds are governmental, proprietary, and fiduciary. The fund
types included in each category are shown below:
Governmental
Fiduciary
General Fund
Special revenue funds
Debt service funds
Capital projects funds
Permanent funds
Custodial funds
Investment trust funds
Pension (and other employee
benefit) trust funds
Private-purpose trust funds
The basis of accounting used by governmental funds is modified accrual. Proprietary
funds use the accrual basis of accounting, as do fiduciary funds.
General Problem Information: Fund categories
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-4
Ch. 2, Answers (Cont’d)
2-6. Governmental accounting systems must provide both reporting in accordance with GAAP
General Problem Information: Purpose of funds
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
2-7. Deferred outflows of resources are resources that have been consumed but are applicable
General Problem Information: Deferred inflows and outflows of resources
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
2-8 Expenditures report actual outlays of funds, whether for an operating cost or the purchase
General Problem Information: Expenses/Expenditures
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-5
Ch. 2, Answers (Cont’d)
2-9. The governmental fund balance classifications and an example for each are provided
below. There are numerous examples of what could be included in each classification;
General Problem Information: Fund balance classifications
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
2-10. The GASB requires that any fund that meets the following relative size criteria be
designated as major:
General Problem Information: Major fund criteria
Learning Objective: 2-4
Topic: Fund Reporting
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-6
Ch. 2, Answers, Question 2-10 (Cont’d)
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Solutions to Cases
2-11. A quick look at these financial statements reveals that the statements clearly do not
conform to the GASB reporting model.
a. It appears the accrual basis of accounting was used. There are at least two items
2. Proprietary fund financial statements: statement of net position, statement of
c. The format seems most similar to the government-wide statements in that all three
funds are being reported on the statements using what appears to be the accrual
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-7
Ch. 2, Solutions, Case 2-11 (Cont’d)
works, and other relevant functions, so the amounts expended for each service
General Problem Information: Accounting and reporting principles
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Hard
2-12. a. Based on the description of this city’s financial statements in the MD&A, the
statements appear to conform very well to GASB standards. Specifically:
Government-wide Financial Statements
• Include the two required financial statements—statement of net position and
statement of activities.
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-8
Ch. 2, Solutions, Case 2-12 (Cont’d)
General Problem Information: Evaluation of basic financial statements
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Evaluate
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Easy
2-13. There are a variety of reasons for the amounts that have been provided for each fund
balance classification appearing on the governmental fund balance sheet for Denver.
Following are some of the reasons provided in the 2016 CAFR.
General Problem Information: Major Fund Criteria
Learning Objective: 2-2
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-9
Ch. 2, Solutions (Cont’d)
2-14. The answer to the current status of the financial reporting model project will depend on
when the student does the research. The Invitation to Comment period ends March 31,
2017. A Preliminary Views document is planned for fall of 2018 with an Exposure Draft
to be issued in May 2020. The major changes being considered in the Invitation to
Comment include the following:
1. Recognition approaches for governmental fund financial statements—three different
recognition approaches are under consideration:
2. A change to the format of the current statement of revenues, expenditures and
3. The addition of a statement of cash flows at the governmental fund level is also being
General Problem Information: Financial reporting model
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
Solutions to Exercises and Problems
2-15. Each student should have a different governmental annual report, so will have different
General Problem Information: Examine the CAFR
Learning Objective: 2-3
Topic: Financial Reporting Model
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-10
Ch. 2, Solutions, Exercise 2-15 (Cont’d)
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
2-16. 1. a. 6. d. 11. d.
General Problem Information: Various
Learning Objective: 2-1
Learning Objective: 2-2
Learning Objective: 2-3
Learning Objective: 2-4
Topic: Various chapter topics
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: BB Industry
Level of Difficulty: Medium
2-17. 1. Custodial fund FF
2. Permanent fund GF
General Problem Information: Matching fund types with fund categories
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-11
Ch. 2, Solutions (Cont’d)
2-18.
1. Governmental funds b, e, f, i
2. Proprietary funds a, d, g, h, j
General Problem Information: Matching government-wide and fund financial reporting
characteristics
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
2-19.
1.
h.
7.
e.
2.
a.
8.
i.
3.
j.
9.
f.
4.
g.
10.
c.
5.
d.
11.
k.
6.
b.
General Problem Information: Matching transactions with funds
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
2-20.
1. d. 6. a.
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-12
Ch. 2, Solutions, Exercise 2-20 (Cont’d)
General Problem Information: Fund balance classifications
Learning Objective: 2-3
Topic: Financial Reporting Model
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN Decision Making
Level of Difficulty: Hard
2-21. DATE: xxx
MEMO TO: City Manager, Forest City
FROM: Independent Auditor
RE: Major Special Revenue Funds
As shown by the blue shading in the calculations provided below, only the
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-13
Ch. 2, Solutions, Exercise 2-21 (Cont’d)
Calculation of Major Fund Thresholds
Financial
Statement
Elements
Gas Tax Revenue Fund
Housing and Urban
Development Fund
Forest City
Library Fund
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
>10% of
Govern-
mental
Funds
>5% of
Govern-
mental and
Enterprise
Funds
Assets
Yes-10.3%
No-4.6%
Yes-11.2%
Yes-5.01%
No-6.5%
No-2.9%
Liabilities
No-8.4%
No-4.9%
No-9.8%
Yes-5.7%
No-0.0%
No-0.0%
Revenues
No-9.0%
No-4.6%
Yes-11.1%
Yes-5.7%
No-7.8%
No-4.0%
Expenditures
No-8.3%
No-4.6%
No-8.7%
No-4.9%
No-8.0%
No-4.5%
General Problem Information: Determination of major funds
Learning Objective: 2-4
Topic: Major Funds
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Decision
Making
Level of Difficulty: Hard
2-22. The students should identify the General Fund as a major fund because it is always
considered a major fund. The only other governmental fund that meets the 10% and the
Chapter 02 – Principles of Accounting and Financial Reporting for State and Local Governments
2-14
Ch. 2, Solutions, Exercise 2-22 (Cont’d)
General Problem Information: Determination of major funds
Learning Objective: 2-4
Topic: Major Funds
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Decision
Making
Level of Difficulty: Hard
Calculation of Major Fund Thresholds
Assets
Met?
Liabilities
Met?
Expenditures
/Expense
Met?
Revenues
Met?
Governmental Funds
General Fund
462.2
52.8
915.9
992.8
Health & Human Services Fund
110.7
YN*
11.9
YN
118.8
NY
125.1
NY
Community Development Fund
220.5
YN
20.9
YN
28.4
NN
16.6
NN
Debt Service Fund
70.8
NN
6.1
NN
132.4
YY
134.7
YY
Total of Governmental Funds by Element
864.2
91.7
1,195.5
1,269.2
10% of Total Governmental Funds by
Element
86.42
9.17
119.55
126.92
Enterprise Funds
Utility Fund
639.4
YY
97.5
NN
104.1
YY
115.9
YY
City Airport Fund
5,419.5
YY
5,017.3
YY
616.7
YY
661.6
YY
Golf Course Fund
48.9
NN
8.6
NN
19.6
NN
18.1
NN
Total of Enterprise Funds by Element
6,107.8
5123.4
740.4
795.6
10% of Total Enterprise Funs by Element
610.78
512.34
74.04
79.56
5% of the Total of Governmental &
Enterprise Funds by Element
348.6
260.755
96.795
103.24