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: 17/e)
Questions:
7-1
Proprietary funds
Explain
Same
7-2
Internal service and enterprise funds
Describe
Same
7-3
Budgetary control of internal service funds
Explain
Same
7-4
Proprietary funds vs. for–profit reporting
Compare
Same
7-5
Restricted assets of enterprise funds
Describe
Same
7-6
Components of net position
Describe, explain
Same
7-7
Dual track accounting in proprietary funds
Explain
New
7-8
Reporting internal balances
Describe
Same
7-9
Regulatory accounting
Describe, explain
Same
7-10
Segment information
Define
Same
7-11
Dissolving an internal service fund
Explain
New
Cases:
7-12
Internal service fund reporting
Assess
7-11
7-13
Proprietary fund operating statement
Analyze
7-12 Revised
7-14
City and County of Denver proprietary funds
Evaluate
7-13 Updated
7-15
Enterprise fund golf course management
Evaluate
7-14
Exercises/Problems:
7-16
Examine the CAFR
Examine
7-15
7-17
Various
Multiple Choice
7-16, Items 6,
8, 11 and 12
are new
7-18
Characteristics of proprietary funds
Remember
New
7-19
Information Technology Internal Service Fund
JEs, FS
7-17
7-20
Central Garage ISF – City of Ashville
JEs, FS
7-18
7-21
Internal Service fund statement of cash flows
FS
7-23 revised
7-22
Tribute Aquatic Center Enterprise Fund
JEs, FS
7-19
7-23
Net position classifications
FS
7-20
7-24
Central Station Enterprise Fund
JEs, FS, assess
7-21
7-25
Enterprise Fund journal entries and FS
JEs, FS
7-22
7-26
Net position classifications
FS
New
7-27
Enterprise fund statement of cash flows
FS
New
7-28
Appendix – Solid Waste Enterprise Fund
FS
7-24
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.
or (3) pricing policies are designed to recover the costs of the activity, including capital
costs.
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
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-3
Ch. 7, Answers, Question 7-2 (Cont’d)
Internal service funds and enterprise funds are both proprietary funds and are presented
General Problem Information: Internal service and enterprise funds
Learning Objective: 7-1, 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: 7-1
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
position can be compared to a for-profit organization’s balance sheet. The format for the
statement of net position differs from a balance sheet, largely because there is no equity
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-4
Ch. 7, Answers, Question 7-4 (Cont’d)
General Problem Information: Proprietary funds vs. for-profit reporting
Learning Objective: 7-1, 7-3, 7–5
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
Topic: Restricted Assets
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-6. GASB Codification Section 2200.117-125 provides the following three components for
the classification of net position: net investment in capital assets, restricted, and
unrestricted. Net investment in capital assets is calculated as the total of gross capital
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-5
Ch. 7, Answers, Question 7-6 (Cont’d)
General Problem Information: Components of net position
Learning Objective: 7-1, 7-2, 7-5
Topic: Statement of Net Position
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Easy
7-7. The “dual–track” accounting approach is useful for recording transactions reported under
both the modified accrual (governmental funds) and the accrual (government-wide) basis
of accounting. Because proprietary funds and governmental activities both use accrual
General Problem Information: Internal service funds
Learning Objective: 7-1
Topic: Internal Service Funds
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
7-8. GASB standards require that activity between governmental activities and business-type
activities should be reported as internal balances at the government-wide level. Although
the internal balances do not meet the definition of elements of financial statements, they
General Problem Information: Reporting internal balances
Learning Objective: 7-1
Topic: Internal Service Funds
Bloom’s Taxonomy: Understand
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
7-6
Ch. 7, Answers (Cont’d)
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 establishes
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
7-10. A segment is an identifiable activity either within an enterprise fund or other standalone
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
7-11. An internal service fund may be dissolved in any one of the following three ways, or in
combinations thereof: (1) transfer the fund’s assets to another fund that will continue the
operation as a subsidiary activity, for example, a supply fund becoming a department of
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-7
Ch. 7, Answers, Question 7-11 (Cont’d)
General Problem Information: Dissolution of an Internal Service Fund
Learning Objective: 7-2
Topic: Dissolution of an Internal Service Fund
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Easy
Solutions to Cases
7-12. 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
equipment, given the nature of the operation). As a consequence, depreciation
(2) restricted, and (3) unrestricted; and the use of expenditures (rather than
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-8
Ch. 7, Solutions, Case 7-12 (Cont’d)
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
General Problem Information: Internal Service Fund Reporting
Learning Objective: 7-2
Topic: Internal Service Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-9
Ch. 7, Solutions, (Cont’d)
7-13. Some of the errors noted in the Calhoun 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).
(2) Operating expenses.
(3) Operating income (loss).
(4) Nonoperating revenues (expenses)
(5) Capital contributions and additions to permanent and term endowments.
(6) Special and extraordinary items.
General Problem Information: Proprietary fund operating statement
Learning Objective: 7-1
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-10
Ch. 7, Solutions (Cont’d)
7-14. a. Yes, the City and County of Denver uses two internal service funds. They are:
Asphalt Plant – to account for the expenditures and revenues of the city’s Asphalt Plant
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.
Denver Airport System – accounts for the operation of the city’s airport system which
includes Denver International Airport.
c. A negative unrestricted net position balance indicates that most of the golf course’s
equity is tied up in capital assets. Net investment in capital assets is calculated by
subtracting accumulated depreciation and debt used to acquire capital assets from the
d. At $212,699 (in thousands) contractual services is the airport’s largest expense.
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-11
Ch. 7, Solutions, Case 7-14 (Cont’d)
g. 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: 7-1
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Medium
7-15. 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 Sec.
1300.104); whereas, business-type activities must be reported in an enterprise
fund if GASB Codification Sec. 1300.109 criteria are met. In this case, there is no
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-12
Ch. 7, Solutions, Case 7-15 (Cont’d)
b. This exercise is intended to have students consider the options provided. Their
questions might include:
(1) Status Quo. Do the citizens support subsidies for the golf course? Is the
decline in revenue a short or long-term problem? Can rates be raised or are
there other revenue sources that could make the fund self-supporting? How
General Problem Information: Enterprise fund golf course management
Learning Objective: 7-1
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Knowledge Application; AICPA: Critical Thinking,
FN Reporting
Level of Difficulty: Hard
Solutions to Exercises and Problems
7-16. 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, 7–3, 7-4
Topic: Proprietary Funds
Bloom’s Taxonomy: Analyze
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
7-13
Ch. 7, Solutions, (Cont’d)
7-17. 1. b. 6. d. 11. d.
General Problem Information: Various
Learning Objective: 7-1, 7–2, 7-3, 7-4, 7-5
Topic: Various
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Communication, AICPA: FN Reporting
Level of Difficulty: Medium
7-18. 1. B. 6. N.
General Problem Information: Characteristics of proprietary funds
Learning Objective: 7-1
Topic: Various
Bloom’s Taxonomy: Characteristics of proprietary funds
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
7-14
Ch. 7, Solutions (Cont’d)
7-19
WASHINGTON CITY
INFORMATION TECHNOLOGY FUND
GENERAL JOURNAL
(NOT REQUIRED)
Debits Credits
1. WAGE EXPENSE 53,500
2. OFFICE EXPENSES 3,700
CASH 3,700
4. UTILITIES EXPENSE 14,525
DUE TO OTHER FUNDS 14,525
6. DUE TO OTHER FUNDS 14,500
CASH 14,500
(2,550 + 8,400 – 2,950)
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-15
Ch. 7, Solutions, Exercise 7-19 (Cont’d)
Debits Credits
9. DUE FROM OTHER FUNDS 78,100
BILLINGS TO DEPARTMENTS 78,100
(4,250 + 78,100 – 5,300)
12. Closing Entries:
BILLINGS TO DEPARTMENTS 78,100
EXCESS OF COST OVER NET BILLINGS TO
DEPARTMENTS 12,075
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-16
Ch. 7, Solutions, Exercise 7-19 (Cont’d)
WASHINGTON CITY
T- ACCOUNTS FOR INFORMATION TECHNOLOGY FUND
(NOT REQUIRED)
CASH DUE FROM OTHER FUNDS
Beg. Bal. 14,500 (1) 34,775 Beg. Bal. 4,250 (10) 77,050
(10) 77,050 (2) 3,700 (9) 78,100
MATERIALS AND SUPPLIES INVENTORY MACHINERY AND EQUIPMENT
ALLOW FOR DEP⎯MACH & EQUIP
ACCOUNTS PAYABLE DUE TO FEDERAL GOVERNMENT
DUE TO OTHER FUNDS NET POSITION—UNRESTRICTED
(6) 14,500 Beg. Bal. 1,200 Beg. Bal. 12,700
(4) 14,525 Closing 12,075 Closing 6,100
NET POSITION—NET INVEST IN CAP. ASSETS BILLINGS TO DEPARTMENTS
WAGE EXPENSE PAYROLL TAX EXPENSE
(1) 53,500 Closing 53,500 (1) 4,100 Closing 4,100
UTILITIES EXPENSE __COST OF MATERIALS AND SUPPLIES USED__
DEPRECIATION EXPENSE OFFICE EXPENSES
(11) 6,100 Closing 6,100 (2) 3,700 Closing 3,700
EXCESS OF NET BILLINGS TO DEPTS OVER COST
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-17
Ch. 7, Solutions, Exercise 7-17 (Cont’d)
a. WASHINGTON CITY
INFORMATION TECHNOLOGY FUND
STATEMENT OF REVENUES, EXPENSES, AND
CHANGES IN FUND NET POSITION
FOR YEAR ENDED DECEMBER 31
BILLINGS TO DEPARTMENTS $78,100
OPERATING EXPENSES:
WAGE EXPENSE $53,500
PAYROLL TAX EXPENSE 4,100
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-18
Ch. 7, Solutions, Exercise 7-19 (Cont’d)
b. WASHINGTON CITY
INFORMATION TECHNOLOGY FUND
STATEMENT OF NET POSITION
AS OF DECEMBER 31
ASSETS:
CURRENT ASSETS:
CASH $ 7,575
DUE FROM OTHER FUNDS 5,300
MATERIALS AND SUPPLIES INVENTORY 500
TOTAL CURRENT ASSETS $13,375
CAPITAL ASSETS:
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
7-19
Ch. 7, Solutions, Exercise 7-19 (Cont’d)
c. WASHINGTON CITY
INFORMATION TECHNOLOGY FUND
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH RECEIVED FROM CUSTOMERS $77,050
CASH PAID TO:
RECONCILIATION OF OPERATING INCOME TO NET CASH
PROVIDED BY OPERATIONS
OPERATING INCOME/(LOSS) $ (12,075)
ADJUSTMENTS:
DEPRECIATION EXPENSE⎯MACHINERY & EQUIPMENT 6,100
INCREASE IN INVENTORY (150)
Chapter 07 – Accounting for the Business-type Activities of State and Local Governments
Ch. 7, Solutions, Exercise 7-19 (Cont’d)
d. On the basis of the operating statement for the current year ended
December 31, the pricing policy is NOT achieving the goal of covering all
General Problem Information: Information Technology Internal Service Fund
Learning Objective: 7-2
Topic: Internal Service Funds
Bloom’s Taxonomy: Apply
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN Reporting
Level of Difficulty: Hard
7-20.
CITY OF ASHVILLE
CENTRAL GARAGE FUND
GENERAL JOURNAL
Debits Credits
1. Internal Service Fund & Governmental Activities:
INVENTORY OF SUPPLIES 92,000
VOUCHERS PAYABLE 92,000