CHAPTER 17
UNDERSTANDING THE ISSUES
1. The new reporting model adopts full accrual
accounting for the government-wide statements
for both governmental and business-type activi-
2. Both fund and government-wide financial state-
ments are required in the new model. Fund
statements include (1) the governmental fund
balance sheet and statement of revenues,
expenditures, and changes in fund balances; (2)
the proprietary fund statement of net position,
statement of revenues, expenses, and changes
in net position, and statement of cash flows; and
(3) the fiduciary fund statement of net position
and statement of changes in net position. The
3. Major funds are those funds that management
chooses to disclose in a separate column in the
fund statements either due to their relative size
or because they are of particular interest or con-
vey unique information. The general fund is al-
ways considered a major fund. Funds whose
assets and deferred outflows, liabilities and de-
4. The purpose of the MD&A is to give a concise
overview and analysis of the information in the
government’s financial statements. Required
tions, including impact of important economic
factors; an analysis of individual fund financial
information, including the reasons for significant
changes in fund balances (or net position) and
whether limitations significantly affect the future
use of the resources; an analysis of significant
variations between original and final budget
amounts and between final budget amounts and
actual budget results for the general fund; a de-
original as well as amended budget must be in-
cluded with a comparison of actual results
reported on a budgetary basis.
6. Interfund transactions are recorded separately
from other transactions. Interfund payables and
receivables are eliminated when government-
Ch. 17—Exercises 17–2
EXERCISES
EXERCISE 17-1
Note to Instructor: The 2013 CAFR of the city of Milwaukee needs to be examined to answer
these questions. The general fund is always considered a major fund. Every other governmental
fund from the combining statements must be examined to determine if it is at least 10% of all
the governmental funds and at least 5% of all government and enterprise funds combined.
EXERCISE 17-2
EXERCISE 17-3
(1) Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances
General
Fund
Special
Revenue
Fund C
Capital
Projects
Fund A
Capital
Projects
Fund B
Total
Nonmajor
Funds
Total
Government
Funds
(2) Proprietary Fund Statement of Revenues, Expenses, and Changes in Net Position
Total Enterprise Funds
Enterprise
Fund D
Enterprise
Fund F
Other
Enterprise
Funds
Totals
Total Internal
Service Funds
EXERCISE 17-4
(2) c Both expenditures for debt principal and capital outlays must be eliminated and
converted to expenses. In addition, depreciation expense must be recorded.
(3) a The government-wide statements report internal service funds among the govern-
(4) a All capital assets, including infrastructure, must be included in the government-wide
(5) d The government-wide statements do not include fiduciary funds but do include
(6) c An up-to-date inventory and a current condition assessment are necessary for the
(7) c Revenue that is specific to a particular activity, function, or program, such as fees
(8) d The government-wide statements report internal service funds among the govern-
(9) c The reconciliation is necessary for the governmental funds to convert the modified
accrual fund information to the full accrual government-wide governmental activities
(10) b The statement of cash flows is part of the proprietary fund financial statements but
is not part of the government-wide statements.
EXERCISE 17-5
To convert from the governmental fund balance sheet to the government-wide statement of net
position, the following adjustments are necessary:
• Add general capital assets, including infrastructure, net of accumulated depreciation.
• Add general long-term liabilities.
EXERCISE 17-6
(2) c In the fund statements, proprietary funds are included in the proprietary fund bal-
ance sheet; statement of revenues, expenses, and changes in net position; and
(3) d Account groups are not reported in either the fund or government-wide statements.
(4) b Total columns are not required for combining statements but are quite commonly
(5) a A statement of cash flows is required for all enterprise funds.
(6) d Construction in progress will be reported in the government-wide statements as a
capital asset. Capital assets are not reported in the fund statements.
EXERCISE 17-7
The new reporting model requires that all capital assets, including infrastructure assets, be
included on the financial statements. In addition, these assets must be depreciated. (The rules
are effective three years after the requirement for implementing the new reporting model.) Gov-
ernments may adopt a “modified approach” to depreciation if they have an up-to-date inventory
of their infrastructure assets and have a current condition assessment. As long as the assets
17–5 Ch. 17—Problems
PROBLEMS
PROBLEM 17-1
(1) b The statement of activities is presented using a net program expense format where
(2) d Special purpose governments that provide business-type activities only are permit-
ted to report the financial statements required for enterprise funds. Since these are
(3) d The government-wide financial statements include a statement of net position and a
statement of activities with an economic resources measurement focus and are
(4) b Budgetary comparison may be included as a separate statement or schedule. The
(5) c Combining statements are used to add together nonmajor funds of the same type in
(6) a The three major sections of the comprehensive annual financial statement are the
(7) c The government-wide financial statements include a statement of net position and a
statement of activities with an economic resources measurement focus and are
(8) a The new reporting model requires that all capital assets, including infrastructure, be
recorded and depreciated. Governments have the option of choosing a modified
(9) d Major funds are those funds that management chooses to disclose in a separate
column in the fund statements either due to their relative size or because they are of
Problem 17-1, Concluded
(10) b The Office of Management and Budget (OMB) sets standards for audits of reci-
(11) c OMB Circular A-133 applies to state, local, and not-for-profit organizations that
(12) a The expenditures threshold for having an A-133 single audit (for fiscal years begin-
ning on or after January 1st, 2015) is $750,000.
PROBLEM 17-2
PROBLEM 17-3
The authority is not a component unit but should be disclosed in the notes as a related organi-
zation. The city appoints the authority’s separate governing board but is not financially account-
PROBLEM 17-4
(1) The school district is not legally separate, so it is part of the city and not a component unit.
(2) The authority is legally separate, the city has financial accountability, and so it is a compo-
(3) The mayor appoints all members of the board so it can be assumed that there is control
(5) The water utility is a joint venture and not a component unit. The city’s equity interest will be
presented in the government-wide statements as an asset.
17–7 Ch. 17—Problems
PROBLEM 17-5
The financial reporting entity of a government includes the primary government and all its com-
ponent units. An example of a primary government is a city. An example of a component unit is
PROBLEM 17-6
(1) Budgetary Fund Balance …………………………………………………… 295,000
Estimated Other Financing Uses ……………………………………….. 15,000
(2) Statement of Revenues, Expenditures, and Changes in Fund Balances
For the Year Ended December 31, 2019
Revenues ……………………………………………………………………………………….. $ 41,600
Expenditures …………………………………………………………………………………… (586,600)
Excess of revenue over expenditures …………………………………………………. $ (545,000)
Other financing sources ……………………………………………………………………. 800,000
(3) Balance Sheet as of December 31, 2019
Cash ……………………………. $110,000 Contracts payable …………………. $ 110,000
Investments ………………….. 250,000 Fund balance—assigned ……….. $ 80,000
PROBLEM 17-7
Government-
Fund
Debit Credit Wide
Revenues ………………………………. (41,600) (41,600)
Other Financing Sources …………. (800,000) (2) 800,000 0
Expenditures ………………………….. 586,600 586,600 (1) 0
PROBLEM 17-8
City of Lucas
Statement of Net Position
June 30, 2019
Governmental Business-Type Total Primary
Activities
Activities Government
Assets:
Cash and cash equivalents ……………….. $ 280,000 $ 75,000 $ 355,000
Receivables …………………………………….. 36,000 145,000 181,000
Inventories ………………………………………. 0 56,000 56,000
Capital assets (net) …………………………… 1,500,000 1,100,000 2,600,000
17–9 Ch. 17—Problems
PROBLEM 17-9
City of Rose
Statement of Activities
As of June 30, 2019
Program Revenues Net Revenue Change in Net Position
Charges Business-
for Operating Capital Governmental Type
Expenses Services Grants Grants Activities Activities Total
Governmental activities:
General government ……………… $ 1,300,000 $ 100,000 $ 0 $(1,200,000) $ 0 $(1,200,000)
Total governmental activities .. $ 3,700,000 $ 575,000 $220,000 $(2,905,000) $ 0 $(2,905,000)
Business-type activities:
Water and sewer system ………… $1,500,000 $ 1,800,000 $ 0 $ 0 $ 300,000 $ 300,000
Parking system ……………………… 45,000 40,000 0 0 (5,000) (5,000)
Total business-type activities .. $1,545,000 $ 1,840,000 $ 0 $ 0 $ 295,000 $ 295,000
PROBLEM 17-10
(1) The basic financial statements in the new reporting model include both government-wide
financial statements and fund financial statements. The government-wide financial
statement presents the financial picture of Minneapolis from an economic resources
measurement focus using the full accrual basis of accounting. Governmental and business-
(2) The management’s discussion and analysis is a requirement in the new reporting model. It
provides an overview of the city’s financial activities for the fiscal year and is subject to audit.
The MD&A provides an objective and easily readable analysis of the government’s financial
(3) Budgetary comparison information is reported as required supplementary information. A de-
(4) Minneapolis has four major governmental funds: Community Planning and Economic Devel-
opment, Convention Center, Permanent Improvement, and Special Assessment.
Minneapolis uses the GASB Statement No. 34 criteria for determining major funds—meeting
17–11 Ch. 17—Problems
Problem 17-10, Concluded
(5) Minneapolis capitalizes and depreciates (or amortizes) all capital assets (including infra-
PROBLEM 17-11
(1) The measurement focus for governmental funds is financial resources, and the basis of ac-
counting for governmental funds statements is modified accrual. The proprietary and fidu-
(2) Differences between fund financial statements and government-wide statements:
Fund Statements Government-Wide Statements
Component units Only blended component units Both blended and discretely
are included. presented component units
are included.
(3) The three net asset categories found in the statement of net position:
Invested in capital assets, net of related debt Fixed assets of the government less all fixed
asset-related debt (current and noncurrent)
PROBLEM 17-12
(1) Major programs for the audit will include Programs 1, and 3. These three programs are iden-
tified due to their size (over $750,000 in expenditures) and risk assessment (not classified
as low risk).
PROBLEM 17-13
Packer City
Reconciliation Schedules
(1) Balance Sheet to Statement of Net Position
Total fund balances for governmental funds ……. $ 15,462,380
Add:
Land …………………………………………………….. $ 3,871,054
Construction in progress …………………………. 748,411
Land improvements ………………………………… 1,880,024
Buildings……………………………………………….. 10,844,461
Machinery and equipment ……………………….. 5,968,095
17–13 Ch. 17—Problems
Problem 17-13, Continued
(2) Statement of Revenues, Expenditures, and Changes
in Fund Balances to Statement of Activities
Net change in fund balances—total governmental funds $ (1,326,268)
Changes in capital assets:
Increase in total capital assets* ………………… $ 4,157,074
Book value, assets sold ………………………….. (76,506)
Depreciation ………………………………………….. (1,291,691) 2,788,877
Principal payments received ……………………. (189,417)
Amortization of bond issue cost ……………….. (12,777)
Add to deferred debits …………………………….. 6,389
Problem 17-13, Continued
(3) Packer City
Statement of Net Position
Government Activities
December 31, 2019
Governmental
Funds Adjustments Total
Assets:
Cash …………………………………………………….. $16,445,619 $16,445,619
Accounts receivable ……………………………….. 604,403 604,403
Deferred bond issue cost ………………………… 104,357 104,357
Land …………………………………………………….. 3,871,054 3,871,054
Construction in progress …………………………. 748,411 748,411
Land improvements ………………………………… 1,880,024 1,880,024
Buildings……………………………………………….. 10,844,461 10,844,461
Accrued interest payable …………………………. $ 133,627 133,627
General obligation debt …………………………… 23,403,178 23,403,178
Community development bonds ……………….. 2,000,000 2,000,000
Compensated absences …………………………. 2,611,738 2,611,738
Total liabilities………………………………………… $ 1,507,679 $28,148,543 $29,656,222
Problem 17-13, Continued
(4) Packer City
Statement of Activities
December 31, 2019
Governmental Funds
Fines, Fees, Operating Net (Expense)
Expenses
Charges Grants Revenue
General government ……………………. $ 3,249,306 $ (456,271) $(2,583,307) $ (209,728)
Protection …………………………………… 6,161,176 (154,270) (6,006,906)
Highway …………………………………….. 3,102,827 (159,636) (2,943,191)
Health ………………………………………… 863,461 (863,461)
Problem 17-13, Concluded
Support Schedule
General Debt Capital Non- Adjustments
Fund Service Project major Total Debit Credit Total
Adjustments:
Property tax ……………………………………. $ 8,466,838 $1,666,729 $ 10,465 $10,144,032 (6) $ 44,394 $ 9,910,221
(11) 189,417
Intergovernment ……………………………… 1,530,215 413,989 1,944,204 1,944,204
Commercial revenues ……………………… 232,598 6,745 $ 51,217 360,725 651,285 651,285
Licenses and permits ………………………. 639,103 639,103 639,103
Economic development ……………………. 86,788 86,788 86,788
Education and recreation …………………. 1,768,889 130,257 1,899,146 1,899,146
Debt principal …………………………………. $1,157,514 1,157,514 (7) $1,157,514
Debt interest …………………………………… 1,057,619 1,057,619 (10) 18,862 1,076,481
(1) Increase capital assets. (4) Bond issue cost amortization. (7) Repayment of bonds. (10) Increase in accrued interest.
(2) Book value of assets sold. (5) New issue cost. (8) New bond issue. (11) Principal payments received in advance.
(3) Depreciation. (6) Decrease in special assessments. (9) Increase in uncompensated absences.