advanced accounting 6e by jeter chaney chapter 17

LO 3 Differences in applications of revenue, expense, and expenditures.Fund Accounting 10 Financial resources dedicated to a specified use.. LO 3 Differences in applications of revenue,

Learning Objectives

• Distinguish between a nonbusiness organization and a profit-oriented enterprise

• Explain the role of fund accounting

• Distinguish among the concepts of revenues, expenses, and expenditures as used in oriented entities and as used for expendable fund entities

profit-• Understand the classification of revenues and other resource inflows for fund accounting

• Understand the classification of expenditures and other resource outflows for fund accounting

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Learning Objectives

• Describe the critical events in the use of financial resources of an expendable fund

• Explain how capital expenditures are recorded in an expendable fund

• Understand the role of a general fund

• Contrast the consumption and the purchases methods of accounting for inventories (and other prepaid items)

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 Earn a return on investment.

 Operate in a competitive market.

 Face liquidity concerns

Classification of Nonbusiness Organizations

Five Major Classifications

– Governmental units

– Hospitals and other health care providers

– Colleges and universities

– Voluntary health and welfare organizations

– Other nonbusiness organizations (trade associations, professional associations, museums, religious organizations, etc.)

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Distinctions between Nonbusiness Organizations and Profit-Oriented Enterprises

• Distinctions

– Absence of primary goal to earn a profit

– No equity interests

– Seldom finance through charges to individuals who benefit from the service

– Rely on political action or fund-raising campaigns

– Income determination model generally not applicable

– Restrictions or limitations on use of resources

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LO 1 Nonbusiness organizations versus profit-oriented enterprises.

LO 1 Nonbusiness organizations versus profit-oriented enterprises.

Standards for Nonbusiness Organizations

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GASB Conceptual Framework: Concept Statements

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1 Objectives of Financial Reporting

2 Service Efforts and Accomplishments

3 Communication Methods

4 Elements of Financial Statements

5 Amendment of Statement Number 2

6 Measurement of Elements of Financial Statements

LO 1 Nonbusiness organizations versus profit-oriented enterprises.

Standards for Nonbusiness Organizations

LO 2 The role of fund accounting.

Fund Accounting

•Fund Accounting

–Designed primarily to meet internal reporting and control objectives

–Provides a basis for determining the fiscal responsibility and status of the organization

– Expendable – Basic fund accounting concepts.

– Proprietary – Business type activity.

– Fiduciary - Agent or trustee.

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

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Financial resources dedicated to a specified use.

Examples - Capital Projects or Debt Service fund.

Resources consist of cash and claims to cash.

Resources - Claims against resources = Fund balance.

Measurement focus is on flow of current financial resources.

Expendable Fund Entities

Accounting Model

LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

Restricted and Unrestricted Fund Entities

• Classification usually applicable to nonbusiness organizations other than governmental units

• “Restricted” refers to resources that bear a legal restriction as to use imposed by parties outside the organization

• “Unrestricted” refers to current financial resources that are available to carry out the primary or general activities of the organization at the discretion of the governing board

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

Proprietary Fund Entities

• Activities that are similar to business enterprises

• Examples:

– Electric or water utility by a municipality

– Rental of real estate by religious organization

• Focus on determination of net income, financial position, and cash flows

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

Fiduciary Fund Entities

Trust and Agency funds:

• Trust Fund – The government acts as trustee for an individual or organization

– Pension trust fund

• Agency Fund – Accounts for resources of taxes, bonds, and other receipts held for individuals, outside organizations, and/or other funds

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LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

Budgetary Fund Entities (Governmental Funds)

• Approved resource flows are incorporated into annual budgets

• Budgeted expenditures (that are enacted into law) are referred to as appropriations

• Approved budget may be recorded in the accounting records

• Budgetary account integration is useful in the control and administration of fund resources

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LO 3 Differences in applications of revenue, expense, and expenditures.

 Short- and long-run information.

 Economic resources measurement concept

 Accrual basis of accounting.

Governmental Fund (expendable)

 Current financial resources concept

 Modified accrual basis of accounting.

 Revenues recognized when measurable and available.

 Expenditures recorded when liability is incurred.

When used in fund accounting, the term “fund” usually refers to

a) A sum of money designated for a special purpose

b) A liability to other governmental units

c) The equity of a municipality in its own assets

d) A fiscal and accounting entity having a set of self-balancing accounts

LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

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 Sales and excise taxes

 Gift and inheritance taxes

 Fines and penalties

 Gifts and donations

 Forfeits

 Licenses and permits

 Sales of property

 Charges for services

 Interest earned on loans and investments From federal, state, or local units:

 Grants

 Shared revenues

 Payments in lieu of taxes

Fund Accounting

Other Financing Sources

• Debt issue proceeds are accounted for as “other financing sources.”

– Classify separately from revenue

• Interfund operating transfers are accounted for as “other financing sources,” or “uses.”

– These transfers do not represent an increase in expendable financial resources of the

organization as a whole

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LO 4 Classification of other resource flows.

Fund Accounting

• Revenue is ordinarily not recognized until it

1) can be objectively measured and

2) is available to finance expenditures of current period

• Property taxes usually meet both criteria when levied

–)Available in the period levied

• Provide a basis for obtaining cash from tax anticipation notes

• Usually collected early in the subsequent period and thus are available to finance current period operations

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LO 4 Classification of revenues.

Fund Accounting

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Revenue recognized when measurable and available.

Recognition of Revenue (Expendable Funds)

When Recognized?

LO 4 Classification of revenues.

Current Operating

Supplies or Salaries

Match

Fund Accounting

Transfers to Other Funds

• Do not represent decreases in the expendable financial resources of the organization as a whole

• Classified separately from expenditures for financial reporting purposes

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LO 5 Classification of expenditures.

Fund Accounting

Fund Balance and Classification

GASB Statement No 54:

–Significantly changed how fund balances are reported on governmental fund financial

statements

–Applies to all governmental funds: General, Special Revenue, Debt Service, Capital

Projects, and Permanent

–Does not affect the government-wide or accrual-based statements presentations

–Does not change the amount of total fund balance on any fund statements.

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LO 6 Use of financial resources.

Fund Accounting

Fund Balance and Classification

GASB Statement No 54:

 Fund balance is reported from the perspective of the underlying resources within the fund

 Fund balances are determined using a hierarchy of fund balance classifications

• based upon the extent to which governments are bound by constraints on resources

reported in the funds.

• For all governmental funds other than the general fund, any remaining positive amounts are classified as nonspendable, restricted, or committed

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LO 6 Use of financial resources.

Fund Accounting

Fund Balance and Classification

 Nonspendable: Includes amounts that cannot be spent because they are either

• Not in a spendable form (inventories or prepaid items)

• Legally or contractually required to be maintained intact (principal of a permanent fund)

 Restricted: Constraints placed on the use of resources are either

• Externally imposed by creditors (debt covenants)

• Grantors, contributors, or laws or regulations (of other governments)

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LO 6 Use of financial resources.

Fund Accounting

Fund Balance and Classification

 Committed: Amounts that can be used for specific purposes subject to constraints imposed by formal action of

(1) state’s highest level of decision-making authority (State Legislature) or (2) City Council ordinance

 Assigned: Amounts constrained for the intent to be used for a specific purpose by a

governing body or official that has been delegated authority to assign amounts

 Unassigned: Residual classification for the general fund – the only fund that can have a positive unassigned fund balance

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LO 6 Use of financial resources.

Appropriation Encumbrance Expenditure

Encumbrances and expenditures are classified on the same basis

(by fund, function, organizational unit, activity, character, or object

class) as appropriations.

Fund Accounting

• Exercise 17-3: (partial) Listed are transactions of the Town of Jackson.

– A contract was signed with an independent company to do the trash collecting for the year The contract price was $96,000

– The first monthly bill of $8,000 was received from the trash collector

– The $8,000 bill was paid

• Required: Prepare the journal entries needed in the records of the General Fund for these

transactions

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LO 5 Classification of expenditures.

Fund Accounting

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LO 5 Classification of expenditures.

Exercise 17-3: 1 A contract was signed with an independent company to do the trash collecting for the year The

contract price was $96,000

Fund Balance – Assigned (encumbrances) 96,000

1.

Fund Balance – Assigned (encumbrances) 8,000

Encumbrances 8,000

2.

Cash 8,000 3.

d) Fund Balance – Assigned (encumbrances).

LO 3 Differences in applications of revenue, expense, and expenditures.

Fund Accounting

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Fund Accounting

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LO 7 Capital expenditures.

Capital Expenditures (Expendable Fund)

 Outflow of financial resources

 Treated as a current period expenditure.

Middletown purchased a police car for $10,000.

Expenditures 10,000

Depreciation is not accounted for in the records of an expendable fund entity

Fund Accounting

Recording Budgeted and Actual Revenue and Expenditures

• Exercise 17-3: (partial)

– A budget consisting of estimated revenues of $1,950,000 and appropriations for

expenditures of $1,800,000 was passed by the town council

– Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible

– Property taxes in the amount of $1,080,000 were collected

– Equipment costing $200,000 was purchased, and the old equipment was sold at for

Fund Accounting

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Exercise 17-3: 1 A budget consisting of estimated revenues of $1,950,000 and appropriations for expenditures of

$1,800,000 was passed by the town council.

Estimated Revenues 1,950,000

1.

Fund Balance - Unassigned 150,000

LO 8 Understand the general fund.

Fund Accounting

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Exercise 17-3: 2 Property taxes of $1,150,000 were assessed; $1,115,000 are expected to be collectible 3 Property taxes

of $1,080,000 were collected.

Property Tax Receivable 1,150,000

Estimated Uncollectible Taxes 35,000 2.

Fund Accounting

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Exercise 17-5: The preclosing trial balance for the General Fund of the City of Springfield is presented below

Trial Balance for December 31, 2015:

Fund Balance – Assigned ( Encumbrances 2014 ) 35,000

LO 8 Understand the general fund.

Fund Accounting – Comprehensive Illustration

Fund Balance - Unassigned 160,000

LO 8 Understand the general fund.

Fund Accounting

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Problem 17-1: 1 The budget authorized the transfer of $50,000 from the Water Fund to the General Fund Interest due for the year on the $1,000,000, 8% bond issue for the Civic Center is approved for transfer from the General Fund to the

Debt Service Fund.

Due from Water Fund 50,000

Transfer from Water Fund 50,000

Transfer to Debt Service Fund 80,000

Due to Debt Service Fund 80,000

LO 8 Understand the general fund.

Allowance for Uncollectible Taxes (2%) 22,000

LO 8 Understand the general fund.

Fund Balance – Assigned (Encumbrances) 1,150,000

4 Invoices for all goods ordered in 2014 amounting to $29,000 were approved for payment.

Expenditures – 2014 29,000

LO 8 Understand the general fund.

Fund Accounting

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Problem 17-1:

5 Funds for bond interest on Civic Center bonds were transferred to the Debt Service Fund.

Due to Debt Service Fund 80,000

LO 8 Understand the general fund.

8 Taxes were collected from property owners in the amount of $1,050,000.

Cash 1,050,000

Property Tax Receivable 1,050,000

LO 8 Understand the general fund.

LO 8 Understand the general fund.

Fund Accounting

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Problem 17-1:

9 Past-due tax bills of $17,000 were charged off as uncollectible.

Allowance for Uncollectible Taxes 17,000

Property Tax Receivable 17,000

10 Checks in payment of invoices for goods ordered in 2014 and 2015 were issued [see items (4) and (6) above].

Vouchers Payable * 1,184,000

* ($29,000 + $1,155,000)

Fund Accounting

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Problem 17-1:

11 Revenues received from miscellaneous sources, other than property taxes, of $455,000 were recorded.

12 Purchase order for two trash collection vehicle systems was issued Bid price per system was $120,000.

Encumbrances (2 x $120,000) 240,000

Fund Balance – Assigned (Encumbrances) 240,000 Cash 455,000

Fund Accounting

Financial Statements

• Two Basic Statements (expendable fund entities)

– Balance sheet

– Statement of revenue, expenditures, and changes in fund balance

• Revenue classified by major sources.

• Expenditures classified by major functions.

• Comparative information presented for prior years

• Statement comparing budgeted and actual should be prepared for budgetary fund entities

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LO 8 Understand the general fund.

Reporting Inventory and Prepayments

Inventory

• Two Methods of accounting for and reporting inventory

– Consumption method

– Purchases method

– Both acceptable for fund purposes

• Under GASB Statement No 34, consumption method is consistent with the government-wide approach and the purchases method is not acceptable

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LO 9 Consumption and purchases Methods.

Reporting Inventory

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Assume $20,000 of beginning inventory, $50,000 is purchased, and ending inventory of $24,000.

LO 9 Consumption and purchases Methods

Reporting Inventory and Prepayments

Inventory

The Fund Balance for the governmental funds should classify any amounts for inventory as Fund Balance – Nonspendable

Consumption Method – end of year:

Fund Balance – Unassigned 4,000

Fund Balance – Nonspendable 4,000

The entry has no overall impact on fund balance, but

–Reclassifies the increase in inventory from unassigned to nonspendable fund balance

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LO 9 Consumption and purchases Methods.