Ch 9 answers.pdf

Chapter 09 - Financial Reporting of State and Local Governments

CHAPTER 9:

FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTS OUTLINE

Number

Topic

Type/Task

Status (re: 15/e)

Questions: 9-1 9-2 9-3 9-4 9-5 9-6 9-7 9-8 9-9 9-10

Special districts and primary government Letter of transmittal and MD&A information Interim reports Financial reporting entity Primary government and component units CAFR and general purpose reports Required financial statements Reconciliation of financial statements Intra-entity transactions Contemporary issues

Compare Compare Explain Explain Explain Explain List Examples Explain Explain

New New Same Same New 9-7 9-8 9-9 New Same

Cases: 9-1 9-2 9-3 9-4

Identification of component units MD&A and statistical tables Classification of fund balances Popular reports

Analysis Analysis Analysis Internet

9-1 revised 9-2 revised New Same

Examine Multiple Choice Examine Journal entries Matching Matching Calculation Error identification Preparation Adjustments, JEs

9-1 revised 9-2 revised New Same New 9-6 revised Same Same 9-9 revised Same

Exercises/Problems: 9-1 Examine the CAFR 9-2 Various 9-3 Interim reports 9-4 Comprehensive set of transactions 9-5 Fund balance classifications 9-6 Adjusting net position balances 9-7 Change in net position 9-8 Governmental fund financial statements 9-9 Government-wide financial statements 9-10 Modified accrual to accrual accounting

9-1 © 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.


CHAPTER 9:

FINANCIAL REPORTING OF STATE AND LOCAL GOVERNMENTAL UNITS

Answers to Questions 9-1.

According to the Bureau of Census a special district includes “local entities (other than counties, municipalities, townships, or school districts) authorized by state law to provide only one or a limited number of designated functions, and with sufficient administrative and fiscal autonomy to qualify as separate governments.” As can be seen from this definition a special district is a type of special purpose government. A primary government is broader in scope than a special district. According to GASB a primary government can be a state government, a general purpose government, or a special purpose government. To qualify as a primary government, GASB indicates a special purpose government needs to have a separately elected governing body, and be legally separate and fiscally independent of state or local governments. This definition is similar to the definition provided by the Bureau of Census for a special district. Therefore, a special district could be considered a type of primary government.

9-2.

The letter of transmittal generally cites legal and policy requirements for the report. It can also provide information on factors relating to government services and operations. Since the transmittal letter is generally not a part of the audit, it can include somewhat subjective information. On the other hand, the MD&A is considered required supplementary information (RSI) subject to review by the auditor. As such, the MD&A can only contain material set out by the GASB standards. Some of the information required to be included in the MD&A is an overview of financial activity for the year, explanation of the contents of the CAFR, and a description of the financial condition and financial trends of the government.

9-3.

Disagree. Administrators need periodic reports in order to make day-to-day operating and management decisions. Government council members should expect at least monthly financial information so that they can provide oversight of the managers. Interim reports are especially helpful in evaluating whether budgets and cash needs are being met.

9-4.

According to the GASB a financial reporting entity is a primary government, organizations for which the primary government is financially accountable, and other organizations for which the nature of their relationship with the primary government are such that exclusion would make the reporting entity’s basic financial statements misleading. Organizations making up a financial reporting entity are the primary government and its component units. The primary government is a state or local generalpurpose government, or a special-purpose government. Component units are the entities for which the primary government is financially accountable.

9-5.

A component unit is a legally separate entity for which the primary government is financially accountable. The GASB also considers a component unit to be an entity 9-2

© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.


Ch. 9, Answers, 9-5 (Cont’d)

whose relationship with the primary government is so important that excluding it from the financial reports of the primary government would make the primary government’s financial reports misleading. Financially accountable means that the primary government appoints a voting majority of the component unit’s governing board and is able to impose its will on the component unit, or there is the potential for the component unit to provide specific financial benefits to, or impose specific financial burdens on the primary government. 9-6.

General purpose external financial reports include management’s discussion and analysis, basic financial statements and related notes, and required supplementary information. A CAFR provides information beyond the minimum requirements of the general purpose external financial statements. Included in a CAFR are all general purpose external financial report information, an auditor’s report (as appropriate), a narrative section (introductory section), combining and individual fund statements and schedules, and a statistical section.

9-7.

The nine required statements are: • The two government-wide financial statements—statement of net position and statement of activities. • The two governmental fund financial statements—balance sheet and statement of revenues, expenditures, and changes in fund balances. • The three proprietary fund financial statements—statement of net position; statement of revenues, expenses, and changes in fund net position; and statement of cash flows. • The two fiduciary fund financial statements—statement of fiduciary net position and statement of changes in fiduciary net position.

9-8.

Chapter 9 provides a list of the items requiring reconciliation when going from the modified accrual to accrual basis of accounting. Students should be able to provide examples related to each of the nine items identified in Chapter 9. The use of a state or local government’s CAFR (easily located through an Internet search) will help students provide examples.

9-9.

Intra-entity transactions are transactions between the primary government and its component units. Both exchange and nonexchange transactions are considered intraentity transactions. If transactions are occurring between the primary government and a component unit that is blended, the transaction activity must be eliminated for reporting at the governmentwide level. The reason is that the blended component unit is “collapsed” with the primary government’s governmental activities. Eliminating the activity between the primary government and the component unit will prevent double-counting of the activity. As an example of the effect—if the component unit is treated as a special revenue type fund for blending purposes, the effect of all activity between the component unit and the governmental funds would be eliminated for reporting at the government-wide level. 9-3



Ch. 9, Answers, 9-9 (Cont’d)

This is the same as would occur if the activity was between governmental funds, such as between a special revenue fund and any of the other governmental fund types (General Fund, debt service fund, capital projects fund, or permanent fund). 9-10. OCBOA stands for other comprehensive basis of accounting. These bases are nonGAAP, and for governments generally include cash, modified cash, or regulatory basis of accounting. Governments may use OCBOA rather than GAAP if they believe the OCBOA makes it easier for management to maintain and prepare financial reports, makes it easier for all users to understand, or is less costly than GAAP. An audit opinion must be modified to reflect that OCBOA rather than GAAP was used (see Chapter 11). Solutions to Cases 9-1.

9-2.

a.

Tesser hospital is a component unit of the City of Tesser. Tesser is financially accountable for the hospital since the mayor appoints the governing board and the city is able to impose its will on the hospital through final approval of the budget.

b.

The Atkins Convention and Visitor’s Bureau is a component unit of the City of Atkins. Since the city has the right to approve the rate of the tax (i.e., the city sets the tax) it has the ability to impose its will on the Convention and Visitor’s Bureau through its control over revenue. Because the city can impose its will on the Convention and Visitors’ Bureau it is financially accountable for the bureau.

c.

The Sports Authority is not a component unit of Dawson County. As indicated, the Sports Authority is a legally separate entity with its own board; therefore, the only question is if there is fiscal dependency on the county. Since the actions of the Sports Authority are voluntary and the recommendations of the county need not be incorporated, no fiscal dependency is created.

d.

The County Aviation Authority is a component unit of the City of Middle Falls. If the city is legally obligated to assume debt responsibilities in the event of a default a financial burden has been imposed on the city; therefore, the Aviation Authority would be considered a component unit. The opinion that the likelihood of default by the Aviation Authority is remote does not affect the decision.

e.

Help for Kids is not a component unit of Alice County. Through its request the county is performing what is referred to as a “ministerial” or compliance function (GASB, Codification, Sec. 2100.116). A compliance function is not considered to result in fiscal dependence.

a.

The two primary governmental funds revenue sources are property taxes and intergovernmental revenues. In 2010 property taxes represent over 35 percent and intergovernmental represents over 19 percent of governmental funds revenues. The percent of revenues coming from property taxes is up from a low of 9-4



Ch. 9, Solutions, Case 9-2 (Cont’d)

29.5 percent in 2005. Conversely, the percent of revenues coming from intergovernmental sources is down from a high of almost 26 percent in 2004.

9-3.

b.

Students will have interpreted the information provided in a variety of ways. The following discussion provides some points students may have considered. With the exception of 2009, property taxes have consistently increased as a percent of revenue since 2005. A review of assessed and estimated actual property values reveals that both values increased during 2008 and 2009 despite the housing market failure. However, the assessed and estimated actual property values have fallen in 2010. A review of the table indicates that the reason for the fall appears to be related to the large increase in tax exempt property. Residential and commercial construction was actually higher in 2010 than 2009. The increase in property tax revenue appears to be the result of the increased millage rate. The property tax indicators are generally strong. Weaker indicators relate to the large increase in tax exempt properties and the increased millage rate. Another problem is the State of Florida “rollback provisions” that limit the amount by which the millage rate can be increased. Overall, it appears that property tax revenue should continue to be a somewhat stable, provided property values do not continue to fall, but probably not a growing source of revenue for Jacksonville over the next two to three years.

c.

Students will have interpreted the information provided in a variety of ways. The following discussion provides some points the students may have considered. Sales tax revenue is the third largest source of revenues for Jacksonville. Sales tax revenue is elastic in that it tends to move with the health of the economy. A review of the sales tax revenue indicates that sales tax as a percent of revenue has dropped over the past 10 years. In 2010 sales taxes provided 11.4 percent of the revenue while in 2002 they provided 14.75 percent of the revenue. Sales tax revenues have dropped over the last two years. The MD&A indicates that sales tax revenues are expected to be down 3 percent in the 2010-2011 fiscal year. The decline in sales tax revenue over the past three years reflects the weak state of the economy and the high unemployment rate in Jacksonville and the State of Florida. With the impact of the overall economy and the recent sales tax trend, sales tax revenues could continue to decline or be flat over the next two to three years.

a.

Non-spendable means the assets can not be spent, either (1) because they are not in a spendable form such as cash or financial assets that can be converted to cash, or (2) because contractual requirements indicate the assets must remain intact. For an advance, which is a type of receivable, to be non-spendable there must be an indication that it is not convertible to cash in the near term due to the terms of the agreement under which the advance was made.




b.

San Mateo reported all unassigned fund balances as part of the General Fund. According to GASB standards, only the General Fund can report a positive unassigned fund balance; therefore, San Mateo has correctly reported its unassigned amounts.

c.

Since a restriction on the city’s fund balance can only be imposed by an external party (including legislative action of a higher level of government), the remaining options for classifying the reserve would appear to be committed, assigned, or unassigned. The information indicates that the board adopted a policy on reserves in 1999. Of importance in making the decision about classifying the reserve is a determination as to whether the policy was a formal action of the board that can only be undone by a similar formal action. Additionally, for a reserve to be reported as committed, the GASB requires that the formal action include additional information such as the requirements for additions to the reserves and conditions under which the amounts can be used. If such conditions are met the reserve amounts would be classified as committed. If the policy on reserves simply reflects the board’s intent to set aside resources for times of economic uncertainty the general reaction would be that the amounts can be classified as assigned. However, the GASB standard specifically indicates that reserve amounts cannot be assigned. The answer is not apparent from the information provided. Therefore, students could arrive at different conclusions. Those indicating the funds should be classified as committed may point to the fact that the policy is very specific as to its purpose and provides specific guidelines for when amounts can be used. The degree of detail indicates actions that are greater than intent. However, there is no indication about how amounts are added to the reserve (see comments in prior paragraph), which negates the possibility of reporting the reserves as committed. Students indicating the funds should be classified as assigned may point out there is no evidence that a formal action needs to be taken to “undo” the policy. Here it should be pointed out that while the students’ solution appears logical, the GASB specifically prohibits reserves from being reported as assigned. Some students may also indicate that the reserves should be unassigned since there is insufficient information to indicate the funds should be committed. Based on the limited information provided by San Mateo, unassigned would be appropriate.

9-4.

a.

Hillsborough County does produce a popular report in a downloadable .pdf form. Cities and counties may be more likely to have experimented with popular reports than smaller townships and villages.

b.

Students’ responses will reflect the reports they were able to obtain, so answers will vary. The criteria for usefulness developed by GASB in Concept Statement No. 1 or the FASB Conceptual Framework will be helpful in addressing this




question. In order to be useful, statements must be relevant, reliable, understandable, timely, consistent, and comparable. Solutions to Exercises and Problems 9-1.

Since each of the students will have a different annual report, the solutions to 9-1 should differ from student to student. Note that not all reports that say “CAFR” on the cover have three sections. Some reports may only contain the middle or financial section.

9-2.

9-3.

1. 2. 3. 4. 5.

d. a. c. d. d.

6. 7. 8. 9. 10.

a. b. b. c. a.

a.

For the first half of 2010 revenues generally exceeded expenditures (an exception was February). However, the last five months of the year the trend reversed with expenditures exceeding revenues by increasingly larger amounts each month. The first three months of 2011 indicate larger variances than were seen in 2010. Although no trend is yet apparent, it can be seen that once again February expenditures exceeded revenues, indicating that February is a low point for revenue collections.

b.

It appears Fort Collins has been able to maintain its 2009 expenditure level fairly well in 2010. Although there are some months (February, August, October, and December) when the 2010 expenditures exceed those in 2009, generally, the 2010 expenditures are slightly lower than 2009.

c.

There appear to be two unusual spikes in 2011 relative to 2010. Revenues for January and February are somewhat consistent with 2010; however, the March revenues are much higher. There is a similar pattern with expenditures. The January and March expenditures are somewhat consistent with 2010; however, the February expenditures are much higher. A question would be whether there is a relationship between the revenue and expenditure spikes. For example, perhaps one time expenditures were incurred in February for which grant revenue was received in March. If there is no relationship, the large increases in variances are somewhat of a concern that warrants monitoring since they indicate management may be having difficulty aligning expenditures and revenues.



Ch. 9, Solutions (Cont’d)

9-4.

CITY OF LYNNWOOD

TRANS. FUND NO. OR ACTIVITY 1. GF

ACCOUNT TITLE ESTIMATED REVENUES

AMOUNTS Debits Credits 2,000,000

APPROPRIATIONS

1,990,000

BUDGETARY FUND BALANCE 2.

GF

TAXES RECEIVABLE—CURRENT

10,000 1,940,000

ESTIMATED UNCOLLECTIBLE CURRENT TAXES

9,000

REVENUES GA

TAXES RECEIVABLE⎯CURRENT

1,931,000 1,940,000

ESTIMATED UNCOLLECTIBLE CURRENT TAXES

9,000

GENERAL REVENUES— PROPERTY TAXES 3.

GF

OFU—INTERFUND TRANSFERS OUT

1,931,000 25,000

CASH ISF

25,000

CASH

25,000

EQUIPMENT

300,000

ACCUMULATED DEPRECIATION

65,000

TRANSFERS IN 4.

PF

260,000

INVESTMENTS—MARKETABLE SECURITIES

800,000

REVENUES—CONTRIBUTIONS FOR ENDOWMENT

800,000



Ch. 9, Solutions, 9-4 (Cont'd)

TRANS. FUND NO. OR ACTIVITY

ACCOUNT TITLE

AMOUNTS Debits Credits

CASH

40,000

REVENUES—INVESTMENT EARNINGS PF

OFU—INTERFUND TRANSFERS OUT

40,000 40,000

CASH SRF

40,000

CASH

40,000

OFS—INTERFUND TRANSFERS IN GA

40,000

INVESTMENTS—MARKETABLE SECURITIES

800,000

GENERAL REVENUES— CONTRIBUTIONS FOR ENDOWMENT CASH

800,000 40,000

PROGRAM REVENUES—PARKS AND RECREATION—OPERATING GRANTS & CONTRIBUTIONS 5.

EF

DUE FROM OTHER FUNDS

40,000 125,000

CHARGES FOR SERVICES CASH

125,000 124,000

DUE FROM OTHER FUNDS GF

EXPENDITURES DUE TO OTHER FUNDS

124,000 125,000 125,000




TRANS. FUND NO. OR ACTIVITY

ACCOUNT TITLE DUE TO OTHER FUNDS

AMOUNTS Debits Credits 124,000

CASH GA

124,000

EXPENSES—GENERAL GOVERNMENT

125,000

INTERNAL BALANCES INTERNAL BALANCES

125,000 124,000

CASH 6.

ISF & GA

124,000

SUPPLIES INVENTORY

4,500

CASH 7.

GF

4,500

CASH

1,988,000


1,925,000

REVENUES GA

CASH

63,000 1,988,000


1,925,000

PROGRAM REVENUE—GENERAL GOVERNMENT—CHARGES FOR SERVICES 8.

ISF

DUE FROM OTHER FUNDS

63,000 23,800

BILLINGS TO DEPARTMENTS EF

EXPENSES—ADMINISTRATIVE

23,800 8,100

DUE TO OTHER FUNDS


8,100



TRANS. FUND NO. OR ACTIVITY GF

AMOUNTS ACCOUNT TITLE Debits Credits EXPENDITURES—GENERAL GOVERNMENT 15,700 DUE TO OTHER FUNDS

GA

INTERNAL BALANCES

15,700 8,100

PROGRAM REVENUE—GENERAL GOVERNMENT—CHARGES FOR SERVICES 9.

CPF

CASH

8,100 5,000,000

OFS—PROCEEDS OF BONDS ENCUMBRANCES

5,000,000 4,500,000

ENCUMBRANCES OUTSTANDING GA

CASH

4,500,000 5,000,000

BONDS PAYABLE 10.

GF

ENCUMBRANCES

5,000,000 32,000

ENCUMBRANCES OUTSTANDING

GA

32,000

ENCUMBRANCES OUTSTANDING

32,000

EXPENDITURES

31,900

ENCUMBRANCES

32,000

CASH

31,900

EQUIPMENT

31,900

CASH

31,900



Ch. 9, Solutions (Cont'd)

9-5.

1. 2. 3. 4. 5.

d. c. a. d. b.

9-6.

1. 2. 3. 4. 5.

d. e. c. c. a.




9-7. TOWN OF LEESBURG Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds to the Statement of Activities For the Year Ended June 30, 2014 Net change in fund balances – governmental funds

$ 131,700

Amounts reported for governmental activities in the statement of activities are different because: Governmental funds report capital outlays as expenditures. However, in the statement of activities the cost of those assets is allocated over their estimated useful lives as depreciation expense. This is the amount by which capital outlays $(1,250,000) exceeded depreciation $(595,000).

655,000

Transactions involving capital assets resulted in a loss. The loss did not require the use of current financial resources, and therefore was not reported in the governmental funds.

(13,000)

Bond proceeds provide current financial resources to governmental funds, but issuing debt increases long-term liabilities in the statement of net position. This is the amount of the proceeds.

(3,030,000)

A decrease in accrued liabilities indicates that expenditures recorded in the governmental funds exceed expenses for the current period.

24,000

Revenues in the statement of activities that do not provide current financial resources are not reported as revenues in the funds.

298,000

Change in net position of governmental activities

$ (1,934,300)




9-8.

Some of the modifications or corrections that should be made include: •

The word Expenses should be changed to Expenditures in the statement title.

•

An analysis should be done of the Other Governmental Funds column to determine whether any of the three funds included in the column meet the definition of a major fund. If so, the fund should be shown in a separate column to the right of the General Fund.

•

A Total Governmental Funds column should be provided to the right of the Other Governmental Funds column.

•

Debt proceeds is not a revenue. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

•

Transfers out is not an expenditure. It should be shown in a separate section titled Other Financing Sources (Uses). This section appears after expenditures.

•

Debt service should be shown separately from the General Government function. Further, debt service should show the expenditures for principal and the expenditures for interest. Generally, information on debt service is shown after the functional expenditures.

•

Capital outlay should be shown separately from the functions of government. Generally, information on capital outlays is shown after the functional expenditures.

•

The beginning and ending fund balances for the period should be included after the Net Change in Fund Balances.




9-9.

TOWN OF FREAZ STATEMENT OF NET POSITION AS OF JUNE 30, 2014 (000S OMITTED)

ASSETS: CURRENT ASSETS: CASH

$ 3,639

INVESTMENTS

7,299

TAXES RECEIVABLE (NET $49 OF ESTIMATED UNCOLLECTIBLE TAXES)

5,739

DUE FROM OTHER GOVERNMENTS

6,343

TOTAL CURRENT ASSETS

23,020

CAPITAL ASSETS: LAND

$ 8,720

OTHER CAPITAL ASSETS (NET OF DEPRECIATION) INFRASTRUCTURE (NET $45,603)

40,165

BUILDINGS (NET $8,021)

17,659

MACHINERY AND EQUIPMENT (NET $13,785)

14,935

TOTAL CAPITAL ASSETS

81,479

TOTAL ASSETS

104,499

LIABILITIES: CURRENT LIABILITES: ACCOUNTS PAYABLE

7,764

ACCRUED LIABILITIES

4,765

DUE TO OTHER FUNDS (NET)

103

CURRENT PORTION OF LONG-TERM DEBT TOTAL CURRENT LIABILITIES

8,600 21,232

LONG-TERM LIABILITIES: BONDS PAYABLE

28,700

TOTAL LIABILITES

49,932




NET POSITION: NET INVESTMENT IN CAPITAL ASSETS RESTRICTED—DEBT SERVICE

44,179 2,123

UNRESTRICTED: DESIGNATED—STREET REPAIR

900

UNDESIGNATED

7,365

TOTAL NET POSITION

$ 54,567

(Note: Net Investment in Capital Assets=$45,259 beginning balance – $1,080 depreciation. Undesignated=$6,598 beginning balance + $587 increase in unrestricted net position + $1,080 depreciation - $900 designated.)


Ch 9 answers.pdf

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