introduction to governmental and not-for-profit accounting, 7e filecopyright ©2013 pearson...

Copyright ©2013 Pearson Education, Inc. publishing as Prentice Hall 7-*

Introduction to Governmental and

Not-for-Profit Accounting, 7e

Chapter 7: The Governmental

Fund Accounting Cycle

Proprietary-Type Funds


Chapter 7 Topics

• Overview (review)

• Specific Aspects of Internal Service Funds

• Specific Aspects of Enterprise Funds

• Use of Special Assessments


Overview: Proprietary Funds

• Proprietary: businesslike

– Provide goods and services to paying

customers on an exchange basis

• Two types

– Enterprise funds

• Customers are primarily individual citizens

– Internal service funds

• Customers are various departments of same

government and occasionally nearby governments

• Reporting government is predominant participant

Overview: Proprietary Funds

• Pricing for goods and services

– Charge above cost

• For future expansion, equipment replacement

• Lotteries

– OR under-price, subsidize from another fund

• Each activity requires a separate fund



Proprietary Funds: Operating Cycle

2 Acquire

Assets

Provide Goods/Services:

Record revenue from user charges

Record operating and nonoperating expenses

Profit (loss)

increases

(decreases)

net position


When Must Use

Enterprise Funds

• Must use enterprise fund if:

– Required to cover costs with fees

– Pricing intended to cover costs OR

– Debt secured only by the activity’s net

revenues

• Debt is typically revenue bonds

• This rule applies to significant activities


Review: Measurement Focus and

Basis of Accounting

• Economic resources measurement focus

– Record fixed assets and related depreciation

– Record long-term debt

• Full accrual basis of accounting

– Recognize revenue when earned

– Recognize expenses when incurred


Review: Proprietary Fund

Financial Statements

Like commercial enterprises

Statement of

Cash Flows

Statement of Net Position

(Assets + Deferred Outflows)

– (Liabilities + Deferred Inflows)

= Net Position

(invested/restricted/unrestricted)

Classified

Balance Sheet

Statement of

Revenues, Expenses,

and Changes in Fund Net Position

OR

2. 3.

1.


Review: Format for Proprietary

Operating Statement Operating revenues

- Operating expenses

= Operating income (loss)

+/- Non-operating revenues and expenses

= Income before other revenues, expenses, gains,

losses, and transfers

+ Capital contributions

+/- Special and extraordinary items

+/- Transfers

= Increase (decrease) in net position

+ Net position at beginning of period

= Net position at end of period


Specific Aspects of

Internal Service Funds

• For lower cost, convenience

– Examples: motor pool, supplies, duplicating

• Controlled indirectly through operating

budgets of funds/departments

– Flexible budgets: based on operation levels

– (Governmental funds use fixed budgets)

• No budget entries, no encumbrances


Specific Aspects of

Internal Service Funds

• To create fund: Cash 500,000

Transfer in from general fund-

capital contribution 500,000

(and corresponding entry in general fund)

• Other entries same as commercial

enterprises

examples


Internal Service Funds:

Sample Ordinary Transactions Automobiles 300,000

Cash 300,000

Due from general fund 57,000

Revenues-vehicle charges 57,000

Maintenance expense 4,500

Cash (or accounts payable) 4,500

Depreciation expense-automobiles 20,000

Accumulated depreciation-automobiles 20,000


Internal Service Funds:

Year-End

• Closing same as commercial enterprises

– Debit revenues or transfers in

– Credit expenses or transfers out

– Difference to net position

• Called owners’ equity for commercial enterprises

Notes on Internal Service Funds

Financial Statements

• Statement of revenues, expenses, and

changes in fund net position

• Statement of net position

– Balance sheet format allowed

– Net position: net investment in capital assets,

restricted, and unrestricted

• Statement of cash flows

– Direct method required

– Reconciliation using indirect method required


Notes on Internal Service Funds

Financial Statements • Statement of cash flows

– Cash receipts and disbursements in four

categories (instead of FASB’s three)

• Operating activities

• Noncapital financing activities

• Capital and related financing activities

• Investing activities



Specific Aspects of

Enterprise Funds

• Examples: airports, swimming pools, utility

operations

– Electric, water, sewer

• Control

– Customer: very little control

• Little or no competition

– Legislative/governing body helps ensure

reasonable rates

continued


Specific Aspects of

Enterprise Funds

– Flexible budgeting helps control

• No budget entries or encumbrances

• Public benefit corporations


Enterprise Funds:

Sample Ordinary Transactions

Portion of sales to internal departments

Accounts receivable 495,000

Due from general fund 5,000

Revenue from waste coll. 500,000

Interest expense 40,000

Cash 40,000


Revenue bonds payable 50,000

Cash 50,000

Cash-contractor deposits 20,000

Contractor deposits payable 20,000

Estimated uncollectible accounts 5,000

Allowance for uncollectible accounts

5,000

Enterprise Funds:


to pay principal on revenue bond

Enterprise Funds:


Depreciation expense-equipment 50,000

Depreciation expense-buildings 15,000

Accumulated depreciation-equipment 50,000

Accumulated depreciation-buildings 15,000



Enterprise Funds:

Year-End

• Close revenues, expenses, and other

temporary accounts

– To net position

• Same financial statements as internal

service funds


Enterprise Funds:

Classify Net Assets

• Statement of net assets

– Must classify net position

– Net investments in capital assets

• Capital assets less accumulated depreciation and

related debt

• Examples: land, buildings, equipment


Enterprise Funds:

Classify Net Assets

– Restricted: restricted for payments

• Example: restricted for revenue bond payments

– Unrestricted: all remaining net assets


Use of Special Assessments

• Financing services or capital

improvements that benefit one group

• Use an enterprise fund if

– Plan to charge fee to recover full cost

– Use total economic resource measurement

focus

• Thus, include depreciation in the charge

– Same entries as illustrated

• Only change: receivables called “special

assessments”


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