What are the objectives of government financial reporting? What are some of the unique aspects of governmental accounting?

14
UNIQUE ASPECTS OF ACCOUNTING FOR
STATE AND LOCAL GOVERNMENTS—
PART II: REPORTING FINANCIAL RESULTS
The learning objectives of this chapter are to:
discuss financial reporting objectives for governments;
define and discuss the governmental reporting components, includingSmanagement’s discussion and analysis, the basic financial
statements, and other required supplementary information;
M
provide an example of the recording and reporting process for state and local governments; and
I
provide a brief discussion of federal government accounting.
T
H
,
INTRODUCTION
Governmental financial reporting standards are developed by an accounting rule-making
A
body, the Governmental Accounting Standards Board (GASB, pronounced gaz-B). GASB’s
D to be Generally Accepted Accounting Principles
official pronouncements are considered
1
(GAAP) for state and local governments.
A
The rules for reporting financial results that are discussed in this chapter are applicable
to public colleges and universities as M
well as governments. Governments in the United States
ultimately answer to the public. The information contained in their financial statements must
serve the needs of not only lenders and vendors, but the public and its elected legislators
2
as well.
Many government bodies prepare
0 a Comprehensive Annual Financial Report (CAFR).
Included as part of that report is a set of audited basic financial statements (BFS). There
are specific guidelines as to what 0
statements and information must be included in the
audited BFS to be considered a fair 8
presentation in accordance with GAAP.
As part of the government reporting rules, governments report for the entity as
a whole. This is accomplished byTincluding two government-wide statements within
the BFS. However, unlike not-for-profit
S reporting, government reporting also requires
additional financial statements that report information about the funds that make up the
governmental entity.
Also, in addition to the BFS, GAAP require state and local governments to provide a
management’s discussion and analysis (MD&A) section and other required supplementary
information (RSI). One element of the other RSI is a comparison of actual results with
authorized budgets.
1
464
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
State and local governments are subject to many laws and regulations that require them to prepare a wide variety of different financial reports for different purposes. Not all state and local governments follow GASB GAAP.
“The decision whether or not to follow GASB standards is dictated by state and local laws and customs, and/or
by the needs of bondholders and other creditors, the general public, and anyone else to whom governments are
accountable” (Dean Mead, GASB, personal communication, December 24, 1999).
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 465
REPORTING FINANCIAL INFORMATION
The Objectives of Financial Reporting
Governmental financial reporting attempts to help keep the government accountable for
its actions. An element of accountability is to ensure that information is provided that is
helpful for making not only economic decisions, but also social and political decisions.
To have such information, it is critical to be able to compare what actually took place
with what was authorized (either directly by the public or by its elected representatives), in the form of an approved budget; to understand the financial condition of the
government and the results of its operations; to assess whether finance-related laws and
regulations were appropriately complied with; and to understand the effectiveness and
efficiency of the government.2
In addition, financial reporting by state and local governments should provide
information that allows the user to determine if interperiod equity has been achieved.
S the government has used revInterperiod, or intergenerational, equity refers to whether
enues from the current period to pay for services provided
M in the current period. If the
government were to run a large surplus or deficit, one might argue that interperiod or
I
intergenerational inequity might arise. People may be paying
today to provide benefits to
future generations or may be creating an unfair debt burden
on
future generations to pay
T
for benefits that are being received today.
H the process of developing
These objectives of financial reporting have guided
governmental accounting standards. Governmental funds
, are reported using the modified accrual basis of accounting. However, this basis does a better job of demonstrating
budget compliance than it does of reporting on interperiod equity. Financial reporting
requirements also call for government-wide statements
A prepared on an accrual basis.
Such statements should provide better information for understanding how well a government has achieved interperiod equity. This issue D
is discussed further in the “Basic
Financial Statements” section of the chapter.
A
Further, government-wide statements prepared on an accrual basis should help
M
USERS OF THE FINANCIAL STATEMENT DO THE FOLLOWING
s
s
s
s
s
s
UNDERSTAND THE OVERALL FINANCES AND OPERATING RESULTS OF THE GOVERNMENT
2
ASSESS WHETHER FINANCIAL RESULTS ARE IMPROVING OR GETTING WORSE
0
UNDERSTAND THE COST OF SERVICES PROVIDED TO THE PUBLIC
UNDERSTAND THE SOURCES OF MONEY THAT GOVERNMENT
0 USES TO PAY FOR ITS PROGRAMS
UNDERSTAND THE GOVERNMENTS INVESTMENT IN CAPITAL ASSETS AND
3
8
BE ABLE TO COMPARE THE GOVERNMENT WITH OTHER GOVERNMENTS
The Governmental Reporting Components
T
S
Figure 14-1 provides an overview of the elements of governmental financial reporting.
There are three main sections to a government’s financial report. They are the management’s discussion & analysis (MD&A), the basic financial statements (BFS), and required
supplementary information (RSI) (other than the MD&A). In turn, there are three
sections to the basic financial statements. They are government-wide financial statements, fund financial statements, and notes to the financial statements. There are two
ISBN 1-323-02300-3
2
Governmental Accounting Standards Board. Concepts Statement No. 1, Objectives of Financial Reporting.
.ORWALK #ONN &INANCIAL !CCOUNTING &OUNDATION PARAGRAPH
3
GASB. Statement No. 34, preface.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
466
S
M
I
T
H
Basic
Financial
,
Statements (BFS)
Governmental
Financial
Reporting
Management’s
Discussion &
Analysis (MD&A)
A
D
A
M
Government-Wide
Financial Statements
Statement
of
Net Position
FIGURE 14-1
Statement
of
Activities
Governmental
Funds
Governmental Reporting Components
2
0
0
8
T
S
Required
Supplementary
Information (RSI)
(Other than MD&A)
Notes to the
Financial
Statements
Fund Financial
Statements
Proprietary
Funds
Fiduciary Funds
and
Component Units
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 467
GOVERNMENT WIDE FINANCIAL STATEMENTS THE STATEMENT OF NET POSITION4 and the statement
OF ACTIVITIES 4HERE ARE THREE GROUPINGS OF FUND FINANCIAL STATEMENTS GOVERNMENTAL FUNDS
proprietary funds, and fiduciary funds and component units (see Figure 14-1). Each of
these elements of governmental financial reporting is discussed below.
MANAGEMENT’S DISCUSSION AND ANALYSIS To best achieve the objectives of
financial reporting, GASB requires that managers provide a discussion placed before
the financial statements. Because MD&A is not a part of the financial statements themselves, it is considered supplementary information. Because it is required, it must
accompany the financial statements to have a presentation that complies with GAAP.
!CCORDING TO ‘!3″
MD&A should provide an objective and easily readable analysis of the government’s financial activities based on currently known facts, decisions, or conditions.… It should provide an analysis of the government’s
overall financial position
S
and results of operations to assist users in assessing whether that financial position
M
has improved or deteriorated as a result of the year’s activities.… MD&A should
conclude with a description of currently known Ifacts, decisions, or conditions that
are expected to have a significant effect on financial
position or the results of
T
operations.5
H
To make the MD&A as useful as possible, the inclusion
, of graphs, charts, and tables is
appropriate. It is up to the managers who are preparing the document to include the most
relevant information and to be creative in providing an MD&A that achieves the goals of the
document rather than following a rigid format that might
Aexclude important information.
D
The BFS for governmental
organizations include two
MAJOR CATEGORIES GOVERNMENT WIDE FINANCIAL STATEMENTS
A AND FUND FINANCIAL STATEMENTS
The basic financial statements also include notes to the financial statements, as is required
M
for all types of organizations (see Figure 14-1).
BASIC FINANCIAL STATEMENTS
Government-Wide Financial Statements There are two government-wide finanCIAL STATEMENTS THE statement of net position and a statement
2 of activities (see Figure 14-1).
These statements are reported on the accrual basis of accounting, which is the same basis
0
required for health and not-for-profit financial statements that are prepared in accordance
0 as a whole.
with GAAP. They provide information about the government
Governments are often complex organizations. 8There may be housing agencies,
school districts, airports, recreational authorities, and so on. These agencies, districts,
T may be legally separate entities.
and authorities may be part of the government, or they
But even if they are separate, the government may have
S financial responsibility for them.
When a town, city, county, or state government issues financial statements, should all
commissions, subgovernments, agencies, and authorities be included or excluded? What
entities should be included in a government’s financial statements?
The key to these questions is the reporting entity. Financial statements can only
convey meaningful information if we know what makes up the entity being reported on.
Generally, the reporting entity includes the primary government, all organizations for
which the primary government is financially accountable, and certain other organizations.
ISBN 1-323-02300-3
4
For financial statements prior to 2012, this was referred to as a statement of net assets. In 2011, Statement No. 63
of the GASB, “Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net
Position,” changed this statement to a statement of net position.
5
GASB. Statement No. 34, Summary.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
468 0ART 6 s 2EPORTING 2ESULTS
The primary government is defined as being a state or local governmental body that has
a separately elected governing body and is legally and financially separate from other
governments.
In preparing government-wide financial statements, the focus is on the primary
government. It is shown separately from its component units, but information for
both the primary government and the component units is provided in the statements.
Component units are governmental bodies that are legally separate from the primary
government. However, the controlling majority of the component unit’s governing
body is appointed by the primary government, and there is some close financial relationship between the primary government and the component unit. For instance, the
primary government might be obligated to pay any debts of a component unit if it
cannot make payment, or the primary government might be able to impose its will on
a component unit.
For example, suppose that a city’s airport is established as a legally separate entity.
However, assume that the city appoints
S the controlling majority of the airport board and
the city is legally responsible for the airport’s debt. The airport is reported as a compoM
nent unit. Clearly, if the debt were substantial, it would be misleading for the city to fail
I
to disclose information about this component
unit. See the additional discussion of component units in Box 14-1.
T
Government-wide statements also provide separate columns to distinguish between
H that are governmental versus those that relate to
activities of the primary government
business-type activities. Providing education,
police protection, and social services would
,
be considered basic governmental functions. A golf course would generally be considered a business-type activity because it is usually run like a private business. Prices are set
with the intention of at least covering
A costs. The business is financed primarily or entirely
by user fees rather than by taxing the general public.
D
It is beneficial to separate governmental
from business-type activities because users
of financial reports might have substantially
different expectations for the financial results
A
of governmental versus business-type activities. For example, deficits in governmental
M business-type activities would almost certainly be
activities subsidized by profits from
considered to be a more acceptable outcome than the reverse.
Statement of net position.2The government-wide statement of net position is
similar to a traditional balance sheet. On this statement, the government equivalent of
0
owners’ equity is referred to as net position. Although the statement contains the same
0
8
T
BOX 14-1
Fund-Raising OrganizationSComponent Units
fund-raising organizations may appear at first
glance to be separate entities. Until recently, they
did not always get included in the financial statements of the governmental body. However, under
current rules even an organization that is a legally
separate, tax-exempt entity must be included as a
component unit if the resources it generates are
almost entirely for the benefit of the government
unit (such as a public university), if it has the ability to access or use most of the resources of the
entity, and if the amount of resources involved
are significant to the primary government.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Sometimes fund-raising organizations may be
component units of governments. If so, they
must be included in the financial statements of
the primary government. Such organizations
generally must be considered to be component units of the primary government if they
generate and hold economic resources that are
intended to be used to the direct benefit of a
governmental unit.
Public colleges and universities often
have fund-raising arms. The same is true of
many public health care organizations. These
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 469
information as a balance sheet, the recommended format is the following form of the
fundamental equation of accounting6
Assets Deferred Outflows of Resources Liabilities
Deferred Inflows of Resources Net Position
That is, assets would be presented at the top of the statement. Then, deferred outflows
of resources would be added to assets, and liabilities and deferred inflows of resources
would be subtracted to arrive at net position. Deferred outflows of resources represent the consumption of resources by the government that is applicable to a future
reporting period, while deferred inflows of resources represent the acquisition of
resources by the government that is applicable to a future reporting period. This
helps to emphasize the governmental focus on resources that are available to the government. See Exhibit 14-1 for a sample statement of net position for the hypothetical
Smith City.
S
In the Assets section of Exhibit 14-1, there is a heading for Capital assets. Included
M and also buildings, equipment,
under the heading are land and construction-in-progress,
and infrastructure. Note that land and construction-in-progress
are assets that are not
I
depreciated. Infrastructure assets are stationary assets with extremely long lifetimes,
T Such assets last longer than
including bridges, tunnels, dams, roads, and similar assets.
buildings and equipment. Buildings would only be considered
infrastructure if they are
H
part of an infrastructure network, such as a building attached to a dam project. In general,
,
governmental capital assets are depreciated in the government-wide statements in a manner similar to that used by other organizations.
As an alternative to depreciation, a modified approach is allowed for reporting
A
some infrastructure. The infrastructure would have to be a network or part of a network,
D the government would have to
such as a sewer system. To use the modified approach,
establish a level of condition at which it intends to maintain
A the infrastructure and document that the infrastructure is being maintained in that level of condition. It would also
M or maintaining the infrastruchave to provide an estimate of the annual cost of preserving
ture at the condition level specified.9
The Net Position section of the statement of net position must be divided into three
SUBCATEGORIES .ET INVESTMENT IN CAPITAL ASSETS 2 2ESTRICTED AND 5NRESTRICTED
The first of these subcategories consists of all capital 0
assets, less accumulated depreciation and less the outstanding balance of any debt related to them.
0
For example, suppose that the town of Millbridge
purchased new buses for
$2,000,000, paying one-quarter in cash and borrowing the
balance
on a 10-year mortgage.
8
At the date of acquisition, the Assets section of the statement of net position would include
T WOULD INCLUDE FOR
FOR THE BUS CAPITAL ASSET THE ,IABILITIES SECTION
the mortgage liability on the buses, and the Net Investment
in Capital Assets section of
S
Net Position would include $500,000, which is the town’s equity in the buses. Each year,
ISBN 1-323-02300-3
6
Deferred outflows of resources should be reported separately from assets, and deferred inflows of resources
should be reported separately from liabilities. Assets and deferred outflows of resources may be subtotaled, and
liabilities and deferred inflows of resources may be subtotaled. Alternatively, a balance sheet format may be used,
where Assets + Deferred Outflows of Resources = ,IABILITIES + Deferred Inflows of Resources + Net Position.

GASB, Summary of Concepts Statement No. 4.

Note that assets and liabilities have been divided into current and noncurrent (long-term) sections in Exhibit 14-1.
This approach is referred to as a classified statement of net position. This approach is permissible but not required
(GASB, Statement No. 34, paragraph 31).
9
One might expect that the government would incur maintenance expense instead of depreciation expense, but
that is not explicitly called for by the reporting requirements. See GASB Statement No. 34, paragraphs 22–26,
n n AND n FOR FURTHER DETAILS
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
470 0ART 6 s 2EPORTING 2ESULTS
Exhibit 14-1 Smith City Government-Wide Statement of Net Position
Smith City
Statement of Net Position
As of June 30, 2014
Primary Government
Governmental
Activities
Business-type
Activities
$
$
Component
Units
Total
Assets
Current assets
Cash and cash equivalents
Investments
Receivables, net
Internal balances
Inventories
Total current assets
Noncurrent assets
Restricted cash and cash equivalents
Equity interest in joint venture
Capital assets
Land and construction-in-progress
Buildings, equipment, and
infrastructure, net of depreciation
Total noncurrent assets
Total Assets [A]
Deferred Outflows of Resources [B]
Liabilities
Current liabilities
Accounts payable
Current portion of long-term liabilities
Total current liabilities
Noncurrent liabilities
Noncurrent portion of long-term
liabilities
Total Liabilities [C]
Deferred Inflows of Resources
Prepaid property taxes
Total Deferred Inflows of Resources [D]
Net Position
Net investment in capital assets
Restricted for:
Transportation and new city hall
project
Debt service
Low income housing and industrial
redevelopment
Other purposes
Unrestricted (deficit)
Total Net Position [A + B – C – D]
8,198,980
11,588,438
8,983,192
219,638S
225,504
$ 29,215,753M
$
7,361,774
45,203
2,526,731
(219,638)
88,672
9,802,741
$ 15,560,754
11,633,641
11,509,923
—
314,176
$ 39,018,494
$
212,755
5,200,266
2,829,603
—
58,588
$ 8,301,212
$
$
I
$
8,886,765
1,612,279T
$
—
—
8,886,765
1,612,279
—
—
H
,
4,485,705
24,390,223
525,867
99,111,415
$129,514,976
$158,730,729A
101,486,421
$105,972,126
$115,774,867
200,597,835
$235,487,102
$274,505,596
25,895,483
$26,421,350
$34,722,562
$
19,904,518
$
—D
$
—
$
$
A
5,276,980M
$
550,789
3,098,400
3,649,190
$
5,827,770
9,563,600
$ 15,391,370
$ 1,262,332
998,647
$ 2,260,980
—
—
6,465,200
$ 11,742,180
$
$
52,137,591
$ 55,786,781
110,449,256
$125,840,625
18,974,306
$21,235,285
$
$
$
$
$
$
$
$
2
58,311,6650
70,053,8450
8
1,004,919
1,004,919T
S
—
—
1,004,919
1,004,919
27,238
27,238
$ 72,597,970
$ 51,162,002
$123,759,972
$11,134,474
7,459,016
2,153,780
—
1,016,397
7,459,016
3,170,178
—
—
4,791,940
1,038,371
(369,112)
—
—
7,809,687
4,791,940
1,038,371
7,440,575
—
344,712
1,980,853
$ 59,988,086
$147,660,052
$13,460,039
$ 87,671,966
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE ‘OVERNMENT 7IDE 3TATEMENT OF .ET 0OSITION v What You Should Know about Your Local
Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN ‘!3” P
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 471
the balance in this section of Net Position would be adjusted for the depreciation on the
buses and for the change in the mortgage payable balance.10
The second section of Net Position is Restricted net position. Net position is considered restricted for reporting purposes on this statement if restrictions have been imposed
by creditors, grantors, donors, law, or regulation.11
The last section of Net Position, Unrestricted net position, represents the net position balance. This would be the amount that does not have to be identified in either of the
other two categories. Internal designations of intended use do not constitute restrictions.
Thus, if management intends to use some of its net position for a particular purpose, it
would still be classed as unrestricted net position unless legislation had been enacted,
placing a legal restriction on its use.
Statement of activities. The second government-wide financial statement is the
statement of activities. See Exhibit 14-2 for an example of this statement. This statement
provides information about the revenues and expenses of the government as a whole, as
S
WELL AS OTHER CHANGES IN NET POSITION ,OOKING AT THE HEADINGS ON THE LEFT ONE CAN SEE
M by function or program. These
that the top half of the statement breaks down information
functions or programs are divided between the primary government and the component
I
units. Within the primary government, the information is further broken down by type of
governmental activity and type of business activity. T
In Exhibit 14-2, the first column of numbers shows
H the expenses related to each
activity. Some governments may choose to allocate expenses from some functions to
other functions. For example, the general government ,might process payroll for many of
the other parts of the government. To get a better sense of the cost to operate each of
those other functions or programs, it might be appropriate to allocate some of the cost
A and indirect expenses should
of the payroll to them. If such allocation is done, direct
be shown in two separate columns. This facilitates comparison
of expenses with that of
D
other governments that do not allocate indirect expenses.
A It would therefore be included
Depreciation is generally treated as a direct expense.
in the expenses of each function. Infrastructure depreciation
should be included in the
M
direct expenses of the function that would normally be responsible for the acquisition and
maintenance of the infrastructure, such as a public works or transportation department.
In the statement of activities, revenues are either2associated directly with functions
in the top part of the statement or included in general revenues and other changes in net
0
position in the bottom part. In Exhibit 14-2, revenues that can be directly associated with
0 of numbers, in the top part of
functions appear in the second, third, and fourth columns
the statement. All other revenues would appear in the
8 first two columns of the bottom
part of the statement.
‘OVERNMENTAL REVENUES COME FROM FOUR PRIMARYTSOURCES TAXES USER FEES
(3) intergovernmental grants and other outside organizations,
and (4) the government
S
itself (e.g., earnings on investments). Taxes are always treated as general revenue, even
if their use is limited to a particular program. Therefore, all tax revenue is shown in the
bottom part of the statement. User fees are always associated with a particular program
and shown in the top part of the statement. Intergovernmental grants and other revenue
from outside organizations are treated as general revenue unless they are restricted in
use to a particular program. Revenue from the government itself is typically considered
general revenue.
ISBN 1-323-02300-3
10
That is, depreciation would reduce the net value of the capital asset, reducing net position, but repayment of
the mortgage would offset at least part of the reduction.
11
If some of the restricted net position is a permanent endowment, then this section of net position would have
to be further subdivided to show the nonspendable portion.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
Exhibit 14-2 Smith City Government-Wide Statement of Activities
Smith City
Statement of Activities
For the Year Ending June 30, 2014
Program Revenues
Functions/Programs
Primary Government
Governmental activities
General government
Fire and police
Public works
Engineering services
Health
Cemetery
Parks and recreation
Industrial redevelopment
Education
Interest on long-term debt
Total governmental activities
Business-type activities
Sewer treatment
Garbage collection
Recreation
Total business-type activities
Total Primary Government
Component Units
Landfill
Public schools
Total Component Units
Expenses
Charges for
Services
Operating
Grants and
Contributions
Capital
Grants and
Contributions
$ 6,796,656
24,347,501
7,092,350
909,752
4,693,973
515,106
8,073,832
2,096,072
15,325,291
4,370,025
$74,220,557
$ 2,333,286
839,199
595,000
S 493,355
M3,928,587
I 148,747
2,796,639
T
—
—
H
—
,
$11,134,813
$ 590,532
915,385
—
—
402,500
50,882
1,715,000
—
—
—
$3,674,299
$
$ 2,550,321
3,436,920
1,977,058
$ 7,964,298
$82,184,855
$A2,911,545
D5,019,373
1,014,308
$A8,945,227
$20,080,039
M
$
—
—
—
$
—
$3,674,299
$ 811,936
340,207
—
$1,152,143
$4,578,584
$ 2,367,510
21,830,549
$24,198,059
$ 2,700,501
2 494,036
$03,194,536
$
—
2,755,958
$2,755,958
$
—
43,610
1,576,831
—
—
—
—
1,806,000
—
—
$3,426,441
$
7,978
—
7,978
472
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
General
Revenues
0
Taxes
8 Property taxes, levied for general purposes
T Property taxes, levied for debt service
S Franchise taxes
Public service taxes
Payment from Purtell Township
Grants and contributions not restricted to specific programs
Unrestricted investment earnings
Other
Special item—gain on sale of parking deck
Transfers
Total general revenues, special items, and transfers
Change in Net Position
Net position—beginning
Net position—ending
Net (Expense) Revenue
and Changes in Net Position
Primary Government
Governmental
Business-type
Activities
Activities
$ (3,872,839)
(22,549,307)
(4,920,519)
(416,396)
(362,886)
(315,477)
(3,562,192)
(290,072)
(15,325,291)
(4,370,025)
$(55,985,005)
$
—
—
—
$
—
$(55,985,005)
Total
Component
Units
$ (3,872,839)
(22,549,307)
(4,920,519)
(416,396)
(362,886)
(315,477)
(3,562,192)
(290,072)
(15,325,291)
(4,370,025)
$ (55,985,005)
$ 1,173,161
1,922,661
(962,749)
$ 2,133,072
$ 2,133,072
S
M
I
T
H
,
A
D
A
M
$
1,173,161
1,922,661
(962,749)
$ 2,133,072
$ (53,851,932)
ISBN 1-323-02300-3
$
340,969
2
(18,580,555)
$(18,239,586)
0
$ 36,185,501
3,308,371
2,838,854
6,278,921
—
1,020,474
1,319,819
619,435
1,857,442
350,986
$ 53,779,802
$ (2,205,203)
89,877,169
$ 87,671,966
$
—
—
—
—
—
—
433,991
—
—
(350,986)
$
83,005
$ 2,216,077
57,772,009
$59,988,086
$ 36,185,501
3,308,371
2,838,854
6,278,921
—
1,020,474
1,753,809
619,435
1,857,442
—
$ 53,862,806
$
10,874
147,649,178
$147,660,052
$
0
8
T
S
—
—
—
—
15,325,291
4,523,196
618,994
13,965
—
—
$ 20,481,446
$ 2,241,859
11,218,180
$ 13,460,039
Note 2OW AND COLUMN TOTALS MAY NOT
equate due to rounding.
Source “ASED ON $EAN -ICHAEL -EAD
h&IGURE ‘OVERNMENT 7IDE 3TATEMENT
of Activities,” What You Should Know
about Your Local
Government’s Finances: A Guide to
Financial Statements. 2nd ed. Norwalk,
#ONN ‘!3” P
473
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
474 0ART 6 s 2EPORTING 2ESULTS
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The second through fourth columns of numbers in the top part of Exhibit 14-2
indicate the revenues related to each activity, under the broad heading of Program
Revenues. Under that heading, the three columns indicate the amount of revenue
from charges for services, operating grants and contributions, and capital grants and
contributions.
The Charges for Services column includes user fees. This results from an exchange
transaction. An exchange transaction is one in which goods or services are provided in
exchange for money or other consideration approximately equal in value to the goods or
services. For example, a toll to use a bridge or a charge to use a county ice rink would
be a user fee or charge.
The Grants and Contributions columns include revenues that do not arise as the
result of an exchange and are restricted to use for specific programs. If the grants and
contributions are to be spent to pay for operating costs, they would appear in the third
column of the exhibit (Operating Grants and Contributions). If they are intended to pay
FOR CAPITAL ASSETSˆSUCH AS BUILDINGSSEQUIPMENT LAND OR INFRASTRUCTUREˆTHEN THEY WOULD
appear in the fourth column of numbers (Capital Grants and Contributions).
M
This creates a curious anomaly. Since this statement is prepared on an accrual basis,
I the full cost of capital assets. Rather, it includes
the expense column does not include
only one year’s worth of depreciation
T expense. However, the full capital grant is treated
as current period revenue. For example, suppose that a state government made a capital
H new police station. Assume that the police stagrant of $4 million to pay for a town’s
tion will be depreciated over 40 years.
, One could reasonably argue that under accrual
accounting, only $100,000 (i.e., 1/40) of the capital grant should be treated as revenue
each year, because that will match the amount of expense that is included in the town’s
activity statement. The remainder would
A be a deferred inflow of resources. The requirement to show the full capital grant as revenue might mislead the financial statement
D results of the town’s police department, which
user about the typical annual financial
is unlikely to receive a $4 millionAcapital grant each year. Nevertheless, the full grant
is recorded as revenue, and only one year’s worth of depreciation is recorded as an
M
expense, under GAAP.
In the top part of Exhibit 14-2, the information from the first four columns of numbers is summarized in the remaining four columns. These four columns on the right side
2
of the exhibit indicate whether expenses exceed direct revenues and whether the function is governmental, business-type,0or component unit in nature.
The difference between the revenues and expenses is referred to as the net rev0
enue or net expense. The overall heading for these four columns on the right side of the
exhibit is Net (Expense) Revenue 8
and Changes in Net Position. If expenses are greater
than revenues, the net amount is shown
T in parentheses. Such activities need to draw on
the government’s general revenues. They are not financially self-sustaining based on their
S exceeding expenses are net contributors providdirect revenues. Activities with revenues
ing the government with more resources than they consume. The net revenue or expense
for the governmental activities is shown in the first of these four columns, while the net
for the business-type activities is shown in the second. Those two columns are then combined in the third of the four columns to get the totals for the primary government. The
net revenue or expense of the component units is shown in the last column in the exhibit
(see Exhibit 14-2).
One of the goals of governmental financial reporting is to allow the user to have
a sense of which services are funded by general revenues versus which governmental
activities are largely self-financing as a result of fees or intergovernmental aid. The format in the top part of Exhibit 14-2 allows the user to quickly get a sense of the extent to
which functions are self-financing. In the case of Smith City, it is apparent that the governmental activities generate revenues that are only a small portion of their expenses. The
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 475
ISBN 1-323-02300-3
TOTAL EXPENSES FOR GOVERNMENTAL ACTIVITIES WERE JUST OVER MILLION TAKEN FROM THE FIRST
column of numbers in the exhibit). The net expense of the governmental activities was
approximately $56 million (see the Total governmental activities row of the fifth column
in the exhibit). That $56 million will have to be covered by general revenues, special
items, and transfers, or the government will have a deficit from its governmental activities. A large net expense for governmental activities would be typical for most state and
local governments.
By contrast, we see that the business-type activities are more than self-sustaining.
3MITH #ITY HAS THREE IDENTIFIABLE ACTIVITIES HANDLED ON A BUSINESS TYPE BASIS SEWER TREATment, garbage collection, and recreation. From the sixth column of numbers in the exhibit
(headed Business-type Activities), we see that the sewer treatment and garbage collection
activities had net revenue; they earned a surplus on a direct revenue and expense basis.
Exercise care in interpreting this surplus. We can see from the fourth column of numbers
in the activity statement that there were approximately $1.15 million of capital grants
and contributions for sewer treatment and garbage collection.
These were undoubtedly
S
restricted for capital acquisitions and would not be available to pay for operating expenses.
M
Recreation had nearly $1 million more in expenses than revenues. In total, however, the
I even if the capital grants are
revenues of business-type activities exceeded their costs,
subtracted. Such information might be of particular interest
T to some users of the statement.
Part of that surplus could be used to help offset the $56 million by which governmental
H
activity costs exceeded revenues.
The bottom part of the statement shows other information
about the changes in net
,
position of the government. The first item listed is general revenues. All taxes are considered to be general revenues. Therefore, even if a portion of the property tax is specifically
restricted to be used for education, it is included in theAgeneral revenues category, in the
bottom part of the statement.12 Taxes are reported separately by type.
D AS ENDOWMENT CONTRIBUTIONS
/THER GOVERNMENT SOURCES OF FINANCINGˆSUCH
extraordinary items, special items, and transfers between
A governmental and business-type
FUNDSˆARE ALSO REPORTED IN THIS PART OF THE STATEMENT )NTERGOVERNMENTAL GRANTS ARE A
large source of revenue for many governments. If theyM
are restricted for use in a specific
program, they would appear in the Program Revenues columns in the top part of the
statement. If they are not restricted, they would appear in the Governmental Activities
2
column in the bottom part of the statement.
0 items. For example, the Joplin,
Extraordinary items are unusual and infrequent
Missouri city government’s costs related to a devastating tornado in 2011, would be con0
sidered an extraordinary item because it was both an unusual and infrequent occurrence.
Special items are unusual or infrequent items that8are within the control of government. For example, if a government had a large gain on
T the sale of a building or a piece
of land, it would be treated as a special item if such sales are unusual or infrequent, and
Sthe bottom part of the statement,
within the control of the government. In Exhibit 14-2, in
below General revenues, we see that Smith City sold a parking deck, and the profit on
the sale was reported as a special item.
Separate reporting of extraordinary and special items is quite beneficial. It allows
users of the financial statements to compare usual, recurring revenues and expenses from
12
Some, including the authors of this text, would argue that a tax whose revenue is restricted for education
should be shown as revenue in the top half of the statement, on the line for the education function. However,
GASB decided to treat them as general revenues “based on the belief that tax revenues that are raised by the
government through its own powers and that are earmarked or restricted for use in a program (as distinct from
charges to program customers or applicants for services) should not be regarded as reducing the net cost of the
program to be financed from general revenue sources. Rather, it is more meaningful to regard such taxes as one
of the sources of general revenues through which the government finances the net cost of the program” (GASB
3TATEMENT .O PARAGRAPH
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
476 0ART 6 s 2EPORTING 2ESULTS
year to year. It also allows examination of whether the government’s ordinary operating activities for a given year are generating an increase or a decrease in net position.
Separating one-shot revenues, gimmicks, or other atypical changes in net position is done
so that the financial statements are less likely to mislead users.
Similarly, the information from showing transfers as a separate category in the statement of activities is quite valuable. Transfers represent the movement of resources from
one fund to another. In Exhibit 14-2, the government’s business-type activities transFERRED TO THE GOVERNMENTAL ACTIVITIES 7E SEE THIS AS BOTH AN INCREASE IN THE
Governmental Activities column and a decrease in the Business-type Activities column.
The requirement to report contributions, special items, extraordinary items, and transfers
separately from the information in the top part of the statement provides the user with
an ability to gain greater insight regarding the financial results of the routine, continuing
operations of the government.
From the Change in Net Position line near the bottom of Exhibit 14-2, in the Total
column, we see that even after theSinclusion of general revenues, Smith City had a very
MODEST INCREASE IN NET POSITION FOR THE YEAR ENDING *UNE )T WOULD
M
appear that the city had to sell a parking deck to avoid having a deficit for the year. The
I
VERY LAST LINE IN THE %XHIBIT STATEMENT
OF ACTIVITIES FOR 3MITH #ITY IS .ET POSITIONˆ
ending. Note that there are exactlyT
the same amounts as the total net position in the last
line of the Exhibit 14-1 statement of net position.
H
, Figure 14-1). A separate set of fund financial statea set of fund financial statements (see
Fund Financial Statements The next element of the basic financial statements is
ments is prepared for the governmental funds, proprietary funds, and fiduciary funds.
Fund financial statements are required in addition to government-wide statements. This
A
is somewhat controversial. Some individuals
argue that these statements do not provide
enough valuable information to beD
worth requiring. Others argue that the fund financial
statements may provide a better ability to determine compliance with finance-related
laws, rules, and regulations; find A
information about the sources and uses of financial
resources; and assess the management
M of short-term resources.
Governmental funds. Recall that governmental funds are the typical funds used
to operate most governments. These include the general fund, special revenue funds,
2
capital projects funds, debt service funds, and permanent funds. A separate set of fund
0 for the governmental funds of the primary govfinancial statements must be provided
ernment. These statements use information recorded on the modified accrual basis of
0
accounting. The required statements are a balance sheet and a statement of revenues,
expenditures, and changes in fund8balances. See Exhibits 14-3 and 14-4 for examples of
governmental funds financial statements
T for hypothetical Smith City. Note that fund balance is a term that is equivalent to owners’ equity or net position. It is often used when
S
reporting for a fund or funds.
Some funds can be grouped together in these statements. However, major funds are
reported individually in their own columns. The general fund is always treated as a major
fund. It is the fund used for most of the government’s routine activities and is essential
in every government. In addition, funds that represent a substantial portion of the assets,
liabilities, revenues, or expenditures/expenses of their class or type of fund are also considered to be major funds.13 Governments may also treat any other fund as a major fund,
if they believe the extra information would be valuable to users of the BFS.
3PECIFICALLY ACCORDING TO ‘!3″ 3TATEMENT .O MAJOR FUNDS ARE THOSE THAT ARE AT LEAST PERCENT OF THE REVenues, expenditures/expenses, assets, or liabilities of all funds of their type or category (e.g., all governmental
funds), and also exceed 5 percent of that element (e.g., revenues) for all governmental and enterprise funds in
aggregate. Enterprise funds are discussed subsequently in the “Proprietary Funds” section.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
13
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 477
ISBN 1-323-02300-3
For example, in Exhibits 14-3 and 14-4, in addition to the general fund there are
ALSO INDIVIDUAL COLUMNS FOR .EW #ITY (ALL 0ROJECT ,OW )NCOME (OUSING AND )NDUSTRIAL
Redevelopment, each of which is a major fund. Next comes a summary column for
all other governmental funds and a totals column. Requiring disclosure of major funds
allows users of the statement to immediately see things such as the money being put
aside for the Industrial Redevelopment project.
Notice in Exhibit 14-3, the balance sheet, that fund balances are divided into
nonspendable, restricted, committed, assigned, and unassigned14 amounts. The nonspendable amount includes those assets that are not in spendable form. This would
include items such as inventories and long-term receivables. It also includes amounts
legally required to be maintained intact, such as endowments. Restricted amounts are
those that have been restricted externally by donors, grantors, creditors, or laws passed
by other governments, or restricted internally by laws passed by the government
itself. Committed amounts represent constraints imposed by the government’s highest
decision-making authority. Assigned amounts are those
S that are to be used for specific
purposes based on a decision of someone who has the authority to do so, and the
M
remaining balance of the fund balance would be unassigned. Notice, in Exhibit 14-3,
I in each of the columns. This
that some of the restricted fund balance is listed as being
is because some of the amounts for each of these funds
T has been restricted as to its use,
either by outsiders or by laws that the government has passed. Since the balance sheet
provides only summary information about the funds,Hthis treatment allows the user to
better understand which types of governmental funds
, have positive or negative fund
balances, and their amount.
In contrast to the government-wide financial statements, which are prepared on
the accrual basis, the governmental funds statements are
A prepared on a modified accrual
basis. At the bottom of the balance sheet, a reconciliation is provided to explain the
D
differences between this statement and the government-wide
statement of net position.
In the last column of Exhibit 14-3, Total Governmental
A Funds, the total fund balance
LINE SHOWS A BALANCE OF 4HIS NUMBER IS ADJUSTED BY THE RECONCILING ITEMS AT
M not include any capital assets,
the bottom of the page. For example, Exhibit 14-3 does
because of their treatment under the modified accrual basis of accounting. This balance
sheet does not show any infrastructure, land, buildings, or equipment. The first item in
2
THE RECONCILIATION IN %XHIBIT IS WHICH IS THE IMPACT OF RECORDING CAPItal assets under the accrual basis. The very last line in0the exhibit shows what the fund
balance for total governmental funds would have been if the accrual basis had been used.
0
.OTE THAT THIS AMOUNTˆ ˆIS EXACTLY THE SAME AS THE TOTAL NET POSITION FOR GOV8
ernmental activities in the first column of numbers in Exhibit
14-1.
The statement of revenues, expenditures, andTchanges in fund balances (see
Exhibit 14-4) reports revenues by major sources and expenditures in a detailed fashion, at
S Notice, however, that in this
least by function, similar to the government-wide statements.
funds statement, both interest and principal payments as well as capital outlays are shown
as expenditures. Also, the proceeds from long-term capital-related debt, listed as an other
financing source, has the impact of increasing fund balance. This treatment is a result of
the use of the modified accrual system for governmental funds financial statements.
Expenditures are subtracted from revenues to arrive at a subtotal, the excess (deficiency) of revenues over expenditures. After this subtotal, other financing sources or uses
and special items are shown. The other sources or uses section would include proceeds
from long-term debt, as noted previously, and also transfers between funds. In Exhibit 14-4,
14
See Statement No. 54 of the Governmental Accounting Standards Board, “Fund Balance Reporting and
Governmental Fund Type Definitions,” February 2009.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
478
Exhibit 14-3 Smith City Governmental Funds Balance Sheet
Smith City
Balance Sheet—Governmental Funds
As of June 30, 2014
General
Fund
Assets and Deferred Outflows of Resources
Cash and cash equivalents
Investments
Taxes receivable, net
Due from other funds
Receivables from state government
Property receivable
Inventories
Total Assets and Deferred Outflows of Resources
$2,392,940
—
2,665,116
959,530
440,425
—
127,975
$6,585,985
Liabilities, Deferred Inflows of Resources, and Fund Balances
Liabilities and deferred inflows of resources
Accounts payable
$2,386,076
Due to other funds
—
Payable to other governments
65,852
Matured bonds and interest payable
—
2,975,301
Prepaid property taxes and other deferred inflows
of resources
$5,427,229
Total liabilities and deferred inflows of resources
Fund balances
Nonspendable
Inventories and noncurrent receivables
$ 156,179
Permanent fund principal
—
Restricted for:
Public safety programs
54,661
New City Hall Project and Low Income Housing
—
Debt service
—
Transportation and Industrial Redevelopment
676,318
Cemetery perpetual care
—
S
Now City
MHall
Project
I
$ 865,566
T
—
H
2,067,407
, —
83,341
Other
Total
Low Income
Industrial
Governmental Governmental
Housing
Redevelopment
Funds
Funds
$
—
9,283,887
247,338
—
—
—
—
$9,531,225
$
—
7,326,926
7,700
—
—
—
—
$7,334,626
$3,924,754
2,439,676
7,155
—
1,117,227
—
—
$7,488,812
$ 7,183,260
19,050,489
4,994,715
959,530
1,640,993
2,237,022
127,975
$36,193,983
—
—
4,391,132
$ 133,384
—
—
—
175,000
$ 773,242
—
—
—
7,700
$ 752,382
—
—
—
—
$ 4,136,066
17,758
65,852
—
7,549,133
$4,499,872
$ 308,384
$ 780,942
$ 752,382
$11,768,809
$
$
$
$
$
2,237,022
—
$5,253,336
$
A
D
A
90,983
17,758
M
2
0
0
—
8—
T—
724,739
S
—
—
—
—
—
—
9,222,841
—
—
—
—
—
—
—
—
4,054,811
—
—
458,025
—
—
2,682,443
2,720,187
525,685
156,179
458,025
0
54,661
9,947,580
2,682,443
7,451,316
525,685
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
479
Committed for:
Transportation and New City Hall Project
Parks and recreation
Assigned to:
Parks and recreation
Unassigned
Total fund balances
Total Liabilities, Deferred Inflows of Resources, and Fund
Balances
69,859
23,380
—
178,359
$1,158,756
$6,585,985
28,724
—
—
—
2,498,873
—
217,174
9,016
2,814,629
32,396
—
—
—
123,900
123,900
178,359
$24,425,174
—
—
—
S—
$ 753,463
$9,222,841
$6,553,684
$6,736,430
M
$7,488,812
$7,334,626
$9,531,225
$5,253,336
I
Amounts reported for governmental activities in the statement of net
T
position are different because:
Capital
Hassets used in governmental activities are not financial
resources and therefore are not reported in the funds.
Other,long-term assets are not available to pay for current-period
112,757,897
expenditures and therefore are deferred in the funds.
6,544,213
The city has an equal interest with Nearby City in the Joint Sewerage
Facility upgrade project. That equity is not reported in the funds.
1,612,279
Internal service funds used by management to charge the cost of
certain activities, such as communications, power, and heat
to individual funds.
2,193,421
Some liabilities, including bonds payable, are not due and payable in
the current period and therefore are not reported in the fund.
(59,861,018)
Net position of governmental activities
$87,671,966
A
D
A
M
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE ‘OVERNMENTAL &UNDS “ALANCE 3HEET v What You Should Know about Your Local Government’s Finances: A Guide to Financial
Statements. ND ED .ORWALK #ONN ‘!3” P
ISBN 1-323-02300-3
2
0
0
8
T
S
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
480
Exhibit 14-4 Smith City Statement of Revenues, Expenditures, and Changes in Fund Balances (Governmental Funds)
Smith City
Statement of Revenues, Expenditures, and Changes in Fund Balances—Governmental Funds
For the Year Ending June 30, 2014
General
Fund
Revenues
Property taxes
Local sales taxes
Licenses
Fees and fines
Investment earnings
Intergovernmental
Charges for services
Permits
Miscellaneous
Total Revenues
Expenditures
Current
General government
Fire and police
Public works
Road engineering services
Sanitation
Cemetery
Parks and recreation
New City Hall Project
Education—payment to school district
Debt service
$35,821,405
2,838,854
6,278,921
424,862
1,601,456
4,283,957
7,962,122
386,628
617,312
$60,215,516
New City Hall
Project
$
—
—
—
—
—
1,804,734
—
60,974
46,323
$1,912,031
$ 6,041,585
23,610,736
3,483,043
909,752
4,249,022
494,414
7,988,180
—
15,325,291
$
—
—
—
—
—
—
—
2,068,072
—
Principal
Interest and other charges
Capital outlay
Total Expenditures
—
—
—
$62,102,021
—
—
—
$2,068,072
Excess/(Deficiency) of Revenues over
Expenditures
$ (1,886,506)
$ (156,041)
Low Income
Housing
S
M$
I
T
H
,
$
A
D$
A
M
Other
Governmental
Funds
Total
Governmental
Funds
$ 3,276,134
—
—
—
—
1,981,641
21,496
255,031
66
$ 5,534,368
$ 39,097,540
2,838,854
6,278,921
424,862
1,601,456
8,070,332
7,983,618
1,276,388
665,758
$ 68,237,727
$
84,736
—
2,605,079
—
—
—
—
—
—
$ 6,430,481
23,610,736
6,088,122
909,752
4,249,022
494,414
7,988,180
2,068,072
15,325,291
—
—
7,897,238
$ 7,908,928
2,415,000
3,650,606
2,233,146
$10,988,568
2,415,000
3,979,914
11,703,054
$ 85,262,037
$(7,717,758)
$ (5,454,200)
$(17,024,310)
Industrial
Redevelopment
—
—
—
—
—
—
—
384,642
—
384,642
$
292,470
—
—
—
—
—
—
—
—
$
2
0
0
—
8 329,308
1,572,670
T $ 2,194,448
S
$(1,809,805)
$
—
—
—
—
—
—
—
189,113
2,057
191,170
11,690
—
—
—
—
—
—
—
—
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
481
Other Financing Sources (Uses)
Refunding bonds issued
$
—
Capital-related debt issued
—
Payment to bond refunding escrow agent
—
Transfers in
90,526
Transfers out
(1,514,631)
Total Other Financing Sources and Uses
$ (1,424,105)
$
—
—
—
—
(243,632)
$ (243,632)
Special Item
Proceeds from sale of parking deck
$ 2,433,542
$
Total Other Financing Sources (Uses) and
Special Items
$ 1,009,436
$ (243,632)
$
$ (399,673)
1,153,137
$ 753,463
Net Change in Fund Balances
Fund balances—beginning
Fund balances—ending
(877,069)
2,035,825
$ 1,158,756
—
$
—
12,600,000
—
—
(1,591,231)
$11,008,769
S
M$
—
I
T$11,008,769
H$ 9,198,964
23,877
, $ 9,222,841
$
$
—
—
—
—
—
—
$ 26,631,500
910,000
$(26,098,901)
3,885,831
(153,353)
$ 5,175,077
$ 26,631,500
13,510,000
(26,098,901)
3,976,357
(3,502,848)
$ 14,516,109
$
—
$
—
$ 2,433,542
$
—
$ 5,175,077
$ 16,949,650
$
$
$(7,717,758)
14,271,442
$ 6,553,684
(279,123)
7,015,553
$ 6,736,430
(74,660)
24,499,834
$ 24,425,174
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
A
D
A
M
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE ‘OVERNMENTAL &UNDS 3TATEMENT OF 2EVENUES %XPENDITURES AND #HANGES IN &UND “ALANCES v What You Should Know about
Your Local Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN ‘!3” P
ISBN 1-323-02300-3
2
0
0
8
T
S
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
482 0ART 6 s 2EPORTING 2ESULTS
NOTICE THAT THE TOTAL OF THE TRANSFERS INTO GOVERNMENTAL FUNDS OF DIFFERS FROM THE
TOTAL OF TRANSFERS OUT OF FUNDS ,OGICALLY ONE MIGHT EXPECT THE TRANSFERS BETWEEN
funds to be exactly equal. Keep in mind, however, that this statement reflects only the
governmental funds. There are other transfers in the proprietary funds that account for this
difference. They are discussed in Appendix 14-A.
The governmental funds financial statements present reconciliations of the fund
balances and changes in fund balances to the net position and changes in net position, respectively, of the governmental activities in the government-wide statements. As
discussed previously, Exhibit 14-3 includes a reconciliation at the bottom of the statement. However, the reconciliations may be shown separately. For example, Exhibit 14-4
does not provide a reconciliation. Instead, Exhibit 14-5 provides a separate reconciliation
to explain the differences between the governmental funds statement of revenues, expenditures, and changes in fund balances and the government-wide statement of activities.
From the Total Governmental Funds column of Exhibit 14-4, we know that the total
NET CHANGE IN FUND BALANCES WAS A DECREASE
OF 4HIS BECOMES THE STARTING POINT FOR
S
Exhibit 14-5. The reconciliation continues with a description of each of the major classes of
M
I
Exhibit 14-5 Smith City Reconciliation
T
H Smith City
Reconciliation of the Statement of Revenues, Expenditures, and Changes
,
in Fund Balances of Governmental
Funds to the Statement of Activities
For the Year Ending June 30, 2014
Net change in fund balances—total governmental
funds
A
$
(74,660)
Amounts reported for governmental activities in the statement of activities
D
are different because:
Governmental funds report capitalA
outlays as expenditures. However, in
the statement of activities, the cost of those assets is allocated over their
M
estimated useful lives and reported as depreciation expense. This is the
amount by which capital outlays exceeded depreciation in the current period.
9,827,802
In the statement of activities, only2the gain on the sale of the parking deck
is reported, whereas for governmental funds, the proceeds from the sale
0 The change in net position differs
increase available financial resources.
from the change in fund balance by the cost of the parking deck.
(576,100)
Revenues in the statement of activities that do not provide current financial
8
resources are not reported as revenues
in the funds.
1,344,441
0
Bond proceeds provide current financial
T resources to governmental funds, but
issuing debt increases long-term liabilities in the statement of net position.
Repayment of bond principal is S
an expenditure in the governmental funds,
but the repayment reduces long-term liabilities in the statement of net
position. This is the amount by which proceeds exceeded repayments.
Some expenses reported in the statement of activities do not require the use
of current financial resources and therefore are not reported as
expenditures in governmental funds.
The net revenue (expense) of certain internal service funds is reported with
governmental activities.
Change in net position of governmental activities
(11,627,599)
(665,059)
(434,028)
$ (2,205,203)
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 2ECONCILIATION OF .ET #HANGES IN ‘OVERNMENTAL &UND
Balances to Governmental Activities Changes in Net Position (Separate Page Format),” What
You Should Know about Your Local Government’s Finances: A Guide to Financial Statements.
.ORWALK #ONN ‘!3” P
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 483
items that cause the accrual-based government-wide statement of activities to differ from
the governmental funds statement. In the case of Smith City, the two largest reconciling
items are the treatment of capital outlays and bond proceeds. The governmental funds
treat capital outlays as expenditures, rather than as capital assets, and treat bond proceeds
as a source of fund balance rather than as long-term liabilities. These require adjustments
OF AND RESPECTIVELY AS SHOWN IN %XHIBIT !LL OF THE ADJUSTments together result in a change in net position of governmental activities of ($2,205,203).
Note that this is the same amount as the change in net position of governmental activities
reported in Exhibit 14-2.
ISBN 1-323-02300-3
Proprietary funds. Proprietary funds are used to account for activities that are run
on a business-like basis. The two types of proprietary funds are internal service funds
and enterprise funds. The fund financial statements that are used for proprietary funds
are a statement of net position,15 statement of revenues, expenses, and changes in fund
NET POSITION AND STATEMENT OF CASH FLOWS 3EE %XHIBITS THROUGH FOR EXAMPLES
S
of these statements for Smith City. Proprietary funds statements are prepared using the
M accounting approaches of most
accrual basis of accounting and, in most respects, use the
for-profit industries.16 There is no need for reconciliations from the proprietary funds
I
statements to the government-wide statements, because the proprietary and governmentwide statements are all prepared on an accrual basis ofTaccounting.
Enterprise-type proprietary funds use the major fund
H reporting approach discussed
earlier with respect to governmental funds. Thus, any enterprise fund that is a major fund
, may be aggregated and reported
would be reported separately. Nonmajor enterprise funds
in one column. A total is shown for the enterprise funds. To the right of that total, internal
service funds are aggregated and reported. Major internal service funds do not have to be
A shown in Exhibit 14-6 reports
segregated. The proprietary fund statement of net position
on two enterprise funds, the Garbage Collection Fund and
D the Golf and Marina Fund.
For proprietary funds, the operating results are reported in a statement of revenues,
EXPENSES AND CHANGES IN FUND NET POSITION SEE %XHIBIT A
4HIS STATEMENT LISTS OPERATING
revenues and operating expenses before nonoperating items
M such as interest, transfers, and
capital contributions. Transfers are amounts provided by one fund to another. Capital contributions are things such as grants or payments by a developer or a higher-level government.
Why would a developer ever want to give a grant
2 to a government? Suppose that
a city-owned boat marina rents dock space only for sailboats. However, the city, under
0
pressure from owners of motorboats, decides to let motorboats dock at the marina as
0 needed to accommodate the
well. It will be costly to build the additional dock space
motorboat owners. One way to recover the cost of building
the new docks is to allow
8
a gasoline company to contribute the cost of building them in exchange for the right to
sell gas from the docks. The government will recoverTthe full cost of construction from
the gas company contribution, and will also gain new S
revenues it charges the motorboat
owners for using the docks. The gas company will gain sales of its product.
0ROPRIETARY FUND STATEMENTS ALSO INCLUDE A STATEMENT OF CASH FLOWS SEE %XHIBIT
This statement differs from the cash flow statement used in most other types of organizations in several respects. First, it must be presented using the direct method. Second, the
categories and their contents are slightly different than those used for the cash flow statement used by for-profit and not-for-profit organizations. A reconciliation at the bottom of
the exhibit shows the adjustments that would be needed to convert income to cash flow
from operating activities.
15
The balance sheet format is an acceptable alternative to the statement of net position for proprietary funds.
It would be inappropriate to say proprietary funds use all for-profit GAAP. For example, the GASB GAAP for
pension measurement differs from the FASB approach and applies to both governmental and proprietary funds.
16
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
Exhibit 14-6 Smith City Proprietary Funds Statement of Net Position
Smith City
Statement of Net Position
Proprietary Funds
As of June 30, 2014
Business-type Activities—Enterprise Funds
Garbage
Collection
Assets
Current assets
Cash
Investments
Restricted cash
Taxes receivables, net
Due from state government
Inventories
Total current assets
Noncurrent assets
Capital assets
Land and improvements
Construction-in-progress
Distribution and collection systems
Buildings and equipment
Less accumulated depreciation
Total noncurrent assets
Total Assets
Deferred Outflows of Resources
Liabilities
Current liabilities
Accounts payable
Due to other funds
Compensated absences
Claims and judgments
Bonds, notes, and loans payable
Total current liabilities
Noncurrent liabilities
Compensated absences
Claims and judgments
Bonds, notes, and loans payable
Total noncurrent liabilities
Total Liabilities
Deferred Inflows of Resources
$
5,891,657
—
—
2,495,210
29,046
S
88,672
8,504,585
M
$
258,418
—
1,045,325
2,475
—
—
$ 1,306,218
$
$
Total
Internal
Service Funds
6,150,075
—
1,045,325
2,497,685
29,046
88,672
9,810,802
$ 2,501,643
150,368
—
110,463
—
97,530
$ 2,860,004
I
569,459
T
1,800,474
H
29,361,628
70,785,793
,
(10,730,238)
$ 91,787,116
$100,291,701
A
$
—
$
$
$
$
$
$
$
D
A
313,199
122,500
M
78,995
—
2,761,226
2
3,275,920
0
315,979
0—
8
38,116,084
38,432,064
T
41,707,984
S—
$ 50,909,805
—
7,673,912
$ 58,583,717
$ 2,115,146
—
—
16,120,416
(4,050,552)
$14,185,010
$15,491,228
$
—
2,684,605
1,800,474
29,361,628
86,906,209
(14,780,790)
$105,972,126
$115,782,928
$
—
—
—
—
10,305,250
(4,047,214)
$ 6,258,036
$ 9,118,040
$
—
$
$
$
$
212,802
—
6,179
—
252,000
470,981
$
$
526,001
122,500
85,174
—
3,013,226
3,746,901
$
571,187
819,272
166,383
1,181,583
174,514
$ 2,912,939
$
24,714
—
13,680,813
$13,705,528
$14,176,509
$
—
$
340,694
—
51,796,898
$ 52,137,591
$ 55,884,492
$
—
—
3,922,030
—
$ 3,922,030
$ 6,834,969
$
—
$
$ 51,162,002
1,016,397
7,720,037
$ 59,898,436
$ 6,083,522
—
(3,800,451)
$ 2,283,072
252,197
1,016,397
46,125
$ 1,314,719
$
89,650
$ 59,988,086
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 0ROPRIETARY &UNDS 3TATEMENT OF .ET 0OSITION v What You Should Know about Your Local
Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN ‘!3” P
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
Net Position
Net investment in capital assets
Restricted for debt service
Unrestricted
Total Net Position
Some amounts reported for business-type
activities in the statement of net position
(Exhibit 14-1) are different because certain
internal service fund assets and liabilities
are included with business-type activities.
Net position of business-type activities
$
Golf and
Marina
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 485
Exhibit 14-7 Smith City Statement of Revenues, Expenditures, and Changes in Fund Net Position
(Proprietary Funds)
Smith City
Statement of Revenues, Expenses, and Changes in Fund Net Position
Proprietary Funds
For the Year Ending June 30, 2014
Business-type Activities—
Enterprise Funds
Garbage
Collection
Golf and
Marina
Total
Internal
Service Funds
Operating Revenues
Charges for services
Miscellaneous
$ 7,930,918
—
$ 938,183
2,678
$ 8,869,101
2,678
$11,727,776
746,733
Total Operating Revenues
$ 7,930,918
$ 940,861
$ 8,871,779
$12,474,509
$
$ 533,644
67,222
70,508
45,232
11,983
—
379,434
$ 2,914,035
308,318
598,383
568,352
360,732
—
1,193,632
$ 3,744,357
409,077
167,776
1,372,343
301,417
5,603,000
1,195,510
$1,108,024
$ (167,163)
$ 5,943,453
$ 2,928,326
$12,793,481
$ (318,973)
Operating Expenses
Salaries
Contractual services
Utilities
Repairs and maintenance
Other supplies and expenses
Insurance claims and expenses
Depreciation
Total Operating Expenses
Operating Income (Loss)
Nonoperating Revenues (Expenses)
Interest and investment revenue
Miscellaneous revenue
Interest expense
Miscellaneous expense
Total Nonoperating Revenue (Expenses)
Income (Loss) before Contributions
and Transfers
Capital Contributions
Transfers in
Transfers out
Change in Net Position
Total net position—beginning
Total net position—ending
S
M
2,380,391
I
241,095
T
527,875
523,121
H
348,749
,—
814,198
$ 4,835,429
A
$ 3,095,489
D
$
318,355
A—
(1,120,581)
M
—
$ 102,589
73,448
(816,582)
(32,792)
$
420,944
73,448
(1,937,163)
(32,792)
$
107,360
14,599
(29,131)
(123,202)
$
(802,226)
$ (673,338)
$ (1,475,564)
$
(30,375)
$ (840,501)
$ 1,452,763
$
(349,348)
—
—
(147,986)
1,152,143
—
(350,986)
$ (988,487)
2,303,206
$ 2,253,920
57,644,516
$
$1,314,719
$59,898,436
$ 2,283,072
2
0
1,152,143
0—
(203,000)
8
$ 3,242,406
T
55,341,311
S
$58,583,717
$ 2,293,263
—
6,306
(128,829)
(471,871)
2,754,942
ISBN 1-323-02300-3
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
Some amounts reported for business-type activities in the statement of activities (Exhibit 14-2) are different because the net revenue
(expense) of certain internal service funds is reported with business-type activities.
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 0ROPRIETARY &UNDS 3TATEMENT OF 2EVENUES %XPENSES AND #HANGES IN &UND .ET 0OSITION v
What You Should Know about Your Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN ‘!3” P
4HE CASH FLOW STATEMENT DISCUSSED IN #HAPTER HAS THREE SECTIONS CASH FROM OPERating activities, cash from investing activities, and cash from financing activities. As shown
IN %XHIBIT GOVERNMENTS USE A DIFFERENT ORDER OF PRESENTATION AND BREAK THE INFORMATION INTO FOUR CATEGORIES AS FOLLOWS CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM
noncapital financing activities, cash flows from capital and related financing activities,
and cash flows from investing activities.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
486 0ART 6 s 2EPORTING 2ESULTS
Exhibit 14-8 Smith City Statement of Cash Flows (Proprietary Funds)
Smith City
Statement of Cash Flows
Proprietary Funds
For the Year Ending June 30, 2014
Business-type Activities—
Enterprise Funds
Garbage
Collection
Cash Flows from Operating Activities
User charges
Payments to suppliers
Payments to employees
Payments to other funds
Claims paid
Other receipts (payments)
$ 7,980,140
(1,907,744)
(2,352,039)
S(907,738)
—
M(815,902)
Golf and
Marina
$
I
$ 1,996,718
941,704
(255,596)
(525,580)
—
—
—
$
160,529
Cash Flows from Capital and Related Financing Activities
Capital debt proceeds
Capital contributions
Capital asset purchases
Capital debt principal payments
Capital debt interest payments
Other receipts (payments)
T
$ (203,000)
H
$ (203,000)
,
Internal
Service Funds
Total
$ 8,921,844 $11,763,750
(2,163,340)
(2,118,169)
(2,877,618)
(2,946,782)
(907,738)
(834,348)
—
(5,937,716)
(815,902)
742,783
$ 2,157,247
$
669,518
$ (147,986)
$ (350,986)
$
(122,523)
$ (147,986)
$ (350,986)
$
(122,523)
$ 2,828,925
A340,207
(2,935,825)
(1,524,944)
D
(1,035,796)
A —
$ 6,062,545
—
(101,301)
(6,226,500)
(816,582)
13,422
$ 8,891,470 $
340,207
(3,037,126)
(7,751,444)
(1,852,378)
13,422
—
—
(280,060)
(667,896)
(29,131)
91,991
Net Cash (Used) by Capital and Related Financing Activities
M
$(2,327,431)
$(1,068,417)
$(3,395,848)
$
(885,096)
Cash Flows from Investing Activities
Proceeds from sales of investments
Interest and dividends
$
$
$
$
10,979
Net Cash Provided by Operating Activities
Cash Flows from Noncapital Financing Activities
Operating subsidies and transfers to other funds
Net Cash (Used) by Noncapital Financing Activities
—
—
—
2318,355
100,623
418,978
103,732
$ 0318,355
$ 100,623
$ 418,978 $ 114,710
Net Cash Provided by Investing Activities
Net (Decrease) in Cash and Cash Equivalents
$ 0(215,359) $ (955,252) $ (1,170,610) $ (223,391)
6,107,016
2,258,995
8,366,010
2,725,034
Balances—beginning of the year
8
$ 7,195,400 $ 2,501,643
Balances—end of the year
$5,891,657
$ 1,303,743
T
Note 2OW AND COLUMN TOTALS MAY NOT EQUATE DUE TO ROUNDING
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 0ROPRIETARY &UNDS 3TATEMENT
OF #ASH &LOWS v What You Should Know about Your Local
S
Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN ‘!3″ P
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
The first category, cash flows from operating activities, includes receipts and disbursements related to the operations of the fund. All cash flows that do not belong in one
of the other categories are included in this section.
The second category, noncapital financing, relates to borrowing or repaying money
for purposes other than to acquire or improve capital assets. Also included in this category are receipts from grants, other funds, and other governments, and some taxes that
are not received for either capital or operating purposes. For example, if the general fund
transfers money to an enterprise fund to cover an operating deficit, that cash receipt by
the enterprise fund would fall into this category.
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 487
The third category, capital and related financing activities, is primarily related to
acquisition and disposition of capital assets, and borrowing and repaying money related
to the acquisition of capital assets. Note that much of this would fall into the investing
category for other types of organizations.
The fourth category, cash flows from investing activities, focuses on cash flows
related to buying and selling debt and equity instruments (not including the initial
issuance of such instruments) as well as lending money and collecting payments on
those loans.
Under the GASB approach, interest paid is categorized as a financing activity, and
interest received is categorized as an investing activity. This differs from the FASB approach
for nongovernmental organizations, which treats interest as an operating activity.
The proprietary funds financial statements, governmental funds financial statements, and the government-wide financials statements are interrelated. Examples of the
connections among these statements are provided in Appendix 14-A at the end of this
chapter.
S
Fiduciary funds. The resources in the fiduciary
M funds are not really resources
of the government because they are being held in trust or as agent. These funds are
I resources are not available for
commonly called trust funds or agency funds. These
the government to use for the provision of services
T to the public. Therefore, fiduciary funds are not included in the government-wide financial statements. The fund
H
financial statements that are used for fiduciary funds are the statement of fiduciary
, net position. See Exhibits 14-9
net position and the statement of changes in fiduciary
and 14-10 for examples for Smith City. Separate columns aggregate the fiduciary
funds by type, such as pension or agency funds. These fund financial statements are
A
the only place where fiduciary funds financial information
is reported in the BFS.
Component units that are fiduciary in nature are not D
included in the government-wide
financial statements. Instead they are included in the fund financial statements of the
A
fiduciary funds.
Notice in the statement of fiduciary net position (Exhibit
14-9) that the Net Position
M
section does not have to be subdivided as is required in the proprietary funds. Also notice
that in the statement of fiduciary net position, the total assets of agency funds always
equal their total liabilities. There is no net position because
2 all of the assets are just being
held temporarily by the government. They will be passed along to other organizations;
0 ,OGICALLY BECAUSE AGENCY FUNDS
CONSEQUENTLY THERE IS NO NET POSITION BALANCE LEFT OVER
have no net position, they are not included in the statement
of changes in fiduciary net
0
position (Exhibit 14-10).
8
T
statements and fund financial statements, the basic financial statements of the government should include a set of notes (see Figure 14-1). S
Notes should disclose all informaNotes to the Financial Statements In addition to government-wide financial
ISBN 1-323-02300-3
tion needed for the financial statements, taken as a whole, to make a fair presentation of
the financial position and results of operations of the government. The notes are considered an integral part of the basic financial statements.
‘!3” 3TATEMENTS AND PROVIDE CONSIDERABLE DISCUSSION OF REQUIRED DISCLOsures that should appear in the notes. These disclosures include areas such as schedules
of interfund transfers and balances, detailed information about long-term obligations,
detailed information about payables and receivables balances, and the risks related to
government deposits and investments.
REQUIRED SUPPLEMENTARY INFORMATION Governments also present RSI in addition
to the basic financial statements (see Figure 14-1). A variety of information geared to
different types of users is provided in the RSI. One element of RSI is discussed in an
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
488 0ART 6 s 2EPORTING 2ESULTS
Exhibit 14-9 Smith City Statement of Fiduciary Net Position
Smith City
Statement of Fiduciary Net Position
Fiduciary Funds
As of June 30, 2014
Pension
Trust
Assets
Cash and cash equivalents
Receivables
Interest and dividends
Other receivables
Total receivables
Investments, at fair value
U.S. Treasuries
Municipal bonds
Corporate bonds
Common stock
Preferred stock
Total investments
Total Assets
Deferred Outflows of Resources
Liabilities
Accounts payable
Refunds payable and others
Total Liabilities
A
D
Deferred Inflows of Resources
A
Net Position
M
Held in trust for pension benefits and
other purposes
Agency
Funds
$
1,381
$
875
$ 31,422
$
355,933
4,778
360,711
$
532
—
532
$
$ 9,139,226
4,569,613
11,424,033
18,278,453
2,284,806
$45,696,131
$46,058,223
$56,000
—
—
—
—
$56,000
$57,407
$
$
—
$
—
$
$
$
$
864
—
864
$
$
—
951
951
$
—
$
—
$
—
$56,543
$
—
$
S
M
I
T
H
,
Investment
Trusts
$46,057,272
$
—
128,213
$128,213
—
—
—
—
—
$
—
$159,635
—
—
159,635
$159,635
2
0
0
8 ELEMENT IS A BUDGETARY COMPARISON SCHEDULE hFOR
EARLIER SECTION -$! !NOTHER 23)
the general fund and for each major special revenue fund that has a legally adopted
T
annual budget.” See Exhibit 14-11 for an example of a budgetary comparison schedS
ule for Smith City.
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 3TATEMENT OF &IDUCIARY .ET 0OSITION v What You Should
Know about Your Local Government’s Finances: A Guide to Financial Statements ND ED .ORWALK #ONN
GASB, 2011, p.59.
For governments, accountability is essential. The budgetary comparison schedule, or
statement, presents the original adopted budget, the final budget, and the actual results.
Governments are encouraged to include a column presenting the variance between the
final budget and the actual results, and may have a column for the difference between the
original budget and the actual budget. The final budget may be the result of numerous
changes that have been authorized legally during the year.
For example, consider Exhibit 14-11. The first two columns of numbers provide the
original and final budgets. The third column reports on the actual results. The next two
columns allow the reader to compare the original budget with the final budget and the
Alternatively, the government may provide a budgetary comparison statement, included in the BFS (GASB
Statement No. 34, paragraph 130).
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3

#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 489
Exhibit 14-10 Smith City Statement of Changes in Fiduciary Net Position
Smith City
Statement of Changes in Fiduciary Net Position
Fiduciary Funds
For the Year Ending December 31, 2014
Pension
Trust
Additions
Contributions
Employer
Plan members
Total contributions
Investment earnings
Net (decrease) in fair value of
investments
Interest
Dividends
Less investment expense
Net investment earnings
Total Additions
Deductions
Benefits
Refunds of contributions
Administrative expenses
Total Deductions
Change in Net Position
Net position—beginning of year
Net position—end of year
$ 1,904,939
994,863
$ 2,899,802
S
(190,765)
M1,722,610
I 1,011,691
(151,500)
$T 2,392,036
$ 5,291,838
H
$, 1,717,133
$
325,284
61,272
$A2,103,689
$D3,188,149
42,869,124
A
$46,057,272
Investment
Trusts
$
$
—
—
—
$
—
3,192
—
—
$ 3,192
$ 3,192
$ 2,660
—
475
$ 3,135
$
57
56,486
$56,543
M
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE 3TATEMENT OF #HANGES IN &IDUCIARY .ET 0OSItion,” What You Should Know about Your Local Government’s Finances: A Guide to Financial
Statements ND ED .ORWALK #ONN ‘!3” P
2
ISBN 1-323-02300-3
final budget with the actual results. One can see that0the variance of the original budget from the final budget was substantially greater than the variance of the final budget
versus the actual results. The comparison of the final 0
budget versus the actual amounts
allows the user to assess legal and budgetary compliance.
8 The comparison of the original budget with the final budget allows the user to assess the competence of the original
T
estimation and the ability of the government and its managers
to control its operations.
As discussed earlier, the government uses accrualSaccounting for government-wide
statements and modified accrual for governmental funds financial statements. The cash
basis of accounting is also discussed in Chapter 13. The budgetary comparison statements are prepared using the budgetary basis of accounting, the basis of accounting that
the government uses for its budgets. This varies for different governments. Use of the
cash basis for budgeting is not uncommon. A reconciliation must be provided for the
differences between the budgetary information and information on a GAAP basis. In
Exhibit 14-11, the last two columns provide information to help the user convert from
the budgetary basis to GAAP. The next to last column shows differences between the

GASB Statement No. 34 does not explicitly indicate if the reconciliation should be from the budgetary basis to
an accrual or a modified accrual basis. However, since governmental funds use the modified accrual basis, the
comparison would be from the budgetary basis to the modified accrual basis.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
490
Exhibit 14-11 Smith City Budgetary Comparison Schedule (General Fund)
Smith City
Budgetary Comparison Schedule for the General Fund
For the Year Ending June 30, 2014
Budgeted Amounts
Revenues
Property taxes
Local sales taxes and licenses
Fees and fines
Investment earnings
Intergovernmental
Charges for services
Permits
Other
Total Revenues
Expenditures
General government
Fire and police
Public works
Road engineering services
Sanitation
Cemetery
Parks and recreation
Education
Total Expenditures
Excess/(Deficiency) of Revenues over
Expenditures [A]
Original
Final
$36,412,483
8,988,846
503,160
1,488,620
4,834,129
8,675,080
711,162
2,117,004
$63,730,484
$36,297,113
8,985,217
503,160
1,488,620
4,599,952
7,841,505
385,000
854,694
$60,955,260
$ 8,286,274
23,135,676
3,650,941
907,393
4,029,375
507,150
7,741,398
15,400,000
$63,658,207
$ 6,627,709
23,788,594
3,518,094
907,893
4,322,257
507,150
7,957,649
15,400,000
$63,029,345
$
$ (2,074,085)
72,278
S
M
I
Actual Amounts
T Basis
Budgetary
H
$35,821,405
9,117,774
,424,862
1,601,456
4,283,957
7,962,122
386,628
617,312
$60,215,516
$
A
D
A
6,035,050
M
23,659,796
3,495,231
907,893
4,322,257
494,414
7,902,402
15,325,291
$62,142,334
2
0
0
8
$ (1,926,819)
T
S
Variances
Budget to
GAAP
Differences
Over (Under)
Actual
Amounts
GAAP Basis
Original to
Final
Final to
Actual
$ (115,371)
(3,630)
—
—
(234,177)
(833,575)
(326,162)
(1,262,311)
$(2,775,224)
$(475,707)
132,558
(78,298)
112,836
(315,995)
120,617
1,628
(237,382)
$(739,745)
$
$(1,658,565)
652,918
(132,847)
501
292,882
—
216,251
—
$ (628,861)
$(592,659)
(128,798)
(22,863)
—
—
(12,737)
(55,247)
(74,709)
$(887,011)
$ (6,535) (1)
49,060 (1)
12,188 (1)
(1,859) (1)
73,235 (1)
—
(85,777) (1)
—
$ 40,313 (1)
$ 6,041,585
23,610,736
3,483,043
909,752
4,249,022
494,414
7,988,180
15,325,291
$62,102,021
$(2,146,363)
$ 147,267
$(40,313)
$ (1,886,506)
$
—
—
—
—
—
—
—
—
—
$35,821,405
9,117,774
424,862
1,601,456
4,283,957
7,962,122
386,628
617,312
$60,215,516
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
491
Other Financing Sources (Uses)
Tranfers in
Tranfers out
Total Other Financing Sources
and Uses [B]
$
657,668
(2,079,179)
$ (1,421,512)
91,000
(1,514,631)
$ (1,423,631)
$
90,526
(1,514,631)
$ (1,424,105)
Special Item
Proceeds from Sale of Parking Deck [C]
$
948,675
$ 2,450,000
$ 2,433,542
Fund balances—beginning [D]
$ 2,470,125
$ 1,919,959
$ 1,919,959
$ (566,668)
564,548
$
(2,120)
$
$
(474)
—
(474)
$
$
—
—
—
$
90,526
(1,514,631)
$ (1,424,105)
$ 1,501,325
$ (16,458)
$
—
$ 2,433,542
S
$ (550,166)
$
—
$(115,866) (2)
$ 2,035,825
M
Fund balances—ending [A + B + C + D]
$ 2,069,566
$ 872,243
$ 1,002,577
$(1,197,323)
$ 130,334
$(156,179)
$ 1,158,756
I
Explanation of differences:
A 4HE CITY BUDGETS FOR VACATION AND SICK LEAVE ONLY TO THE EXTENT EXPECTED TO BE PAID RATHER THAN ON THE MODIlED ACCRUAL BASIS
A
T
(b) Encumbrances for equipment and supplies ordered but not received are reported in the year the orders are placed for
BUDGETARY PURPOSES BUT ARE REPORTED IN THE YEAR THE EQUIPMENT AND SUPPLIES ARE H
RECEIVED FOR ‘!!0 PURPOSES
B
C .ET INCREASES IN FUND BALANCEˆBUDGET TO ‘!!0
C
(2) The amount reported as “fund balance” on the budgetary basis of accounting derives ,from the basis of accounting used in preparing the city’s budget This amount differs
from the fund balance reported in the statement of revenues, expenditures, and changes in fund balances because of the cumulative effect of transactions such as those
described above.
Source “ASED ON $EAN -ICHAEL -EAD h&IGURE )LLUSTRATIVE “UDGETARY #OMPARISON 3CHEDULE v 7HAT 9OU 3HOULD +NOW ABOUT 9OUR ,OCAL ‘OVERNMENTS &INANCES ! ‘UIDE TO
&INANCIAL 3TATEMENTS .ORWALK #ONN ‘!3” PP n
A
D
A
M
ISBN 1-323-02300-3
2
0
0
8
T
S
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
492 0ART 6 s 2EPORTING 2ESULTS
final budget and GAAP, and the last column shows the actual results on a GAAP rather
than budgetary basis. At the bottom of the page a summary explanation is given for the
differences.
RSI also includes a variety of other schedules and statistical data. The various other
elements of RSI are beyond the scope of this book.
The Millbridge Example
The information that was recorded in Chapter 13 for Millbridge is now used to prepare
financial statements. Exhibit 13-3 from Chapter 13, which summarizes all of the financial
events for Millbridge, is repeated here as Exhibit 14-12, for convenience.
GOVERNMENTAL FUNDS FINANCIAL STATEMENTS The governmental funds financial
statements are reported on a modified accrual basis, so they may be developed directly
from the information in Exhibit 14-12, which was recorded on that basis. Exhibits 14-13
S
and 14-14 present the governmental funds balance sheet and statement of revenues,
expenditures, and changes in fundM
balances. Note that each of the governmental funds
is shown in this example because they all meet the criteria for being considered major
I
funds.
T
The assets and liabilities in Exhibit
14-13 come directly from the ending balances
in Exhibit 14-12. For example, theH
$10,000 of cash in the General Fund column comes
from the ending balance in the Cash column in Exhibit 14-12, Part A. The $42,000 in cash
in the Debt Service Fund column ,comes from Exhibit 14-12, Part B. The remainder of
the assets and liabilities can be found for all three funds using the ending balances from
Exhibit 14-12, Parts A, B, and C.
A statement of revenues, expenditures, and changes
Now examine Exhibit 14-14, the
in fund balances. The revenues andDexpenditures also come directly from the changes in
the fund balance columns of Exhibit 14-12, Parts A, B, and C.
Ashow the connection between the government-wide
Reconciliations are required to
statement of net position and the M
governmental funds balance sheet, and between the
government-wide statement of activities and the governmental funds statement of revenues, expenditures, and changes in fund balances. At the bottom of Exhibit 14-13, we can
see that for this example there are2three factors that explain the difference between the
$99,000 total fund balance as reported on the governmental funds balance sheet and the
0
$105,000 total net position that will be reported on the government-wide statement of net
0 reporting capital assets, and long-term liabilities.
position. They are related to inventory,
These items are discussed subsequently.
8
Exhibit 14-15 provides a reconciliation of the statement of revenues, expendiT of governmental funds (Exhibit 14-14) to the
tures, and changes in fund balances
statement of activities. In this reconciliation,
we can see that there were four reasons
S
that the changes in fund balances on the governmental funds financial statement
will differ from the change in net position that we will see on the government-wide
statement.
These relate to treatment of expenditures for supplies, bond proceeds, capital outlays, and a special item. These reconciling items are discussed subsequently as well.
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
ISBN 1-323-02300-3
GOVERNMENT-WIDE FINANCIAL STATEMENTS %XHIBITS AND PRESENT THE
government-wide statement of net position and statement of activities. Notice that there
are no amounts in the Business-type Activities column or in the Component Units column
because Millbridge has neither business-type activities nor component units. These columns would not have to be shown since there is no information in them.
How are these statements derived? To prepare government-wide statements, the
ending balances in the various governmental funds are aggregated. For example, consider
493
Exhibit 14-12
Town of Millbridge
Financial Transactions (Journal and Ledger)
Prepared on a Modified Accrual Basis
For the Year Ending December 31, 2014
A. The General Fund

Assets
Cash
Beginning
Balance
$ 68,000
Transaction 1a
Property
State
Taxes
Aid
Receivable Receivable
$ 25,000
Accounts
Payable
$ 15,000
$ 5,000
611,000
Transaction 1b
600,000
Transaction 2a
15,000
A
D
A
M
(15,000)
150,000
125,000
Transaction 3
$(580,000)
(125,000)
Transaction 4a
(5,000)
(5,000)
Transaction 4b
(53,000)
7,000
Transaction 5
(97,000)
Transaction 6
Transaction 7
(63,000)
Transaction 8a
Transaction 8b
Transaction 9
Ending Balance $ 10,000
Fund Balance
Fund Balance
Property Tax Revenues
(600,000)
Transaction 2b
Transaction 2c
S
Liabilities and Fund Balance
M
Liabilities
I
Due to
Due to
Debt Service
Capital
Salaries
FundT Projects Fund Payable
H
$18,000
$ 70,000
$
0
$ 15,000
,
611,000
$ 36,000
$ 25,000
=
$ 7,000
2
0
3,000
0
8
T
S
$21,000
150,000 State Aid Revenues
20,000
(300,000) General Government Expenditures
(200,000) Public Safety Expenditures
(100,000) Sanitation Expenditures
(40,000) General Government Expenditures
(15,000) Public Safety Expenditures
(5,000) Sanitation Expenditures
(100,000) Transfer to Debt Service Fund
(63,000)
$ 7,000
$20,000
$ 16,000
ISBN 1-323-02300-3
(Continued)
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
494 0ART 6 s 2EPORTING 2ESULTS
Exhibit 14-12 Continued
B. The Debt Service Fund

Assets
Beginning Balance
Transaction 1a
Transaction 1b
Transaction 2a
Transaction 2b
Transaction 2c
Transaction 3
Transaction 4a
Transaction 4b
Transaction 5
Transaction 6
Transaction 7
Transaction 8a
Transaction 8b
Transaction 9
Ending Balance
Cash
Due from
General
Fund
Liabilities
$ 10,000
$18,000
$0
97,000
(65,000)
3,000
$ 42,000
$21,000
S
M
I
T
H
,
=
C. The Capital Projects Fund

Assets
Beginning Balance
Transaction 1a
Transaction 1b
Transaction 2a
Transaction 2b
Transaction 2c
Transaction 3
Transaction 4a
Transaction 4b
Transaction 5
Transaction 6
Transaction 7
Transaction 8a
Transaction 8b
Ending Balance
Liabilities and Fund Balance
Cash
Due from
General
Fund
$ 20,000
$ 70,000
63,000
(63,000)
A$0
D
A
M
$ 28,000
100,000 Transfer from General Fund
(15,000) Interest Expenditure
(50,000) Debt Service—Principal Expenditure
$ 63,000
Liabilities and Fund Balance
Liabilities
2$0
0
0
8
T
S
Fund Balance
$ 90,000
200,000 Other Sources of Financing—
Bond Proceeds
(270,000) Capital Outlay Expenditure
200,000
(270,000)
$ 13,000
Fund Balance
$ 7,000
=
$0
$ 20,000
ISBN 1-323-02300-3
Financial Management for Public, Health, and Not-for-Profit Organizations, Fourth Edition, by Steven A. Finkler, Thad D. Calabrese, Robert M. Purtell, and Daniel L. Smith.
Published by Prentice Hall. Copyright © 2013 by Pearson Education, Inc.
#HAPTER s 5NIQUE !SPECTS OF !CCOUNTING FOR 3TATE AND ,OCAL ‘OVERNMENTSˆ0ART )) 2EPORTING &INANCIAL 2ESULTS 495
Exhibit 14-13 Millbridge Governmental Funds Balance Sheet
Town of Millbridge
Balance Sheet
Governmental Funds
December 31, 2014
General Fund
Debt
Service Fund
Capital Projects
Fund
Total
Governmental
Funds
Assets and Deferred Outflows of
Resources
Cash
$10,000
$42,000
$13,000
$ 65,000
Property taxes receivable, net
36,000
—
—
36,000
State aid receivable
25,000
Due from other funds
Total assets and deferred outflows
of resources
—
$71,000
Liabilities, Deferred Inflows of
Resources, and Fund Balances
Liabilities:
Accounts payable
$ 7,000
S
M
I
T
H
,
—
—
25,000
21,000
7,000
28,000
$63,000
$20,000
$ 154,000
$
$
$
—
—
Salaries payable
20,000
—
—
20,000
Due to debt service fund
21,000
—
—
21,000
—
—
7,000
—
$ 55,000
Due to capital projects fund
Total liabilities and deferred
inflows of resources
7,000
$55,000
Fund Balances:
Unassigned
Total fund balances
A
D
A
M
$
—
$
$16,000
$63,000
$20,000
$ 99,000
$16,000
$63,000
$20,000
$ 99,000
2
Total liabilities, deferred inflows of
$63,000
$20,000
resources, and fund balances
$71,000
0
Reconciliation:
0
Amounts reported for governmental activities in the statement of net position (Exhibit 14-16) are
8
different because:
Inventory is treated on a purchases basis in the funds. T
Capital assets used in governmental activities are not financial
S resources and therefore are not
reported in the funds.
Long-term liabilitie…
Purchase answer to see full
attachment