Question

(Government and Not-for-Profit Accounting: Concepts and Practices, Chapter 9, continuing problem) You can take a help from this book

1. Indicate the activities accounted for in both internal service funds and major enterprise funds. Comment on whether any of these activities could also have been accounted for in a general or other governmental fund.
2.   How are the internal service fund activities reported in the government-wide statement of net position? How are they reported in the proprietary funds statement of net position?
3.   Did any of the internal service funds report significant operating surpluses or deficits for the year? Were any accumulated significant net asset balances over the years not invested in capital assets?
4.   Were any of the government’s enterprise funds “profitable” during the year? If so, what has the government done with the “earnings”? Has it transferred them to the general fund?
5.   Does the government have revenue bonds outstanding that are related to business-type activities? If so, for what activities?
6.   Do the financial statements include a statement of cash flows for proprietary funds? Is the statement on a direct or an indirect basis? In how many categories are the cash flows presented? Which of these categories resulted in net cash inflows? Which resulted in net cash outflows?
7.   What was the total operating income? What was total net cash provided by operating activities? What accounts for the largest difference between these two amounts?
8.   Has the city entered into any service concession arrangements? Which specific ones, and why?

Answer 1

Understanding Government and Not-for-Profit organizations, definition : Government organizations are the ones which are run by government and are staffed by the government only hence the management is done by the officials appointed by government, where-as not for profit making organizations are the one which does not have profit making as it’s objective, but are set-up for welfare of the society and are solely managed by independent elected members like president, secretary, cashier of such organization.

Now, Government and Not-for-Profit Accounting : This is to be noted that both the Government and non profits organizations follows Generally Accepted Accounting Standards, however they have their own standards ( standards are guidelines or charter which direct as how an item which is going to be part of financial statements should be dealt ) . Hence, Government organizations follow Government Accounting Standard Board , while Non-profit organizations follows Financial Accounting Standards Board.

In light of the above discussion:-

Answer to question 1) The difference between the internal service fund and the enterprise fund is that - enterprise fund provides services to the general public, for example expenses in relation to health, public safety, education, development, etc. While, internal service funds provides services within the governmental organization, for example expenses incurred in travel and transfer of government employees, maintenance of government offices, etc.

                                    Hence, activities accounted for in both internal service funds and major enterprise funds are workers’ compensation, employee health insurance and fleet maintenance, and, “yes” these funds can also be listed on within governmental activities.

Answer to Question 2)    In the government-wide statement of net position and statement of activities, internal service fund financial information is “collapsed or aggregated” and reported in the Governmental Activities column of both government-wide financial statements, unless enterprise funds are the predominant participants in an internal service fund.

For reporting purposes (reporting over here means “reporting to stakeholders”) internal service fund financial information is aggregated and reported as a separate column in the statement of net position— proprietary funds; statement of revenues, expenses, and changes in net position—proprietary funds; and statement of cash flows—proprietary funds

Answer to Question 3) “Yes” internal service funds do report significant operating surpluses or deficits for the year, because any of the expenses that Government will meet for it’s internal purpose ( for example - for example expenses incurred in travel and transfer of government employees, maintenance of government offices) may be more or less than the principle amount in the beginning.

                       Also if any accumulated significant net asset balances over the years is not invested in capital assets, then internal service funds report will show significant operating surpluses or deficits for the year.

Answer to Question 4) It depends on state to state as how do they utilize the surplus of any funds, but the funds can be invested or utilized only as per the government guidelines and accounted in the financial statements as per Government Accounting Standard Board.

                                       Such profitable funds can be used for – waste treatment, water operations , health, public safety, education, etc.

                                        At the end any of such profit un-utilized has to be transferred to General fund.

Answer to Question 5)   “Yes” the governments do have revenue bonds outstanding that are related to business-type activities, and such activities are Road and Road Improvement Projects.

Answer to Question 6)     “Yes” the financial statements includes a statement of cash flows for proprietary funds, since, cash flow statement is a financial statement that summarizes the amount of cash and cash equivalents (cash equivalents means - trade able securities like bills receivables that can be converted into cash within a very short duration) entering and leaving a company.

Is the statement on a direct or an indirect basis?

Answer- Cash flow statements are always on direct basis. The statement of cash flows direct method uses actual cash inflows and outflows from the Government operations rather than accrual basis.

In how many categories are the cash flows presented?

Answer-Statement of cash flows includes cash flows from operating, financing and investing activities so there are three categories of activities

Which of these categories resulted in net cash inflows? Which resulted in net cash outflows?

Answer- The net of all the three activities namely- cash flows from operating, financing and investing activities results in net changes in cash position.

Question 7) What was the total operating income? What was total net cash provided by operating activities? What accounts for the largest difference between these two amounts?

Comment : Incomplete question ( Need further information in relation to the items of cash flows based on which the calculation can be made )

Question 8) Has the city entered into any service concession arrangements? Which specific ones, and why ?

Comment : Incomplete question ( Need further information on the name of the city as the question mentions the term “city” only )