Question

Explain the following as they relate to Governmental Accounting:

E: What funds follow the flow of economic resources and accrual accounting

F: Major fund reporting and the two tests

G: Major sections of a CAFR

H: Basic financial statements

I: Required Supplementary Information

J: How to record budgets and encumbrances

K: How to classify fund balance

L: Revenue and expenditure recognition

M: Interfund transactions

N: Accounting for inventories

O: Debt refunding

Answer 1

Definition of Government organization :- Government organizations are those organizations which is wholly managed by government and runs as per the policies framed by the government ,therefore, all the employees are appointed by the government and the expenses made are as per government policies.

However Government accounting refers to the process of recording and the management of all financial transactions incurred by the government which includes its income and expenditures and which is done in accordance with the Generally Accepted Accounting Principles.

Further, audit of government companies are done by the auditors who have been appointed by government only.

Answer to Question E) What funds follow the flow of economic resources and accrual accounting ?

Answer - Government fund such as the General Fund, Special Revenue Funds, Debt Service Funds, and Capital Projects Funds use the modified accrual basis of accounting, where,

A general fund is the primary fund used by a government entity. This fund is used to record all resource inflows and outflows that are not associated with special-purpose funds. The activities being paid for through the general fund constitute the core administrative and operational tasks of the government entity.

A special revenue fund is an account established by a government to collect money that must be used for a specific project

A debt service fund is a cash reserve that is used to pay for the interest and principal payments on certain types of debt.

A capital projects fund is used in governmental accounting to track the financial resources used to acquire and/or construct a major capital asset like building, dams, power-plant etc.

Answer to Question F) Major fund reporting and the two tests ?

Answer- Major funds are funds whose revenues, expenditures/expenses, assets, or liabilities (excluding extraordinary items) are at least 10 percent of corresponding totals for all governmental or enterprise funds and at least 5 percent of the aggregate amount for all governmental and enterprise funds, and the above said 10% and 5% rule are the two test to classify a fund as major fund in government accounting.

Answer to Question G)     Major sections of a CAFR ?

CAFR stands for Comprehensive Annual Financial Report . A CAFR is a set of financial statements for a state, municipality or other governmental entity that comply with the accounting requirements established by the Governmental Accounting Standards Board (GASB) and the purpose of the Comprehensive Annual Financial Report (CAFR) is to provide accurate and meaningful information concerning the City's financial condition and performance.

Finally, there are two sections of CAFR namely the introductory section and the financial section as described below :-

The introductory section includes a transmittal letter, the City's organizational chart and a list of principal officials. The financial section includes general purpose financial statements and schedules, the independent auditor's report, and the notes to the financial statements.

. Answer to Question H)   Basic financial statements.

The government financial statements usually include a statement of activities (similar to an income statement in the private sector- which shows the accounting for items of income on debit side and the items of income on credit side), a balance sheet (statement that shows the position of assets and liabilities as on a given date) and cash flow statements are often included to show the sources of the revenue and the destination of the expenses.     

. Answer to Question I)   Required Supplementary Information.

Supplementary information is not a part of the financial statement in the government accounting, neither does it form any part of the double entry system but for the purpose of disclosure such information which had or may have huge impact on government revenues/ loss should be disclosed as additional note to the financial statements. For example, government properties were destroyed due to earthquake, this is a natural event and cannot be recorded in the books but this fact can be provided as an additional information since it can affect the decision of the users of the financial information.

. Answer to Question J) How to record budgets and encumbrances.

Budget means an estimate of income and expenditure for a set period of time.

Further, the word encumbrances over here means that burden of variance between actual and the budgeted figures .

Now, Budgetary accounting is an important control tool for General Funds, Cash Funds, Construction Funds, Federal Funds and Revolving Funds (budgeted fund types) since the annual budget is a legal compliance standard against which the operations of such funds are evaluated.

. Answer to Question K) How to classify fund balance.

Fund balance is the difference between assets and liabilities in a governmental fund. The general fund, where a government accounts for everything not reported in another fund. Special revenue funds, for reporting specific revenue sources that are limited to being used for a particular purpose.

Hence fund balance is classified by the balance sheet, as the balance sheet reports an organization's assets (what is owned) and liabilities (what is owed). The net assets (also called equity, capital, retained earnings, or fund balance) represent the sum of all the annual surpluses or deficits that an organization has accumulated over its entire history.

Answer to Question L) Revenue and expenditure recognition.

In government accounting the revenue and expenditure is recognized as per the accrual concept of accounting which states that revenue should be recognized in the books of accounts in the period when earned irrespective of actual cash flow and expenditure should be recognized in the period for which it relates to irrespective of the actual cash flow.

Answer to Question M) Interfund transactions.

Interfund transactions are those financial transaction that occurs between two funds within the same government institution that are generally not included in its annual financial statements. For example : transactions include internal revenue, expense reimbursement, interfund loans, fund additions and deductions.

Answer to Question N)   Accounting for inventories.

Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale. Inventory can be raw material to be used in production , it can be the work-in-progress material, it can be the finished good ready to be sold in market.

The accounting for inventory involves determining the correct unit counts comprising ending inventory, and then assigning a value to those units. The resulting costs are then used to record an ending inventory value, as well as to calculate the cost of goods sold for the reporting period.

Answer to Question O)

Debt refunding : It means refunding occurs when an entity that has issued callable bonds calls those debt securities from the debt holders with the express purpose of reissuing new debt at a lower coupon rate. In essence, the issue of new, lower-interest debt allows the company to prematurely refund the older, higher-interest debt.