3.0 State and Local Governments BAR Practice Quiz

• A. Full accrual basis with an economic resources measurement focus, recognizing all assets, deferred outflows, liabilities, and deferred inflows regardless of when cash flows occur
• B. Modified accrual basis with a current financial resources measurement focus, the same as governmental fund financial statements
• C. Cash basis, government-wide statements measure only actual cash receipts and disbursements
• D. The basis varies by activity, governmental activities use modified accrual; business-type activities use full accrual

GASB Statement No. 34 established the dual-reporting model: Government-wide financial statements: Full accrual basis / Economic resources measurement focus, long-term assets (capital assets, infrastructure), long-term liabilities (bonds payable, pension obligations), deferred outflows/inflows are all recognized; revenues are recognized when earned (not when received); expenses are recognized when incurred (not when paid). Governmental fund financial statements: Modified accrual basis / Current financial resources measurement focus, only short-term financial resources are recognized; revenues recognized when measurable and available; expenditures recognized when incurred if current liability; long-term assets and liabilities are NOT reported in funds.

• A. Debt service fund, accounts for the accumulation of resources for and the payment of general long-term debt principal and interest
• B. Special revenue fund, accounts for revenues from specific sources restricted for specified purposes
• C. Capital projects fund, accounts for the acquisition and construction of major capital assets
• D. Permanent fund, accounts for resources that are legally restricted so that only earnings may be used

Debt service funds accumulate resources needed to pay principal and interest on general long-term debt of the governmental reporting entity. Resources are transferred from the general fund or special revenue funds to the debt service fund; the fund then makes required principal and interest payments to bondholders on the scheduled due dates.

• A. Net expense = $4,200,000, all program expenses are presented as a single line without netting program revenues
• B. Net expense = $2,800,000 ($4,200,000 − $800,000 − $600,000); presented as the function's net burden on general revenues; property taxes are shown separately as general revenues that offset the net expenses of all functions combined
• C. Net expense = $2,800,000 ($4,200,000 − $800,000 − $600,000); the property taxes reduce the net expense because they are general revenues
• D. Net revenue = $11,400,000 (property taxes $15,000,000 minus public safety net expense $3,600,000)

Statement of activities format under GASB 34: Program revenues: Charges for services: $800,000 + Operating grants: $600,000 = $1,400,000 total program revenues. Net expense of Public Safety = Program expenses ($4,200,000) − Program revenues ($1,400,000) = $2,800,000 net expense. This $2,800,000 represents the cost of public safety services NOT covered by program revenues, the net burden on the general taxpayer. Property taxes ($15,000,000) are GENERAL REVENUES presented separately below the functional expense table. They are not allocated to specific functions. The statement structure: Functions listed with net expense/(revenue) for each → total net expense → then general revenues (property taxes, sales taxes, unrestricted grants) → change in net position. This format shows citizens how much each program costs after considering its own revenues.

• A. $5,000,000, all levied taxes are revenue because the tax lien creates a legally enforceable receivable
• B. $4,900,000, taxes that are measurable and available (collected or collectible within 60 days after year-end) are recognized as revenue; the remaining $100,000 is deferred
• C. $4,700,000, only cash collected during the year is recognized under governmental fund accounting
• D. $4,800,000, only 96% of taxes levied are recognized, based on the collection rate

Modified accrual revenue recognition for property taxes: The GASB's availability criterion: revenues are available if collected within the current period OR expected to be collected soon enough after year-end to pay current period liabilities (typically within 60 days). Recognized: Collected during year: $4,700,000; Expected within 60 days: $200,000; Total recognized revenue = $4,900,000. Deferred: $100,000 (expected in 18 months, not available) → recorded as Deferred Inflows of Resources (not revenue) on the balance sheet until it becomes available. Journal entry: Dr. Property Tax Receivable $5,000,000; Cr. Revenue. Property Taxes $4,900,000; Cr. Deferred Inflows of Resources $100,000.

• A. Only a balance sheet and a statement of revenues, expenditures, and changes in fund balances
• B. A statement of net position; a statement of revenues, expenses, and changes in fund net position; and a statement of cash flows
• C. A statement of activities and a statement of net position only
• D. A statement of fiduciary net position and a statement of changes in fiduciary net position

Correct. Those three statements constitute the required proprietary fund financial statements.

• A. Net investment in capital assets: $45,000,000; Restricted: $3,000,000; Unrestricted: ($26,000,000); Total: $22,000,000
• B. Net investment in capital assets: $15,000,000; Restricted: $3,000,000; Unrestricted: $4,000,000, total confirms to $22,000,000
• C. Net investment in capital assets: $15,000,000; Restricted: $3,000,000; Unrestricted: $4,000,000; Total: $22,000,000
• D. All net position is reported as a single unrestricted amount, component classification is optional

Net position component calculation (GASB 34): (1) Net investment in capital assets = Capital assets (net of accumulated depreciation) − Related outstanding debt + Related deferred outflows of resources − Related deferred inflows of resources = $45,000,000 − $30,000,000 = $15,000,000. (2) Restricted = Net position subject to externally imposed constraints (by creditors, grantors, laws, regulations) = $3,000,000 (given). (3) Unrestricted = Total net position − Net investment in capital assets − Restricted = $22,000,000 − $15,000,000 − $3,000,000 = $4,000,000. Verification: Total assets = $45,000,000 + $12,000,000 = $57,000,000. Total liabilities = $30,000,000 + $5,000,000 = $35,000,000. Net position = $57,000,000 − $35,000,000 = $22,000,000. ✓ The three components must sum to total net position.

• A. Dr. Cash $10,000,000 / Cr. Bonds Payable $10,000,000, long-term debt is recorded in the fund that received the proceeds
• B. Dr. Cash $10,000,000 / Cr. Revenue. Bond Proceeds $10,000,000, proceeds are recognized as revenue in the period received
• C. Dr. Cash $10,000,000 / Cr. Other Financing Sources. Proceeds of Long-Term Debt $10,000,000, bond proceeds are not debt in governmental funds but rather a financing source
• D. No entry in the fund, bond proceeds are recorded only in the government-wide statements, not in fund statements

Under GASB governmental fund accounting: Bond proceeds are a SOURCE OF FINANCING in the current period but are not revenues (no service has been provided, no tax has been levied) and not liabilities in the fund (governmental funds don't carry long-term debt). The entry in the capital projects fund: Dr. Cash $10,000,000 / Cr. Other Financing Sources. Proceeds of Bonds $10,000,000. The $10,000,000 appears as 'Other Financing Sources' in the statement of revenues, expenditures, and changes in fund balances (below the 'Expenditures' section, after the 'Excess/(Deficiency) of Revenues over Expenditures' subtotal). The corresponding $10,000,000 Bonds Payable appears in the government-wide statement of net position, NOT in the capital projects fund balance sheet.

• A. Only the governmental activities are included in government-wide statements, proprietary funds are excluded
• B. Governmental activities: deficit of $7,500,000; Business-type activities: surplus of $3,000,000; difference is not meaningful
• C. Business-type activities profit: $800,000 ($3,000,000 − $2,200,000); depreciation is not an expense in government accounting
• D. Governmental activities: change in net position $500,000 (revenues $8M − expenses $7.5M); Business-type activities: change in net position $400,000 ($3M − $2.2M − $0.4M); Total government-wide change: $900,000

Government-wide statement of activities analysis: Governmental activities (general government): Program revenues and general revenues: Property taxes and other general revenues = $8,000,000; General government expenses = $7,500,000; Change in net position, governmental activities = $8,000,000 − $7,500,000 = $500,000 increase. Business-type activities (water utility): Operating revenues (charges for services): $3,000,000; Operating expenses: $2,200,000; Depreciation: $400,000; Change in net position, business-type activities = $3,000,000 − $2,200,000 − $400,000 = $400,000 increase. Total government-wide change in net position: $500,000 + $400,000 = $900,000 increase. The government-wide statement presents BOTH governmental activities and business-type activities with a total column. Enterprise funds ARE included in government-wide statements as business-type activities, they convert from their proprietary fund basis (already full accrual) without significant adjustment.