Student name:__________
TRUE/FALSE - Write 'T' if the statement is true and 'F' if the statement is false.
1) For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position. ⊚ true ⊚ false
2) A statement of cash flows is prepared for enterprise funds but not for internal service funds. ⊚ true ⊚ false
3) Revenues of internal service funds should be recognized only when they are expected to be available in time to pay current liabilities of the fund. ⊚ true ⊚ false
4) Internal service funds account for operating expenses on the accrual basis of accounting. ⊚ true ⊚ false
5) Internal service funds should not account for depreciation of capital assets used in their operations, since this would, in effect, charge the government twice for the same assets. ⊚ true ⊚ false
6) The net position of an internal service fund is classified as nonspendable, restricted, committed, assigned, and unassigned. ⊚ true ⊚ false
7) Internal service funds are classified as governmental funds.
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8) Internal service funds are intended to operate on taxes or other financing sources authorized by the legally enacted revenue budget for each year.
⊚ true ⊚ false
9) Internal service funds utilize encumbrance accounting. ⊚ true ⊚ false
10) A statement of revenues, expenses, and changes in fund net position for an internal service fund is similar in many respects to an income statement prepared for a commercial business. ⊚ true ⊚ false
11) Equipment acquired under a lease for use by an internal service fund will be reported as a capital asset in both the fund and government-wide financial statements. ⊚ true ⊚ false
12) A motor pool is a common example of an internal service fund. ⊚ true ⊚ false
13) An employee pension fund is a common example of an internal service fund. ⊚ true
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⊚ true ⊚ false
⊚ false
14) Proprietary funds follow the current financial resources measurement focus and use the accrual basis of accounting.
⊚ true
⊚ false
15) Public utilities owned and operated by governments are common examples of enterprise funds.
⊚ true
⊚ false
16) If a business-type activity is subsidized by a government’s General Fund rather than fully covering its costs of providing services with fees or charges, that activity need not be reported in an enterprise fund.
⊚ true
⊚ false
17) Interest and principal on enterprise fund revenue bonds should be recorded in a debt service fund until paid. ⊚ true
⊚ false
18) The liability for utility revenue bonds should be reported in business-type activities on the government-wide statements, as well as in the enterprise fund.
⊚ true
⊚ false
19) Proprietary funds report using three net position categories: net investment in capital assets; restricted; and unrestricted. ⊚ true
⊚ false
20) Enterprise funds may capitalize interest paid on debt incurred for construction of plant assets.
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⊚ true
⊚ false
21) Premiums or discounts on bonds payable issued by enterprise funds should be accounted for in the same manner as those of a comparable business entity.
⊚ true
⊚ false
22) The GASB requires the statement of cash flows for proprietary funds to be prepared using the direct method of presentation.
⊚ true
⊚ false
23) Unlike the General Fund and other major governmental funds for which a budget is legally adopted, proprietary funds are not required by GASB standards to record budgets in their accounting systems, nor are they required to present a budgetary comparison schedule.
⊚ true
⊚ false
24) Enterprise funds are reported as a part of the Governmental Activities column of the government-wide financial statements when they provide services to governmental funds.
⊚ true
⊚ false
25) GASB standards require that interfund receivables and payables between governmental and business-type activities be presented as internal balances.
⊚ true
⊚ false
26) If enterprise funds are the predominant participants in an internal service fund, the government should report the internal service fund's residual assets, deferred inflows and outflows of resources, and liabilities within the business-type activities column in the statement of net position.
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⊚ true
⊚ false
27) Consistent with accounting in capital projects funds, interest capitalization for selfconstructed assets is prohibited under regulatory accounting principles.
⊚ true
⊚ false
28) In the context of regulatory utility plant accounting, original cost and historical cost have the same meaning.
⊚ true
⊚ false
29) The amount of expense and liability to be reported each period for the closure and postclosure costs of a municipal solid waste landfill (MSWLF) is proportional to the amount of landfill capacity used during the period.
⊚ true
⊚ false
30) Under regulatory reporting, Utility Plant in Service is stated at original cost.
⊚ true
⊚ false
31) All segments within an enterprise fund are subject to segment disclosure requirements.
⊚ true
⊚ false
MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question.
32) Which of the following may properly be reported as a component of net position in the proprietary fund statement of net position?
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A) Retained earnings.
B) Designated equity.
C) Restricted net position.
D) Contributed capital.
33) Which of the following properly portrays the components of net position for proprietary funds?
A) Net investment in capital assets, Reserved, Unreserved.
B) Designated, Undesignated, Restricted, Unrestricted.
C) Net investment in capital assets, Restricted, Unrestricted.
D) Contributed capital, Net investment in capital assets, Reserved, Unreserved.
34) Which of the following funds of a government uses the same basis of accounting as a proprietary fund?
A) Permanent fund.
B) Investment trust fund.
C) Special revenue fund.
D) Capital projects fund.
35) Proprietary funds:
A) Are required to integrate budgetary accounts into their accounting system.
B) Are required to present budgetary comparison schedules.
C) Can be required to operate under a legally adopted budget.
D) More than one statement above is true.
36) Internal service funds should be used only if:
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A) The reporting government funds the activity with general obligation debt.
B) The reporting government provides services primarily to external participants.
C) The reporting government provides services primarily to other departments of the same government.
D) The reporting government provides services below full cost.
37) In which of the following funds is it appropriate to record depreciation of capital assets?
A) Internal service fund.
B) Permanent fund.
C) General fund.
D) Capital projects fund.
38) Which of the following is a difference between enterprise funds and internal service funds?
A) The use of cost accounting.
B) The customers who primarily benefit from the fund's service.
C) The number of fund financial statements required.
D) The measurement focus.
39) The comprehensive annual financial report (CAFR) of a government should contain a statement of revenues, expenses, and changes in fund net position for which of the following?
A) Both proprietary and governmental funds.
B) Proprietary but not governmental funds.
C) Governmental but not proprietary funds.
D) Proprietary and fiduciary funds.
40) Which of the following activities or services would most likely not be accounted for by an internal service fund?
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A) Information systems.
B) Central purchasing, warehousing, and issuing of supplies.
C) Municipal swimming pool.
D) Risk management.
41) When a supplies internal service fund records a billing to the General Fund, the journal entry in the internal service fund will include which of the following?
A) A debit to Due from General Fund.
B) A debit to Inventory of Supplies.
C) A debit to Billings to Department.
D) No journal entry is recorded in the internal service fund.
42) When a supplies internal service fund records a billing to the General Fund, the journal entry in the General Fund will include which of the following?
A) A debit to Cost of Supplies Issued.
B) A credit to Interfund Loans Payable.
C) A debit to Expenditures.
D) No journal entry is recorded in the General Fund.
43) Which of the following is not true regarding proprietary funds?
A) The difference between assets plus deferred outflows of resources and liabilities plus deferred inflows of resources of proprietary funds is called net assets.
B) Proprietary funds record long-term debt directly in the fund accounts.
C) Proprietary funds record capital assets directly in the fund accounts.
D) Proprietary funds present a statement of cash flows.
44) Under GASB standards, an internal service fund should prepare all of the following financial statements except a:
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A) Statement of revenues, expenditures, and changes in fund balance.
B) Statement of revenues, expenses, and changes in net position.
C) Statement of net position.
D) Statement of cash flows.
45) Which of the following illustrates the appropriate basis of accounting for enterprise and internal service funds?
Enterprise Funds Internal Service Funds
A. Modified Accrual Modified Accrual
B. Modified Accrual Accrual
C. Accrual Modified Accrual
D. Accrual Accrual
A) Choice A.
B) Choice B.
C) Choice C.
D) Choice D.
46) An internal service fund normally uses which of the following budgetary accounts?
A) Estimated Revenues.
B) Appropriations.
C) Encumbrances.
D) An internal service fund normally does not use budgetary accounts.
47) Goods and services provided by internal service funds to other departments of the government are typically priced to:
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A) Cover variable costs only.
B) Cover full costs (both fixed and variable).
C) Cover full costs, plus an additional charge to capital maintenance and anticipated expansion needs.
D) Cover full costs, plus an additional charge to ensure a reasonable profit.
48) Which of the following should be accounted for in an internal service fund?
A) $ 65,000.
B) $ 415,000.
C) $1,250,000.
D) $1,315,000.
49) Which of the following should be accounted for in an enterprise fund?
A) $ 65,000.
B) $ 415,000.
C) $1,250,000.
D) $1,315,000.
50) When a new internal service fund is established with a transfer of funds (not to be repaid), which account would be credited in the internal service fund?
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Light poles to be paid
installments by
property owners $ 350,000 Van used to transport supplies to all city departments on a cost reimbursement basis 65,000 Equipment used for supplying electric power to residents 1,250,000
for in
affected
Light poles to be paid for in installments by affected property owners $ 350,000 Van used to transport supplies to all city departments on a cost reimbursement basis 65,000 Equipment used for supplying electric power to residents 1,250,000
A) Cash.
B) Interfund Transfer In.
C) Interfund Transfer Out.
D) Estimated Revenues.
51) The City of Cinnamon Hill operates a central motor pool as an internal service fund for the benefit of the city’s other funds and departments. In the current year, this fund charged the Parks Department $30,000 for vehicle rentals. What account should the internal service fund use to record these charges?
A) Interfund Transfers In.
B) Interfund Exchanges.
C) Billings to Departments.
D) Cost of Providing Rentals to Other Funds and Units.
52) The City of Cinnamon Hill operates a central motor pool as an internal service fund for the benefit of the city’s other funds and departments. In the current year, this fund billed the Parks Department $30,000 for vehicle rentals. If the Parks Department is a governmental fund, which account should the Parks Department use to record these billings?
A) Interfund Transfers In.
B) Interfund Exchanges.
C) Expenditures.
D) Cost of Rentals from Other Funds and Units.
53) When utility customers are billed during the year, the enterprise fund journal entry will include which of the following?
A) A debit to Sales of Water.
B) A debit to Cash - Restricted.
C) A debit to Customer Accounts Receivable.
D) A debit to Billings to Customers.
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54) When a new utility customer submits a deposit, the enterprise fund journal entry will include which of the following?
A) A credit to Customer Deposits.
B) A debit to Customer Deposits.
C) A debit to Sales of Water.
D) A credit to Sales of Water.
55) Customers' meter deposits, which cannot be spent for normal operating purposes, would be classified as restricted cash in the balance sheet of which fund type?
A) Internal service fund.
B) Private-purpose trust fund.
C) Enterprise fund.
D) Special revenue fund.
56) Which of the following organizations or units would least likely be accounted for by an enterprise fund?
A) A golf course.
B) An airport.
C) A motor pool.
D) A sports stadium.
57) Which of the following accounts would appropriately be included on an enterprise fund balance sheet?
A) Fund Balance: No; Net Position—Unrestricted: Yes.
B) Fund Balance: Yes; Net Position Unrestricted: No.
C) Fund Balance: No; Net Position Unrestricted: No.
D) Fund Balance: Yes; Net Position Unrestricted: Yes.
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58) The following cash transactions were among those reported by Cambridge County's Wastewater Enterprise Fund for the year:
In the Wastewater Enterprise Fund's statement of cash flows for the year ended December 31, what amount should be reported as cash flows from capital and related financing activities?
A) $5,000,000.
B) $5,300,000.
C) $6,000,000.
D) $6,300,000.
59) The following cash transactions were among those reported by Cambridge County's Wastewater Enterprise Fund for the year:
In the Wastewater Enterprise Fund's statement of cash flows for the year ended December 31, what amount should be reported as cash flows from investing activities?
A) $300,000.
B) $1,300,000.
C) $5,300,000.
D) $6,300,000.
60) The liability for general obligation bonds issued for the benefit of a governmentallyowned electric utility and serviced by its earnings should be recorded in:
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from
$ 5,000,000 Interest income 300,000 Capital contributed by developers 1,000,000
Proceeds
sale of revenue bonds for construction
from
5,000,000 Interest income 300,000 Capital contributed by developers 1,000,000
Proceeds
sale of revenue bonds for construction $
A) An enterprise fund.
B) An internal service fund.
C) An enterprise fund and the business-like activities accounts.
D) The governmental activities accounts.
61) The Central City Golf Course, an enterprise fund, purchased a new stove for use in the course’s snack shop. The debit for the entry to record the purchase should be to:
A) Expenditures.
B) Purchases.
C) Equipment.
D) General capital assets.
62) Which of the following would be reflected in the operating statement of a proprietary fund?
A) Accrual of interest expense.
B) Repayment of the principal of debt.
C) Issuance of debt.
D) Purchase of a capital asset.
63) How should financial information for internal service funds be reported in the government-wide financial statements?
A) As part of governmental activities.
B) As part of business-type activities.
C) Amounts allocated proportionately between governmental and business-type activities.
D) Usually as part of governmental activities, unless the internal service fund predominantly serves one or more enterprise funds.
64) Which of the following account balances would only be reported if a city-owned utility followed regulatory accounting principles?
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A) Depreciation expense.
B) Pumping expense.
C) Restricted Assets Cash.
D) Utility Plant Acquisition Adjustments.
65) Which of the following is not a true statement about the Allowance for Funds Used During Construction (AFUDC)?
A) AFUDC may have either a debt component or an equity component.
B) The amount credited to AFUDC may exceed the amount of interest paid during the period on bonds issued for construction.
C) AFUDC may be credited for an imputed amount of interest on the utility's own funds used for construction.
D) AFUDC may include the total amount of borrowing during construction.
66) Which of the following items is not required to be included in the segment information that must be reported for a municipality's enterprise funds?
A) Enterprise fund capital assets.
B) Enterprise fund operating income or loss.
C) Enterprise fund tax revenues.
D) Intergovernmental operating subsidies to an enterprise fund.
67) Under utility regulatory accounting principles (RAP), the account "Utility Plant Acquisition Adjustment" reflects:
A) The difference between the amount paid for utility plant and the amount originally paid by the utility that first placed the plant into public service, less accumulated depreciation.
B) The difference between the fair market value of the utility plant and the amount paid for it, less accumulated depreciation.
C) The difference between the amount paid for the utility plant less its current replacement cost.
D) The difference between the amount paid for the utility plant less the fair market value of its tangible plant assets.
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ESSAY. Write your answer in the space provided or on a separate sheet of paper.
68) Select the key term that relates to accounting for the business-type activities of state and local governments that best matches each of the following definitions.
A.Internal service funds
B.Enterprise funds
C.Regulatory accounting principles
D.Generally accepted accounting principles
E.Restricted assets
F.Net position
G.General obligation bonds
H.Revenue bonds
_____ 1. Funds used to account for the acquisition or production and the distribution of centralized goods and services that are provided to departments or agencies of the government, or to other governments, on a cost-reimbursement basis.
_____ 2. Accounting principles prescribed by federal or state regulatory commissions for investor-owned and some governmentally owned utilities.
_____ 3. Bonds whose principal and interest are payable exclusively from earnings of a public enterprise.
_____ 4. Bonds which carry the pledge of the government entity’s full faith and credit, although the intent may be to service them from proprietary revenues rather than general taxes.
_____ 5. A common classification for items restricted by contractual agreements or legal requirements.
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69) During the current fiscal year, the following transactions (summarized) occurred in the Town of Springfield Information Technology Internal Service Fund:
1. Employees were paid $290,000 wages in cash.
2. Utility bills received from the Town of Springfield’s Utility Fund during the year amounted to $23,500. The amount had previously been accrued by the Utility Fund.
3. Office expenses paid in cash during the year amounted to $10,500.
4. Service supplies purchased on account during the year totaled $157,500.
5. Parts and supplies used during the year totaled $152,300 (at cost).
6. Charges to departments during the fiscal year were as follows:
7. Payments to the Utility Fund totaled $21,800.
8. Annual depreciation totaled $30,000 for machinery and equipment. Prepare the journal entries for the transactions. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)
70) Explain the reporting requirements for internal service funds and enterprise funds. Internal service funds and enterprise funds are both proprietary funds, so why do their reporting requirements differ?
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General Fund $ 308,700 Street Fund 279,300
71) How does the statement of cash flows under GASB standards differ from the statement of cash flows under FASB standards?
72) Legislators often believe an internal service fund function will not be subjected to annual legislative budget review and the legislature will “lose control” of the fund. Do you agree with this line of reasoning? Why or why not?
73) "Enterprise funds should not be permitted to accumulate unrestricted net position, since to do so would indicate overpricing of its services." Do you agree? Why or why not?
74) In some local government financial reports you will find activities such as solid waste disposal and sewage disposal accounted for as a part of the General Fund. In other reports apparently identical activities are accounted for as enterprise funds. When is a government required to establish an enterprise fund?
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75) Explain the difference between operating revenues/expenses and nonoperating revenues/expenses. Why does the GASB require that operating revenues/expenses be reported separately on proprietary statements of revenues, expenses, and changes in fund net position?
76) Explain how capitalization of interest costs differs for enterprise funds as opposed to forprofit entities.
77) What are the alternative methods of dissolving an internal service fund?
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Answer Key
Test name: Governmental 7
1) TRUE
2) FALSE
3) FALSE
4) TRUE
5) FALSE
6) FALSE
7) FALSE
8) FALSE
9) FALSE
10) TRUE
11) TRUE
12) TRUE
13) FALSE
14) FALSE
15) TRUE
16) TRUE
17) FALSE
18) TRUE
19) TRUE
20) TRUE 21) TRUE
22) TRUE 23) TRUE 24) FALSE 25) TRUE 26) TRUE
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Version 1 21 27) TRUE 28) FALSE 29) TRUE 30) TRUE 31) FALSE 32) C 33) C 34) B 35) C 36) C 37) A 38) B 39) B 40) C 41) A 42) C 43) A 44) A 45) D 46) D 47) C 48) A 49) C 50) B 51) C 52) C 53) C 54) A 55) C 56) C
Version 1 22 57) A 58) C 59) A 60) A 61) C 62) A 63) D 64) D 65) D 66) C 67) A 68) 1. A, 2. C, 3. H, 4. G, 5. E 69) Transaction Account Title Debit Credit 1 Wage Expense 290,000 Cash 290,000 2 Utility Expense 23,500 Due to Other Funds 23,500 3 Office Expenses 10,500 Cash 10,500 4 Service Supplies Inventory 157,500 Accounts Payable 157,500 5 Cost of Parts and Supplies Used 152,300 Service Supplies Inventory 152,300 6 Due from Other Funds 588,000 Billings to Departments 588,000
Version 1 23 7 Due to Other Funds 21,800 Cash 21,800 8 Depreciation Expense 30,000 Allowance for Depreciation 30,000
70) Internal service funds and enterprise funds are presented in three proprietary fund financial statements a statement of revenues, expenses and changes in fund net position; a statement of net position; and a statement of cash flows. Those enterprise funds considered to be major funds are presented in separate columns of the proprietary fund financial statements, with non-major enterprise funds aggregated in an Other Enterprise Funds column. All internal service funds are aggregated and reported in a single column on the fund statements. The internal service fund column is not included in the proprietary fund total column. At the government-wide level the internal service funds balances are essentially collapsed into the Governmental Activities column of the government-wide statements. Enterprise funds are considered business-type activities and are reported in the Business-type Activities column of the government-wide statements.
Internal service funds and enterprise funds are both proprietary funds and are presented as such in the funds financial statements. However, since the transactions of internal service funds primarily involve sales of goods or services to the General Fund and other funds that compose the governmental activities of a government, their financial balances are included in a single column of the proprietary fund financial statements and with governmental activities (rather than business-type activities) at the government-wide level. An exception is made if enterprise funds are the predominant participants in an internal service fund. In that case, the government should report the internal service fund’s residual assets, deferred inflows and outflows of resources, and liabilities within the Business-type Activities column in the statement of net position.
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71) The FASB allows entities to prepare the statement of cash flows using either the indirect or the direct preparation method, while the GASB requires the direct method. The information in the statement of cash flows is displayed using three categories under FASB standards operating activities, investing activities, and financing activities. GASB standards provide for four categories of cash flows operating activities, noncapital financing activities, capital and related financing activities, and investing activities. Chapter 7 gives a fairly detailed description of the types of transactions reported in each of the four GASB categories. Notice that the types of activities reported in the two financing categories and the investing category have a number of differences when compared with the comparable FASB categories.
72) No. As described in Chapter 7, the customers of an internal service fund are, by definition, other funds and departments of the government or of other governments. Therefore, each using fund and department must include in its appropriations budget request the justification for the amount to be spent (i.e., paid to the internal service fund) for supplies, so the legislative branch continues to exercise budgetary review over the amount each fund and department budgets for supplies. Departments and programs that require legislative appropriations to expend resources for goods and services should account for purchases of goods or services from internal suppliers (i.e., internal service funds or enterprise funds) in essentially the same manner as goods and services purchased from external suppliers. By setting pricing policies for the internal service fund and policies governing the use and retention of current earnings, the legislature can maintain considerable control over the function performed by the internal service fund but leave fund manager's freedom to operate at their discretion within the policies set by the legislative branch.
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73) No. It is in the best interest of taxpayers that enterprise funds be self-supporting. While the pricing policy should not permit the accumulation of excessive unrestricted net position, policy-makers may appropriately maintain a sufficient balance to permit replacement of inventory and capital assets (usually at increased prices), repayment of long-term debt, and acquisition or construction of assets as necessary to meet new or expanded operating needs.
74) Under GASB Codification Section 1300.109, a government must report business-type activities in an enterprise fund if any of the following criteria are met: (1) The activity is financed with debt that is secured solely by a pledge of the revenues from fees and charges of an activity; (2) Laws or regulations require that the activity’s costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues; or (3) Pricing policies are designed to recover the costs of the activity, including capital costs.
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75) The GASB leaves the definition of operating and nonoperating revenues/expenses/income to management. However, guidance indicates that operating revenues and expenses are those related to the primary function or reason for the proprietary fund’s existence. The operating revenues generated by a proprietary fund are based on the goods or services provided by the proprietary fund. Consequently, operating expenses are those expenses incurred in provision of the fund’s primary goods or services. Nonoperating revenues and expenses are peripheral or incidental in nature to the primary function or objective of the proprietary fund. Generally, nonoperating revenues include such items as interest income, gains on sale of assets, tax revenues, and grants and gifts that can be used for operating activity. One reason for separating operating and nonoperating items is to help assess management performance. Additionally, the GASB requires that operating revenues/expenses/income be separately identified on the statement of revenues, expenses and changes in fund net position since the information is necessary for classifying activity as operating, noncapital financing, capital and related financing, or investing on the statement of cash flows.
76) Similar to self-constructed general capital assets where interest capitalization is prohibited, the GASB also requires interest for selfconstructed assets of proprietary funds to be expensed when incurred. This is contrary to for-profit entities, which the FASB allows to capitalize interest costs associated with construction.
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77) As Chapter 7 explains, dissolution of an internal service fund may be accomplished in any of three ways, or in any combinations thereof:
(1) The fund’s assets are transferred to another fund that will continue the operations as a subsidiary activity, (2) distribution of the fund’s assets (and liabilities), in kind, to another fund or another government, and (3) liquidation of noncash assets and transferring the net cash (after settlement of liabilities) to another fund. Legal counsel should be obtained to ensure the dissolution, including distribution of assets, is according to law and legislative intent.
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Test Bank for Accounting for Governmental & Nonprofit Entities, 19th Edition, Jacqueline Reck, Visit TestBankBell.com to get complete for all chapters
