Accounting Chapter 7: Proprietary Funds

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Questions and Answers

What type of funds are used to account for the acquisition or production and distribution of centralized goods and services provided to departments or agencies of the government?

Enterprise Fund

Special Revenue Fund

General Fund

Internal Service Fund (correct)

What type of activities do Enterprise Funds account for?

Activities that produce goods or services to be sold to the general public

Internal service funds are included in Business-Type Activities for government-wide financial reports.

False

The financial objective of an internal service fund is to recover from operating revenues the full cost of operations including future needs for and .

equipment replacements and upgrades Signup and view all the answers

Which of the following is one of the financial statements prepared for an Enterprise Fund?

Statement of Cash Flows Signup and view all the answers

How long is the repayment period for the interfund loan from Water Utility Fund to the Supplies Fund?

20 equal annual installments Signup and view all the answers

The Water Utility Fund must report certain activities in an enterprise fund if laws or regulations require it.

True Signup and view all the answers

The total building depreciation of $____ is to be charged to Warehousing Expenses.

2,800 Signup and view all the answers

What are the three ways that liquidation of an internal service fund can occur?

Transfer assets, distribute assets, or convert all assets to cash Signup and view all the answers

Match the following financial statements with their fund:

Internal Service Fund = Statement of Revenue, Expenses, and Changes in Fund Net Position Enterprise Fund = Statement of Cash Flows General Fund = Balance Sheet Proprietary Fund = Statement of Net Position Signup and view all the answers

The Supplies Fund includes a markup to cover costs when issuing supplies.

True Signup and view all the answers

Which is NOT a method of liquidating an internal service fund?

Continue operating as a separate entity Signup and view all the answers

When closing operating statement accounts, which date is significant for reporting purposes?

December 31, 2017 Signup and view all the answers

Which of the following is a step in the order of payments during the dissolution of an internal service fund?

Pay outstanding interfund loans Signup and view all the answers

What is the primary purpose of an Enterprise Fund in government accounting?

To account for activities producing goods or services sold to the general public Signup and view all the answers

Which financial statement is specifically included for Proprietary Funds?

Statement of Net Position Signup and view all the answers

What is a characteristic of the accounting method used for Proprietary Funds?

Full accrual accounting similar to business entities Signup and view all the answers

What must happen for an Internal Service Fund to be dissolved?

All liabilities must be transferred to another fund Signup and view all the answers

Which of the following is NOT a component of the Statement of Cash Flows for Proprietary Funds?

Budgetary Activities Signup and view all the answers

In which scenario would an Internal Service Fund be appropriate for use?

To manage central purchasing and distribution services for government agencies Signup and view all the answers

What statement correctly describes net position in a Proprietary Fund?

Includes net investment in capital assets, restricted, and unrestricted components Signup and view all the answers

Which of the following does NOT get reported in an Internal Service Fund's operating statement?

Net position changes from previous years Signup and view all the answers

What is the primary financial objective of an internal service fund?

To recover the full cost of operations including future equipment needs Signup and view all the answers

Which statement accurately describes the creation of the Supply Fund by the Town of Brighton?

The Supply Fund was created by transferring cash and supplies from the General Fund. Signup and view all the answers

What was the amount of the long-term interest-free interfund loan provided to the Supplies Fund?

$130,000 Signup and view all the answers

How many equal annual installments is the Supplies Fund required to repay the interfund loan?

20 Signup and view all the answers

What portion of the building purchase price is allocated to the land?

$25,000 Signup and view all the answers

Which of the following is a key consideration for administrators regarding the internal service fund?

Determining if costs are reasonable compared to the benefits provided Signup and view all the answers

What total amount was spent on machinery and equipment purchased for the Supply Fund?

$35,000 Signup and view all the answers

What is a potential consequence of not recovering full costs in an internal service fund?

Undermined financial sustainability of the fund Signup and view all the answers

Study Notes

Types of Proprietary Funds

Internal Service Fund: Accounts for centralized goods and services provided to government departments or other governments, based on cost reimbursement.
Enterprise Fund: Designed to account for goods and services sold to the public. Major and aggregate nonmajor enterprise funds are displayed separately in financial reports.

Proprietary Fund Financial Reporting

Accounting Method: Similar to private business entities with an accrual accounting basis and economic resource measurement.
Financial Statements:
- Statement of Net Position (Balance Sheet): Displays net investment in capital assets, restricted, and unrestricted assets.
- Operating Statement: Reports revenues by major sources, net of discounts and allowances.
- Statement of Cash Flows: Categorized into operating, noncapital financing, capital financing, and investing activities.

Internal Service Funds

Established to enhance financial management of government resources.
Aim to recover full operational costs, including future capital needs.
Example: Town of Brighton created an internal service fund for centralized purchasing, funded with a $30,000 cash and $61,500 in supplies from the General Fund.

Illustrative Transactions (Supply Fund)

Water Utility Fund provided a $130,000 interest-free loan to the Supplies Fund, to be repaid in 20 annual installments.
Warehouse building purchased for $95,000, with land valued at $25,000; machinery and equipment amounted to $35,000 total.
Supplies received in 2017 totaled $192,600, with 35% markup applied for issuing supplies to departments.

Payroll and Expenses

Payroll and fringe benefits of $55,000 paid in cash, allocated to various expense accounts.
A $1,000 state grant received for energy-efficient lighting, recorded in both the Supplies Fund and governmental activities journal.

Liquidation of Internal Service Fund

Payments ordered to settle debts: creditors first, then interfund loans.
Liquidation methods include transferring assets, distributing to a fund or government, or converting assets to cash.

Enterprise Fund Reporting

Activities must meet specific criteria under GASB standards, such as pricing policies to recover costs or being financed through debt secured by revenues.
Example: Water Utility Fund adjusts revenues and expenses, adheres to NARUC and FERC regulations.

Financial Activities in Water Utility Fund

In FY 2017, total customer billing was $726,000, with collections of $680,000 from non-government customers.
Construction projects recorded $220,000 in costs, customers' deposits and advances managed according to regulations.
Interest on restricted investments totaled $44,500, with investments adjusted for bond repayments.

Year-End Adjustments

Year-end entries for depreciation, uncollectible accounts, and unbilled receivables must be recorded accurately to ensure compliance and accuracy in financial statements.
Cash investments restricted for bond repayment noted, with variations in net position adjustments required.

These notes emphasize key concepts and transactions related to the management and reporting of proprietary funds in state and local government settings.

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Description

This quiz focuses on Chapter 7 of accounting for business-type activities of state and local governments, specifically examining types of proprietary funds. Participants will gain insight into Internal Service Funds and their role in government financial reporting.