CHAPTER 13

FINANCIAL REPORTING: THE BASIC FINANCIAL STATEMENTS

ANSWERS TO QUESTIONS
Question 13-1
The measurement focus and basis of accounting required for reporting governmental activities is
the flow of economic resources measurement focus and the accrual basis of accounting.
Question 13-2
GASB Statement No. 34 requires two government-wide financial statementsa statement of net
position and a statement of activities. The standard requires presentation of the following eight
fund-based financial statements
Governmental Funds

Balance Sheet
Statement of Revenues, Expenditures, and Changes in Fund Balances
Statement of Revenues, Expenditures, and Changes in Fund BalancesBudget and
Actual (for the General Fund and major Special Revenue Funds with legally adopted
annual budgets). Governments are permitted to present the budgetary comparison
statement as a schedule in the required supplementary information (RSI), instead of
as a basic financial statement.

Proprietary Funds

Statement of Net Position (or Balance Sheet)

Statement of Revenues, Expenses, and Changes in Fund Net Position
Statement of Cash Flows

Fiduciary Funds

Statement of Fiduciary Net Position

Statement of Changes in Fiduciary Net Position

Additionally, GASB Statement No. 34 requires presentation of management's discussion and

analysis as required supplemental information preceding the financial statements.
Finally, although not a financial statement, the notes are an essential, integral part of the basic
financial statements.

Question 13-3
In both the government-wide statement of net position and the proprietary funds statement of net
position, net position is required to be presented in three broad classifications:

Net investment in capital assets

Restricted net position
Unrestricted net position

These classifications were defined and discussed in Chapter 10, pages 402 to 405.
Question 13-4
Major fund reporting refers to presenting a separate individual fund column for each major
governmental fund in the governmental fund financial statements and a separate individual fund
column for each major Enterprise Fund in the proprietary fund financial statements. Major fund
reporting differs from fund type reporting in that individual major funds are reported in separate
columns, whereas in fund type reporting all funds of the same type are combined in a single
column. Fund type reporting entails presenting a separate column for each fund type instead of
for each major fund.
Major fund reporting is required for Enterprise Funds and for all governmental funds. Fund type
reporting is used for Internal Service Funds and for all fiduciary fund types.
Question 13-5
First, the General Fund is always a major fund. Second, government officials should identify
any other individual governmental fund or Enterprise Fund as a major fund that, in their
judgment, is important enough to financial statement users to warrant presentation in a separate
column. Finally, the government must apply the size-based criteria required to be used to identify
the minimum set of major funds based on the size criteria. Under these criteria, a government
determines which additional governmental funds and Enterprise Funds are major funds as
follows:
1.

Any governmental fund that meets the following size-based criteria must be treated as a
major fund:

Total assets and deferred outflows, liabilities and deferred inflows, revenues, or
expenditures (excluding extraordinary items) of an individual governmental fund are
at least 10% of the corresponding total (assets and deferred outflows, liabilities and
deferred inflows, and so forth) for all governmental funds, and

The same element of the individual governmental fund that met the 10% criterion is
at least 5% of the corresponding element total for all governmental and Enterprise
Funds combined.
2

Question 13-5 (continued)

2.

Any Enterprise Fund that meets the equivalent size-based criteria for Enterprise Funds
must be treated as a major fund. Thus, an Enterprise Fund is a major fund if it meets
both of the following criteria:

Total assets and deferred outflows, liabilities and deferred inflows, revenues, or expenses
(excluding extraordinary items) of an individual Enterprise Fund are at least 10% of the
corresponding total (assets and deferred outflows, liabilities and deferred inflows, and so
forth) for all Enterprise Funds, and

The same element of the individual Enterprise Fund that met the 10% criterion is at least 5%
of the corresponding element total for all governmental and Enterprise Funds combined.

Internal Service Funds and fiduciary funds are never major funds. They are reported by fund
type.
Question 13-6
Governmental activities are general government activities and are financed primarily through
taxes, intergovernmental revenues, and other nonexchange revenues. Governmental activities
generally are reported in governmental funds and (perhaps in Internal Service Funds). For all but
a few governments, all general capital assets and general long-term liabilities are part of
governmental activities as well. Common examples of governmental activities include general
administration, public safety, education, streets and roads, and health and sanitation.
Business-type activities are financed in whole or in part by fees charged to external users for
goods or services and are generally reported in Enterprise Funds. (Some governments have
Internal Service Fund activities that are part of business-type activities, however.) Common
examples include public utilities, mass transportation, landfills, airports, and certain types of
recreational facilities such as golf courses.
Question 13-7
Program revenues raised for or derived from a function are deducted from the expenses
incurred for that function to determine the net (expenses) revenues of that function. Program
revenues are described as revenues derived "directly from the program itself or from parties
outside the reporting governments constituency." Program revenues include

Charges to users for services provided by a function (whether or not restricted to use
for that function)
Operating grants and contributions that are restricted to use for activities classified in
a particular function but not restricted solely to capital asset construction, acquisition,
or improvement.

Question 13-7 (continued)

Capital grants and contributions that are restricted to use for activities classified in a
particular function and restricted solely to capital asset construction, acquisition, or
improvement.
Investment income that is legally or contractually restricted to use for a particular
program.

Under GASB Statement No. 34, all other revenues are general revenues.

All taxes, even if restricted to a specific program, are general revenues.

Grants and investment income that do not meet the requirements to be reported as
program revenues are among the general revenues.
Contributions to endowments, special items, extraordinary items, and transfers are
reported separate from and following general revenues.

Question 13-8
The minimum classifications of program revenues are:

Charges for services

Operating grants and contributions
Capital grants and contributions

Other classifications are permitted, but not required.

Question 13-9
Charges for services are reported as program revenues of the function that generates the revenues
even if the use of the revenues is unrestricted or restricted to use for a different program. All
other program revenues are classified as revenues of the program for which the resources must
be used.
Question 13-10
The focus in the statement of activities is program reporting. For governmental activities, the
minimum level of functional detail required to be presented for direct expenses in the upper
portion of the Statement of Activities is the level of detail required in the governmental fund
Statement of Revenues, Expenditures, and Changes in Fund Balances. This level typically is by
function. Common examples of functions include general government, public safety, highways
and streets, education, and so on.
Business-type activities programs must be presented, as a minimum, by different identifiable
activities. GASB Statement No. 37 defines a different identifiable activity as follows:

Question 13-10 (continued)

An activity within an enterprise fund is identifiable if it has a specific revenue stream and related
expenses and gains and losses that are accounted for separately. Determining whether an activity is
different may require the use of professional judgment, but is generally based on the goods, services, or
programs provided by an activity. For example, providing natural gas is different from supplying water
or electricity, even though all three are regarded as "utility services." On the other hand, separate
identifiable water districts would not be considered "different" activities, even though they may serve
different parts of the government. . . .

Examples of different identifiable activities of a government's Enterprise Funds might include

electric services, water services, sewer services, and mass transportation services. Note that an
activity does not have to be accounted for in a separate Enterprise Fund to be a different
identifiable activity. Many governments report water and sewer services in a single Enterprise
Fund. Also, the level of detail described for both governmental activities and for business-type
activities is the minimum detail required. The GASB encourages presentation of additional
detail, where practicable.
Question 13-11
Only one expenseinterest on most general long-term liabilitiesis required to be reported as a
separate line item (and not allocated to programs). However, interest on general long-term
liabilities that are borrowings essential to the creation or continuing existence of a program
should be charged to the program if it would be misleading to exclude that interest from the
direct expenses of the program.
Certain other expenses are permitted to be reported as separate line items instead of being
allocated to programs or functions. Depreciation expense on general infrastructure capital
assets may be reported (1) in direct expenses of the function that the reporting government
normally associates with capital outlays for and maintenance of the infrastructure (usually public
works or highways and streets) or (2) as a separate line item. Likewise, depreciation expense on
capital assets such as city hall that essentially serve all functions can be allocated to the various
functional categories or reported as a separate line item.
SOLUTIONS TO EXERCISES
Exercise 13-1
1. a
2. c
3. b
4. b
5. a, c, and d are all included in functional expenses. b is reported on a separate line.
6. a
7. c
8. d
9. c
10. a
5

Exercise 13-2
1. a
2. c
3. d
4. c
5. c
6. a
7. b
8. a
9. c
10. a
Exercise 13-3
General revenues:
General property taxes................................................................
Restricted property taxes............................................................
Meals taxes.................................................................................
Unrestricted investment income.................................................
Total General Revenues..................................................
Program revenues:
Fines and forfeits (charges for services).....................................
Federal police protection grant (operating grants)......................
Federal capital grant (capital grants)..........................................
Total program revenues..................................................
Total Revenues............................................................................

$8,000,000
570,000
200,000
75,000
$8,845,000
82,000
132,000
600,000
814,000
$9,659,000

Exercise 13-4
Program Revenue Classifications
Operating
Capital Grants
Charges for
Grants and
and
Services
Contributions
Contributions

Revenue
Locally-levied gas tax (general revenues)
State grant for street widening
Charges for ambulance services
Contributions for recreation programs
Endowment income for economic development
Fines
Restricted property taxes (general revenues)
Shared revenues restricted to education
Federal grant for police
Federal grant for water/sewer lines
Totals

$4,000,000
$250,000
$ 75,000
120,000
31,000
1,230,000
400,000
$281,000

$1,825,000

5,000,000
$9,000,000

Exercise 13-5
The required column headings for the governmental funds Statement of Revenues, Expenditures,
and Changes in Fund Balances (other than the first column for the accounts, etc.) are shown in
the chart below.
General
Fund

Special Revenue
Fund A

Capital
Projects
Fund

Other
Governmental
Funds*

Total
Governmental
Funds

The required column headings for the proprietary funds Statement of Revenues, Expenses, and
Changes in Fund Net Position (other than the first column for the accounts, etc.) are:
Enterprise Funds
Fund C

Fund D

Other
Enterprise Funds**

Totals

Internal
Service
Funds

*This column is used to report the combined data of the other two Special Revenue Funds and
the two Debt Service Funds.
**This column is used to report the combined data of the other three Enterprise Funds.

SOLUTIONS TO PROBLEMS
Problem 13-1
Net Position:
Net investment in capital assets..................................................
Restricted for:
Debt service..............................................................................
Capital projects ($400,000 - $300,000)....................................
Specific programs.....................................................................
Unrestricted.................................................................................
Total Net Position.....................................................................
Computations:
Unrestricted net position:
Total fund balances of governmental funds................................
Less:
Special Revenue Funds fund balances......................................
Restricted Capital Projects Funds fund balances......................
Debt Service Funds fund balances............................................
Long-term claims and judgments payable*..............................
Long-term compensated absences payable*.............................
Add:
Equity of Internal Service Funds..............................................
Less: ISF net investment in capital assets
($3,000,000 x .3) - ($1,100,000 x .25)..................................
Total Unrestricted Net Position...................................................
Restricted net position:
Special Revenue Funds fund balances........................................
Debt Service Fund fund balance.................................................
Capital Projects Funds restricted fund balance...........................
Less: Capital debt equal to unexpended bond proceeds..........
Total Restricted Net Position......................................................
Net Investment in Capital Assets
General capital assets..................................................................
Less: Accumulated depreciation................................................
Net general capital assets........................................................
Deferred Outflow Deferred amount on refunding...................
Internal Service Fund capital assets ($3,000,000 x .3)...............
Less:
General long-term capital debt
($3,000,000 - $300,000).........................................................
Internal Service Fund capital debt ($1,100,000 x .25)...............
Total Net Investment in Capital Assets.......................................

$4,995,000
$2,000,000
100,000
2,000,000

4,100,000
7,175,000
$16,270,000

$12,800,000
$2,000,000
400,000
2,000,000
1,750,000
750,000

(6,900,000)

1,900,000
625,000

1,275,000
$7,175,000
$2,000,000
2,000,000

400,000
300,000

$12,000,000
5,000,000
7,000,000
70,000
900,000
2,700,000
275,000

100,000
$4,100,000

$7,970,000

2,975,000
$ 4,995,000

*The solution assumes that none of this liability is capital asset-related.

Problem 13-2
Computation of Thresholds for Size Tests to Identify Major Funds

Fund
General
Grants Special Revenue
School Special Revenue
Debt Service
Capital Projects
TotalsGovernmental Funds
Transit EF
Water & Sewer EF
Civic Center EF
Public Parking EF
TotalsEnterprise Funds
TotalsAll Governmental
and Enterprise Funds
10% testGovernmental Funds
10% testEnterprise Funds
5% testAll Governmental Funds
and Enterprise Funds
ThresholdGovernmental Funds
ThresholdEnterprise Funds

Fund
Grants Special Revenue
School Special Revenue
Debt Service
Capital Projects
Transit EF
Water & Sewer EF
Civic Center EF
Public Parking EF

Assets &
Deferred
Outflows
$ 23,302,450
7,636,000
14,000,000
13,934,000
48,090,000
106,962,450
11,350, 000
165,000,000
10,800,000
22,100,000
209,250,000

Liabilities &
Deferred
Inflows
$14,281,850
6,500,000
8,910,000
800,000
1,028,000
31,519,850
177,533
36,300,000
504,000
9,160,000
46,141,533

Revenues
$181,338,000
5,700,000
65,068,000
545,250
4,135,000
256,786,250
3,650,000
25,700,000
2,800,000
1,800,000
33,950,000

Expenditures/
Expenses
$114,376,000
5,736,000
68,000,000
9,360,000
21,200,000
218,672,000
5,000,000
21,250,000
3,540,000
1,820,000
31,610,000

$316,212,450
$ 10,696,245
$ 20,925,000

$77,661,383
$ 3,151,985
$ 4,614,153

$290,736,250
$ 25,678,625
$ 3,395,000

$250,282,000
$ 21,867,200
$ 3,161,000

$ 15,810,622
$ 15,810,623
$ 20,925,000

$ 3,883,069
$ 3,883,069
$ 4,614,153

$ 14,536,812
$ 25,678,625
$ 14,536,813

$ 12,514,100
$ 21,867,200
$ 12,514,100

Size Tests Results Using Thresholds

Both Size Tests Met for Major Fund Classification
Expenditures/
Assets
Liabilities
Revenues
Expenses
Met
Met
Met
Met
Met
Met

Met

Met

Met

Met

Met

Major governmental funds are the General Fund, the Grants Special Revenue Fund, the School
Special Revenue Fund, and the Capital Projects Fund. Major Enterprise Funds are the Water and
Sewer Enterprise Fund and the Public Parking Enterprise Fund.
Problems 13 -3 and 13-4
Refer to Excel Files.
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Problems 13-5 and 13-6

Summary reports on these research and analysis problems should be evaluated in terms of the
specific requirements. The depth of analysis and understanding should be apparent
particularly if several reports are evaluated simultaneously.
Problem 13-7
a.

b.

Even though this is an capital asset, its use is restricted by the grantor and thus qualifies for
Program Revenue classification on the Statement of Activities. The land, valued at the fair
market value on the date of donation, should be reported in the public safety function as a
capital grant and contribution.
Grants that are restricted for use in specific functional areas by the grantor should be
reported as program revenues. However, if the recipient has the discretion to choose
whether the grant is used for capital or operating purposes, the entire amount should be
reported as an operating grant and contribution.

Case Studies 13-1 and 13-2

Refer to Excel Files.

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