Introduction to Accounting and Financial Reporting
17
Number of Funds Required
The GASB Summary Statement of Principles states that governmental units should
establish and maintain those funds required by law and sound financial administration. If state law and/or agreements with creditors do not require the receipt of
revenues that are raised solely for a defined purpose and if administrators do not feel
that use of a separate fund is needed to be able to demonstrate that revenues were
raised solely for that particular purpose, the General Fund should be used to account
for the revenue and related expenditures.
Now that you have finished reading Chapter 1, complete the multiple choice questions provided on the Connect website to test your comprehension of the chapter.
Questions and Exercises
1–1. Obtain a copy of a recent Comprehensive Annual Financial Report (CAFR).
These may be obtained by writing the director of finance in a city or county
of your choice. Your instructor may have one available for you, or you may
obtain one from the GASB website: www.gasb.org. It would be best, but not
absolutely necessary, to use a CAFR that has a Certificate of Excellence in
Financial Reporting from the Government Finance Officers Association. You
will be answering questions related to the CAFR in Chapters 1 through 8.
Answer the following questions related to your CAFR.
a. What are the inclusive dates of the fiscal year?
b. Identify the name and address of the independent auditor. Is the auditor’s
opinion unmodified? If not, describe the modification. Is the opinion limited to the basic financial statements, or does the opinion include combining and individual fund statements?
c. Does the report contain an organization chart? A table of contents? A list
of principal officials? A letter of transmittal? Is the letter of transmittal
dated and signed by the chief financial officer? List the major items of
discussion in the letter of transmittal.
d. Does the report include a Management’s Discussion and Analysis? List
the major items of discussion.
e. Does the report include the government-wide statements (Statement of
Net Position and Statement of Activities)?
f. Does the report reflect fund financial statements for governmental, proprietary, and fiduciary funds? List those statements. List the major governmental and proprietary funds (the funds that have separate columns in
the governmental and proprietary fund statements).
1–2. Identify and describe the five environmental differences between governments and for-profit business enterprises as identified in the Governmental
Accounting Standards Board’s Why Governmental Accounting and Financial
Reporting Is—and Should Be—Different.
18 Chapter 1
1–3. Identify and briefly describe the three organizations that set standards for
state and local governments, the federal government, and nongovernmental
not-for-profit organizations.
1–4. What is the definition of a government as agreed upon by the FASB and
GASB?
1–5. Describe the “hierarchy of GAAP” for state and local governments.
1–6. Accounting and financial reporting for state and local governments use, in
different places, either the economic resources measurement focus and the
accrual basis of accounting or the current financial resources measurement
focus and the modified accrual basis of accounting. Discuss the differences
in measurement focus and basis of accounting related to (a) the conceptual
differences, (b) differences in revenue recognition, (c) differences in expense/
expenditure recognition, (d) differences in recognition of fixed assets, and
(e) differences in the recording of long-term debt.
1–7. Distinguish between private and public sector organization.
1–8. Go to the GASB website (www.gasb.org). What is the mission of GASB?
1–9. For each of the items below, identify which fund(s) would be used to account
for the item and provide a justification for your answer.
a. A city government issued general obligation bonds to finance the construction of a new jail.
b. A tax of $1.00 per residential phone number is collected by a city government from the phone company. This amount is required by state law to be
used for the operation of the 911 emergency phone system.
c. A county government expended $1 million to expand the water treatment
plant.
d. A donor provided investments totaling $4 million to create an endowment, the earnings of which will be used to provide scholarships.
e. A donor provided $50,000 to be used to purchase newspaper and magazine subscriptions for the public library. There is no requirement that the
original principal may not be spent.
f. A city government sold surplus street maintenance trucks for $10,000.
g. A city government contributed $500,000 to a pension plan administered
by the city for its teachers, public safety employees, and employees of the
water department.
Continuous Problem
1–C. Chapters 2 through 9 deal with specific knowledge needed to understand
accounting and financial reporting by state and local governments. A continuous problem is available in additional resources through Connect. The
problem assumes the government is using fund accounting for its internal
record-keeping and then at year-end makes necessary adjustments to prepare

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