NINTH EDITION. Robert J. Freeman. Craig 0. Shoulders. Gregory S. Allison. Terry K. Pattoo. G. Robert Smith, Jr. Pearson Education International

Transcription

1 NINTH EDITION Robert J. Freeman Texas Tech University Craig 0. Shoulders University of North Carolina Pembroke Gregory S. Allison University of North Carolina Chapel Hill Terry K. Pattoo Midwestern State University G. Robert Smith, Jr. Middle Tennessee State University Pearson Education International

2 Preface 1 CHAPTER 1 Governmental and Nonprofit Accounting: Environment and Characteristics 11 Characteristics and Types of G&NP Organizations 12 G&NP Sector Significance 12 The G&NP Environment 13 Objectives of G&NP Accounting and Financial Reporting 16 Authoritative Sources of G&NP Accounting Principles and Reporting Standards 16 TheFAF 17 TheFASB 17 FASB-GASB Jurisdictions 17 "Government" Defined In Practice-. Not-for-Profit (Nonprofit) Organizations May Be Governments 18 TheGASB 19 GAAP Hierarchies 21 Concepts and Objectives of SLG Accounting and Financial Reporting 22 Governmental-Type Activities 23 Financial Report Users 27 Financial Report Uses 28 Business-Type Activities 28 Users and Uses of Financial Reports 29 Financial Reporting Objectives 30 Characteristics of SLG Accounting and Financial Reporting 31 Fund Accounting 31 Budgets and Appropriations 32 Other Distinguishing Characteristics 33 Commercial Accounting Comparison 34 Concluding Comments 34 APPENDIX 1-1 Evolution of Accounting Principles and Standards Prior to the GASB 34 Questions 37 Exercises 38 Problems 40 CHAPTER 2 State and Local Government Accounting and Financial Reporting Model: The Foundation 42 Overview of the GASB Financial Reporting Model 43 The Fundamental Features of the SLG Accounting and Financial Reporting Model 45 GAAP and Legal Compliance 46 Fund Accounting 47 Fund Categories 48 Transaction Analysis 53 Types of Funds In Practice: Governmental Fund Accounting for the Dallas Cowboys Football Stadium 59 Comparative Financial Statement Formats 62 Annual Financial Reporting 65 Concluding Comments 69 Questions 69 IX

3 X Exercises 70 Problems 74 Cases 77 CHAPTER 3 The General Fund and Special Revenue Funds 79 Measurement Focus 80 Purposes and Assumptions of This Chapter 81 General Fund Accounting Illustrative Example 81 Entries During 20X1 82 Year-End Adjustments 93 Preclosing Trial Balances 94 Illustrative Example Worksheets 94 20X1 Closing Entries 94 Reserve for Encumbrances 96 Postclosing Trial Balance 97 Balance Sheets 98 Interim Balance Sheet 98 Year-End Balance Sheet 98 Fund Balance 99 Fund Balance Reserves 100 Unreserved Fund Balance 101 Fund Balance Designations 101 Interfund Receivables and Payables 102 Capital Assets and Long-Term Liabilities 102 Statement of Revenues, Expenditures, and Changes in Fund Balances 103 Restatements 105 Extraordinary Items and Special Items 105 Classification of Expenditures 105 Combining Special Revenue Fund Statements 108 Concluding Comments 110 APPENDIX 3-1 General Ledger Worksheet and Subsidiary Ledgers 110 APPENDIX 3-2 Classification of Expenditures 110 APPENDIX 3-3 Alternative Account Structure and Entries 119 Questions 120 Exercises 120 Problems 123 Cases 126 CHAPTER 4 Budgeting, Budgetary Accounting, and Budgetary Reporting 129 The Government Budgetary Perspective 130 Budgetary Accounting and Reporting 131 Budgetary Accounting and Control 131 Recording the Budget General Ledger and Subsidiary Ledger 134 Budget Revisions 135 Revenues and Expenditures Ledgers Incorporating Budgetary Accounts 140 Level of Detail in Subsidiary Ledgers 145 Budgetary Reporting Overview 146 The Budgetary Basis 146 Interim Budgetary Statements 146

4 Budget Comparison Schedule or Statement of Revenues, Expenditures, and Changes in Fund Balance Budget and Actual 149 Budgetary Comparison Statement Illustrated Budgetary Basis Same as GAAP 150 Budgetary Comparison Statement Illustrated Budgetary Basis Differs from GAAP 150 Entries During 20X2 153 Use of a Budgetary Fund Balance Account 154 Budgetary Planning, Control, and Evaluation 155 Planning 156 Control 156 Evaluation 156 Basic Budgetary Terminology 157 Capital vs. Current Budgets 157 Tentative vs. Enacted Budgets 157 General vs. Special Budgets 158 Fixed vs. Flexible Budgets 158 Executive vs. Legislative Budgets 158 Budgetary Approaches and Emphases 159 Budget Preparation 160 Overview 160 Preliminary Estimates 160 Preparing the Budget " 161 Revenue Estimates and Requests 162 Expenditure Estimates and Requests 162 Expenditure Budgeting Approaches 162 Legislative Consideration and Action 165 Budget Execution 166 Concluding Comments 166 Questions 166 Exercises 167 Problems 171 Cases 175 Harvey City Comprehensive Case 178 CHAPTER 5 Revenue Accounting Governmental Funds 183 Revenue Definition and Recognition 184 Nonexchange Transactions 186 Governmental Fund and Proprietary Fund Revenue Recognition Compared 188 Classification of Revenue Accounts 190 General Fund Revenues 190 Other Governmental Funds Revenues 190 Taxes 191 Taxpayer-Assessed Taxes 191 Property Taxes 192 Property Tax Statements/Schedules 201 Licenses and Permits 201 Intergovernmental Revenues 201 Intergovernmental Revenue Classifications 202 Intergovernmental Revenue Accounting 203 Charges for Services 206 Interfund Services vs. Reimbursements 206 Charges for Services 206 XI

5 XII Fines and Forfeits 208 Investment Earnings 209 Miscellaneous Revenues 212 Escheats 212 Private Contributions 213 Selected Nonrevenue Fund Balance Increases 213 Capital Asset Sales/Losses 213 Internal PILOTS 213 Col lateral ized Borrowings 214 Revenue Reporting: GAAP vs. Budgetary 214 Changes in Accounting Principles 214 Error Correction 217 Concluding Comments 218 Questions 218 Exercises 219 Problems 223 Cases 227 Harvey City Comprehensive Case 228 CHAPTER 6 Expenditure Accounting Governmental Funds 230 Expenditure Definition and Recognition 231 Capital Outlay Expenditures 232 Debt Service Expenditures 233 Intergovernmental Expenditures 233 Current Operating Expenditures 233 Inventories and Prepayments 233 Expenditure Recognition Summary 234 Expenditure Accounting Controls 235 Expenditure Accounting Procedures 235 ' Personal Services 236 Materials and Supplies 238 Other Services and Charges 242 Adjusting Entries In Practice: Government Lease Transactions 246 Encumbrances 247 Debt Service 248 Claims and Judgments 248 Compensated Absences 252 Pension/OPEB Plan Contributions 253 Expenditure Reporting: GAAP vs. Budgetary 254 Changes in Accounting Principles 255 Alternative Principles 255 New GASB Standards 258 Error Correction 259 Concluding Comments 259 Questions 260 Exercises 260 Problems 262 Cases 269 Harvey City Comprehensive Case 270

6 XI11 CHAPTER 7 Capital Projects Funds 272 Capital Projects Fund Operations and Accounting Standards 274 CPF Financial Resources 274 Number of Funds 274 CPF Life Cycle 275 The Budget 276 Interim Financing 277 Project Costs 278 Intergovernmental Revenues 279 Recording Bond Issues 279 Capital Projects Fund Case Illustration Begun, 20X1 279 Budgetary Entry 280 Transaction/Event Entries 281 General Ledger Worksheet(s) 282 Preclosing Trial Balance 283 Closing Entries 284 Financial Statements 285 Capital Projects Fund Case Illustration Concluded, 20X X1 Accounts Closed 289 Case Illustration Assumptions and Entries 20X2 289 General Ledger Worksheet X2 Financial Statements 292 Other Capital Projects Fund Operations, Accounting, and Reporting Matters 295 Bond Anticipation Notes (BANs) 295 Investments and Arbitrage 297 Remaining Fund Balance 297 Reporting Multiple Projects 297 Combining CPF Statements 298 Concluding Comments 298 Questions 299 Exercises 299 Problems 302 Cases 307 Harvey City Comprehensive Case 309 CHAPTER 8 Debt Service Funds 311 Debt Service Fund Environment, Financing, and Expenditure Recognition 312 Long-Term Liabilities 312 Fixed vs. Variable Rates 313 Debt Service Payments 314 Bonds and Fiscal Agents 314 Required DSF Reserves 315 Bond Ratings 315 Bond Insurance 315 Sources of Financing 315 DSF Investments 316 DSF Expenditure Recognition 316 Debt Service Fund for a Serial Bond Issue: Case Illustration 317 Illustrative Entries 318 Financial Statements 320

7 XIV Special Assessment Debt Service Funds 320 Illustrative Entries 322 Illustrative Financial Statements 324 Other Conventional Debt Service Fund Considerations 325 Nonaccrual of Interest 325 Combining Balance Sheet 325 Combining Operating Statement 325 Debt Service Fund for a Term Bond Issue 325 Sinking Fund Requirements 327 Debt Service Funds for Deep Discount Issues 328 Refundings 329 Reasons for Refundings 330 Refundings Defined 330 Defeasance of Debt In Practice: GFOA Recommended Practice: Analyzing an Advance Refunding 332 Debt Service Funds for Refundings 332 Current Refunding 333 Advance Refunding 335 Debt and Non-Debt Financing 336 Reporting Refundings 338 ' Advance Refunding Disclosures 338 Concluding Comments 339 Questions 341 Exercises 341 Problems 344 Cases 348 Harvey City Comprehensive Case 350 CHAPTER 9 General Capital Assets; General Long-Term Liabilities; Permanent Funds: Introduction to Interfund-GCA-GLTL Accounting 352 Overview of General Capital Assets and General Long-Term Liabilities Accounting Procedures 353 General Capital Assets 354 General Capital Assets Defined 354 Initial Valuation 355 Classification 356 Capitalization Policy In Practice 357 Property Records 358 Capital Assets Inventory 359 Additions, Betterments, and Renewals 359 Depreciation/Accumulated Depreciation 359 Updating GCA Accounts 361 Recording Depreciation 364 Sale, Replacement, or Retirement 364 Intragovernmental Transactions 366 Impairment 368 Insurance Recoveries 370 Damage or Destruction 370 Reporting and Disclosures 371 General Long-Term Liabilities In Practice 373 CPF-DSF-GLTL 374

8 XV Serial Debt 375 Special Assessment Debt 375 Other Government Liabilities 375 Interest-Related Adjustments 377 Defaulted Bonds 377 In-Substance Defeasance 378 GLTL Records 378 GLTL Reporting and Disclosures 378 Permanent Funds Introduction to Interfund-GCA-GLTL Accounting 382 Concluding Comments 386 Questions 386 Exercises 387 Problems 390 Cases 394 Harvey City Comprehensive Case 396 CHAPTER 10 Enterprise Funds 399 Common Characteristics and Principles of Proprietary Funds 399 Accounting Equation 399 Accounting Principles 400 Financial Statements 400 Enterprise Funds 409 Enterprise Funds Defined 409 Specific EF Topics 410 EF Accounting Illustrated 414 Enterprise Fund Reporting Illustrated 425 Combining Enterprise Fund Financial Statements 428 Concluding Comments 434 Questions 434 Exercises 435 Problems 438 Cases 443 Harvey City Comprehensive Case 446 CHAPTER 11 Internal Service Funds 448 Overview of Accounting Principles 449 Initial Establishment 449 Pricing Policies 452 Pricing Methods 452 Relation to Budget 453 Financial Statements 453 Internal Service Fund Accounting Illustrated 454 Automotive Equipment Unit 454 Central Stores Fund 458 Self-Insurance Fund In Practice: Practice Examples: Internal Service Funds In Practice: Practice Examples: Self-Insurance Note Disclosure 463 Disposition of Increase or Decrease in Net Assets 467 Dissolution of an Internal Service Fund 467

9 XVI Combining Internal Service Fund Financial Statements 467 Concluding Comments 467 Questions 471 Exercises 471 Problems 474 Cases 476 Harvey City Comprehensive Case 478 CHAPTER 12 Trust and Agency (Fiduciary) Funds: Summary of Interfund-GCA-GLTL Accounting 480 The Accountability Focus 481 Agency Funds 482 Simpler Agency Funds In Practice: Practice Examples: Agency Funds 484 Tax Agency Funds 484 Special Assessment Agency Funds 488 Trust Funds 489 Private-Purpose Trusts 489 Investment Trusts 491 Pension Trusts 492 * In Practice: Defined Benefit Pension Trust Funds: Statement Information vs. Schedule of Funding Progress 495 Combining Trust and Agency Fund Financial Statements 500 Additional Interfund General Capital Asset General Long-Term Liability Accounting Illustrations 500 Concluding Comments 506 Questions 506 Exercises 507 Problems 510 Cases 513 Harvey City Comprehensive Case 515 CHAPTER 13 Financial Reporting: The Basic Financial Statements and Required Supplementary Information 516 Basic Financial Statements Overview 518 Fund Financial Statements 519 Major Fund Reporting 520 Fund-Based Financial Statements In Practice In Practice: GFOA Policy Statement: Budgetary Reporting 531 Government-Wide Financial Statements 532 Statement of Net Assets 534 Statement of Activities 536 Measurement Focus 538 Reporting Expenses 539 Program vs. General Revenues 541 Internal Service Funds 544 Infrastructure Capital Assets 544 Note Disclosures 544 Required Supplementary Information 544 Management's Discussion and Analysis 544 Other RSI 546 Special Purpose Governments 546

10 XVII Concluding Comments 546 APPENDIX 13-1 Illustrative Management's Discussion and Analysis 548 Questions 555 Exercises 555 Problems 558 Cases 561 Harvey City Comprehensive Case 564 CHAPTER 14 Financial Reporting: Deriving Government-Wide Financial Statements and Required Reconciliations 565 Deriving Governmental Activities Data 567 Deriving Government-Wide Financial Statement Data for Governmental Activities A Worksheet-Based Approach 568 The Conversion Worksheets 568 Balance Sheet Conversion Worksheet Adjustments 573 Farley County Balance Sheet Conversion 575 Operating Statement Conversion Worksheet Conversion Adjustments 579 Farley County Operating Statement Conversion 582 Deriving Business-Type Activities Data 587 Statement of Net Assets, 588 Statement of Activities 588 Reconciliations 591 Concluding Comments 593 APPENDIX 14-1 A One-Worksheet Approach to Deriving Governmental Activities Data 593 Questions 603 Exercises 604 Problems 607 Cases 615 Harvey City Comprehensive Case 619 CHAPTER 15 Financial Reporting: The Comprehensive Annual Financial Report and the Financial Reporting Entity 621 The Comprehensive Annual Financial Report 622 The Introductory Section 622 The Financial Section 624 The Statistical Section 628 Supplemental and Special Purpose Reporting 632 Financial Reporting Complex Entity Structure 632 Reporting Entity Definition 633 Reporting Entity Disclosures 635 Integrating Component Units Into the Reporting Entity In Practice: Component Units, Joint Ventures and Related Organizations 636 Blending 638 Discrete Presentation 638 Dual Reporting Entity Model 640 Other Issues In Practice: State Component Unit Data 640 Separate Issuance of Primary Government Financial Statements 641 Related Organizations, Joint Ventures, and Jointly Governed Organizations 641 Concluding Comments 642 Questions 644

11 XVIII Exercises 644 Problems 648 Cases 651 Harvey City Comprehensive Case 653 CHAPTER 16 Non-SLG Not-for-Profit Organizations: SFAS 116 and 117 Approach 654 Classification of Organizations 655 Voluntary Health and Welfare Organizations 656 Other Not-for-Profit Organizations 656 Classes of Net Assets 657 Non-GAAP Accounting and Reporting Requirements 658 Basis of Accounting 658 SFAS 117 Financial Statements 658 Balance Sheet 658 Statement of Activities 660 Statement of Cash Flows 668 Statement of Functional Expenses 668 Nongovernment VHWO and ONPO Accounting and Reporting Illustration 668 Transactions and Entries 668 Illustrative Financial Statements In Practice 681 Concluding Comments 682 Questions 682 Exercises 683 Problems 686 CHAPTER 17 Accounting for Colleges and Universities 693 Classification as "Engaged Only in Business-Type Activities" 694 GAAP Reporting Requirements 695 Balance Sheet 695 Operating Statement In Practice: Government University Financial Statement: Practice Example 700 Statement of Cash Flows 702 Case Illustration A Government University 703 Other Resources 707 Annuity and Life Income Gifts 713 Annuity Gifts 713 Life Income Gifts 717 Colleges and Universities Engaged in Both Governmental and Business-Type Activities 718 Nongovernment Not-For-Profit University Reporting 718 Concluding Comments 722 Questions 722 Exercises 722 Problems 724 CHAPTER 18 Accounting for Health Care Organizations 731 Funds Government Hospitals 732 Basic Principles 733

12 XIX Unique Measurement and Display Features 733 Distinguishing Primary Activities 733 Classes of Revenues In Practice: Third-Party Payers: Significance and Accounting Policies 734 Gains 736 Donations 736 Expense Classification 736 Restricted Assets 737 Property, Plant, and Equipment 738 Illustrative Case 738 Summary of Transactions and Events 738 Financial Statements 747 Balance Sheets 747 Operating Statement 747 Statement of Cash Flows 747 Nongovernment Not-for-Profit Hospital Reporting 747 Concluding Comments 754 Questions 754 Exercises 755 Problems 758 CHAPTER 19 Federal Government Accounting 761 The Federal Financial Management Environment 762 Financial Accounting Responsibilities 762 Overview 764 The Budgetary Process 765 The Budget Cycle 765 Exceeding Budget Authority 768 Accounting Principles and Standards for Federal Agencies 768 The Federal Model 768 Standard General Ledger 772 Federal Fund Structure 773 Financial Reporting In Practice: Federal Government Accounting Issues 111 Federal Agency Accounting and Reporting Illustrated 777 A Case Illustration 777 Maintaining Budgetary Control 777 Maintaining Proprietary Accounts 782 Other Transactions and Entries 782 Closing Entries 786 Reporting 788 Concluding Comments 792 Questions 793 ^ Exercises 793 Problems 795 CHAPTER 20 Auditing Governments and Not-for-Profit Organizations 798 Overview 799 What is an Audit? 799 Classifications of Audits 799 Management's Representations 801

13 XX External Auditor Classifications 801 Engagement Letter 802 Auditing Standards 802 AICPA Auditing Standards 802 GAO Auditing Standards 804 GAGAS Summary 805 The Financial Audit 806 Auditing Standards 806 Audit Procedures 806 The Audit Report 807 The Single Audit 809 Purposes 810 Applicability 810 Definitions 810 Objectives 811 Overview 812 Auditee Responsibilities 812 Auditor's Responsibilities^ 814 Auditing Guidance 816 Major FFA Programs 817 Findings & Questioned Costs 821 Illegal Acts 822 Subrecipients 822 Auditor Reports Single Audit 823 Auditee Reporting Responsibilities 824 Other Matters 827 Concluding Comments 827 APPENDIX 20-1 Glossary 827 APPENDIX 20-2 Data Collection Form for Reporting on Audits of States, Local Governments, and Nonprofit Organizations 829 Questions 833 Exercises 833 Problems 837 Cases 838 Index 841