Deck 7: Accounting for the Business-Type Activities of State and Local Governments

Question 1

Internal service funds account within the fund for any long-term liabilities to be serviced from revenue derived from fund operations.

Answer 1

True
Explanation: Since the internal service fund uses accrual accounting, it recognizes any long-term liabilities of the fund. Long-term liabilities of an internal service fund ordinarily result from advances from other funds or governments, not from outside creditors.

Question 2

A statement of revenues,expenses,and changes in net position for an internal service fund is similar in many respects to an income statement prepared for an investor-owned business.

Answer 2

True
Explanation: The terminology differs somewhat, but otherwise the statement is similar in format and display to income statements prepared for business organizations.

Question 3

Internal balances between governmental and business-type activities are reported in the government-wide statements.

Answer 3

True
Explanation: GASB standards require that interfund receivables and payables between governmental and business-type activities be presented as internal balances. While internal balances do not meet the definition of elements of financial statements, they are reported in the government-wide statement of net position for purposes of fairly presenting each reporting entity.

Question 4

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.

Question 5

The net position of an internal service fund consists of contributed equity and reserves for assets that will not be converted into cash in the normal operation of the fund.

Question 6

Capital assets acquired under a capital lease for use by an internal service fund should be recorded in the General Fund in order to report all leased assets in one financial statement.

Question 7

Public utilities owned and operated by governments are common examples of enterprise funds.

Question 8

Internal service funds of one government may not provide goods or services,on a cost-reimbursement basis,to other governments.

Question 9

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.

Question 10

Internal service funds should account for operating expenditures on the accrual basis.

Question 11

In the information for the Supplies Fund that follows,the account "Interfund Transfer In from General Fund" should be credited for $89,200 because this amount was transferred from the General Fund to the Supplies Fund in a nonexchange transfer that will not have to be repaid.

Question 12

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.

Question 13

A statement of cash flows is not prepared for an internal service fund.

Question 14

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.

Question 15

In the information for the Supplies Fund that follows,the account "Interfund Loan from Electric Utility Fund" should be credited for $320,000 because this amount was borrowed from and will have to be repaid by the Supplies Fund.

Question 16

Enterprise funds are used by state and local governments to account for services that are provided to the general public on a user-charge basis,with prices set to recover the costs of operations,activities financed with debt secured solely by revenues from fees of the activity,activities required by law or regulations to recover operating costs from user charges,or any activity that the governing body of the government has decided should be accounted for on a "business basis."

Question 17

An internal service fund can be liquidated only if there is a ready and willing buyer for the fund's assets.

Question 18

The Encumbrances account should be used by an internal service fund in the same manner as by the General Fund.

Question 19

Proprietary funds are accounted for in a manner similar to investor-owned businesses; among other features,the accrual basis of accounting is used and all of the capital assets used in fund operations are accounted for by the using fund.

Question 20

Internal service funds are intended to operate on taxes or other financing sources authorized by the legally enacted revenue budget for each year; therefore,they are classified as governmental funds.

Question 21

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.

Question 22

Budgets for enterprise funds should be recorded in the accounts in the same manner as budgets for a General Fund or a special revenue fund.

Question 23

To facilitate the combination of utility financial statements with the statements of other enterprise funds,GAAP permits utilities to follow the customary format used by nonutility business organizations.

Question 24

GASB requires interest capitalization for self-constructed assets of proprietary funds,except those constructed with general long-term debt that will be repaid from resources of governmental activities.

Question 25

The liability for long-term debt issued to provide financing for an enterprise fund and to be serviced from revenues of the enterprise fund should be reported in the financial statements of the enterprise fund,even though the debt also is backed by the general obligation credit of the government.

Question 26

Utility enterprise funds that report to regulatory agencies may capitalize both actual interest paid on debt incurred for construction of plant assets and an imputed amount on their own funds so used.

Question 27

Which of the following may properly be reported as a component of net position in the proprietary fund statement of net position?

A) Retained earnings.
B) Designated equity.
C) Restricted net position.
D) Contributed capital.

Question 28

Internal service funds should be used only if

A) The reporting government is the predominant participant in the activity.
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 to other departments at a charge that covers the full cost of operations.

Question 29

Which of the following funds of a government uses the same basis of accounting as a proprietary fund?

A) Permanent trust.
B) Investment trust fund.
C) Special revenue.
D) Capital projects.

Question 30

Unbilled customer accounts receivable should be reflected in the balance sheet of a governmentally owned utility even though the exact amount of service to be billed is unknown until the customers' meters can be read.

Question 31

Interest and principal on enterprise fund revenue bonds should be recorded in a debt service fund until paid.

Question 32

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.

Question 33

General obligation bonds used to increase the capacity of a water treatment plant (part of a water utility enterprise fund),but for which the debt service (including repayment of principal)will be paid from general government revenues should be reported as a long-term liability in the water utility fund balance sheet.

Question 34

The balance sheet format recommended for financial statements submitted to the NARUC and FERC for utilities subject to regulatory reporting requirements displays Utility Plant before Current and Accrued Assets and Long-Term Debt before Current and Accrued Liabilities.

Question 35

Governments can follow either the GASB or FASB Codification.

Question 36

Which of the following is a difference between enterprise funds and internal service funds?

A) The use of cost accounting by enterprise funds but not internal service funds.
B) The customers who primarily benefit from the fund's service.
C) The number of basic financial statements required.
D) The measurement focus on economic resources for enterprise funds and current financial resources for internal service funds.

Question 37

In the context of regulatory utility plant accounting,original cost and historical cost have the same meaning.

Question 38

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.

Question 39

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.

Question 40

Plant and equipment utilized by a governmentally owned utility should be depreciated in the same manner as if it belonged to an investor-owned utility.

Question 41

When utility customers are billed during the year,the enterprise fund journal entry will include

A) A debit to Sales of Water.
B) A debit to Cash - Restricted.
C) A debit to Customer Accounts Receivable.
D) All of the above.

Question 42

To establish a new internal service fund with a transfer of funds (not to be repaid),which account would be credited in the internal service fund?

A) Cash.
B) Interfund Transfer In.
C) Interfund Transfer Out.
D) Estimated Revenues.

Question 43

GASB accounting and financial reporting standards for risk financing activities provide that an internal service fund should recognize claims expense and a related liability when a claim has been asserted and

A) A municipal court has awarded a judgment to a claimant fund (e.g.,the General Fund).
B) It is reasonably possible that a loss has been incurred and the amount can be reasonably estimated.
C) It is probable that a loss has been incurred and the amount can be reasonably estimated.
D) A loss has been incurred,but the amount cannot be reasonably estimated.

Question 44

Depreciation on capital assets used by an enterprise fund of a government

A) Should not be recorded for infrastructure assets.
B) Should be recorded in the General Fund as an expenditure.
C) Should be recorded in the governmental activities accounts.
D) Should be recorded in the enterprise fund as an expense.

Question 45

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.

Question 46

Which of the following is not true regarding proprietary funds?

A) The difference between assets and liabilities of proprietary funds is called "fund balance."
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.

Question 47

When a new utility customer submits a deposit,the enterprise fund journal entry will include

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.

Question 48

When a supplies internal service fund records a billing to the General Fund,the journal entry in the General Fund will include

A) A debit to Cost of Supplies Issued.
B) A credit to Interfund Loans Payable.
C) A debit to Expenditures.
D) A credit to Billings to Department.

Question 49

Which of the following activities or services would most likely not be accounted for by an internal service fund?

A) Electronic data processing.
B) Central purchasing,warehousing,and issuing of supplies.
C) Municipal golf course.
D) Risk management.

Question 50

Which of the following account balances would only be reported if a city-owned utility followed regulatory accounting principles?

A) Depreciation expense.
B) Pumping expense.
C) Restricted Assets-Cash.
D) Utility Plant Acquisition Adjustments.

Question 51

The comprehensive annual financial report (CAFR)of a government should contain a statement of revenues,expenses,and changes in net position for

A) Both proprietary and governmental funds.
B) Proprietary but not governmental funds.
C) Governmental but not proprietary funds.
D) Proprietary and fiduciary funds.

Question 52

What amount of the following items should be accounted for in an enterprise fund?

A) $2,100,000.
B) $1,760,000.
C) $1,640,000.
D) $350,000.

Question 53

What amount of the following items should be accounted for in an internal service fund?

A) $2,100,000.
B) $1,760,000.
C) $1,640,000.
D) $350,000.

Question 54

Under GASB standards,an internal service fund should prepare all of the following financial statements except for a

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.

Question 55

Which of the following funds of a government would account for depreciation in the accounts of the fund?

A) General.
B) Internal service.
C) Capital projects.
D) Special revenue.

Question 56

The City of Jennings 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 Community Services Department $30,000 for vehicle rentals.What account should the internal service fund use to record these billings?

A) Interfund Transfers In.
B) Interfund Exchanges.
C) Billings to Departments.
D) Cost of Providing Rentals to Other Funds and Units.

Question 57

Which of the following is not a typical means of dissolving an internal service fund that a city no longer needs or wants?

A) Conversion of the fund's noncash assets to cash and distribution of the cash to another fund or funds.
B) Transfer the fund's assets to another fund that will continue the same or similar operating activities.
C) Distribute the fund's assets in kind to another fund or funds that will not continue the same or similar operating activities.
D) Transfer the fund's assets to a not-for-profit organization that provides charitable services in the community.

Question 58

Which of the following is (are)an appropriate basis of accounting for an internal service fund?

A) Modified accrual basis: Yes; accrual basis: No
B) Modified accrual basis: No; accrual basis: Yes
C) Modified accrual basis: Yes; accrual basis: Yes
D) Modified accrual basis: No; accrual basis: No

Question 59

When a supplies internal service fund records a billing to the General Fund,the journal entry in the internal service fund will include

A) A debit to Cost of Supplies Issued.
B) A debit to Loans Receivable.
C) A debit to Billings to Department.
D) A debit to Inventory of Supplies.

Question 60

In order to conform to GASB standards,goods and services provided by internal service funds to other departments of the government must be priced to

A) Cover variable costs only.
B) Cover full costs (both fixed and variable).
C) Cover full costs,plus an additional charge to cover inflation and anticipated needs for expansion.
D) GASB standards do not address appropriate fees.Each government determines its own operating and pricing policies,which may include subsidizing the cost of operating an internal service fund.

Question 61

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

Question 62

Sales revenues of a utility for a certain fiscal period

A) Are equivalent to total debits to Customer Accounts Receivable for that period.
B) Include receivables billed during a fiscal period,plus receivables billed early in the next year if meters were read before year-end.
C) Should be reported on the cash basis for the sake of conservatism.
D) Include billed receivables and an accrual for unbilled receivables as of the balance sheet date.

Question 63

The Capitol City Golf Course,an enterprise fund,purchased new furniture for use in the golf pro's office.The debit for the entry to record the event should be to

A) Expenditures.
B) Purchases.
C) Furniture and fixtures.
D) General capital assets.

Question 64

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) Material enterprise fund capital assets.
B) Material enterprise fund operating income or loss.
C) Material enterprise fund tax revenues.
D) Material intergovernmental operating subsidies to an enterprise fund.

Question 65

The following are key terms in Chapter 7 that relate accounting for the business-type activities of state and local governments:
A.Customer advances for construction
B.Revenue bonds
C.Utility plant acquisition adjustment
D.Regulatory accounting principles
E.Original cost
F.Historical cost
G.General obligation bonds
For each of the following definitions,indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

Question 66

Which of the following would be reflected in the operating statement of a proprietary fund?

A) Incurrence of interest expense.
B) Repayment of the principal of debt.
C) Issuance of debt.
D) Purchase of a capital asset.

Question 67

The liability for general obligation bonds issued for the benefit of a governmentally owned electric utility and serviced by its earnings should be recorded in

A) An enterprise fund.
B) An enterprise fund and disclosed in the notes to the financial statements.
C) An enterprise fund and the business-like activities accounts.
D) The governmental activities accounts.

Question 68

Which of the following accounts would least likely be found in the general ledger of an internal service fund?

A) Cash.
B) Expenditures.
C) Billings to Departments.
D) Machinery and equipment.

Question 69

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.
B) Private-purpose trust fund.
C) Enterprise.
D) Special revenue.

Question 70

For which of the following assets can the "modified approach" be elected in lieu of depreciation?

A) Eligible infrastructure assets.
B) All general capital assets.
C) Buildings and equipment.
D) All capital assets.

Question 71

The water utility fund of the City of Pikesville uses cycle billing procedures.Under these procedures,the City of Pikesville will likely do which of the following on December 31,the end of its fiscal year?

A) Read meters and bill all customers on December 31.
B) Accrue revenue and a receivable for the number of days from the last billing date for each customer until December 31.
C) Ignore water consumed by customers from their last billing date until December 31.
D) Call the unbilled customers and request that they read their own meters.

Question 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?

Question 73

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.

Question 74

A municipal solid waste landfill (MSWLF)accounted for by an enterprise fund should recognize an expense and liability for the year in the amount of

A) The estimated total current costs for closure and postclosure of the MSWLF determined at the time the landfill is placed into initial operation divided by the estimated number of years the landfill will be operated.
B) The estimated total current costs for closure and postclosure of the MSWLF as reevaluated at the end of each fiscal year divided by the remaining estimated number of years the landfill will be operated.
C) A portion of the estimated total current costs for closure and postclosure of the MSWLF,determined at the time the landfill is placed into initial operation,equal to the ratio of landfill used during the year to its total capacity.
D) A portion of the estimated total current costs for closure and postclosure of the MSWLF,as reevaluated at the end of the fiscal year,equal to the ratio of landfill used during the year to its total capacity.

Question 75

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.

Question 76

"In order to determine whether user charges are commensurate with operating costs,it is desirable for internal service fund operations to be accounted for on a business basis." Do you agree? Why or why not?

Question 77

Primarily,the operating statement of a proprietary fund should provide information useful in answering which of the following questions?

A) What are the transactions or events of the period that have increased or decreased the resources available for spending in the near future?
B) Have current financial resources increased or decreased during the period?
C) Have cash balances increased or decreased as a result of transactions and events of the period?
D) What are the transactions or events of the period that have increased or decreased the fund's total economic resources?

Question 78

The following cash transactions were among those reported by Crawford County's Water and Sewer Enterprise Fund for the year: In the Water and Sewer 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) $6,000,000.
C) $8,000,000.
D) $9,000,000.

Question 79

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.

Question 80

Which of the following organizations or units would least likely be accounted for by an enterprise fund?

A) A hospital.
B) An airport.
C) The computer department.
D) A sports stadium.