Chapter 11

Issues of Reporting, Disclosure, and Financial Analysis

/(CHAPTER 11)

1. Discrete presentation requires combining the unit's transactions and balances as if they were part of the primary government for reporting.
2. Governments must combine their blended component units into both the fund and government-wide statements.
3. Governments must combine their discretely presented component units into both the fund and the government-wide statements.
4. A related organization is a contractual arrangement whereby two or more participants agree to carry out a common activity and share its risks and rewards.
5. A primary government can impose its will on a potential component unit if it has the authority to modify or approve the unit’s budget.
6. The annual comprehensive financial report (ACFR) is divided into three main sections: the table of contents section, the auditors’ report section, and the financial section.
7. The typical audit is designed to cover all information included in the ACFR.
8. There are only two government-wide statements: the statement of net position and the statement of activities.
9. Required notes are an essential element of the basic financial statements.
10. Required supplementary information (RSI) is considered part of the basic financial statements.
11. Public colleges and universities must adhere to the same GASB pronouncements as other types of governments.
12. When a component unit is blended into the financial statements of a primary government, the resulting fund financial statements will include two general funds.
13. Internal service funds are presented in a single column in the proprietary fund financial statements, even if one or more of them is a major fund.
14. In its ACFR, a government should report upon individual internal service funds in combining financial statements.
15. It is unacceptable for a special-purpose government that is a component unit of a general-purpose government to issue its own “stand-alone” financial report.
16. One ratio measure of fiscal effort is Revenue from own sources / Intergovernmental revenues. ANSWERS TO /(CHAPTER 11)

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MULTIPLE CHOICE (CHAPTER 11)

1. The financial reporting entity is composed of
   1. The primary government.
   2. The primary government and all legally separate governments for which the primary government is financially accountable.
   3. The primary government and all legally separate organizations for which the primary government is financially accountable.
   4. The primary government, all legally separate organizations for which the primary government is financially accountable, and any organizations whose omission would cause the primary government’s financial statements to be misleading or incomplete.
2. Which of the following is not a primary government?
   1. A state government.
   2. A general-purpose local government with the ability to determine its own budget.
   3. A general-purpose local government whose tax levies must be approved by the state.
   4. A special-purpose local government whose tax levies must be approved by the state.

3. Which of the following is necessary for a special-purpose local government to be considered a primary government?

1. It must operate for a single purpose.
2. It must have a separately elected governing body.
3. It must tax its citizens with ad valorem taxes.
4. It must be fiscally dependent on another government.

4. Which of the following is necessary for a government to be considered fiscally independent?

1. It must be able to hire its own management.
2. It must be able to issue bonds that are tax-exempt.
3. It must not be subsidized by another government.
4. It must be able to levy taxes and/or set rates for its services.

5. Which of the following is a necessary characteristic of a component unit?

1. It is fiscally dependent on a primary government.
2. The primary government provides services that are used by both organizations.
3. The primary government can impose its will on the unit or the unit has the potential to provide a financial benefit to or impose a financial burden on the primary government.
4. The primary government appoints a voting majority of the component unit’s governing body or a voting majority of the unit's governing body is composed of officials of the primary government.

6. The Molasses School District, a legally separate school district that has a separately elected governing body, cannot enter into any debt agreements without the approval of the county commission. Marigold School District would be considered a(n):

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

7. The Tipu County commission appoints a voting majority of the members of the board of a particular organization. The county commission cannot impose its will upon the organization. There is no potential for the organization to provide any financial benefit to the county nor is there any potential for the organization to impose any financial burden on the county. The organization is an example of a(n):

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

8. The Raven State University Foundation is a legally separate, tax-exempt 501(c)(3) entity organized for the purpose of raising funds to provide scholarships only to academically qualified students at the State University. The existing university foundation board members elect new members of the board. The foundation provides scholarships to students of the State University, but the foundation receives no financial support from the university. The Foundation is an example of:

1. Primary government.
2. Related organization.
3. Affiliated organization.
4. None of the above.

9. The governor of the state appoints the members of the Game and Fish Commission. The members of the commission serve ten-year terms and can be removed only for cause. State law prohibits the reappointment of a commissioner. The commission receives no tax dollars. It is supported entirely by licenses and fees paid by hunters and anglers. The only bonds that can legally be issued by the commission are revenue bonds backed by the licenses and fees paid by the sportsmen. The Game and Fish Commission is not a 501(c)(3) organization and does not have separate legal status. The Game and Fish Commission is an example of a:

1. Primary government.
2. Component unit.
3. Related Organization.
4. None of the above.

10. Of the following powers possessed by Government A, which is an indication that Government A can impose its will on Government B? Government A:

1. Can dismiss Government B’s chief operating officer.
2. Can review Government B’s budget.
3. Can remove appointed members of Government B’s governing board only for cause.
4. Issues debt on behalf of Government B.

11. Of the following powers possessed by Government A, which is not an indication that Government B should be included as a component unit of Government A?

1. The governing documents state that, if dissolved, the assets of Government B will become the property of Government A.
2. Government A issues revenue bonds in its name backed by the revenues of a project to be undertaken by Government B. Government A is neither legally nor morally liable for repayment.
3. Government A has agreed to provide financial support to Government B if Government B operates at a deficit but in the entire 75 years that Government B has operated, it has never operated at a loss.
4. The governing documents state that once Government B has equity in excess of a certain amount, 50 percent of all future operating profits will be used to reduce bonded debt of Government A.
5. The State has a legally separate State Building Authority which has a board appointed by the Governor. The authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the State. The authority would be considered a(n)
   1. Primary government.
   2. Component unit.
   3. Related organization.
   4. Affiliated organization.

13. The State has a legally separate State Building Authority which has a board appointed by the governor. The authority issues debt in its own name, holds title to buildings in its own name, and leases its building exclusively to the state. In what manner would the authority be included in the State’s basic financial statements?

1. Blended.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

14. The Guzmania City created a legally separate housing authority to provide low-income housing to residents of the city. The city issues debt for the housing authority in the name of the city, but the housing authority is responsible for repayment of the debt. The housing authority is governed by a board composed of all five members of the city council. Actions can be taken by the authority upon receiving an affirmative vote by a simple majority of the board. The housing authority would be considered a(n):

1. Primary Government.
2. Component Unit.
3. Related Organization.
4. Affiliated Organization.

15. The Impatiens City created a legally separate housing authority to provide low-income housing to residents of the city. The city issues debt for the housing authority in the name of the city, but the housing authority is responsible for repayment of the debt. The housing authority is governed by a board composed of all five members of the city council. The authority can take action based on the affirmative vote of a simple majority of the board. In what manner would the authority be included in the city’s basic financial statements?

1. Blended.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

16. The Silver Oak County created a legally separate county hospital authority. Members of the board of the county hospital are elected in county-wide elections. The county must approve the budget of the hospital, but the hospital receives no financial support from the county, except that the county pays the hospital bills for county indigents. All revenues of the hospital are user fees. The county hospital would be considered a(n)

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.
   • 1. The Queen Palm County created a legally separate county hospital authority. Members of the board of the county hospital are elected in county-wide elections. The county must approve the budget of the hospital, but the hospital receives no financial support from the county, except that the county pays the hospital bills for county indigents. All revenues of the hospital are user fees. In what manner would the hospital be included in the county’s basic financial statements?
5. Blended.
6. Discretely presented.
7. Note disclosure only.
8. Not included in any manner.

18. The Pistachio County created a legally separate county hospital authority. Members of the board of the county hospital are elected in county-wide elections. The hospital receives no financial support from the county, except that the county pays the hospital bills for county indigents. All revenues of the hospital are user fees. The county hospital would be considered a(n)

a) Primary government.

1. Component unit.
2. Related organization.
3. Affiliated organization.

19. The Peppermint County created a legally separate county hospital authority. Members of the board of the county hospital are elected in county-wide elections. The hospital receives no financial support from the county, except that the county pays the hospital bills for county indigents. All revenues of the hospital are user fees. In what manner would the hospital be included in the county’s basic financial statements?

1. Blended.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

20. The Watsonia City created a legally separate port authority. Members of the board of the port authority are elected in general city elections. The port authority receives no tax dollars; it is supported entirely by user fees. The port authority determines its budget, sets user fees, and has the power to issue bonded debt. The authority would be considered a(n)

• 1. Primary government.
  2. Component unit.
  3. Related organization.
  4. Affiliated organization.

21. The Zinnia City created a legally separate port authority. Members of the board of the port authority are elected in general city elections. The port authority receives no tax dollars; it is supported entirely by user fees. The port authority determines its budget, sets user fees, and has the power to issue bonded debt. In what manner would the port authority be included in the city’s basic financial statements?

1. Blended.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

22. Two cities entered into a contractual agreement to operate a landfill. The cities each contributed the necessary assets to operate the landfill in proportion to their populations. First City has the ability to appoint five members of the seven-person governing body of the landfill. The appointees serve for six-year terms, cannot be reappointed, and can be removed only for cause. First City has no obligation to contribute to the landfill if the landfill revenues are insufficient to cover current operating costs. The landfill would be considered a(n)

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

23. Two cities entered into a contractual agreement to operate a landfill. The cities each contributed the necessary assets to operate the landfill in proportion to their populations. Each city has the ability to appoint two members of the governing body of the landfill, and each has an equity interest in the arrangement. The assets contributed by First City were primarily in the form of property and equipment that had been used in general government activities. In what manner would the landfill be included in First City’s government-wide financial statements?

1. As an investment.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

24. Two cities entered into a contractual agreement to operate a landfill. The cities each contributed the necessary assets to operate the landfill in proportion to their populations. Each city has the ability to appoint two members of the governing body of the landfill. The assets contributed by First City were primarily in the form of property and equipment that had been used in general government activities. In what manner would the landfill be included in First City’s fund financial statements?

1. In a governmental fund only.
2. In the schedule of changes in capital assets only.
3. In a proprietary fund only.
4. Not be recognized in the financial statements.

25. The Yellow Bell City created a legally separate entity to operate a county hospital. The city council appoints a voting majority of the board of the hospital. The city cannot impose its will on the hospital and there is no potential for a financial benefit or financial burden to the city. The county hospital would be a(n)

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

26. The Blazing Star City created a legally separate entity to operate a county hospital. The city council appoints a voting majority of the board of the hospital. The city cannot impose its will on the hospital and there is no potential for a financial benefit or financial burden to the city. In what manner would the hospital be included in the city’s basic financial statements?

1. Blended.
2. Discretely presented.
3. Only by note disclosure of the relationship.
4. Not included in any manner.

27. The Friends of the City Public Library Foundation is a legally separate, tax-exempt 501(c)(3) entity organized for the purpose of raising funds to provide financial assistance to the library. Members of the board of the foundation are elected by the existing foundation board members. The foundation provides financial assistance to the library, but the foundation receives no financial support from the library. If dissolved, all of the foundation assets would revert to the library. The foundation would be considered a(n)

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

28. The Friends of the City Public Library Foundation is a legally separate, tax-exempt 501(c)(3) entity organized for the purpose of raising funds to provide financial assistance to the library. Members of the board of the foundation are elected by the existing foundation board members. The foundation provides financial assistance to the library, but the foundation receives no financial support from the library. If dissolved, all of the foundation assets would revert to the library. In what manner should the foundation be presented in the financial statements of the library?

1. Blended.
2. Discretely presented.
3. Note disclosure only.
4. Not included in any manner.

29. The Hospital Foundation is a legally separate, tax-exempt 501(c)(3) entity organized for the purpose of raising funds to provide scholarships only to academically qualified students at the Hospital Medical School. Members of the board of the Hospital Foundation are elected by the existing board of trustees. The foundation provides scholarships to students of the Hospital Medical School, but the foundation receives no financial support from the hospital. The foundation would be considered a(n)

1. Primary government.
2. Component unit.
3. Related organization.
4. Affiliated organization.

30. The Hospital Foundation is a legally separate, tax-exempt 501(c)(3) entity organized for the purpose of raising funds to provide scholarships only to academically qualified students at the Hospital Medical School. Members of the board of the Hospital Foundation are elected by the existing board of trustees. The foundation provides scholarships to students of the Hospital Medical School, but the foundation receives no financial support from the Hospital. In what manner would the Hospital include the foundation in its financial statements?

1. Blended.
2. Discretely presented.
3. Consolidated.
4. Note disclosure only.
   1. A annual comprehensive financial report (ACFR) for Heather City need not include which of the following sections?
5. Condensed summary data.
6. Introductory section.
7. Financial section.
8. Statistical section.
   1. The introductory section of a ACFR includes which of the following?
   2. Auditor’s opinion on the basic financial statements.
   3. Basic financial statements.
   4. Letter of transmittal.
   5. MD&A and other RSI.
   6. The financial section of a ACFR includes:
   7. MD&A and other RSI.
   8. Statistical section.
   9. Letter of transmittal.
   10. GFOA certificate of achievement.

34. Which of the following statements is not a required part of the basic financial statements of Chicory City?

1. Government-wide statement of net position.
2. Statement of revenues, expenditures, and changes in fund balances for all governmental funds.
3. Statement of revenues, expenses, and changes in net assets for all fiduciary funds.
4. Statement of cash flows for all proprietary funds.

35. The auditor’s report generally refers to information in which of the following sections of the ACFR?

1. The introductory section, the financial section, and the statistical section.
2. The introductory and the financial sections only.
3. The statistical and the financial sections only.
4. The financial section only.
   • 1. Government-wide financial statements include which of the following?
     2. Balance sheet and income statement.
     3. Balance sheet, income statement, and statement of cash flows.
     4. Statement of net position and statement of activities.
     5. Statement of net position, statement of activities, and statement of cash flows.
     6. Fund financial statements include which of the following for a governmental fund?
     7. Statement of net position and statement of changes in net position.
     8. Statement of net position, statement of changes in net position, and statement of cash flows.
     9. Balance sheet; statement of revenue, expenditures, and changes in fund balance; and statement of cash flows.
     10. Balance sheet; and statement of revenue, expenses, and changes in fund balance.
     11. Fund financial statements for fiduciary funds include which of the following?
5. Balance sheet and income statement.
6. Balance sheet, income statement, and a statement of cash flows.
7. Statement of fiduciary net assets and a statement of changes in fiduciary net assets.
8. Statement of fiduciary net assets, statement of changes in fiduciary net assets, and statement of cash flows.
   • 1. For a government that depreciates infrastructure, RSI likely would not include which of the following?
9. MD&A.
10. Actual to budget comparison.
11. Information about infrastructure condition.
12. Details of pension actuarial valuations.
    • 1. With regard to combining statements, which of the following statements is ?
13. Combining statements for nonmajor governmental funds are optional.
14. Combining statements for nonmajor governmental funds are required.
15. Combining statements for nonmajor internal service funds are optional.
16. Combining statements for all internal service funds are optional.

41. Eremurus City Council has adopted a policy of aggressively pursuing grants and other resource inflows from other levels of government. Over the past several years, the proportion of total city revenues that comes from other levels of government has steadily increased. As a consequence of these increased revenues, the city has begun offering a number of new services to citizens. In assessing the financial condition of the city, an analyst would conclude which of the following?

1. The increasing reliance on intergovernmental revenues has increased the financial viability of the city.
2. The increasing reliance on intergovernmental revenues can be a negative fiscal characteristic.
3. The increasing reliance on intergovernmental revenues is irrelevant in assessing the financial condition of the city.
4. The increasing reliance on intergovernmental revenues is a sign of poor management on the part of the city council.

42. Which of the following is generally considered to be a positive fiscal characteristic for a city?

1. A high, or increasing, ratio of intergovernmental revenues to total revenues.
2. A low percentage of restricted revenues to total revenues.
3. A high proportion of one-time revenues to total revenues.
4. A low ratio of property tax revenues to total revenues.

43. Which of the following is generally considered to be a positive fiscal characteristic for a city?

1. An increasing amount of payroll costs.
2. An increasing amount of expenditures for specific functions.
3. An increasing percentage of nondiscretionary expenditures.
4. An increasing percentage of discretionary expenditures.

44. Which of the following would generally be considered an indication of future economic concern for a city?

1. A decreasing percentage of revenue raised by the city as a proportion of total appraised value of property.
2. A decreasing percentage of revenue raised by the city as a proportion of median family income.
3. An increasing population base.
4. An increasing industrial base in a variety of industries.

45. A city’s Revenue from own sources/Median family income ratio is a measure of its

a) Adequacy of revenues

b) Fiscal effort

c) Stability of revenues

d) Liquidity

46. When a government’s Unassigned fund balance/Total operating revenues ratio is high

a) It is a sign of fiscal strength.

b) It indicates the government is spending too little.

c) It indicates the government is taxing too much.

d) Any of the above may be indicated.

47. A special-purpose government that engages only in a single governmental-type program

a) Need not prepare fund financial statements.

b) May combine fund and government-wide statements into a single statement.

c) May present a government-wide income statement in a business format showing expenses deducted from revenues.

d) Should be reported upon as a blended component unit of a general-purpose government.

48. A special-purpose government that engages in more than one program or in both governmental-type and business-type programs

a) May combine fund and government-wide statements into a single statement.

b) Should be reported upon as one or more discretely presented component units of a general-purpose government.

c) May present a government-wide income statement in a business format showing expenses deducted from revenues.

d) Should prepare both government-wide and fund statements, similar to those required of general-purpose governments.

49. A government’s financial condition

a) Is another term for its financial position as reported in the government-wide statement of net position.

b) Is its ability to finance its services and satisfy its obligations on a continuing basis.

c) Can adequately be assessed from the financial section of its ACFR.

d) Depends primarily upon the national economy.

50. Which of the following would not be classified as required supplementary information (RSI)?

a) MD&A.

b) Information about infrastructure condition (for governments that do not depreciate infrastructure).

c) Letter of transmittal included in a government’s ACFR.

d) Multi-year schedule of funding progress for a government’s pension plan.

51. The required supplementary information (RSI) includes all but the the following

a) budget-to-actual comparisons

b) demographic information

c) infrastructure conditions

d) detail of pension actuarial values

52. A government strives to maintain a positive fund balance, defined as:

a) unassigned fund balance / total operating revenues

b) positive net change in fund balance

c) strong economic forecast

d) fully funded pension obligations

PROBLEMS (CHAPTER 11)

Primrose City joined with two other cities to create a regional landfill authority. The initial cash investment by each community was as follows:

Primrose City $15 million

Sage City $10 million

Rosemary City $ 5 million

The landfill will be governed by a seven-member board—two members chosen by each mayor and one member chosen by majority vote of the six mayoral appointees. During the first year of operation the landfill, which receives no tax dollars, generated an excess of revenues over expenses of $120,000.

REQUIRED:

Record the journal entries Primrose City should make under each of the mutually exclusive situations listed below, assuming that all participants have an equal equity interest in the authority. Indicate in which fund the entry is being made.

1. Assume that Primrose City appropriates the $15 million contribution from its general fund resources.
2. Assume that Primrose City uses the resources available in its city utility enterprise fund to make the contribution.

For each of the following independent cases state whether or not the entity described should be included in the financial statements of the primary government and if so, how? Be concise but adequately defend your answer using GASB criteria.

1. The Planning and Development Authority is a separate legal entity with a five-member board appointed as follows: one member appointed by the school district, one member appointed by the city, one member appointed by the county, and two members elected by the three appointed members. The Planning and Development Authority received a $50,000 grant from the state. The money was used to make loans to businesses agreeing to relocate to the immediate area. Repayments of the principal and interest by borrowers are available for lending to new entities.
2. The state created a Public Building Authority, a separate legal entity. The governor appoints a voting majority of the authority’s board. The authority issues bonds, backed by the buildings financed with the proceeds. The authority leases the buildings to the state and uses the proceeds of those leases to service the debt on the bonds.
3. Boxwood County Hospital is built on land donated to the hospital by the US Bureau of Land Management (a federal agency). The hospital board members elect replacements to the board without outside nominations. The hospital is a separate legal entity and is entirely supported by revenues generated by the hospital. The county commission must approve the budget each year, but has never questioned any item in the budget.
4. Members of State University’s board of trustees are elected in a statewide general election. The state provides approximately one-half of the operating revenues necessary to finance the university’s programs. The university is a separate legal entity and state laws apply to the conduct of its business.
5. Based on the data from the general fund presented below, assess (as best you can) the financial/fiscal condition of Kaffir City. As much as possible, justify your answer with quantitative data.

(000’s omitted)

Population (increasing slowly) 86

Appraised value of taxable property $120,000

Total general fund revenues $ 25,000

General fund property tax revenue $ 11,000

Intergovernmental revenues $ 4,000

Miscellaneous revenues $ 8,000

Total general fund expenditures

(including debt service) $ 20,000

Current expenditures $ 21,300

Capital outlay $ 1,600

Debt service expenditures $ 100

Operating transfer-in $ 600

Operating transfer-out $ (4,600)

Unassigned fund balance $ 13,000

Cash and investments $ 15,000

Current liabilities $ 1,400

4. The data below were taken from the ACFRs of two cities.

REQUIRED:

Based on this limited information

• • • • 1. Which city has the greater resources?
        2. Which city imposes a greater tax burden on its citizens based on
• Per capita total general fund revenues?
• Per capital property taxes?
• Property taxes as a percentage of property values?
  • • • 1. Which city receives more assistance from other governments?

1. Gerbera City has prepared all of the elements of its ACFR.

REQUIRED:

Numbering from one to ten, indicate the order in which each of these elements should appear in the city’s ACFR.

____ Auditor’s report

____ Letter of transmittal

____ Required supplementary information other than MD&A

____ Government-wide financial statements

____ Notes to financial statements

____ Combining statements for nonmajor funds

____ Combining statements for major discretely presented component units

____ Management’s Discussion and Analysis (MD&A)

____ Statistical tables

____ Governmental fund statements

6. Kapok County has two component units—an Electric Utility and a Housing Authority. In its separate financial statements, the Electric Utility reports using a single enterprise fund. The Housing Authority reports using a general fund, a special revenue fund, and a debt service fund.

a. Assuming that both component units meet the criteria for presentation as discretely presented component units

• Where should their financial information be presented in the county’s financial report?
• How would the Housing Authority’s general fund be reported?

b. Assuming that the Electric Utility meets the criteria for reporting as a major component unit, what is the most likely way in which the city would meet the additional disclosure requirement for the utility? What are two other ways that the disclosure requirements could be met?

c. Assuming that the Housing Authority meets the criteria for presentation as a blended component unit

Where should the authority’s financial information be presented?

• How would the authority’s general fund be reported?
  1. Agapanthus City established an airport authority as a municipal corporation under state law for the purpose of acquiring, maintaining, operating, and financing airports. The authority’s governing board consists of five members--four appointed by the mayor of the city and one appointed by the board of county commissioners. The board members may not be removed by the appointing officials, except for cause through an impeachment process.

The authority is authorized to issue bonds, to levy taxes, to own property in its own name, to determine its budget, and to establish rates. All debt issued is payable from revenues derived solely from the operation of the authority. The city has no obligation for the debt of the authority. The authority's board controls the day-to-day operations of the organization. The authority has sole responsibility for financing its deficits and has sole control of its surplus funds.

Should the city include the authority in its financial statements as a component unit? How, if at all, should it report the authority? Explain and justify citing the specific criteria that you used to make your determination.

ANSWERS TO PROBLEMS (CHAPTER 11)

Problem 1

1. GENERAL FUND

Capital expenditure—investment in

joint venture $15 million

Cash $15 million

To record expenditure for contribution to joint venture

[Note: The investment is a long term investment and is, therefore, not recorded in the general fund as an investment. The investment and related income would be reported on the full accrual basis in the government-wide statements.]

1. ENTERPRISE FUND

Investment in landfill joint venture $15 million

Cash $15 million

To record initial investment in joint venture

Investment in landfill joint venture $ 40,000

Earnings from joint venture $ 40,000

To record one-third share of joint venture net income

Problem 2

1. The Planning and Development Authority should not be reported on the financial statements of any of the supporting organizations. It is a special-purpose government that qualifies as a primary government. The entity is legally separate and no one entity appoints a voting majority of the authority’s board. The fiscal dependency criterion is not met, and it appears that its omission from any of the supporting organizations’ financial statements would not render them misleading.
2. The Public Building Authority is a component unit that should be blended with the funds of the primary government—the state. The entity is legally separate and the governor appoints a voting majority of the authority’s board. There appears to be a potential financial burden to the state. The authority provides its services entirely to the state.
3. Because the county does not appoint a voting majority of the hospital’s board, Boxer County Hospital would only be included as a component unit if the hospital were fiscally dependent on the county or if it would be misleading for the county to exclude the hospital. The fact that the county must approve the hospital’s budget, even though it has never questioned the budget, indicates that the hospital is fiscally dependent on the county and should be included as a discretely presented component unit in the county’s government-wide financial statements.
4. Because the university’s trustees are elected in a statewide general election, this special-purpose government should not be included as a component unit of another government unless it is fiscally dependent on another government. The fact that the university receives a substantial amount of support from the state does not indicate fiscal dependency. Entities are fiscally independent if they can determine their budget, levy taxes or set rates, and issue bonds without the approval of another government. With no detail to the contrary, the university appears to be a fiscally independent primary government.

Problem 3

Students may calculate a number of ratios. Among them should be a liquidity measure, a measure of fiscal effort, a measure of the adequacy of fund balance, and a measure of the tax burden imposed on the citizens.

Adequacy of fund balance = Unassigned fund balance $13,000 = 52.0%

Total general fund revenues $25,000

Liquidity measure = Cash and investments = $ 15,000 = 10.71 times

Current liabilities $ 1,400

Fiscal effort measure = Revenue from own sources* = $ 19,000 = 15.83%

Total appraised value $120,000

*[Note: Property taxes + misc. Some students may include in the numerator only the property tax revenue, i.e. $11,000 = 9.17%]

$120,000

Property taxes as a percentage of total revenues = $11,000 = 44.0%

$25,000

Tax burden per capita = $11,000 = $127.91 per person

86

Debt service as a percentage

of total general fund expenditures = $ 100 = 0.50%
$20,000

A decline in the adequacy of fund balance ratio would be viewed as negative. This particular percentage implies that there can be as much as a 50 percent decline in operating revenues in a particular year and the city will still be able to operate on existing reserves and current revenues. This seems healthy.

Liquidity measures are valid for business entities and for governments. This particular ratio implies that there is almost $11 to satisfy each $1 of liabilities. That seems to be a very healthy position.

The fiscal effort measure is used to determine how sensitive the entity will be to changes in revenues that are outside its control. Also, the ratio measures the level of taxation on the citizens. As this ratio increases, the margin between revenues and potential revenues decreases and governments become more vulnerable if expenditures increase significantly.

Property tax revenues as a percentage of total revenues is a measure of fiscal effort. Property tax revenues are under the control of the local city council, and can be controlled (within existing laws) by the city council. Total revenues from own sources is 16 percent of total assessed value of property. Total revenues from property taxes is 9 percent of total assessed value of property. These both seem to be reasonable numbers. External revenues are less dependable and cause the entity to be more vulnerable to changes in those revenue sources. In this particular situation property taxes are 44 percent of the total revenues. The city has control over nearly one-half of its revenue sources. This seems to be good.

Property taxes per capita are a good measure of the tax burden on local citizens. The amount of revenue per person is approximately $128. This seems to be a small number. Comparison with other entities would be important.

Debt service as a percentage of total expenditures is less than 1 percent. This is very good. Most of the revenues raised can be used to provide current-period expenditures.

Overall, the entity seems to be very healthy.

Problem 4

a. Per capita value of taxable property

OsteospernumMandevilla

Value of taxable property $860,678,900 $1,075,890,100

Population 19,000 115,000

Per capita value of taxable property $ 45,299 $ 9,356

Based on property value, Oak has the greater resources per capita upon which to draw.

b.

Per capita general fund taxes

Osteospernum Mandevilla

General fund tax revenues $43,977,949 $54,991,385

Population 19,000 115,000

Per capita general fund taxes $ 2,315 $ 478

Per capita property taxes

OsteospernumMandevilla

Property tax levy $16,787,068 $54,991,385

Population 19,000 115,000

Per capita property taxes $ 884 $ 478

Property taxes as a percent of property values

OsteospernumMandevilla

Property tax levy $ 16,787,068 $ 54,991,385

Value of taxable property 860,678,900 1,075,890,100

Percent (tax rate) 1.95% 5.11%

Osteospernum residents pay more in taxes on a per capita basis, but not as a percentage of their wealth (as measured by property values).

c.

Percentage of total general fund revenues from other governments

Osteospernum Mandevilla

Intergovernmental revenues $ 6,188,029 $ 17,293,415

Total general fund revenues 57,166,696 77,171,776

Percent intergovernmental revenues 10.82% 22.41%

Per capita intergovernmental revenues

Osteospernum Mandevilla

Intergovernmental revenues $ 6,188,029 $ 17,293,415

Population 19,000 115,000

Per capita intergovernmental revenues $ 326 $ 150

Despite being the wealthier community, Osteospernum receives a greater amount of intergovernmental revenues per capita. However, Mandevilla receives a higher percentage of its general fund revenues from other governments.

Problem 5

2 Auditor’s report

1 Letter of transmittal

8 Required supplementary information other than MD&A

4 Government-wide financial statements

7 Notes to financial statements

9 Combining statements for nonmajor funds

6 Combining statements for major discretely presented component units

3 Management’s Discussion and Analysis (MD&A)

10 Statistical tables

5 Governmental fund statements.

Problem 6

a.

• Discretely presented component units should be reported only in the government-wide financial statements in a column(s) to the right of the total primary government column.
• The Housing Authority’s general fund should be included in the component unit column(s). The component unit data presented in the reporting entity’s financial statements should be based on the component unit’s government-wide information. No fund data should be presented.

b. The city would most likely meet the major component unit disclosure requirement by presenting the Utility in a separate column on the face of the government-wide financial statements. Alternatively, the city could disclose summary financial statements in the notes to its financial statements or present a combining statement of major discretely presented component units.

c.

• Blended component units should be presented with the other funds of the primary government. Therefore, the authority should be reported both in the city’s fund financial statements and its government-wide statements (in its governmental activities column).
• The authority’s general fund should be reported as a special revenue fund of the city. If it meets the definition of a major fund, it should be presented as a separate column in the fund financial statements. Governments are prohibited from presenting more than one general fund.

Problem 7

Is the authority a legally separate entity? YES

Does the city appoint a majority of its governing board? YES

Can the city impose its will in the authority? NO

Is there a financial benefit/burden relationship? NO

Therefore the authority is a related organization, not a component unit of the city.

As a related organization, the authority cannot be incorporated into the city’s (primary government) basic financial statements. The city should describe the authority in its notes to the financial statements and indicate the nature of the relationship.

ESSAYS (CHAPTER 11)

1. The state established the State Housing Authority to finance construction of low-income housing. The authority, a state corporation, is governed by an independent board of directors, the members of which are appointed by the governor. They can be removed only for cause. The board of directors has complete control over the authority’s operations. The director is hired by the board and reports to the board; the director cannot be removed by the governor. Although the state constitution limits the state to $2 million of bonds outstanding, the authority issued $970 million in bonds to finance construction projects. In earlier years, the authority issued debt that was backed by the taxing power of the state (moral obligation debt). The newer bonds are revenue bonds only.

The authority uses the proceeds of the debt it issues to make loans to finance housing construction. Debt is serviced from monies received in repayment of loans made by the authority.

Do you believe the state should include the authority in its reporting entity? If so, how? Justify your answer using the GASB Financial Reporting Entity criteria.

1. A annual comprehensive financial report (ACFR) includes a statistical section. What kinds of information are found in the statistical section? To what use would a reader put the information found in the statistical section? In your opinion, is the statistical section worth the effort put into its preparation?
2. GASB reporting standards require that legally separate component units be included on the face of the financial statements of the primary government. Small City created a legally separate City Utility Service. The Small City council appoints the utility board members, authorizes the bonds of the utility, and approves its budget. Small City’s general fund revenues are $58 million; the revenues of the utility are $100 million (the utility owns a generating plant and sells its excess power to other communities). Discuss the appropriate reporting for the City Utility Service. Do you think that this presentation is meaningful? Why or why not?
3. What are four types of information that must be presented in Management’s Discussion and Analysis (MD&A)? From which financial statement, if any, is each type of information derived?
4. Government colleges and universities have several reporting options under GAAP. What are they? What financial statements would be presented under each? What basis of accounting would be used?

ANSWERS TO ESSAY (CHAPTER 11)

1. The authority is a separate legal entity but it does not have a popularly elected governing body. Because the governor appoints the board, the authority is a potential component unit. Because the state backs the older bond issues, there is a potential for a financial burden. Therefore, the authority is a component unit. Because the board of the primary government and the component unit are not substantially the same and because the component unit does not provide its services almost entirely to the primary government, this is a component unit that should be discretely presented.
2. The statistical section is considered supplementary disclosure. This section is of value for several reasons. Governments have the power to tax, a characteristic not shared with other types of entities. Because the government has the power to command resources, information regarding the resources available to the government, but not yet under its direct control, is important.

Much of the information in the statistical section simply expands on the information already available in the financial statements—for example, 10 years’ worth of property tax revenue. The demographic data, however, is not available in the financial statements. The statistical section provides information about the total amount of debt imposed on property subject to taxation by the government. It lists the largest taxpayers. This type of information is useful in projecting the ability of the government to sustain or increase the current levels of property tax revenues. Property taxes by multiple layers of governments may soon be ‘overtaxed.’ If the government is dependent on one or two major employers or business entities, the economic outlook for those entities is extremely important when forecasting the economic outlook for the government.

[Note: Students may have differing opinions on the usefulness of the statistical section.]

The statistical data should be very useful to those forecasting the financial capacity of the entity in the future. Some users find the statistical data as useful as--or more useful than--the financial statements because of the trend information it provides. When considered in conjunction with some financial data, the statistical section aids in assessing overall financial condition.

3. Despite the fact that the revenues of utility far exceed the revenues of the general fund, City Utility Service is a component unit of Small City because Small City is financially accountable for utility. Small City is financially accountable for utility because the Small City council appoints the board members for the utility and the utility is not fiscally independent. That is, Small City must authorize any bonds issued by the utility and must also approve its budget. City Utility Service should be presented as a discretely presented component unit to the right of the totals for Small City on the city’s government-wide financial statements. This appears to be more appropriate than blending the two together (because of the size difference) or omitting the utility’s operations from the financial statements.

GASB Statement No. 14 was controversial. The example of a component unit with assets and net assets in excess of those of the primary government has frequently been part of the argument against GASB Statement No. 14. According to GASB, accountability is the cornerstone of financial reporting. The only elected officials to whom the public can look if they are unhappy with the management of City Utility Service are the elected officials of Small City. Holding elected officials financially accountable for entities over which they have effective control was a guiding premise for the GASB when they developed Statement No. 14.

4. Examples of items that must be addressed in the MD&A include:

[Note: Students must name four.]

• A brief description of the required financial statements—not derived from the financial statements.
• Condensed financial information—derived from government-wide statement of net position and statement of activities.
• An analysis of the government’s overall financial position and results of operations, including the impact of important economic factors—based in part on information provided in the government-wide financial statements.
• An analysis of balances and transactions of individual funds—based on major funds in the governmental and proprietary fund financial statements.
• An analysis of differences between original and final budget amounts and between actual and budgeted amounts for the general fund—based on the budgetary comparison statement or the budgetary comparison schedule (if included as RSI).
• A description of changes in capital assets and long-term debt during the year—based principally on the required schedules of changes in capital assets and changes in long-term obligations required to be presented in the notes to financial statements.
• A discussion of the condition of infrastructure assets—required only if the government uses the modified approach —derived from RSI.
• A description of currently known facts, decisions, or conditions that have, or are expected to have, a material effect on the financial position or results of operations—not necessarily derived from the financial statements.

5. Colleges and universities can elect to report as special-purpose governments that engage (1) only in business-type activities (2) only in governmental activities, or (3) in both. If they report as entities that engage only in business-type activities, they will present a statement of net position and a statement of revenues, expenses, and changes in net position—both prepared using the full accrual basis of accounting. They will also need to present a statement of cash flows. Colleges and universities that elect to report as entities that engage only in governmental activities would present government-wide statements (prepared using the full accrual basis of accounting) and governmental fund financial statements (prepared using the modified accrual basis of accounting). If needed, they may also present fiduciary fund statements. Colleges and universities that elect to report as entities that engage in both governmental and business-type activities would present all of the above financial statements.