Question 1

Internal Service Funds may only provide services to individuals or entities outside the government.

Accepted Answer

Internal Service funds should be used only if the reporting government is the predominant participant [customer] in the activity.

Question 2

In Proprietary Fund accounting, transactions related to operating costs are recognized as expenditures when purchased.

Accepted Answer

Proprietary funds use the full accrual basis of accounting, so revenues are recognized when they are earned and expenses, not expenditures, are recognized in the period in which they are incurred.

Question 3

Capital assets are not recorded in proprietary fund accounting.

Accepted Answer

Capital assets (and depreciation expense) are accounted for within proprietary funds. The focus of this fund type is to provide information to evaluate how well an activity recovers its costs, including capital costs.

Question 4

Only the GASB's standards for proprietary funds apply to Enterprise and Internal Service Funds.

Accepted Answer

Although some of the services provided by proprietary funds are the same as those provided by private-sector for-profit and nonprofit entities-such as water utilities-proprietary funds apply only GASB pronouncements, not FASB pronouncements.

Question 5

Proprietary funds are required to present four basic financial statements-a Statement of Net Position, a Statement of Changes in Fund Net Position, a Statement of Cash Flows, and a Budgetary Comparison Statement.

Accepted Answer

Budgets are not integrated into proprietary fund accounting systems (no appropriations or estimated revenues are recorded) nor does GAAP require governments to present budgetary comparison statements/schedules for their proprietary funds. Also, a Statement of Revenues, Expenses and Changes in Fund Net Position is required instead of a Statement of Changes in Fund Net Position.

Question 6

An Enterprise Fund must be used if the activity it reports issues debt secured solely by a pledge of its own revenues.

Accepted Answer

Enterprise Fund accounting is required if the activity issues debt that is secured solely by a pledge of the net revenues from fees and charges of the activity.

Question 7

An Internal Service Fund typically provides services to the other funds and departments of a government, such as a motor pool or a data processing service.

Accepted Answer

Internal Service Funds typically are used to account for activities such as central data-processing services, motor pools, and inventory and supply (central stores) functions.

Question 8

Internal Service Fund expenses are generally controlled by the budgetary constraints of the funds and departments who use their services.

Accepted Answer

The operations of Internal Service Funds are controlled indirectly by the operating budgets of the funds and departments using the goods or services.

Question 9

When Internal Service Funds [ISFs] bill the government's other funds or departments for the services they provide, ISFs report the amount billed as revenues.

Accepted Answer

When ISFs provide goods or services to paying customers, they recognize revenues from user charges.

Question 10

When Internal Service Funds [ISFs] present net position in their financial statements, they can use up to three line items, including net investment in capital assets, restricted, and unrestricted.

Accepted Answer

Governmental GAAP requires that the net position section of Enterprise Funds and ISFs be reported in three components: (1) net investment in capital assets; (2) restricted; and (3) unrestricted.

Question 11

When governments establish an activity that must use Enterprise Fund accounting and reporting, many also create a separate legal entity, like a public authority or public corporation.

Accepted Answer

Many governments create separate legal entities for their business-type entities-called public benefit corporations or public authorities-that also use Enterprise Fund accounting.

Question 12

An Enterprise Fund must be used whenever a government charges fees to external users for goods or services.

Accepted Answer

Enterprise Funds may be used to report an activity for which a fee is charged to external users, but they are not required to be used unless certain specific criteria are met. For example, an Enterprise Fund need not be used when an activity charges incidental fees such as inspection fees or admissions fees. Enterprise Funds must be used when certain other criteria are met; for example, when the activity is financed with debt secured solely by a pledge of the net revenues from the fees charged by the activity.

Question 13

Revenue bonds are debt that is secured exclusively by the revenues generated by an activity accounted for in a specific fund, generally an Enterprise Fund.

Accepted Answer

Revenue bonds are debt securities that are secured exclusively by the revenues generated by the fund (in contrast to general obligation bonds, which are secured by the "full faith and credit"-the general taxing power-of the government).

Question 14

Accounts receivable that an Enterprise Fund estimates won't be collectible are reported as bad debt expense in its statement of revenues, expenses, and changes in fund net position.

Accepted Answer

Estimated uncollectible accounts are reported in the statement of revenues, expenses, and changes in net position as a direct reduction of revenue to report net revenues.

Question 15

The Enterprise Fund net position component called, Net Investment in Capital Assets, is equal to the sum of all capital assets net of accumulated depreciation reported on those assets.

Accepted Answer

Net investment in capital assets is equal to the sum of the carrying values of the fund's capital assets-for example, land and buildings, net of accumulated depreciation-less the related Enterprise Fund debt used to pay for those capital assets.

Question 16

Only Enterprise Funds may use the modified approach to report infrastructure assets.

Accepted Answer

All governmental entities, including both Enterprise and Internal Service Funds, have an option to apply the modified approach-a different method of accounting for infrastructure assets.

Question 17

In governmental accounting and reporting, all leases are classified as either short-term or long-term.

Accepted Answer

GASB Statement No. 87 states that all leases are financings, classified as either short-term or long-term.

Question 18

Because all capital assets may become impaired-because of changes in technology or other reasons-the FASB and GASB both require impaired assets to be written down using the same criteria.

Accepted Answer

FASB standards requires commercial entities to report an impairment of a capital or intangible asset if the sum of the undiscounted cash flows that it expects to receive from using the asset in the future is less than its fair value. GASB standards require governments to estimate the cost to restore the service utility of a capital asset that has been physically damaged. When an impairment occurs because of a change in technology or of legislation affecting the asset's use, governmental capital or intangible assets are written down based on a comparison of the service units that the asset could have provided before or after the impairment.

Question 19

Both the FASB and the GASB, respectively, require companies and governments to record some form of a net pension or other postemployment benefit (OPEB) liability on the face of the entity's financial statements.

Accepted Answer

Both the FASB and GASB focus on reporting some form of net pension or OPEB liability, consisting of a pension or OPEB liability for all earned benefits, net of amounts that the entity (government or company) has placed in trust to pay those obligations in the future.

Question 20

Neither the FASB nor any of its predecessor standards-setting bodies have ever considered whether fiduciary activities should be reported in GAAP financial reports.

Accepted Answer

For commercial entities, no accounting standards setters, specifically the FASB, or any of its predecessors, have discussed whether fiduciary activities should be included in the GAAP financial statements of businesses.

Quiz 7: Proprietary Type Fundsenterprise and Internal Service Funds