Question 1

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

Accepted Answer

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.

Accepted Answer

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.

Accepted Answer

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.

Accepted Answer

As for a business enterprise, including a depreciation charge is necessary to determine the full cost of services.

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.

Accepted Answer

Under GASB standards, net position is classified into the three categories of net investment in capital assets, restricted, and unrestricted.

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.

Accepted Answer

All capital assets used by an internal service fund, regardless of source, should be recorded in the accounts of that fund.

Question 7

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

Accepted Answer

A government may operate almost any kind of enterprise, but public utilities are the most common examples.

Question 8

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

Accepted Answer

The definition of internal service funds quoted in the text is to provide for service to other governments as well as to other departments or agencies of the unit operating the internal service fund. While internal service funds exist primarily to provide goods and services to other departments and agencies of the same government, there is no prohibition to providing the goods or services to other governments as well.

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.

Accepted Answer

This sentence describes the nature of a proprietary fund statement of net position.

Question 10

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

Accepted Answer

This question requires careful reading. Internal service funds account for expenses, not expenditures, and use 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.

Accepted Answer

"Interfund Transfer In" is a temporary account that will be closed to Net Position-Unrestricted at year-end.

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.

Accepted Answer

Utility revenue bonds, for which interest and principal are to be paid from revenues of the enterprise fund, are a liability of that fund and should be so reported. They should also appear as long-term liabilities of business-type activities on the government-wide statement of financial position.

Question 13

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

Accepted Answer

GASB standards require that a statement of cash flows be prepared for proprietary funds. However, this statement is not required for governmental fund types.

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.

Accepted Answer

Revenues of internal service funds should be recognized on the accrual basis: when earned, without regard to when they will be available 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.

Accepted Answer

Loan is the term described in GASB standards for such transactions. Interfund loans should be properly classified as current or noncurrent receivables or payables.

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."

Accepted Answer

Even if user charges are not the primary source of revenues, the enterprise fund approach may be used for any activities for which the governing body desires periodic determination of revenues earned, expenses incurred, and/or net income.

Question 17

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

Accepted Answer

The text suggests three ways, or combinations thereof, in which liquidation of an internal service fund may be accomplished. Even if there is no external buyer for the fund's assets, the fund could be dissolved by either distributing the fund's assets in kind to other funds or by simply making the fund a department of another fund.

Question 18

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

Accepted Answer

Internal service funds do not incorporate budgetary accounts with proprietary accounts. Memorandum records of purchase orders and contracts should be kept, however, for management control purposes.

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.

Accepted Answer

The features described are characteristic of GAAP applicable to proprietary funds.

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.

Accepted Answer

Internal service funds and enterprise funds are intended to cover operating costs on a continuing basis and ordinarily obtain their revenues from user charges, not taxes or other financing sources provided for by an annual budget; therefore, these are both proprietary, not governmental, funds. However, under GASB standards, internal service funds are reported as governmental activities, not business-like activities, on the government-wide statements if they primarily serve other governmental departments or functions.

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