Question 1

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 2

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 3

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 4

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 5

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.

Accepted Answer

Budgets for enterprise funds are prepared to assist management in the efficient use of resources and normally are not legally binding documents. Consequently, GASB standards do not require or recommend that budgets be recorded in the accounts of an enterprise fund. (However, in jurisdictions in which enterprise funds are required by law to prepare budgets it may be desirable to integrate budgetary accounts with proprietary accounts. Only the proprietary account balances should be reported in the basic financial statements, however.)

Question 6

If an internal service fund is created to improve the management of resources devoted to the supply function,the supplies fund should use periodic inventory accounting instead of perpetual physical inventory accounting.

Accepted Answer

Perpetual inventory accounting is needed to efficiently manage the supply function. (Items of low value which are not critical to the operations of any of the governmental departments may, however, properly be accounted for on a periodic physical inventory basis).

Question 7

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 8

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.

Question 9

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 Assets-Unrestricted at year-end.

Question 10

A statement of revenues,expenses,and changes in net assets 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 11

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 12

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 13

The net assets of an internal service fund consist 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 assets are classified into the three categories of net assets invested in capital assets (net of related debt), restricted, and unrestricted.

Question 14

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 15

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 16

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 17

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 18

Public utilities owned and operated by governments are the most 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 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 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.

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