Question

In: Accounting

1. What are the measurement focus and basis of accounting of governmental funds? What is the...

1. What are the measurement focus and basis of accounting of governmental funds? What is the traditional rationale for this basis of accounting (used in governmental fund statements)—as opposed to a full accrual basis?

2. What is the difference between an exchange and a nonexchange transaction?

3. What criteria must be met before revenues can be recognized on a modified accrual basis? What is the rationale for these criteria?

4. What is the general rule for recognizing property taxes as revenues? How would property taxes be accounted for differently in the fund statements, as opposed to in the government-wide statements?

Solutions

Expert Solution

1. For accounting of government funds, Modified Accrual basis are used. Under this method, Revenues are recognized in the period they become measurable and available and in case of expenditure, they are recognized in the period the associated liability is incurred.

The measurement focus is on determination of financial position per generally accepted practices today. Financial resources include current financial resources such as cash, and other items like receivable etc that can be expected to be transformed into cash in the normal course of operations. Current financial resources and the modified accrual basis of accounting is a bridge between a measurement focus and basis of accounting that would measure interperiod equity (which uses full accrual basis) and one that would report upon budgetary compliance (which can be reported on satisfactorily by focusing on the same resources as does the budget of the individual government.

2. An exchange transaction is one in which equal value consideration is involved in both purchase and sale.
A nonexchange transaction is one in which one party gives or receives value without directly receiving or giving equivalent value in exchange.

3. Revenues must be measurable and available to finance expenditures of the current period. The nonexchange revenues of governments are intrinsically associated with expenditures; they are generated solely to meet expenditures. Therefore it is reasonable to recognize revenues only to the extent that they are available to cover the expenditures with which they are associated.
4. Property taxes are recognized in the period for which the taxes are levied. In the fund statements, the taxes must meet the additional criterion that they be “available.” (ie., tax after availing exemptions)

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