Question

1. Briefly (in about a paragraph) explain the difference in recording inventory items, which a cost entity purchased, between the accrual basis of accounting and the modified basis of accounting.

2. Explain (in about two full paragraphs) the role of reconciliation notes in government fund statements, pursuant to the GASB Statement No. 34. While preparing your answer, refer to the table that explains the difference between accrual and modified accrual bases of accounting in terms of resource outflows, resource inflows, long-term assets, and long-term liabilities.

Answer 1

1. Under accrual basis of accounting inventories are recorded as soon as the liability is incurred regardless of the timing of related cash flows.

Modified cash basis is an accounting method that combines elements of two major accounting methods - the cash method and the accrual method. Under this method inventories are reported as expenditures when purchased rather than capitalized as an asset.

2. There are three groups of funds for which financial statements are prepared - governmental, proprietary and fiduciary. Government funds account for everything else. There are five types of goverment fund:

a. General Fund

b.Special revenue fund

c.Debt service fund

d.Capital projects fund

e.Permanent funds

Reconciliation is the final component of the balance Sheet. It acts like a crosswalk between the total fund balance and total governmental activities net assets in the government wide statements of the net assets. Goverment fund are reported using an accounting method called modified accrual method which measures cash and all other financial asset that can readily be converted to cash. The goverment fund provides a detailed short term view of the Town's general govt operations and the basic services it provide.