chapter 7:accounting for the business-type activities of state and local governments
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CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE ACTIVITIES OF STATE AND LOCAL GOVERNMENTS
OUTLINENumber Topic Type/Task Status
(re: 12/e)
Questions:7-1 Compare internal service and enterprise funds Contrast 7-1 7-2 Benefits of internal service funds Describe 7-37-3 Reason for internal service funds Explain 7-47-4 Pricing policy for ISF Describe 7-67-5 Restricted assets of enterprise funds Describe 7-87-6 Original cost of public utilities Define 7-107-7 Cash flows in proprietary funds Describe 7-117-8 Accrued utilities revenues Describe 7-127-9 Segment information Define 7-137-10 Solid waste landfills Explain 7-14
Cases:7-1 Building maintenance fund Assess 7-2 7-2 Internal service fund policies – Columbia, MO Assess 7-17-3 Mass transit system Evaluate 7-3
Exercises/Problems:7-1 Examine the CAFR Examine 7-17-2 Various Multiple Choice 7-2 Revised7-3 Automotive Service Fund Financial Statement 7-57-4 Insurance internal service fund JEs and FE 7-6 Revised7-5 Central Garage ISF – City of Ashville Journal Entries 7-47-6 Utility Plant Fund Compute and JEs 7-77-7 City of Templeton Water Utility Fund JEs and FS 7-87-8 City of Templeton (cont'd) FS and recommend 7-9
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CHAPTER 7: ACCOUNTING FOR THE BUSINESS-TYPE ACTIVITIES OF STATE AND LOCAL GOVERNMENTS
Answers to Questions
7-1. Internal service funds and enterprise funds are similar in that they are both proprietary funds and thus follow business-type accounting principles, including accrual accounting and many FASB standards. They are different in their purpose and in their presentation in the government-wide financial statements. Internal service funds are created primarily to provide goods and services to other departments of the same government; enterprise funds are created mainly to provide goods and services to the general public or to other departments of the same government in exchange transactions, such as for water, electricity, and sewage treatment.
Both internal service funds and enterprise funds are presented as proprietary funds in the funds financial statements. However, since the transactions of internal service funds predominately involve sales of goods or services to the General Fund and other funds that comprise the governmental activities of a government, their financial balances are allocated back on a pro rata basis to the governmental funds, and hence collapsed into the government activities column of the government-wide statements.
7-2. The traditional benefit from establishing internal service funds is improved management of resources. However, since government services are increasingly being financed by user charges, another benefit of proprietary fund accounting is that it permits administrators to determine whether user charges are commensurate with operating costs and whether costs are reasonable in relation to benefits. Typical examples of activities accounted for in internal service funds are purchasing, warehousing, and issuing supplies; motor pool; electronic data processing; printing; and risk financing.
7-3. Ordinarily, the segregation of resources for specific purposesthe creation of a fiscal entitymust be authorized by the legislative branch. Since a fund is both a fiscal entity and an accounting entity, administrators generally cannot create a fund without approval of the legislative branch.
7-4. The pricing policy depends on the view of the internal service fund held by those who authorized its establishment: Is it supposed to recover direct cash costs, or direct and indirect costs? Is "cost" historical cost or replacement cost? Does it have to repay interfund loans? Does it have to generate revenues for capital assets replacement and expansion?
7-5. Restricted assets are assets that have been segregated, pursuant to agreement with an external party or by law or regulation, for a specified purpose and therefore are not available for the discretionary use of management. Items typically reported in the "Restricted Assets" section of the statement of fund net assets include assets set aside for retirement of revenue bonds in conformity with bond covenants and bond proceeds,
125
Ch. 7, Answers, Question 7-5 (cont’d)
grants, and contributions restricted for capital purposes. Customer deposits are commonly reported as restricted assets by government utilities that use proprietary fund accounting.
7-6. As used in utility regulatory accounting and reporting, original cost is the cost to the first owner who dedicated the property to public service. Assume, for example, a private individual constructed or purchased some asset to be used in supplying electric service to him at a cost of $100,000. If the asset is sold for $140,000 to an owner who uses it in serving the public, which sells it to another public service enterprise for $200,000, “original cost" to the second owner and to the third owner is $140,000. The third owner would also record as accumulated depreciation of the asset the amount shown on the books of the second owner as accumulated depreciation. Historical cost to the first owner is $100,000; to the second owner, $140,000; and to the third, $200,000.
7-7. GASB standards provide for four categories of cash flows: operating activities, noncapital financing activities, capital and related financing activities, and investing activities. The transactions summarized and reported in these categories are those affecting cash and cash equivalents (short-term, highly liquid investments). Chapter 7 gives a fairly detailed description of the types of transactions reported in each of the four categories, and provides the information needed to answer the second part of this question.
7-8. Utilities that meter their service cannot read all meters simultaneously. Consequently, they read a set number of meters each working day and bill customers after the meters are read. At any period-end many meters have not been read in several weeks, and other bills have not been prepared for meters read recently. Accordingly, in order to state both assets and sales properly it is necessary to accrue the unbilled revenues for each group of customers on the basis of average usage per month times the number of days since meters were last read.
7-9. Segment information consists of key operating and balance sheet information for each enterprise fund discussed in Chapter 7. Revenue bonds and other debt instruments are secured by the revenues of individual enterprise funds, not by the aggregate revenues of all enterprise funds. Bondholders, analysts, and others therefore need segment disclosures for enterprise funds as required by GASB standards. The GASB Codification, and any statements, interpretations, and technical bulletins issued since the most recent Codification provide guidance as to current disclosure standards.
7-10. Calculation of the estimated total current cost of municipal solid waste landfill closure and postclosure is quite complex and was deemed beyond the scope of the discussion in Chapter 7. However, once the estimated total cost has been calculated, GASB standards require the enterprise fund to recognize an expense and related liability each period using the units of production method so that the estimated total cost is assigned to periods on the basis of usage rather than passage of time. Recognition of an expense and liability on
126
Ch. 7, Answers, Question 7-10 (cont’d)
the basis of usage appears rational since it will produce a cumulative accrued liability that more realistically reflects "closeness to closure" than would the passage of time. Unusually heavy usage in a single period, or a few periods, may suggest the landfill will not last as long as expected before it is filled to capacity. In this case, accumulation of the accrued liability on the basis of time could materially understate the actual liability.
Solutions to Cases
7-1. a. The financial statements suggest the Building Maintenance Fund is not being accounted for and reported in accordance with GASB standards for internal service funds, as described in Chapter 7. In particular, there is no indication on the balance sheet that equipment and capital assets of the Building Maintenance Fund (of which there should some, given the nature of the operation) are being accounted for within the fund. As a consequence, depreciation also is not being charged on equipment and property, plant, and equipment. A look at the fund equity section of the balance sheet and operating statement suggests quite clearly that the Building Maintenance Fund is being accounted for as a governmental fund type rather than internal service fund. This is evident by the use of the line item “fund balance” rather than net assets, segregated into 1) invested in capital assets, net of related debt, 2) restricted, and 3) unrestricted; and the matching of expenditures (rather than expenses) to revenues in the operating statement. Finally, the preferred name of this financial statement, if the fund is to reflect the guidance of GASBS 34, is statement of fund net assets, rather than balance sheet.
b. As manager of a City department you should want to know the full cost of Building Maintenance’s operations. Such information would aid in determining the appropriateness and fairness of the fund’s charges to departments. Although the financial statements indicate that revenues exceed expenditures only slightly, the statements fail to disclose the relationship between operating revenues and operating expenses. As such, they provide you with little useful information, even though as a City employee you might have a pretty good idea if the salaries, wages, and number of employees of the Building Maintenance Fund were in line with those of the rest of the City departments. Cash and Investments exceed current liabilities if one assumes that the accrued annual leave is a long-term liability and other accrued liabilities are current liabilities. (If current liabilities were reported separately it wouldn't be necessary to guess which is current and which is long-term.) It would also be useful to know how the accrued annual leave was computed, and how much of this will probably have to be paid each year. Finally, one should determine that the Inventory figure does not include an excessive supply of materials that could be obtained readily from suppliers when needed.
127
Ch. 7, Solutions, Case 7-1 (cont’d)
It is also possible that some managers of City departments that use the services of the Building Maintenance Fund may have little interest in the financial statements if the employees of that Fund are doing a good job of keeping the City’s buildings well maintained, and the charges of that Fund do not strain their maintenance budgets. If, however, they perceived the service to be poor or the charges to be excessive, the lack of full accrual financial information to objectively evaluate the Building Maintenance manager’s performance could become a problem.
7-2. a. While individual students may disagree with these policies, most will agree that the policies encourage the establishment of internal service funds when needed and thus contribute to improved resource management. The policies allow internal service funds to recover the full cost of goods or service provided, including debt service, capital replacement, and allowance of one month's working capital.
b. (1) Council members should find the funding policies reasonable and draw comfort from the limitations placed on management's ability to build up cash in internal service funds by overcharging departments for goods and services.
(2) Top management (Mayor or City Manager) may consider these policies overly restrictive since they limit management's ability to adjust rates to meet the specific needs of individual internal service funds.
(3) Department heads should find the funding policies reasonable since the policies provide for recovery of full costs but do not allow the internal service fund to make a profit. Assuming the internal service fund activities are efficiently managed, departments should pay less for goods and services purchased internally than they would for the same goods or services purchased from external suppliers, especially after considering loss of volume discounts and duplicative activities (such as procurement, contracting, and added inventory management) the departments would have to perform. If this were not the case, the city should consider terminating the internal service fund.
c. As mentioned above, management may prefer more flexibility in setting billing rates. A closer reading suggests, however, that the policies do allow for differential growth needs of individual funds in that 100% of budgeted capital outlay (rather than depreciation expense) can be used in setting billing rates. Moreover, expansion through debt financing is feasible since debt service costs can be passed on to departments. Finally, the internal service funds' budgeted capital outlays and their debt issuances are subject to approval of the City Council. Thus the Council retains significant control over expansion of internal service funds.
128
Ch. 7, Solutions, (Cont’d)
7-3. The information in the case provides no clearcut answer as to which fund type should be used to account for the mass transit system, since GASBS 34 requires the use of an enterprise fund only if the government intends to cover the full cost of operations with user fees or else bond financing to be repaid from enterprise fund revenues is used. Neither appears relevant in this case. If, however, the Finance Director and the head of DTS wish to measure the full cost of operating the mass transit system, then it is important that the accrual basis of accounting, including depreciation, be used. Determination of full cost would facilitate measurement of operational efficiency and help determine whether the General Fund subsidy is reasonable in relation to benefits received. Further, the requirement to use fixed budgeting, including appropriation control, under special revenue fund accounting would detract from efficient operation of the mass transit system. Sound management thus suggests the need to measure the full cost of operating the mass transit system and to use flexible budgeting as well managed business enterprises do. Enterprise fund accounting would measure full cost; special revenue fund accounting would not. Thus, although the information provided suggests that the criteria for use of an enterprise fund as discussed in this chapter are not met, clearly the use of enterprise fund accounting would be preferred.
Solutions to Exercises and Problems
7-1. Since each student has a different annual report, no two answers to this exercise will be exactly alike. Students whose governmental reports conform to GASBS 34 will provide an interesting contrast to students whose governments who may not yet have adopted the GASBS 34 reporting model. Use this opportunity to discuss the value of government-wide financial statements to determine the “profitability” of proprietary activities and the extent of subsidies from resources arising from governmental activities. Airports are an example of enterprise funds that may or may not provide additional resources to provide general governmental services.
7-2. 1. b. 6. a.2. d. 7. b.3. b. 8. d.4. c. 9. d.5. d. 10. c.
129
Ch. 7, Solutions (Cont’d)
7-3. TOWN OF SANDERSAUTOMOTIVE SERVICE FUND
GENERAL JOURNAL(NOT REQUIRED)
Debits Credits
1. WAGE EXPENSE 333,500
PAYROLL TAX EXPENSE 23,375
CASH 290,000
DUE TO FEDERAL GOVERNMENT 66,875
2. DUE TO FEDERAL GOVERNMENT 65,500
CASH 65,500
3. UTILITY EXPENSE 23,500
DUE TO OTHER FUNDS 23,500
4. OFFICE EXPENSES 10,500
CASH 10,500
5. SERVICE SUPPLIES INVENTORY 157,500
ACCOUNTS PAYABLE 157,500
6. COST OF PARTS AND SUPPLIES USED 152,300
SERVICE SUPPLIES INVENTORY 152,300
7. DUE FROM OTHER FUNDS 560,000
BILLINGS TO DEPARTMENTS 560,000
130
Ch. 7, Solutions, 7-3 (Cont'd)
Debits Credits
8. CASH 550,200
DUE FROM OTHER FUNDS 550,200
(20,200 + 560,000 - 30,000)
9. DUE TO OTHER FUNDS 21,800
CASH 21,800
10. ACCOUNTS PAYABLE 156,950
CASH 156,950
(12,700 + 157,500 - 13,250)
11. DEPRECIATION OF MACHINERY AND
EQUIPMENT 9,000
DEPRECIATION OF BUILDINGS 6,300
ALLOWANCE FOR DEPRECIATION
MACHINERY AND EQUIPMENT 9,000
ALLOWANCE FOR DEPRECIATIONBUILDINGS 6,300
12. Closing Entries:
BILLINGS TO DEPARTMENTS 560,000
WAGE EXPENSE 333,500
PAYROLL TAX EXPENSE 23,375
UTILITY EXPENSE 23,500
OFFICE EXPENSES 10,500
COST OF PARTS AND SUPPLIES USED 152,300
DEPRECIATION OF MACHINERY AND EQUIPMENT 9,000
DEPRECIATION OF BUILDINGS 6,300
OPERATING INCOME 1,525
131
Ch. 7, Solutions, 7-3 (Cont'd)
Debits Credits
OPERATING INCOME 1,525
NET ASSETS - UNRESTRICTED 1,525
NET ASSETS – INVESTED IN CAPITAL ASSETS 15,300
NET ASSETS – UNRESTRICTED 15,300
132
Ch. 7, Solutions, 7-3 (Cont'd)
TOWN OF SANDERST- ACCOUNTS FOR AUTOMOTIVE SERVICE FUND
(NOT REQUIRED) CASH DUE FROM OTHER FUNDS
9-30-04 15,000 (1) 290,000 9-30-04 20,200 (8) 550,200
(8) 550,200 (2) 65,500 (7) 560,000
(4) 10,500
(9) 21,800
(10) 156,950
SERVICE SUPPLIES INVENTORY LAND
9-30-04 35,300 (6) 152,300 9-30-04 37,000
(5) 157,500
BUILDINGS ALLOW FOR DEP BUILDINGS
9-30-04 210,000 9-30-04 70,000
(11) 6,300
MACHINERY AND EQUIPMENT ALLOW FOR DEP MACH
& EQUIP
9-30-04 90,000 9-30-04 20,000
(11) 9,000
ACCOUNTS PAYABLE DUE TO FEDERAL GOVERNMENT
(10) 156,950 9-30-04 12,700 (2) 65,500 9-30-04 1,500
(5) 157,500 (1) 66,875
NET ASSETS – UNRESTRICTED DUE TO OTHER FUNDS
9-30-04 55,500 (9) 21,800 9-30-04 800
C.L. 1,525 (3) 23,500
C.L. 15,300
NET ASSETS-INVESTED IN CAP. ASSETS BILLINGS TO DEPARTMENTS
C.L. 15,300 9-30-04 247,000 CL. 560,000 (7) 560,000
WAGE EXPENSE PAYROLL TAX EXPENSE
(1) 333,500 CL. 333,500 (1) 23,375 CL. 23,375
UTILITY EXPENSE COST OF PARTS AND SUPPLIES USED
(3) 23,500 CL. 23,500 (6) 152,300 CL. 152,300
DEPRECIATION OF MACH. AND EQUIP. OFFICE EXPENSES
(11) 9,000 CL. 9,000 (4) 10,500 CL. 10,500
DEPRECIATION OF BUILDINGS OPERATING INCOME
(11) 6,300 CL. 6,300 CL. 1,525 CL. 1,525
133
Ch. 7, Solutions, 7-3 (Cont'd)7-3. a. TOWN OF SANDERS
AUTOMOTIVE SERVICE FUNDSTATEMENT OF REVENUES, EXPENSES, AND
CHANGES IN NET ASSETSFOR YEAR ENDED SEPTEMBER 30, 2005
BILLINGS TO DEPARTMENTS $560,000
DIRECT COSTS:
WAGE EXPENSE $300,150
PAYROLL TAX EXPENSE 21,038
UTILITY EXPENSES 18,800
PARTS AND SUPPLIES USED 152,300
DEPRECIATION OF MACHINERY
AND EQUIPMENT 9,000
TOTAL DIRECT COSTS 501,288
58,712
INDIRECT COSTS:
WAGE EXPENSE 33,350
PAYROLL TAX EXPENSE 2,337
UTILITY EXPENSES 4,700
OFFICE EXPENSES 10,500
DEPRECIATION OF BUILDINGS 6,300
TOTAL INDIRECT COSTS 57,187
OPERATING INCOME 1,525
NET ASSETS, OCTOBER 1, 2004 302,500
NET ASSETS, SEPTEMBER 30, 2005 $304,025
b. ON THE BASIS OF THE OPERATING STATEMENT FOR THE YEAR ENDED SEPTEMBER 30, 2005, THE PRICING POLICY IS ACHIEVING THE GOALS OF ENABLING BILLINGS TO DEPARTMENTS TO COVER ALL DIRECT AND INDIRECT OPERATING COSTS, INCLUDING DEPRECIATION. THE NET INCOME FOR THE YEAR IS ONLY .27 OF 1 PERCENT, WELL UNDER THE 3 PERCENT MAXIMUM SET FOR THIS FUND.
134
Ch. 7, Solutions, 7-3 (Cont'd)
c . TOWN OF SANDERSAUTOMOTIVE SERVICE FUNDSTATEMENT OF NET ASSETSAS OF SEPTEMBER 30, 2005
ASSETS:
CURRENT ASSETS:
CASH $ 20,450
DUE FROM OTHER FUNDS 30,000
SERVICE SUPPLIES INVENTORY 40,500
TOTAL CURRENT ASSETS $ 90,950
CAPITAL ASSETS:
LAND 37,000
BUILDINGS $210,000
LESS: ALLOWANCE FOR DEPRECIATION 76,300 133,700
MACHINERY AND EQUIPMENT 90,000
LESS: ALLOWANCE FOR DEPRECIATION 29,000 61,000
TOTAL CAPITAL ASSETS 231,700
TOTAL ASSETS 322,650
LIABILITIES:
ACCOUNTS PAYABLE 13,250
DUE TO FEDERAL GOVERNMENT 2,875
DUE TO OTHER FUNDS 2,500
TOTAL CURRENT LIABILITIES 18,625
NET ASSETS:
NET ASSETS – INVESTED IN CAPITAL ASSETS 233,700
NET ASSETS - UNRESTRICTED 68,325 ________
TOTAL NET ASSETS $ 304,025
135
Ch. 7, Solutions, 7-3 (Cont’d)
d. TOWN OF SANDERSAUTOMOTIVE SERVICE FUNDSTATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH RECEIVED FROM CUSTOMERS $550,200
CASH PAID TO:
EMPLOYEES $(290,000)
FEDERAL GOVERNMENT (W/T, FICA) (65,500)
SUPPLIERS (167,450)
OTHER DEPARTMENTS (21,800) (544,750)
NET CASH PROVIDED BY OPERATIONS $ 5,450
NET INCREASE IN CASH AND
CASH EQUIVALENTS 5,450
CASH AND CASH EQUIVALENTS, 10/1/2004 15,000
CASH AND CASH EQUIVALENTS, 9/30/2005 $ 20,450
RECONCILIATION OF OPERATING INCOME TO NET CASHPROVIDED BY OPERATIONS
OPERATING INCOME $ 1,525
ADJUSTMENTS:
DEPRECIATION EXPENSEMACHINERY & EQUIPMENT 9,000
DEPRECIATION EXPENSEBUILDINGS 6,300
INCREASE IN INVENTORY (5,200)
INCREASE IN RECEIVABLES FROM OTHER FUNDS (9,800)
INCREASE IN ACCOUNTS PAYABLE 550
INCREASE IN DUE TO FEDERAL GOVERNMENT 1,375
INCREASE IN DUE TO OTHER FUNDS 1,700
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 5,450
136
Ch. 7, Solutions (Cont'd)
7-4.a. The Insurance Fund centralizes administration and accounting for risk
management activities and thus probably achieves more efficient
operation by utilizing a professional risk manager. Lower premiums likely
are obtained by pooling some risks under single policies.
b. This fund is an instrumentality used to contract for and pay premiums, a
regular and continuing activity. Settlements of losses by insurance
companies would be irregular occurrences, requiring special attention,
with proceeds going to the funds that are required to pay for repair or
replacement of damaged assets, or for other insured losses.
c.
Debits Credits
1. PREPAID INSURANCE PREMIUMS 132,625
VOUCHERS PAYABLE 132,625
2. DUE FROM OTHER FUNDS 216,700
BILLINGS TO DEPARTMENTS 216,700
EXPIRED INSURANCE PREMIUMS 197,000
PREPAID INSURANCE PREMIUMS 197,000
3. SALARIES AND WAGES EXPENSE 12,400
RENT EXPENSE 5,200
UTILITIES EXPENSE 860
MISCELLANEOUS EXPENSE 800
CASH 19,260
137
Ch. 7, Solutions, 7-4 D (Cont’d)
Debits Credits
4. CASH 4,000
EXPIRED INSURANCE PREMIUMS 4,000
BILLINGS TO DEPARTMENTS 4,400
DUE FROM OTHER FUNDS 4,400
5. VOUCHERS PAYABLE 127,000
CASH 127,000
6. CASH 75,000
OFS - INTERFUND TRANSFER IN 75,000
7. CASH 170,500
DUE FROM OTHER FUNDS 170,500
8. Closing Entry:
BILLINGS TO DEPARTMENTS 212,400
EXPIRED INSURANCE PREMIUMS 193,000
SALARIES AND WAGES EXPENSE 12,400
RENT EXPENSE 5,200
UTILITIES EXPENSE 860
MISCELLANEOUS EXPENSE 800
OPERATING INCOME 140
OPERATING INCOME 140
NET ASSETS - UNRESTRICTED 140
OFS - INTERFUND TRANSFER IN 75,000
NET ASSETS - UNRESTRICTED 75,000
138
Ch. 7, Solutions, 7-4 (Cont’d)
d . CITY OF DALTONINSURANCE FUND
STATEMENT OF NET ASSETSAS OF JUNE 30, 2005
ASSETS:
CASH $ 108,890
DUE FROM OTHER FUNDS 71,800
PREPAID INSURANCE PREMIUMS 172,570
TOTAL ASSETS $ 353,260
LIABILITIES:
VOUCHERS PAYABLE
111,570
NET ASSETS:
NET ASSETSUNRESTRICTED $ 241,690
e . CITY OF DALTONINSURANCE FUND
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED JUNE 30, 2005BILLINGS TO DEPARTMENTS $ 212,300
OPERATING EXPENSES:
EXPIRED INSURANCE PREMIUMS $193,000
SALARIES AND WAGES EXPENSE 12,400
RENT EXPENSE 5,200
UTILITIES EXPENSE 860
MISCELLANEOUS EXPENSE 800
TOTAL EXPENSES 212,260
OPERATING INCOME 40
INTERFUND TRANSFER IN 75,000
INCREASE IN NET ASSETS 75,040
NET ASSETSUNRESTRICTED, 6/30/2004 166,650
NET ASSETSUNRESTRICTED, 6/30/2005 $ 241,690
139
Ch. 7, Solutions, 7-4 (Cont’d)
f . CITY OF DALTONINSURANCE FUND
STATEMENT OF CASH FLOWSFOR THE YEAR ENDED JUNE 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH RECEIVED FROM CUSTOMERS $ 170,500
CASH PAID TO INSURERS $ (127,000)
CASH RECEIVED FROM PREMIUM
ADJUSTMENTS 4,000
CASH PAID TO EMPLOYEES (12,400)
CASH PAID TO SUPPLIERS AND VENDORS (6,860) (142,260)
NET CASH PROVIDED BY OPERATING ACTIVITIES $28,240
CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES:
CONTRIBUTIONS FROM GENERAL FUND 75,000
NET INCREASE IN CASH AND CASH EQUIVALENTS 103,240
CASH AND CASH EQUIVALENTS, 6/30/2004 5,650
CASH AND CASH EQUIVALENTS, 6/30/2005 $108,890
RECONCILIATION OF EXCESS OF NET BILLINGSTO DEPARTMENTS OVER COSTS TO NET CASH
PROVIDED BY OPERATIONS
OPERATING INCOME $ 40
ADJUSTMENTS:
INCREASE IN RECEIVABLES (41,800)
DECREASE IN PREPAID INSURANCE PREMIUMS 64,375
INCREASE IN VOUCHERS PAYABLE 5,625
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 28,240
140
Ch. 7, Solutions, 7-4 (Cont’d)
g. Analysis: During the year, Expenses—General Government and Internal Balances (alternatively, an account such Intra-Activities Balance can be used) have been recorded for the billings received from the Insurance Fund for expired premiums and operating costs. It is assumed that the Insurance Funds assets and liabilities as of June 30, 2004, had been appropriately closed to governmental activities on that date, and thus were reported in the government-wide statement of net assets.
In aggregate during the year 2005, governmental activities would had a net debit of $212,300 to Expenses-General Government ($216,700, Transaction 2 minus $4,400, Transaction 4), and would have had net credit to Internal Balances in the same amount. Note that no cash flows from governmental funds to internal service funds, nor any cash outflows from the Insurance Fund to any parties has been recorded at the government-wide level.
To “close” the Insurance Fund to governmental Activities, it will be necessary to:
(1) Credit payments made from the Insurance Fund Cash account (this will net against cash received by the Insurance Fund from governmental funds, but which had not been recorded during the year at the government-wide level), debit or credit any net change in the Prepaid Insurance Premiums account, and debit or credit any net change in the Vouchers Payable account.
(2) Eliminate any element of “net income” or “net loss” that is reflected in the billings recorded during the year.
As shown in the operating statement in Part e, there is a “net income” in the amount of $40 that must be eliminated as only the cost of insurance to the Insurance Fund should be reported as an expense at the government-wide level. Unrestricted Net Assets must be debited and Expenses-General Government credited in the governmental activities general journal to reflect a break-even level of billing from the Insurance Fund.
Note that we assume the Interfund Transfer of $75,000 has no overall effect on governmental activities. Further, we assume it was not recorded at the government-wide level. Based on this analysis, the following entries should be made in the governmental activities general journal to close the Insurance Fund activities into governmental activities at the government-wide level.
141
Ch. 7, Solutions, 7-4 g (Cont’d)
Debits Credits
(1) INTERNAL BALANCES 212,300
PREPAID INSURANCE PREMIUM 64,375
CASH 142,260VOUCHERS PAYABLE
5,625NET ASSETS - UNRESTRICTED 40
(2) NET ASSETS - UNRESTRICTED 40EXPENSES - GENERAL GOVERNMENT 40
Note: As in the example in the text, the net effect of these transactions in the governmental activities accounts at the government-wide level is to reduce Net Assets – Unrestricted by $212,260 when Expenses – General Government is closed to Net Asset – Unrestricted. This is precisely the cost to the Insurance Fund of providing its services for the year.
142
7-5. a. CITY OF ASHVILLECENTRAL GARAGE FUND
GENERAL JOURNALDebits Credits
1. INVENTORY OF SUPPLIES 92,000
VOUCHERS PAYABLE 92,000
2. COST OF SUPPLIES USED 110,000
INVENTORY OF SUPPLIES 110,000
3. SALARIES AND WAGES EXPENSE 235,000
CASH 235,000
4. UTILITIES EXPENSE 30,000
CASH 30,000
5. DEPRECIATION EXPENSEBUILDING 10,000
DEPRECIATION EXPENSEMACHINERY
AND EQUIPMENT 9,000
ALLOWANCE FOR DEPRECIATIONBUILDING 10,000
ALLOWANCE FOR DEPRECIATIONMACHINERY
AND EQUIPMENT 9,000
6. DUE FROM OTHER FUNDS 397,000
BILLINGS TO DEPARTMENTS 397,000
7. CASH 390,000
DUE FROM OTHER FUNDS 390,000
($20,000 + $397,000 - $27,000 = $390,000)
Ch. 7, Solutions, 7-5 a (Cont'd)
143
Debits Credits
8. VOUCHERS PAYABLE 118,000
CASH 118,000
($42,000 + $92,000 - $16,000 = $118,000)
9. Closing Entries:
BILLINGS TO DEPARTMENTS 397,000
COST OF SUPPLIES USED 110,000
SALARIES AND WAGES EXPENSE 235,000
UTILITIES EXPENSE 30,000
DEPRECIATION EXPENSEBUILDING 10,000
DEPRECIATION EXPENSEMACHINERY
AND EQUIPMENT 9,000
EXCESS OF NET BILLINGS OVER COSTS 3,000
EXCESS OF NET BILLINGS OVER COSTS 3,000
NET ASSETS - UNRESTRICTED 3,000
NET ASSETS – INVESTED IN CAPITAL ASSETS 19,000
NET ASSETS – UNRESTRICTED 19,000
144
Ch. 7, Solutions, 7-5 (Cont'd)
b. THE CENTRAL GARAGE FUND FINANCIAL DATA SHOULD BE
PRESENTED IN THE INTERNAL SERVICE FUND COLUMN IN THE:
STATEMENT OF NET ASSETS – PROPRIETARY FUNDS,
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET
ASSETS – PROPRIETARY FUNDS, and
STATEMENT OF CASH FLOWS – PROPRIETARY FUNDS.
IN ADDITION, THE INTERNAL SERVICE FUND BALANCES SHOULD BE
REPORTED IN THE GOVERNMENTAL ACTIVITIES COLUMN OF THE
GOVERNMENT-WIDE FINANCIAL STATEMENTS UNLESS AN ENTERPRISE
FUND IS THE PREDOMINANT CUSTOMER OF THE INTERNAL SERVICE
FUND.
145
Ch. 7, Solutions (Cont'd)
7-6. a.
1. BOND INTEREST PAID OR ACCRUED DURING PERIOD OF CONSTRUCTION:
BOND INTEREST PAID ON JULY 15, 2005
$9,000,000 X .06 X 1/2 YEAR = $270,000
BOND INTEREST ACCRUED FOR 4 MONTHS
(JULY 15 - NOVEMBER 15, 2005)
$9,000,000 X .06 X 4/12 YEAR = 180,000
BOND INTEREST PAID OR ACCRUED DURING
THE PERIOD OF CONSTRUCTION $450,000
2. INTEREST EARNED ON INVESTMENT OF BOND PROCEEDS:
MARCH 15 - 2 MONTHS ACCRUED INTEREST
ON $1,500,000, AT RATE OF 6%, SOLD $ 15,000
MAY 15 - 4 MONTHS ACCRUED INTEREST ON
$1,500,000, AT RATE OF 6%, SOLD 30,000
JULY 15 - 6 MONTHS INTEREST ON
$6,000,000, AT RATE OF 6% RECEIVED 180,000
SEPTEMBER 15 - 2 MONTHS ACCRUED INTEREST
ON $3,000,000, AT RATE OF 6%, SOLD 30,000
TOTAL INTEREST EARNED ON INVESTMENT OF
BOND PROCEEDS DURING PERIOD OF
CONSTRUCTION $255,000
Debits Credits
3. CONSTRUCTION WORK IN PROGRESS 195,000
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 195,000
[NET INTEREST COST ON BORROWED FUNDS DURING PERIOD OF CONSTRUCTION =
$450,000 (PART 1) - $255,000 (PART 2)]
Ch. 7, Solutions, 7-6 (Cont'd)
146
Debits Credits
b. CONSTRUCTION WORK IN PROGRESS 202,250
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 202,250
c. OTHER INCOME AND DEDUCTIONS:
INTEREST ON LONG-TERM DEBT
(FOR 11 1/2 MONTHS: $450,000+
$9,000,000X.06X1.5/12) $517,500
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION (195,000)
TOTAL INCOME AND DEDUCTIONS $322,500
NOTE: OTHER ITEMS THAT WOULD BE REPORTED IN THIS SECTION ARE NOT GIVEN
IN THE PROBLEM; THE NET EFFECT OF THE INFORMATION GIVEN IS INTEREST
EXPENSE FOR THE YEAR OF $322,500.
d. OTHER INCOME AND DEDUCTIONS:
ALLOWANCE FOR FUNDS USED DURING
CONSTRUCTION $202,250
NOTE: THE NET EFFECT OF CAPITALIZING IMPUTED INTEREST IS TO INCREASE NET
INCOME BY $202,250 SINCE THE DEBIT IS TO CONSTRUCTION WORK IN PROGRESS
(SEE ENTRY B ABOVE).
147
Ch. 7, Solutions (Cont’d)
7-7. a. CITY OF TEMPLETON
WATER UTILITY FUND
GENERAL JOURNAL
Debits Credits
1. CASH 1,000,000
OFS - INTERFUND TRANSFER IN 1,000,000
2. UTILITY PLANT IN SERVICE 929,000
ACCOUNTS RECEIVABLE 64,000
MATERIALS AND SUPPLIES 66,000
ACCUMULATED PROVISION FOR
UNCOLLECTIBLE ACCOUNTS 32,000
ACCOUNTS PAYABLE 99,000
MISCELLANEOUS ACCRUALS 28,000
CASH 900,000
NOTES:
1. IF THE NEW WATER UTILITY FUND HAD BEEN SUBJECT TO REGULATION
BY A STATE REGULATORY COMMISSION, BOTH SOUTHLAND'S ORIGINAL
COST AND ACCUMULATED DEPRECIATION WOULD HAVE BEEN
RECORDED IN ENTRY 2. IN THAT CASE, AS EXPLAINED IN CHAPTER 7
UNDER "REGULATORY ACCOUNTING PROCEDURES," A DEBIT TO "UTILITY
PLANT ACQUISTION ADJUSTMENT" IN THE AMOUNT OF $91,000 WOULD
ALSO HAVE BEEN REQUIRED IN ENTRY 2.
2. CASH, CAPITAL STOCK, AND RETAINED EARNINGS OF THE SOUTHLAND
WATER COMPANY WERE NOT PURCHASED BY THE CITY OF TEMPLETON
AND THUS ARE NOT RECORDED IN ENTRY 2.
148
Ch. 7, Solutions, 7-7 (Cont'd)
b. CITY OF TEMPLETON
WATER UTILITY FUND
STATEMENT OF NET ASSETS
JUNE 30, 2004
ASSETS:
CURRENT AND ACCRUED ASSETS:
CASH $ 100,000
CUSTOMER ACCOUNTS RECEIVABLE $64,000
ACCUMULATED PROVISION FOR
UNCOLLECTIBLE ACCOUNTS 32,000 32,000
MATERIALS AND SUPPLIES 66,000
TOTAL CURRENT AND
ACCRUED ASSETS $ 198,000
UTILITY PLANT:
UTILITY PLANT IN SERVICE 929,000
TOTAL ASSETS AND OTHER DEBITS 1,127,000
LIABILITIES:
CURRENT AND ACCRUED LIABILITIES:
ACCOUNTS PAYABLE 99,000
MISCELLANEOUS ACCRUALS 28,000
TOTAL LIABILITIES 127,000
NET ASSETS:
INVESTED IN PLANT 929,000
UNRESTRICTED 71,000
TOTAL NET ASSETS $1,000,000
149
Ch. 7, Solutions (Cont'd)
7-8. a. CITY OF TEMPLETONWATER UTILITY FUNDGENERAL JOURNAL
Debits Credits
(1) CASH 500,000
LONG-TERM NOTES PAYABLE 500,000
(2) MISCELLANEOUS ACCRUALS 28,000
CASH 28,000
(3) DUE FROM GENERAL FUND 40,000
CUSTOMER ACCOUNTS RECEIVABLE 632,000
SALES OF WATER 672,000
(4) MATERIALS AND SUPPLIES 88,000
SOURCE OF SUPPLY EXPENSES 32,000
PUMPING EXPENSES 40,500
WATER TREATMENT EXPENSES 51,500
TRANSMISSION AND DISTRIBUTION EXPENSES 68,000
CUSTOMERS ACCOUNTS EXPENSES 93,000
ADMINISTRATIVE AND GENERAL EXPENSES 76,000
CONSTRUCTION WORK IN PROGRESS 357,000
ACCOUNTS PAYABLE 806,000
(5) SOURCE OF SUPPLY EXPENSES 10,800
PUMPING EXPENSES 6,500
WATER TREATMENT EXPENSES 34,500
TRANSMISSION AND DISTRIBUTION EXPENSES 32,200
MATERIALS AND SUPPLIES 84,000
150
Ch. 7, Solutions, 7-8, (Cont'd)Debits Credits
(6) CASH 15,000
LOSS FROM DISPOSITION OF UTILITY PLANT 10,000
UTILITY PLANT IN SERVICE 25,000
(7) ACCUMULATED PROVISION FOR
UNCOLLECTIBLE ACCOUNTS 28,000
CUSTOMER ACCOUNTS RECEIVABLE 28,000
(8) CASH—CUSTOMER DEPOSITS 15,000
CUSTOMER DEPOSITS 15,000
(9) CASH 498,000
CUSTOMER ACCOUNTS RECEIVABLE 460,000
DUE FROM GENERAL FUND 38,000
(10) ACCOUNTS PAYABLE 800,000
CASH 800,000
(11) OTHER INTEREST EXPENSE 500
CUSTOMER DEPOSITS 500
CASH—CUSTOMER DEPOSITS 500
CASH 500
(NOTE: SECOND ENTRY UNDER 11 REQUIRED TO TRANSFER $500 FROM UNRESTRICTED TO RESTRICTED CASH FOR INTEREST OWED TO CUSTOMERS)
(12) DEPRECIATION EXPENSE 47,050
ACCUMULATED PROVISION FOR
DEPRECIATION OF UTILITY PLANT 47,050
151
Ch. 7, Solutions, 7-8, (Cont'd)Debits Credits
(13) MATERIALS AND SUPPLIES 7,000
ACCOUNTS PAYABLE 7,000
(14) INTEREST ON LONG-TERM DEBT 40,000
CASH 40,000
(15) CONSTRUCTION WORK IN PROGRESS 40,000
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 40,000
(16) CUSTOMER ACCOUNTS EXPENSES 6,320
ACCUMULATED PROVISION FOR
UNCOLLECTIBLE ACCOUNTS 6,320
(17) CASH—REPAYMENT OF LONG-TERM NOTES 100,000
CASH 100,000
NET ASSETS – UNRESTRICTED 100,000
NET ASSETS – RESTRICTED FOR
REPAYMENT OF LONG-TERM NOTES 100,000
152
Ch. 7, Solutions 7-8, (Cont'd)Debits Credits
(18) Closing entries:
SALES OF WATER 672,000
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION 40,000
SOURCE OF SUPPLY EXPENSES 42,800
PUMPING EXPENSES 47,000
WATER TREATMENT EXPENSES 86,000
TRANSMISSION AND DISTRIBUTION EXPENSES 100,200
CUSTOMER ACCOUNTS EXPENSES 99,320
ADMINISTRATIVE AND GENERAL EXPENSES 76,000
LOSS FROM DISPOSITION OF UTILITY PLANT 10,000
OTHER INTEREST EXPENSE 500
DEPRECIATION EXPENSE 47,050
INTEREST ON LONG-TERM DEBT 40,000
NET ASSETSUNRESTRICTED 163,130
NET ASSETS – INVESTED IN CAPITAL ASSETS 47,050NET ASSETS – UNRESTRICTED 47,050
To adjust net assets for depreciation.
NET ASSETS – UNRESTRICTED 397,000NET ASSETS – INVESTED IN CAPITAL ASSETS 397,000
To adjust net assets for Construction Work in Progress.
NET ASSETS – INVESTED IN CAPITAL ASSETS 25,000NET ASSETS – UNRESTRICTED 25,000
To adjust net assets for loss.
NET ASSETS – INVESTED IN CAPITAL ASSETS 500,000NET ASSETS – UNRESTRICTED 500,000
To adjust for net assets restricted for long-term debt.
153
Ch. 7, Solutions, 7-8 (Cont’d)CITY OF TEMPLETON - WATER UTILITY FUND
GENERAL LEDGER (NOT REQUIRED)
CASH CUSTOMER ACCOUNTS RECEIVABLE_BAL. 100,000 (2) 28,000 BAL. 64,000 (7) 28,000
(1) 500,000 (10) 800,000 (3) 632,000 (9) 460,000
(6) 15,000(11) 500 ACCUMULATED PROVISION FOR
(9) 498,000(14) 40,000 UNCOLLECTIBLE ACCOUNTS____
(17) 100,000 (7) 28,000 BAL 32,000
DUE FROM GENERAL FUND (16) 6,320
(3) 40,000 (9) 38,000
MATERIALS AND SUPPLIES CASH—CUSTOMER DEPOSITS___
BAL. 66,000 (5) 84,000 (8) 15,000
(4) 88,000 (11) 500
(13) 7,000
CASH—REPAYMENT OF LONG-TERM NOTES UTILITY PLANT IN
SERVICE__
(17) 100,000 BAL. 929,000 (6) 25,000
ACCUMULATED PROVISION FOR DEPRECIATION OF UTILITY PLANT CONSTRUCTION WORK IN PROGRESS_
(12) 47,050 (4) 357,000
(15) 40,000
ACCOUNTS PAYABLE MISCELLANEOUS ACCRUALS____
(10) 800,000 BAL. 99,000 (2) 28,000 BAL. 28,000
(4) 806,000
(13) 7,000
CUSTOMER DEPOSITS LONG-TERM NOTES PAYABLE___
(8) 15,000 (1) 500,000
(9) 500 N.A.– INVESTED IN CAPITAL ASSETS
(18) 47,050 BAL. 929,000
(18) 25,000 (18) 397,000
NET ASSETS – RESTRICTED (18) 500,000
FOR REPAYMENT OF LT NOTES NET ASSETS - UNRESTRICTED__(17) 100,000 (17) 100,000 BAL. 71,000
(18) 397,000 (18) 163,130
(18) 47,050
(18) 25,000
154
SALES OF WATER____________ (18) 500,000
(18) 672,000 (3) 672,000
155
Ch. 7, Solutions, 7-8 (Cont'd)
SOURCE OF SUPPLY EXPENSES PUMPING EXPENSES______
(4) 32,000 (18) 42,800 (4) 40,500 (18) 47,000
(5) 10,800 (5) 6,500
CUSTOMER ACCOUNTS EXPENSES WATER TREATMENT EXPENSES____
(4) 93,000 (18) 99,320 (4) 51,500 (18) 86,000
(16) 6,320 (5) 34,500
ADMINISTRATIVE AND GENERAL TRANSMISSION AND DISTRIBUTION
EXPENSES EXPENSES_________
(4) 76,000 (18) 76,000 (4) 68,000 (18) 100,200
(5) 32,200
LOSS FROM DISPOSITION
DEPRECIATION EXPENSE OF UTILITY PLANT____
(12) 47,050 (18) 47,050 (6) 10,000 (18) 10,000
INTEREST ON LONG-TERM DEBT ALLOWANCE FOR FUNDS USED
(12) 40,000 (18) 40,000 DURING CONSTRUCTION____
(18) 40,000 (15) 40,000
OTHER INTEREST EXPENSE________
(11) 500 (18) 500
156
Ch. 7, Solutions, 7-8 (Cont'd)
b. CITY OF TEMPLETONWATER UTILITY FUND
STATEMENT OF NET ASSETSJUNE 30, 2005
ASSETS:
CURRENT AND ACCRUED ASSETS:
CASH $ 144,500
CUSTOMER ACCOUNTS RECEIVABLE (net) 197,680
DUE FROM GENERAL FUND 2,000
MATERIALS AND SUPPLIES 77,000 $ 421,180
RESTRICTED ASSETS-CASH 115,500
UTILITY PLANT:
UTILITY PLANT IN SERVICE 904,000
ACC. PROVISION FOR DEPRECIATION 47,050
UTILITY PLANTNET 856,950
CONSTRUCTION WORK IN PROGRESS 397,000
NET UTILITY PLANT 1,253,950
TOTAL ASSETS 1,790,630
LIABILITIES:
CURRENT AND ACCRUED LIABILITIES:
ACCOUNTS PAYABLE 112,000
LIABILITIES PAYABLE FROM RESTRICTED ASSETS:
CUSTOMER DEPOSITS 15,500
LONG-TERM DEBT 500,000
TOTAL LIABILITIES 627,500
NET ASSETS:
INVESTED IN CAPITAL ASSETS, net of related debt 753,950
RESTRICTED FOR REPAYMENT OF L-T NOTES 100,000
UNRESTRICTED 309,180
TOTAL NET ASSETS $ 1,163,130
Ch. 7, Solutions, 7-8 (Cont'd)
157
c. CITY OF TEMPLETONWATER UTILITY FUND
STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETSFOR THE YEAR ENDED JUNE 30, 2005
UTILITY OPERATING REVENUE:
SALES OF WATER $ 672,000
OPERATING EXPENSES:
SOURCE OF SUPPLY EXPENSES $ 42,800
PUMPING EXPENSES 47,000
WATER TREATMENT EXPENSES 86,000
TRANSMISSION AND DISTRIBUTION EXPENSES 100,200
CUSTOMER ACCOUNTS EXPENSE 99,320
ADMINISTRATIVE AND GENERAL EXPENSES 76,000
DEPRECIATION EXPENSE 47,050
TOTAL OPERATING EXPENSES 498,370
UTILITY OPERATING INCOME 173,630
OTHER INCOME AND DEDUCTIONS:
LOSS FROM DISPOSITION OF UTILITY PLANT 10,000
INTEREST ON LONG-TERM DEBT 40,000
ALLOW. FOR FUNDS USED DURING CONSTRUCTION (40,000)
OTHER INTEREST CHARGES 500
TOTAL OTHER INCOME AND DEDUCTIONS 10,500
CHANGE IN NET ASSETS 163,130
TOTAL NET ASSETS, 7/1/2004 1,000,000
TOTAL NET ASSETS, 6/30/2005 $1,163,130
158
Ch. 7, Solutions, 7-8 (Cont'd)d. CITY OF TEMPLETON
WATER UTILITY FUNDSTATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 2005
CASH FLOWS FROM OPERATING ACTIVITIES:
CASH RECEIVED FROM CUSTOMERS (NOTE A)
$ 498,000
CUSTOMER DEPOSITS RECEIVED 15,000
CASH PAID TO EMPLOYEES FOR SERVICES (310,000)
CASH PAID TO SUPPLIERS (NOTE B) (161,000)
NET CASH PROVIDED BY OPERATIONS 42,000
CASH FLOWS FROM CAPITAL AND RELATED
FINANCING ACTIVITIES:
PROCEEDS OF LONG-TERM NOTES 500,000
SALE OF UTILITY PLANT 15,000
UTILITY PLANT CONSTRUCTION IN PROGRESS
(INCLUDING $40,000 CAPITALIZED INTEREST) (397,000)
NET CASH PROVIDED BY CAPITAL AND
RELATED FINANCING ACTIVITIES 118,000
NET INCREASE IN CASH AND CASH EQUIVALENTS 160,000
CASH AND CASH EQUIVALENTS, JULY 1, 2004 100,000
CASH AND CASH EQUIVALENTS, JUNE 30, 2005 $ 260,000
RECONCILIATION OF CASH AND CASH EQUIVALENTS TO THE BALANCE
SHEET
END BEGINNING OF YEAR OF YEAR
CASH AND CASH EQUIVALENTS IN CURRENT AND ACCRUED ASSETS $144,500 $100,000 RESTRICTED CASH AND CASH EQUIVALENTS 115,500 -0-
TOTAL CASH AND CASH EQUIVALENTS $260,000 $100,000
159
Ch. 7, Solutions, 7-8 (Cont'd)
RECONCILIATION OF NET OPERATING INCOMETO NET CASH PROVIDED BY OPERATING ACTIVITIES
UTILITY OPERATING INCOME $ 173,630
ADJUSTMENTS:
DEPRECIATION EXPENSE $ 47,050
INCREASE IN ACCOUNTS PAYABLE 13,000
INCREASE IN CUSTOMER DEPOSITS RECEIVED 15,000
DECREASE IN MISC. OPERATING ACCRUALS (28,000)
INCREASE IN INVENTORIES (11,000)
INCREASE IN INTERFUND RECEIVABLES (2,000)
INCREASE IN NET CUSTOMER
ACCOUNTS RECEIVABLE (165,680)
TOTAL ADJUSTMENTS (131,630)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 42,000
NOTE A: Given by PROBLEM 7-8, Entry 9. NOTE B: PROBLEM 7-8, ENTRY 2 ($28,000), PLUS ENTRY 10 ($800,000), MINUS
CONSTRUCTION WORK IN PROGRESSENTRY 4 ($357,000); MINUS $310,000 GIVEN AS CASH PAID FOR WAGES AND SALARIES = $161,000.
e. The utility earned operating income is about 25.84 percent of operating
revenue; this appears to be somewhat high as a rate of return on sales, but
it amounts to only 9.70 percent on total assets, or 17.36 percent on
contributed equity. Because the city has operated the utility for only one
year, it may not have prepared a cost of service study. Such a study is
needed in order to determine an equitable rate structure. Similarly, studies
of the condition of the utility plant and its capability to meet forecast needs
of the community must be made, if they have not yet been, because it may
require several years to develop and finance new supply, treatment,
pumping, storage, and distribution facilities.
160
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