Governmental Fund Accounting for FAR CPA Exam

Name: Governmental Fund Accounting for FAR CPA Exam | Humix Video
Uploaded: 2024-05-03T19:31:38+00:00
Duration: 14 min 35 s

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All right, in this video from SuperfastCPA, we're going to go over governmental accounting
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and fund accounting specifically. Again, in SuperfastCPA fashion, we're going to go straight through practice problems
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and the ones that I have lined up will kind of take us from the top of this concept through
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to some of the deeper parts of it. So starting with example problem one, which of the following is not one of the three categories
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of funds used in governmental accounting? Is it governmental funds, encumbrance funds, proprietary funds, or fiduciary funds
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So just take a second, pause the video and just read through those and make your best guess
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That's all you're trying to do at this point. We will move on. So the answer is encumbrance funds
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So it was asking which of the following is not one of the three categories of funds used
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in governmental accounting? So the explanation is the three categories of funds used in governmental accounting are
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governmental funds, proprietary funds, and then fiduciary funds. Governmental funds use the modified accrual basis of accounting that focuses on the flow
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of current financial resources. They are used primarily for non-exchange revenues such as taxes or grants, revenues between
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other funds. Then you have proprietary funds that are used for the primary functions of the government
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such as health and safety infrastructure, such as building roads or just general government administration
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Then you have proprietary funds and these operate like a for-profit business and they
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engage in exchange transactions, meaning users are charged for goods or services just like
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a regular business. These funds and fiduciary funds use accrual accounting, which focuses on the flow of economic
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resources versus current financial resources. So that's accrual accounting. And again, fiduciary funds, these are funds that are held for other entities or individuals
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and these funds do not belong to the governmental entity. These funds, like I said, also use accrual accounting
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There are there is no such thing as an encumbrance fund. Encumbrance accounting is the term for the for the way that governments track and account
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for purchases against a budget. Moving on to example problem number two, which of the following is not a governmental fund
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Is it an internal service fund, general fund, permanent fund or a debt service fund
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So pause the video, read those words and just think about what they mean
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And that might not help at all. You know, if you're new to this and that's OK, just read the words, think about what
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they might mean and then make your best guess. We're going to move on
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The answer is the internal service fund. So again, the question was, which of the following is not a governmental fund
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So again, going back to problem one, you have governmental type funds, you have proprietary
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funds, then you have fiduciary funds. Now within the governmental funds, there are five of those
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Those are the general fund, special revenue funds, debt service funds, capital projects
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funds and then permanent funds. Going down to proprietary funds again, proprietary funds use accrual accounting
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They are for exchange based transactions, meaning some type of users being charged for
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a product or service. So these are the business type funds. You have enterprise funds and then internal service funds
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Then we have the fiduciary funds. There are four types of these. Those are pension trust funds, investment trust funds, private purpose trust funds and
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then custodial funds. They used to be called agency funds or there was a fifth type, but it's all within custodial
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funds at this point. Now just a memory or a retention tip from different review courses or other things I've
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seen all these different mnemonics for these, I guess there'd be five, two and then four
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So there's 11 types of funds total across the three categories of funds
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But I think what works the best and what will help you the most instead of just trying to
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memorize these words, these 11 types of funds, what really helps is to just think about what
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the words mean. And if you just do that, these all really make sense
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So for example, we know that proprietary funds are business type funds
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So there are just two types of proprietary funds. And the first type is enterprise
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That is kind of just another name for a business, right? We all have that word associated with business
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So an enterprise type fund, just remember that's a business type fund
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And then the second type is an internal service type fund, meaning a service is being provided
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within or among the different government funds or accounts or parts of the government and
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a service fee or a fee is being charged to the users for that service
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So internal service, just think of a business providing a service. So for the two proprietary funds, you have enterprise funds and internal service funds
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Then with the fiduciary funds, we know that the fiduciary funds, the purpose is for the
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government entity to hold funds for some other entity or persons. And so each of the names of the fiduciary funds, they have the word trust in the name
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of the fund. So something being held in trust for somebody else
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The three types do. And then custodial funds, which is a different way of saying that, right
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Funds being held in custody for another party. So pension trust funds, investment trust funds, private purpose trust funds, and then custodial funds
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Those are all if you just think about the words, you know, you can get this that it's
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a fiduciary type fund. And then the ones that are left, the five that are left, you know that those are the
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governmental type funds. Federal fund, special revenue fund, permanent fund, debt service funds and capital project funds
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And that tip will help you a lot across the entire CPA process is instead of just seeing
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a new word that's kind of a new term to you and just trying to memorize it, think about
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what the words mean, because most of the time it will just from a common sense standpoint
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the definition or the term will kind of explain what it means or how it works
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And that can just go a long ways to helping you deeply understand things versus just trying
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to memorize things. All right. Example problem number three. Which of the following funds would use the flow of economic resources measurement focus
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Is it the permanent fund, special revenue fund, enterprise fund or debt service fund
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Before we go on, press pause, make your own guess, but read what it's asking
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Which one would use the flow of economic resources? Now thinking back, we know that the governmental type funds, they all use the current financial
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resources measurement focus. So this is asking really which one of these is a business type fund
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So the permanent fund, we know that that's a governmental fund. Special revenue is a governmental fund
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Enterprise fund is a proprietary fund. So that's the answer. And then the debt service fund is a governmental type fund
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So the enterprise fund is a proprietary fund which uses accrual accounting
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That is the flow of economic resources measurement focus. The governmental funds use modified accrual accounting, which uses the current financial
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resources measurement focus. What that means, again, if you think about the words, like what is that saying
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That means, OK, what current financial resources do we have available or will we have available
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within the current period to cover the current period's obligations? That's really what that means
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And then on the other hand, the proprietary funds and fiduciary funds, they use accrual
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accounting, which focuses on the flow of economic resources. So the flow of economic resources, it's not just talking about financial
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And that's the distinction. What are all of our cash and non-cash assets and obligations, both in the short term and
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long term? So that's the difference between the current financial resources measurement focus and
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the flow of economic resources measurement focus. Going on to example problem number four, for the year ended December 31st, Corona City
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had the following expenditures from the general fund during the year. They spent $10,000 on new furniture for the city hall, $20,000 on a new copy machine
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What amount would be listed for fixed assets on the general fund balance sheet for these
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expenditures at year end? Is it zero? Is it $10,000? Is it $20,000
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Or would it be $30,000? Press pause, read through that again and just think about it for yourself and make your
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best guess. So we're moving on. The answer is zero. That would not be listed
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Here's why. Now, while proprietary funds would list fixed assets in its fund balance sheets because
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they are like a business type fund, they use accrual based accounting
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Governmental funds assets are classified as general fixed assets and they are not listed
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as part of the fund balance because governmental funds use the current financial resources
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measurement focus. Remember, we said what that really means is what financial resources do we have currently
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or will we have in the current period to cover our obligations for the current period
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So for money spent on these machines or furniture, those are no longer financial resources that
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can be spent. So they're not tracked as such within the governmental type funds
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These general fixed assets, they would be listed in the governmental activity column
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in the government wide financial statements. But again, not in the fund balance because it's not a financial resource that's available
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to be spent. So the accounting equation for governmental funds is current financial assets plus deferred
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outflow of resources minus current liabilities minus deferred inflows of resources. That leaves you with the fund balance
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So there's nothing about fixed assets in there. So another thing related to this type of question, basically just a different way of asking this
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that you could see a question on, it would say something like, which of the following
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funds would record depreciation? And it's the same thing. Only the proprietary funds which use accrual accounting and the economic resources measurement
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focus would record depreciation of fixed assets. Going on to example problem number five, a newly incorporated city is setting up their
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fund structure. For a population of 200,000, what is the minimum number and types of funds required to be established
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Would it be at least a general fund and a special revenue fund
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Or would it be at least a general fund and a debt service fund
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Or would it be at least a general fund, a proprietary fund, and then some type of custodial fund
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Or would it be the minimum number of funds required by law and sound financial administration
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Now this is one of those things where there are a lot of topics on the CPA exams where
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the right answer will be basically a flowery way of saying it depends
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That that's going to be the answer to a lot of things. And they pull in kind of definitions specific to that topic
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But really, it's saying it depends. And this is one of those cases
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So the answer is the minimum number of funds required by law and sound financial
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administration. So this is one of those conceptual ideas or almost just a definition that you just need
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to know. And again, this is basically saying it depends. Right. That's basically what that is
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So here's the specific language. Governmental units should establish and maintain those funds required by law and sound
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financial administration. Only the minimum number of funds consistent with legal and operating requirements should
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be established, however, because unnecessary funds result in inflexibility, undue complexity and inefficient financial administration
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Okay. So those are the five practice questions or sample questions for this topic
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If this is your first thing you've ever seen from us, SuperfastCPA, what
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it really comes down to your success on these exams is how you study
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There are a lot of people out there that are pouring hours and hours week by week into
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the study process. But what they're doing, they're just missing a few key things
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that would make their process actually effective. And they're really just wasting a lot of their time that they think they're sitting
13:03
there studying. So how you study is the most important factor to passing your exams
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We have a free training that we do. These are one hour long trainings
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And we walk you through the SuperfastCPA approach to study. And what it is, it's you can use your current study materials, whatever
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review course you already have. You take these strategies and it's a different way of using your current materials
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Our big claim on these is you will learn on these one hour trainings, you will learn
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how to get more done in two hours than in four to five hours studying the normal way
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That is what we teach our clients, how to have a two hour main study session
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typically in the mornings with your review course. And that's all you need to do with your review course on weekdays
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So these one hour trainings, these can literally save you months and months of time
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from frustration, failing sections. You know, every failed section really is costing you another six to
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12 weeks, depending on how long you study. So these are free training sessions
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You can register at SuperfastCPA.com slash pass now or just text passnow, one word to 44222 or just go below this video
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And there's a link in the description. So if you found this video useful, we have been publishing a lot more of these
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Subscribe to our YouTube channel and, you know, like the videos. It's just a free way of supporting our free content side of things that we're trying to do a
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lot more of. Thanks for watching and we'll see you on the next video

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Governmental Fund Accounting for FAR CPA Exam

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