CPA Financial Accounting and Reporting (FAR) : Encumbrance Accounting
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Example Questions
Example Question #1 : Encumbrance Accounting
During the current year, a city spends $5 million to construct a new highway. The highway will be a toll road that can only be used by paying a fee. What is the difference between the fund-based financial statements and the government-wide financial statements in regards to the reporting of this $5 million outflow?
It is recorded as an asset in the government-wide statements and as an expenditure in the fund statements
It is reported as an asset in the government-wide statements and not reported at all in the fund statements
There is no difference
It is reported as an expenditure in the government-wide statements and as an asset in the fund statements
There is no difference
Because users of the road must pay a fee, the road is accounted for as an enterprise fund. Enterprise funds are accounted for the same way (that is, using standard accrual accounting) in both the fund statements and the government-wide statements.
Example Question #1 : Encumbrance Accounting
Harrison County is currently preparing its government-wide financial statements. The Harrison Public Airport is legally separate from the county but is viewed as a component unit because the county appoints a majority of the commission and has guaranteed certain debts held by the airport. In Harrison County's government-wide financial statements, how is the information for the airport reported?
The airport's financial information should be included as a business-type activity because it charges users a fee
The airport's financial information should not be included as part of the county's financial statements because it is a legally separate entity
The airport's financial information may be discreetly presented on the financial statements or blended as if it were part of the county
The airport's financial information must be included as a separate schedule in the notes to the government-wide financial statements of the county
The airport's financial information may be discreetly presented on the financial statements or blended as if it were part of the county
Component units must be included in the government-wide statements, but if that component is very intertwined with the government as a whole, the government can choose to present that unit separately or blended with the rest of the government.
Example Question #1 : Encumbrance Accounting
The town of Harmony has a large public hospital. On its government-wide financial statements, within the statement of activities, the town has reported a net financial burden of $2 million in the past year. How is this amount determined?
It is the amount of cash expenditures for the year
It is the hospital's expenses for the year netted with the program revenues generated by that function
It is the total of expenses for the year
It is an allocation of the town's financial deficit for the year
It is the hospital's expenses for the year netted with the program revenues generated by that function
The net financial burden represents the portion of the hospital's expenses that are not covered by program revenues, directly generated by the hospital. These expenses would need to be covered by some type of general revenue and thus represent a burden to the government.
Example Question #4 : Encumbrance Accounting
Fixed assets donated to a governmental unit should be recorded:
At estimated fair value when received
As a memorandum entry only
At the lower of donor's carrying amount or estimated fair value when received
At the donor's carrying amount
At estimated fair value when received
Donated capital assets to a governmental unit are recorded as if they had been purchased that is at estimated fair value when received.
Example Question #5 : Encumbrance Accounting
ABC City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government wide statement of net position as:
Fiduciary activities
Governmental activities
Business type activities
Note disclosures only
Governmental activities
For the purposes of government wide financial statements, internal service funds are normally reported in the governmental activities column of the government wide statement of net position and statement of activities since they are generally established to service the governmental funds.
Example Question #6 : Encumbrance Accounting
The word most closely associate with "encumbrance" would be:
Assigned
Committed
Dedicated
Stated
Committed
The concept of encumbering is essentially committing funds for use. Committed and encumbered may be used interchangeably.
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