Definition and Elements of Financial Reporting

Examples and demonstrations for chapter I of Financial Reporting in Government
By Dr. John Sacco , George Mason University
Revised Saturday, April 12, 1997

In this demonstration, two governments are compared on a limited scale. We get a chance to familiarize ourselves with the form of selected financial statements , reading financial statements, and making some judgements about success , health or conditions , and compliance from information in the financial statements. Financial statements are usually found in the CAFR .

The two governments in this demonstration are called Government One and Government Two .

In this demonstration, for purposes of simplicity, only one financial statement is given. That statement is the Combined Statement of Revenues, Expenditures and Changes in Fund Balance. This statement is similar to the income statement in business but has several funds and allows for transfers among funds and even allows for borrowing to generate a balance within a fund. Remember, governments do not report results or conditions for the entire government but by individual funds.

This demonstration includes three funds: the general revenue, special revenue, and debt service . The general revenue cover the major day-to-day activities; the special revenue fund (in this case) covers revenues that are designated (ear marked) for recreation; and the debt service fund accumulates money to pay interest and principle on the current portion of long term debt, that is, the portion due this period.

What is not displayed and what will become quite interesting as the demonstration progresses is that both governments have total long term debt of $5,000 from general obligation bonds .

What can be drawn from these statements about financial success, health, and compliance of the entities? Actually, the Statement of Revenues, Expenditures and Changes in Fund Balance is better at dealing with success and compliance so these two will be the target of the analysis.

To simplify matters, start by examining the amount for each of the funds and for each of the two governments. If balanced budgets are the goal for government, the results seen in these financial statements for the two governments are not bad! None of the funds in either government is in the red. In fact all the funds in both governments are either in balance or in the black.

But what about the $5,000 debt that must be paid in two years? Maybe it is in the balance sheet as with business accounting? Even if the balance sheets were shown, that $5,000 would not be there. Governments emphasize financial items that occur during the current year, not items that will occur in a year or more. The $5,000 will appear in something called an account group but that has no direct impact on the success, health, or compliance of the funds. Odd, but an explanation will be offered in later chapters.

Notwithstanding the case of the missing $5,000 debt, some analysis can be done on the degree to which the two governments are planning to meet that debt. Government One does have an excess of $1,000 in its general fund and the government officials can allocate that amount for the debt. Of course, there is no guarantee, since the government will have pressure for maintaining current expenditures.

Government two not only has an excess of $1,000 in its general fund, but also has an excess of $2,800 in something called debt service. In all likelihood, that $2,800 was accumulated to pay off the $5,000 principle amount and interest associated with the debt. How did the second government manage to save $2,800 when both governments have the same revenues ($75,000)? The second government spends less ($56,000 on general government activities for administration, safety, etc.) than the first (which spent $59,000).

With respect to the second government, the bond holders might be more content, but some people in the community who did not get $3,000 worth of services might not. Thus, the evaluation of financial success and compliance goes beyond economic criteria. Values and politics enter.

Government One
Combined Statement of Revenuese, Expenditures, and Changes in Fund Balance
All Government Fund Types
For the Fiscal Year Ended 12/31/ xx
Government Fund Types
General Special Revenue Debt Service
Revenues:
taxes 50000
intergovt 20000
fee 5000
total 75000 0
Expenditures:
admin 5000
safety 20000
transport 20000
health 14000
recreation 14800
total 59000 14800
Debt service:
interest 200
Other sources:
(uses): -15000 14800 200
Excess $1,000 $0 $0
Fund bal-beg $0 $0 $0
Fund bal-end $1,000 $0 $0
Government Two
Combined Statement of Revenuese, Expenditures, and Changes in Fund Balance
All Government Fund Types
For the Fiscal Year Ended 12/31/ xx
Government Fund Types
General Special Revenue Debt Service
Revenues:
taxes 50000
intergovt 15000
fee 10000
total 75000
Expenditures:
admin 4000
safety 18000
transport 20000
health 14000
recreation 15000
total 56000 15000
Debt service:
interest 200
Other sources:
(uses): -18000 15000 3000
Excess $1,000 $0 $2,800
Fund bal-beg $0 $0 $0
Fund bal-end $1,000 $0 $2,800
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