Financial Statements in Government: A Compliance and Liquidity Approach

• success i.e., were financial inflows sufficient to meet financial outflows during the year?
• conditions i.e., is there enough money on hand to pay the current, outstanding bills and take advantage of opportunities that are within the legal mandates?
• compliance i.e., did the government follow the budget and other laws in raising and spending money?

The financial statements of government and the above three purposes (success, conditions, and compliance) are molded by key elements in the compliance and liquidity model . Compliance and liquidity translates into an emphasis on addressing short term responsibilities and short term pressures at the sacrifice of the long term pressures. Intergenerational equity is not a dominant goal in the financial statements of government. As such, funds cash accounting (formally called modified accrual) and annual budgets will play an important part in the construction and format of the financial statements.

The financial statements are also molded by the diverse set of goals in government. Unlike the more singular goal of profit making in business, government has numerous goals, some related to legality and efficiency but some related to the politics of staying in power. As a result, the financial statements may be very detailed because of legal mandates but not always clear and easily understandable because of the wide range of goals. For example, they may also reflect preference for special interests groups. These can include support for parks, hospitals, and roads.

The chapter will survey these financial statements:

1. statement of revenues, expenditures, and changes in fund balance ;
2. the balance sheet ; and
3. the statement of revenues, expenditures, and changes in fund balance--budget and actual .

The statements are also linked or connected in a variety of ways and these connections will be discussed and explored. For example, the year end fund balance in the statement of revenues, expenditures and changes in fund balance of the general fund should equal the fund balance in the balance sheet of the general fund.

1. Review the tenets of the compliance and liquidity model discussed earlier, including the role of funds, cash accounting (modified accrual in GASB terminology), the short term measurement focus, and budgets
2. Present the various financial statements used by government to assess financial performance.
3. Examine the broad purpose of the statement of revenues, expenditures and changes in fund balance, including the fact that this statement allows borrowing to help balance outflows with inflows.
4. Cover the balance sheet, its emphasis on short term items and the placement of long term items " off balance sheet " in account groups .
5. Look carefully at account groups and how they differ from funds in the balance sheet.
6. Consider the compliance role of the statement of revenues, expenditures, and changes in fund balance -- budget and actual.
7. Cover the different major fund types (governmental, fiduciary, and proprietary) and subtypes within these major types.
8. Examine level of aggregation within funds , including combined, combining, and individual.
9. In some areas, government tries to emulate business in the financial statements, namely in the proprietary funds.
10. Discuss the relationship between the short term emphasis of the financial statements and the nature of U.S. politics.