Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 9: Business – Type (proprietary) activities

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 9: Business – Type (proprietary) activities. Chapter 9 - Business – Type (proprietary) activities. In this chapter, the learning objectives are: Why governments and NFPs engage in business-type activities, distinguish between proprietary and governmental activities, proprietary fund accounting, two types of proprietary funds,...
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 9: Business – Type (proprietary) activities. Chapter 9 - Business – Type (proprietary) activities. In this chapter, the learning objectives are: Why governments and NFPs engage in business-type activities, distinguish between proprietary and governmental activities, proprietary fund accounting, two types of proprietary funds,....

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Click icon to add picture Chapter 9 Business – Type (Proprietary) Activities Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | 1 All rights reserved. Today’s Funnie Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. ChCahpateprte9r|9 | All rights reserved. Thought to Ponder: Chapter 9 "Nobody wants a landfill site anywhere near them, including in rural areas. We've come to this realization that landfill is valuable and we can't bury things that don't need to be buried." - JON D. JOHNSTON of the EPA, who is helping to lead the zero-waste movement in the Southeast. NY TIMES-Oct. 20, 2009 Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Learning Objectives • Why governments and NFPs engage in business-type activities • Distinguish between Proprietary and Governmental activities • Proprietary FundAccounting • Two types of Proprietary Funds o Enterprise Funds o Internal Service Funds • Accounting for Insurance Activities • GASB 34, special problems of reporting proprietary funds in government-wide statements Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | 4 All rights reserved. Proprietary Funds Reasons for use: • to account for governmental entity’s ongoing (continuing) operations and activities • Enhances management of activities in which goods or services are provided on a cost-reimbursement basis (i.e. on a user charge basis.) • To compare benefits and costs of the business-type activities of a government. • Facilitates comparisons with private enterprises Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Proprietary Funds Two types of Proprietary Funds A) Enterprise funds: • Provide services to the general public. • Example: City of Houston’s Airports (Bush, Hobby and Ellington Field), George R. Brown Convention Center, Combined Utility System (formerly called the water and sewer system), etc. B) Internal service funds: • Provide services to other government departments. • Example: City of Houston Health Benefit and Long-term Disability funds. • Both of these services predominantly benefit governmental units rather than the general public or businesses Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Proprietary Funds -Accounting Characteristics GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting • Funds are said to be nonexpendable (or revolving) • focus on determining operating net income, changes in net assets (or cost recovery). • Full accrual basis • Measurement focus on all economic resources is consistent with GASB • Recognize revenues as earned and expenses as incurred. • Balance sheet recognition to both capital assets and long-term debt. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Proprietary Funds Required Financial Statements Similar to those for a for-profit entity: • Statement of Net Position (or Balance Sheet): Assets – Liabilities = Net Position Three categories of Net Position 1) Net Investment in capital assets 2) Restricted Net Position 3) Unrestricted Net Position • Statement of Revenues, Expenses, and changes in Fund Net Position: o) Reconciles beginning and ending net assets • Statement of Cash Flows o) Prepared in conformity with GASB standards rather than FASB standards o) Include cash and cash equivalents (i.e., time deposits, marketable securities, and other items readily convertible to cash) Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Proprietary Funds - Accounting Equation Assets - Liabilities = Net Position 1) Unrestricted Assets 2) RestrictedAssets (e.g., for payment of debt service) 3) Net Investment in Capital Assets, Recall this is the same classification of net assets that is required under GASB 34. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Restricted Assets Definition: Assets whose use is restricted by contractual agreements or legal requirements • Typical examples: o Customer deposits of utilities, assets set aside for repayment of revenue bond principal, reserves for maintenance of plant, and funding of depreciation • Ideally liabilities to be paid from restricted assets should be reported separately from liabilities to be paid from unrestricted assets. • NetAssets – Restricted, should be reported in the Equity section of the Statement of Net Position. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 9 | All rights reserved. Statement of Cash Flows Required for proprietary funds but not governmental funds FASB (NFPs & publicly-traded companies) vs. GASB (Governmental entities): FASB Statement No. 95 classifies cash transactions into: • Cash flows from operating activities • Cash flows from financing activities • Cash flows from investing activities GASB Statement No. 9: • Cash flows from operating activities • Cash flows from NON-CAPITAL financing activities Granof, et al. – 7th Cash flows from CAPITAL &tRELATED financing .activities Chapter 9 | Enterprise Funds Accounts for services: 1) provided to the general public on a user charge basis OR

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