Chapter 9 Review: The Comprehensive Annual Financial Report

Chapter 9review The Comprehensive Annual Financial Report Cafr And A

Review the comprehensive annual financial report (CAFR) and answer the following questions: 1. Indicate the activities accounted for in both internal service funds and major enterprise funds. Comment on whether any of these activities could also have been accounted for in a general or other governmental fund. 2. How are the internal service fund activities reported in the government-wide statement of net position? How are they reported in the proprietary funds statement of net position? 3. Did any of the internal service funds report significant operating surpluses or deficits for the year? Were any accumulated significant net asset balances over the years not invested in capital assets? 4. Were any of the government's enterprise funds "profitable" during the year? If so, what has the government done with the "earnings"? Has it transferred them to the general fund? 5. Does the government have revenue bonds outstanding that are related to business-type activities? If so, for what activities? 6. Do the financial statements include a statement of cash flows for proprietary funds? Is the statement on a direct or an indirect basis? In how many categories are the cash flows presented? Which of these categories resulted in net cash inflows? Which resulted in net cash outflows? 7. What was the total operating income? What was total net cash provided by operating activities? What accounts for the largest difference between these two amounts? 8. Has the city entered into any service concession arrangements? Which specific ones, and why? Chapter 10 Review the comprehensive annual financial report (CAFR) and answer the following questions: 1. Does the government maintain any permanent funds? If so, are they major or nonmajor funds and for what purposes? 2. Does the government maintain any fiduciary funds? If so, for what purposes? 3. Does the government contribute to one or more pension plans? Are they defined benefit or defined contribution plans? If they are defined benefit plans, are they single employer (maintained by the government itself) or multiple-employer plans? 4. Does the government report pension expenses or expenditures? If so, in which fund or funds? 5. Does the government report pension liabilities? If so, in which fund or funds? 6. Does the CAFR indicate the actuarial value of plan assets and liabilities? Are the plans over- or underfunded? 7. Does the CAFR include the financial statements of the pension plans? Does it indicate that the pension plans issue their own reports and that these are publicly available? 8. Did the pension fund investments have a "good year"? 9. Does the CAFR indicate that the government provides other postemployment benefits? If so, what is the nature of these benefits? How are they reported? 10. Does the government maintain any custodial funds? How many and for what purposes?

Paper For Above instruction

The Comprehensive Annual Financial Report (CAFR) provides a detailed overview of a government's financial condition, including its activities, funds, and obligations. Analyzing the CAFR reveals critical insights into how governments manage resources, allocate funds, and report financial health according to the Governmental Accounting Standards Board (GASB) standards. This paper addresses specific questions related to the activities within internal service funds, enterprise funds, fiduciary funds, pension plans, and other postemployment benefits, based on a typical CAFR review.

Activities in Internal Service and Major Enterprise Funds

Internal service funds typically account for activities providing goods or services to other departments within the government, such as fleet management, information technology, and centralized printing services. Major enterprise funds, on the other hand, handle activities that are primarily self-supporting through user charges, including water and sewer utilities, transit systems, or airports. Some of these activities could also have been recorded as governmental funds if they were not deemed sufficiently separate or if they did not meet the criteria of an enterprise fund, such as significant reliance on government subsidies or grants.

For instance, water utility services, although often operating with their own revenues, might be classified under governmental funds if they are not strictly enterprise activities. The classification depends on the financial reporting objectives and whether the activities meet the criteria of an enterprise fund by being commercially oriented.

Reporting of Internal Service Activities in Financial Statements

In the government-wide statement of net position, internal service fund activities are consolidated within governmental activities and are reflected as internal balances. This eliminates intra-governmental transactions for clarity and presents a comprehensive view of assets and liabilities. Conversely, in the proprietary funds statement of net position, internal service funds are reported as separate individual funds, often classified as enterprise or internal service funds, to highlight their self-sustaining nature.

Surpluses, Deficits, and Net Asset Balances in Internal Service Funds

Some internal service funds may report significant operating surpluses or deficits, depending on cost management and revenue strategies. Over time, net asset balances that are not invested in capital assets might accumulate if the fund consistently generates surplus funds, which could be used for future activities, reserves, or to offset deficits.

Profitability of Enterprise Funds and Earnings Allocation

Enterprise funds such as water, sewer, or transportation services may report profitability during the year. Profits are often retained within the fund or transferred to the general fund for broader governmental uses. The transfer strategy depends on the government's policies, but in many cases, excess earnings are used to subsidize other activities or fund capital improvements.

Revenue Bonds and Business-Type Activities

Many governments issue revenue bonds that are secured by revenues generated from enterprise activities. These bonds are associated with specific activities such as water supply, sewer services, or airports. The CAFR discloses whether such bonds are outstanding and the related activities, ensuring transparency regarding liabilities and funding sources.

Cash Flows for Proprietary Funds

The CAFR generally includes a statement of cash flows for proprietary funds, prepared on a direct basis, which reports cash receipts and payments directly. Cash flows are categorized into operating, investing, and financing activities. Typically, net cash inflows result from operating activities, whereas investing or financing activities might generate outflows depending on capital purchases or debt repayment.

The cash flow statement helps assess the liquidity and financial flexibility of the government concerning proprietary activities.

Operational Income and Cash Flows

The total operating income reflects revenues minus operating expenses, indicating the fund's ability to generate profit through its core activities. Conversely, net cash provided by operating activities measures actual cash generated, which can differ significantly from operating income due to non-cash items like depreciation or changes in working capital. The largest difference often results from timing differences in revenue recognition versus cash collection or expense recognition versus cash payments.

Service Concession Arrangements

Some governments enter into service concession arrangements where a private entity operates and maintains assets such as toll roads or airports, with the government retaining ownership. These arrangements are disclosed in the CAFR to clarify the risks and responsibilities involved, often justified by the need for private sector expertise and funding.

Additional Funds and Fiduciary Activities

Governments may maintain permanent funds—nonexpendable funds used for specific purposes like endowments—and fiduciary funds, which hold resources acting as a trustee or agent, such as pension and custodial funds. Pension plans are frequently defined benefit plans, either single-employer or multi-employer, with contributions made by both the government and employees.

Most governments report pension expenses in pension and employment benefit funds, with liabilities on the government’s books. The actuarial valuation typically indicates whether these plans are over- or underfunded, affecting future financial decisions. Pension plans often issue their own publicly available reports, and recent CAFRs indicate the investment performance, which can be seasonal or steady.

Postemployment Benefits and Custodial Funds

Governments often provide other postemployment benefits (OPEB), such as health coverage, which are reported as liabilities if unfunded. The CAFR details the nature of these benefits and the associated funding status. Custodial funds handle resources collected on behalf of others, such as taxes, fines, or other fees, often maintained separately to ensure accountability.

Conclusion

Overall, the CAFR provides extensive disclosures about a government’s financial activities, funds, liabilities, and obligations. Analyzing its contents offers valuable insights into fiscal health, strategic priorities, and compliance with accounting standards. Each element—whether internal service or enterprise funds, pension plans, or fiduciary assets—contributes to a comprehensive understanding of the government's financial stewardship and long-term sustainability.

References

• governmental accounting standards board. (2021). GASB Codification of Governmental Accounting and Financial Reporting Standards. GASB.
• Government Finance Officers Association. (2022). CAFR Certificate of Excellence Program Guidelines. GFOA.
• Harvey, J. (2019). Financial Accounting for Local and State Governments. Routledge.
• United States Government Accountability Office. (2020). Financial Audit Manual. GAO.
• Horton, S., & Tysiac, K. (2018). The Investor's Guide to Government Financial Statements. Journal of Accountancy, 225(4), 34-39.
• U.S. Census Bureau. (2022). State and Local Government Finances. Census Bureau Publications.
• U.S. Department of the Treasury. (2021). Financial Report of the United States Government. Treasury.
• Levine, P. (2017). Pension Accounting and Disclosure, 2nd Edition. Wiley.
• Mitchell, O., & Utkus, S. (2020). Pension Funding and Investment Policies. Journal of Pension Economics & Finance, 19(1), 65-85.
• Governmental Accounting Standards Board. (2017). Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans. GASB Statement No. 75.