P. 5-4: Generally accepted modified accrual accounting practices pertaining to i
ID: 2459129 • Letter: P
Question
P. 5-4: Generally accepted modified accrual accounting practices pertaining to inventories may not fulfill the objectives of financial reporting. (80 points)
Scenario 2: The following is an excerpt from a note to the financial statements of the city of Dallas (dates changed): The city prepares its annual appropriated general fund, debt service fund, and proprietary operating funds budgets on a basis (budget basis) which differs from generally accepted accounting principles (GAAP basis). The major differences between the budget and GAAP bases are that encumbrances are recorded as the equivalent of expenditures (budget) rather than a commitment of fund balance (GAAP) in the governmental funds. The city accounts for inventories on the purchases basis. One of the city’s departments, which is accounted for in the general fund, budgeted $195,000 in supplies expenditures for fiscal 2015. It began the 2015 fiscal year with $30,000 of supplies on hand. It also had $12,000 of supplies on order. During the year it ordered an additional $180,000 of supplies, received (and paid for in cash) $185,000 of supplies, and consumed $178,000 of supplies.
Instructions: Prepare all journal entries, consistent with GAAP, including budgetary and encumbrance entries that the department should make in 2015. Indicate the accounts and amounts related to supplies that the city would report on its year-end statement of revenues, expenditures, and changes in fund balance and balance sheet.
By how much did the department over- or under-spend its supplies budget (on a budget basis)? Comment on the extent to which the city’s statement provides a basis to: Assess the ‘‘true’’ economic costs associated with supplies Determine whether the city adhered to budgetary spending mandates Suppose that in the last quarter of the year, department officials realized that the department was about to overspend its supplies budget.
They therefore ceased placing new orders for supplies.
However, they imposed no restrictions on the use of supplies and thereby allowed the supplies inventory to decline to near zero.
What impact would these cost-cutting measures have on supplies expenditures as reported in an actual-to budget comparison (on a budget basis)?
What impact would the year-end measures have on reported supplies expenditures (per GAAP)?
Would your response be different if the city accounted for supplies on the consumption basis?
Explanation / Answer
Ans:
Journal Entries for Financial Statements of the City of Dallas.
Particulars
Dr.($)
Cr.($)
Suppliers on order
Bal. b/d
( inventory account opening details)
30,000
12,000
42,000
Ordered supplies
Cash account
(The payment of the suppliers ordered and received by the city officials)
180,000
5,000
185, 000
Ordered and received suppliers
Unconsumed inventories
Consumed inventories
( The level of total inventories consumed during the period)
42,000
180,000
44,000
178,000
Total
449,000
449,000
The department under spend its supplies budget by $10,000. This can be obtained from the difference between the budgeted supplies expenditures of $ 195, 000 and the amount paid in cash, $185,000 for the current year supplies. I think the city’s statement does not assess the true economic costs associated with the suppliers. GAAP only focuses on reporting the elements that have some financial and computation consequences. Based on the accounting of the inventories and budgetary allocations, the city adhered to the budgetary spending mandates. This is because the city did not overspend the allocated funds for the supplies.
The cost cutting measures would have an effect of reducing the budgeted supplies expenditures based on the actual to budget comparisons. This would reduce the funds to be budgeted for purchasing new inventories for the city. The yearend measures would seek to control and minimize the supplies expenditures due to the small deviation between the budget and actual supplies expenditures. However, the consumption basis could propose to maintain the reported supplies expenditures due to the positive deviation from the budgeted supplies expenditures.
Particulars
Dr.($)
Cr.($)
- Balance c/f
Suppliers on order
Bal. b/d
( inventory account opening details)
30,000
12,000
42,000
- Inventory account
Ordered supplies
Cash account
(The payment of the suppliers ordered and received by the city officials)
180,000
5,000
185, 000
- Inventory account: Bal. c/f
Ordered and received suppliers
Unconsumed inventories
Consumed inventories
( The level of total inventories consumed during the period)
42,000
180,000
44,000
178,000
Total
449,000
449,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.