Chapter 7, Problem 19EP

a.

To determine

Prepare a “statement of revenues, expenses, and changes in fund net position” for information technology internal service fund of City W.

Explanation of Solution

Statement of revenues, expenses and changes in net position: Statement of activities is the operating statement that reports revenues, expenses, and changes in net position during the year.

Prepare a “statement of revenues, expenses, and changes in fund net position” for information technology internal service fund of City W.

Table (1)

Working notes:

• Determine the wage expense.

$\begin{array}{c}\text{Wage expense}=\text{Gross wages}-\text{Payroll taxes}\\ =\$57,600-\$4,100\\ =\$53,500\end{array}$

• Determine the net position on January 1.

The net position of net investment is capital assets are $23,500 and the unrestricted net position is $12,700 on January 1. Hence, the total net position on January 1 is $36,200$\left(\$23,500+\$12,700\right)$.

(b)

To determine

Prepare a “statement of net position” for information technology internal service fund of City W as of December 31.

Explanation of Solution

Statement of net position: Statement of financial position is a balance sheet that reports the assets, deferred outflow of resources, liabilities, deferred inflow of resources and the residual amount or net position of the government at the end of the fiscal year.

Prepare a “statement of net position” for information technology internal service fund of City W as of December 31.

Table (2)

Working notes:

• Determine the closing balance of cash on December 31.

Step 1: Determine the amount of cash paid as wages.

$\begin{array}{c}\text{Net wages}=\text{Gross wages}-\text{Tax withholdings}\\ \text{=}\$57,600-\left(\$18,725+\$4,100\right)\\ =\$57,600-\$22,825\\ =\$34,775\end{array}$

Step 2: Determine the amount of cash receipts from other funds.

$\begin{array}{c}\text{Cash receipts}=\left(\text{Opening balance of dues}+\text{Total dues }\right)-\text{Closing balance of dues}\\ \text{=}\left(\$4,250+\left(\$57,500+\$20,600\right)\right)-\left(\$3,500+\$1,800\right)\\ =\left(\$4,250+\$78,100\right)-\$5,300\\ =\$82,350-\$5,300\\ =\$77,050\end{array}$

Step 3: Determine the amount cash paid to accounts payable.

$\begin{array}{c}\begin{array}{l}\text{Cash payment}\\ \text{to accounts payable}\end{array}\}=\left(\begin{array}{l}\text{Opening balance}\\ \text{of accounts payable}\end{array}\right)+\left(\text{Purchases}\right)-\left(\begin{array}{l}\text{Closing balance of}\\ \text{accounts payable}\end{array}\right)\\ =\left(\$2,550+\$8,400\right)-\$2,950\\ =\$10,950-\$2,950\\ =\$8,000\end{array}$

Step 4: Determine the closing balance of cash on December 31.

$\begin{array}{c}\text{Closing cash balance}=\text{Opening cash balance}+\text{Cash receipts}-\text{Cash payments}\\ =\$14,500+\$77,050-\left(\begin{array}{l}\$34,775+\$3,700+\$23,000+\\ \$14,500+\$8,000\end{array}\right)\\ =\$14,500+\$77,050-\$83,975\\ =\$7,575\end{array}$

• Determine the closing balance of dues from other funds.

$\begin{array}{c}\begin{array}{l}\text{Closing balance of dues }\\ \text{from other funds}\end{array})\text{ = }\left(\begin{array}{l}\text{Closing balance of dues from general fund }\\ \text{+ Closing balance of dues from special revenue fund}\end{array}\right)\\ =\$3,500+\$1,800\\ =\$5,300\end{array}$

• Determine the closing balance of inventory.

$\begin{array}{c}\begin{array}{l}\text{Closing balance}\\ \text{of inventory}\end{array}\}=\left(\begin{array}{l}\text{Opening balance}\\ \text{of inventory}\end{array}\right)+\left(\text{Purchases}\right)-\left(\begin{array}{l}\text{The amount of materials and}\\ \text{supplies used during the Year}\end{array}\right)\\ =\left(\$350+\$8,400\right)-\$8,250\\ =\$8,750-\$8,250\\ =\$500\end{array}$

• Determine the accumulated depreciation for the year ended December 31.

$\begin{array}{c}\begin{array}{l}\text{Accumulated depreciation for the year }\\ \text{ended December 31}\end{array})\text{ = }\left(\begin{array}{l}\text{Accumulated depreciation of January 1 }\\ \text{+ Depreciation charged }\end{array}\right)\\ =\$30,100+\$6,100\\ =\$36,200\end{array}$

• Determine the closing balance of dues to federal government.

Due to federal government
Date	Details	Debit ($)		Date	Details	Credit ($)
	Cash payment towards federal taxes	23,000			Payroll taxes payable, January 1	2,650
	Closing balance, December 31	2,475			Payroll taxes for the year	4,100
					Federal income and social security taxes withheld for the year	18,725
	Total	25,475			Total	25,475

Table (3)

Hence, the closing balance of dues to the federal government is $2,475.

• Determine the closing balance of dues to other funds.

Due to other funds
Date	Details	Debit ($)		Date	Details	Credit ($)
	Cash payment towards utility expenses	14,500			Opening balance, January 1	1,200
	Closing balance, December 31	1,225			Utility expenses	14,525
	Total	15,725			Total	15,725

Table (4)

Hence, the closing balance of dues to other funds is $1,225.

• Determine the net position of “net investments in capital assets” as on December 31.

$\begin{array}{c}\begin{array}{l}\text{Net position-}\\ \text{Net investment}\\ \text{in capital assets as on}\\ \text{December 31}\end{array}\}=\left(\begin{array}{l}\text{Net position-}\\ \text{Net investment}\\ \text{in capital assets as on}\\ \text{January 1}\end{array}\right)-\left(\begin{array}{l}\text{Depreciation expense}\\ \text{for the year}\end{array}\right)\\ =\$23,500-\$6,100\\ =\$17,400\end{array}$

• Determine the net position of unrestricted assets as on December 31.

Step 1: Calculate decrease in net investment in capital assets.

$\begin{array}{c}\begin{array}{l}\text{Decrease in net investment}\\ \text{ in capital assets}\end{array})\text{ = }\left(\begin{array}{l}\text{Opening balance of “net investment in capital assets }\\ -\text{ Closing balance of “net investment in capital assets}\end{array}\right)\\ =\$23,500-\$17,400\\ =\$6,100\end{array}$

Step 2: Calculate the net position of unrestricted assets.

$\begin{array}{c}\text{Unrestricted net position}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Opening balance of}\\ \text{unrestricted}\\ \text{net position}\end{array}\right)+\\ \left(\begin{array}{l}\text{Decrease in "net investment}\\ \text{in capital assets"}\end{array}\right)\end{array}\right]-\text{Operating loss}\\ =\$12,700+\$6,100-\$12,075\\ =\$6,725\end{array}$

(c)

To determine

Prepare “a statement of cash flows” for information technology internal service fund of City W for the year ended December 31.

Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare “a statement of cash flows” for information technology internal service fund of City W for the year ended December 31.

Step 1: Prepare the reconciliation statement to reconcile the operating loss with the “net cash used for operating activities”.

Table (5)

Working notes:

• Determine the increase in accounts payable.

The opening balance of accounts payable is $2,550 and the closing balance of accounts payable is $2,950. Hence, the accounts payable increased by$400$\left(\$2,950-\$2,550\right)$.

• Determine the increase in “due to other funds”.

The opening balance of “dues to other funds” is $1,200 and the closing balance of “due to other funds” is $1,225. Hence, the “due to other funds” increased by$25$\left(\$1,225-\$1,200\right)$.

• Determine the increase in inventory.

The opening balance of inventory is $350 and the closing balance of inventory is $500. Hence, the inventory increased by $150$\left(\$500-\$350\right)$.

• Determine the increase in “due from other funds”.

The opening balance of “due from other funds” is $4,250 and the closing balance of “due from other funds” is $5,300. Hence, the “due from other funds” increased by$1,050$\left(\$5,300-\$4,250\right)$

• Determine the decrease in “due to the federal government”.

The opening balance of “due to the federal government” is $2,650 and the closing balance of “due to the federal government” is $2,475. Hence, the “due to the federal government” increased by $175$\left(\$2,650-\$2,475\right)$.

Step 2: Prepare “a statement of cash flows”.

Table (6)

(d)

To determine

Evaluate the manager’s performance.

Explanation of Solution

The “statement of revenues, expenses, and changes in fund net position” shows an operating loss of $12,075. The charges collected by the information technology fund are not sufficient to meet its operating expenses.

The manager has not addressed the “user charges policy” of the department. Hence, the fund is incurring a loss. Hence, the manager should estimate the costs of the fund and fix a reasonable user charge to cover the fund’s expenses.