A city operates a water utility, a parking garage, and a central motor pool. The water utility and garage charge external customers; the motor pool serves only internal departments. All three use business-type accounting, but only the first two appear in enterprise fund statements presented to the public. Understanding which fund goes where, and how the three required financial statements differ from commercial GAAP separates candidates who memorize from candidates who can prepare these statements from a trial balance.
AICPA Representative Tasks (verbatim). "Remembering & Understanding, Identify and recall basic concepts and principles associated with proprietary fund financial statements (e.g., required funds, financial statements, financial statement components)." "Application, Prepare the statement of revenues, expenses and changes in fund net position for the proprietary funds of a state or local government from trial balances and supporting documentation." "Application, Prepare the statement of net position for the proprietary funds of a state or local government from trial balances and supporting documentation." "Application, Prepare the statement of cash flows for the proprietary...
Common mistakes
- Classifying internal service funds as enterprise funds. Enterprise funds serve external users; internal service funds serve other departments. Mixing them up misstates the business-type activities column on government-wide statements.
- Using the indirect method for GASB cash flows. GASB requires the direct method. Candidates accustomed to FASB's indirect-method shortcut must switch gears. The reconciliation schedule is supplementary, not the primary presentation.
- Placing interest expense in operating activities. Under GASB, interest expense is nonoperating on the operating statement, and interest paid is classified based on the purpose of the debt, usually capital and related financing, not operating.
Bottom line
- Proprietary funds use full accrual accounting and the economic resources measurement focus, the same basis as commercial entities.
- Two fund types: enterprise funds (services to external users for a fee) and internal service funds (services to other governmental departments).
- Three required statements: Statement of Net Position; Statement of Revenues, Expenses, and Changes in Fund Net Position; Statement of Cash Flows.
- Net position has three components: net investment in capital assets, restricted, and unrestricted.
Exam shortcut
When a question asks you to compute net investment in capital assets, start with capital assets net of depreciation, subtract any debt issued to acquire those assets, and add back unspent bond proceeds still in restricted cash. The formula trips up candidates who forget the debt offset. When classifying cash flows under GASB, ask "What was the cash used for?" Operating = service delivery.
The full lesson (about 2,781 words, 19 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.A3
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