Determine Different Accounting Methods Used by Different Fund

Determine Different Accounting Methods Used by Different Fund Types Principles of Cost Analysis and Management 1

Food for Thought Q 1. Does the way governmental activities are funded have an impact on how governmental activities are managed? Q 2. How? Why or why not? 2

Terminal Learning Objective Action: Determine Different Accounting Methods Used by Different Fund Types Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international learners): • Identify different types of funds • Classify funds by funding mechanism • Classify funds by purpose • Read and Review a Case Study 3

Review: Fund Accounting • Tracks flow of resources through funds • Characteristics of funds: Ø Separate accounting entity within a larger government entity Ø Self-balancing set of accounts Ø Produces its own financial statements 4

Types of Funds • • • General Fund Special Funds Trust Funds Revolving Funds Agency Funds Management or Working Funds 5

The General Fund • Revenue from general sources • Expended for general purposes • A government entity must have ONE general fund • The General Fund of the United States has many subsidiary appropriation funds • Each appropriation fund has budgetary accounts and proprietary accounts 6

Special Funds and Trust Funds • Account for resources designated for specific programs or activities • Typically financed by dedicated fees • Track expenditures for these specific purposes Ø Ex. National Wildlife Refuge Fund • May be legally designated as trust funds Ø Ex. Social Security’s Old Age and Survivors Insurance Fund 7

LSA #1 Check on Learning Q 1. Name threes characteristics of funds? A 1. 1. Separate Accounting Entity within a larger government entity. 2. Self-balancing set of accounts 3. Produces its own financial statements. Q 2. Which fund type accounts for resources designated for specific programs or activities? A 2. Special Fund (or Trust fund, if legally designated as such. ) 8

Appropriated Fund Reporting • The General Fund, special funds, and trust funds are financed by appropriations. • Budgetary resources are reported according to budgetary basis • Proprietary accounts are reported according to accrual basis 9

Non-Appropriated Funds • • Receive no appropriated funding Do not maintain budgetary accounts Do not use the obligation process Report according to the accrual basis 10

LSA #2 Check on Learning Q 1. Which funding mechanism requires both the budgetary and the proprietary accounts? A 1. Appropriated Funding Q 2. Which funding mechanism does not require the obligation process? A 2. Non-appropriated funding 11

Revolving Funds • Generate revenues by providing services to general public or to other government entities • Must set user fees to cover costs of providing services • Resources carry over or “revolve” from one period to the next (do not expire) Ø Ex. U. S. Postal Service 12

Deposit Funds • Account for resources that belong to other entities Ø Other government agencies Ø Other funds within the same agency Ø Non-federal entities • For every asset held there is an equal liability Ø Ex. State income taxes withheld from federal employees’ payroll 13

Management or Working Funds • Provide goods and services to appropriated funded programs and departments • May pool appropriations from multiple reporting entities to accomplish a common purpose Ø Ex. Bureau of Land Management Working Capital Fund 14

LSA #3 Check on Learning Q 1. Which type of fund has an equal liability for every asset it holds? A 1. Deposit fund Q 2. Which type of fund provides goods and services to the general public or other governmental entities? A 2. Revolving Fund 15

LSA #3 Summary During this lesson, we discussed the six different types and the three characteristics of funds, and gave in-depth descriptions on each. We also classified these funds by both Mechanism and Purpose. We will now conduct a case Study based on this information. 16

BLM Working Capital Fund • Read the case study: A Case Study in the Management and Accounting of Capital Assets: The Bureau of Land Management’s (BLM) Working Capital Fund (WCF) 17

BLM Working Capital Fund (Cont. ) Q 1. What are capital assets? Q 2. Who are the customers of the Working Capital Fund? Q 3. What are the revenue sources? Q 4. How does this meet the definition of a working or management fund? 18

BLM Working Capital Fund (Cont. ) • What services are provided? • How are appropriations “pooled”? • How did using the Working Capital Fund impact the customers of the fund? • Understanding true cost of operations • Dealing with political environment • Choosing assets appropriate to operational needs • Managing and maintaining assets 19

BLM Working Capital Fund (Cont. ) • Under the accrual basis, capital assets are a cost of doing business in the periods the assets are used. • The consumption of the useful life of a capital asset is called depreciation. • Under the budgetary basis, the cost of a capital asset is an expenditure in the period it is purchased. 20

Working Capital Fund Example: Accrual Basis • Performance reflects costs that are not cash flows of the period. • A $100 K truck depreciated straight line over 5 years puts $20 K cost into each year. Ø Book value of the asset is reduced annually until zero value. 21

Working Capital Fund Example: Budgetary Basis • Budgets recognizes 100% of asset in year of acquisition • A $100 K truck depreciated Ø Is recognized as a $100 K expenditure when bought Ø Subsequent years see no effect 22

Working Capital Fund Example: Problems of Government • Annual performance is distorted • Asset acquisition becomes a big ticket item subject to political climate • Maintenance of asset sometime avoided on logic that asset has zero value 23

BLM Working Capital Fund Example: Behavior Impacts • Acquisition specifications became more conservative Ø As managers more clearly recognized tradeoffs with operating budgets • Maintenance was performed diligently Ø To stretch useful life Ø Since already pre-paid (via allocation) 24

BLM Working Capital Fund Example: Bottom Line • Annual performance was more clear • Capital assets needs declined 25

TLO Check on Learning Quickly break the learners in two groups. Have each group as a group write down one question from this lesson, give about two minutes. Once the groups have their question written, pass it to another group to answer it. Facilitate a discussion on each question.

Lesson Summary Determining Different Accounting Methods Used by Different Fund Types is a lesson designed to for the learners to apply the cost management processes. Cost management is an integral part of the Army‘s stewardship. Financial managers throughout all levels of FM operations – from strategic to tactical – must have a good understanding of costs and manage costs carefully, Now, you should be able to identify the different types of funds used, classify the funds by funding mechanisms and by purpose. What are your questions?

Practical Exercise

TLO Summary Action: Determine Different Accounting Methods Used by Different Fund Types Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion. Standard: With at least 80% accuracy (70% for international learners): • Identify different types of funds • Classify funds by funding mechanism • Classify funds by purpose • Read and Review a Case Study 29