Consider the following issues:
The Board of Alderman of the Hayville approved the Appropriations budget for its General Fund for the
year ending December 31st as shown below.
General Government: $500,000
Public Safety 2: $800,000
Public Works: $1,200,000
Health and Welfare: $1,300,000
Culture and Recreation: $700,000
Contributions to Retirement Fund: $600,000
Total General Fund Appropriations: $7,100,000
In a paper, provide responses to the following:
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- Explain the legal significance of an appropriation and why auditors engaged for a financial and
compliance audit need to know the meaning of the term. - It is illegal for a governmental unit to spend money for any purpose unless a valid appropriation for that
purpose exists? Does this legal rule assure good financial management for each governmental unit? Why
or why not? - Provide the entry in General Journal form to record the budget in all necessary General Ledger and
Subsidiary Ledger accounts. - Illustrate a form of Appropriations, Expenditures, and Encumbrances subsidiary ledger account that
would provide the information needed by a government finance director to ensure compliance with legal
requirements concerning appropriations.
Explain how the term expenditure can be employed and defined differently in the following given
situations:
- Expense
- Disbursement
- Encumbrance
- Other financing use
- The fund equity section of the interim balance sheet of the Freeman Town�s General Fund, as of
June 30, 2005, was:
Fund Equity:
Appropriations: $2,551,600
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Less: Expenditures $1,349,000
Encumbrances: #1 – $112,000 and #2 – $1,461,000
Available Appropriations: $1,090,600
Reserve for Encumbrances: $112,000
Fund Balance: $122,600
Total Fund Equity: $1,325,200
The fund equity section of the balance sheet for the same fund as of December 31, 2005, the end of the
fiscal year, was:
Fund Equity:
Reserve for Encumbrances: $32,000
Reserve for Inventory of Supplies: $60,000
Total Reserved Fund Equity: $92,000
Fund Balance: $81,600
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Total Fund Equity: $173,600
A local newspaper ran a feature article and an editorial on the incompetence of city administrators in
�running the General Fund at a loss of over $1,150,000 in the last six months of 2005,� since the Total
Fund Equity decreased from $1,325,200 to $173,600.
Is the newspaper correct? Why or why not? If you need additional information to be sure of your answer,
explain what additional information you need.
Johnstown is considering a capital project. For each of the following legally feasible alternatives, compare
and contrast the desirability of each from the viewpoint of (1) the official in charge of administering capital
projects funds, and (2) taxpayers residing in the governmental unit.
a. $5,000,000 face value of 10-year special assessment bonds can be sold at 98 with a semiannual
interest at the normal annual rate of 6%. The discount would be borne by a debt service fund.
b. Same as Item (a), except the discount would be borne by the capital projects fund.
c. Same bond issue can be sold at 103 with semiannual interest at the nominal rate of 9%; the premium
would be transferred to the debt service fund.
d. Same as Item (c), except the premium would be retained by the capital projects fund.
One of the common objections to computing depreciation of general capital assets has been that the
assets are used for activities that are not expected to generate revenues sufficient to replace the assets;
therefore, depreciation expense is not relevant to decisions about the acquisition or use of general capital
assets. Evaluate this argument as a conclusion to your paper.
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Support your paper with a minimum of five (5) scholarly resources. In addition to these specified
resources, other appropriate scholarly resources, including older articles, may be included.
Length: 5-7 pages not including title and reference pages
Question 1
- Explain the legal significance of an appropriation and why auditors engaged for a
financial and compliance audit need to know the meaning of the term.
An appropriation is an authorization for administrators to incur on behalf of the
governmental unit liabilities in the amounts specified in the appropriation ordinance or statute,
for the purposes set forth in that ordinance or statute, during the period of time specified
(William, 2012). The official meaning of “appropriation” refers the procedures and policies to be
made and implementing for the purpose of using money for specified objectives. Budgets and
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spending bills are also demonstrated through this term. An appropriation is an authorization for
administrators to incur on behalf of the governmental unit liabilities in the amounts specified in
the appropriation ordinance or statute, for the purposes set forth in that ordinance or statute,
during the period of time specified.
The meaning of audit engagement is to perform audit of financial statements of the client or
perform activities in accordance of the contract/engagement letter with client. Compliance audit
or compliance review is a function to ensure a company’s adherence to Guidelines which may
include regulatory, internal department guidelines and other compliance matrices.
An official level review is made to ensure regulatory compliance has been fulfilled. A review
is small engagement in which assurance is not given while financial audit represents an opinion
whether or not financial statements have been made free from error, misstatements or
misrepresentations or they give true and fair view. It is also necessary for auditors to observe if
any unusual or unauthorized expenditure has been made.
- It is illegal for a governmental unit to spend money for any purpose unless a valid
appropriation for that purpose exists? Does this legal rule assure good financial
management for each governmental unit? Why or why not?
Not necessarily, If the appropriation budget is prepared mechanically (with very thought as to
what services should be rendered and it is basically and how the services should be delivered)
adhering to the budget may be poor financial management. In some cases, there are some non-
financial purposes projects which are required to execute which have much general public
benefits and may be shown in future but may not be shown in financially effective.It is very
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necessary to have best financial management to planning of objectives specially obtaining
services by inputting resources to optimal level.
In some cases, there may be situation that financial objective may not be preferable for the
economy therefore the objective of the appropriation may be changed and a good financial result
may not arise. Most of time Decision makers prefer the general public interest as a preference
therefore they did not consider financial result as a preference but in future these decisions give
good result. Legal rules also have drawbacks which may create restrictions to achieve the
specified objective of the project which are directly assigned to the projects.
- Provide the entry in General Journal form to record the budget in all necessary
General Ledger and Subsidiary Ledger accounts.
BOARD OF ALDERMEN OF THE HAYVILLE
Appropriations, Expenditures, and Encumbrances Ledger
Year: Code No:
Fund: General
Function: General Government
Month
and
Day
Reference Encumbrances Expenditures Appropriations
Debit Credit Open Debit Cumulative
Total
Credit Available
Balance
Jan 1 Budget 7,100,000 7,100,000
2 General
administration
500,000 6,600,000
2 Public safety 800,000 5,800,000
2 Public works 1,200,000 4,600,000
2 Health and
welfare
1,300,000 3,300,000
2 Culture and
recreation
700,000 2,600,000
2 Contribution to
Retirement
Funds
600,000 2,000,000
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(1) Expense:
For the purpose of generating revenue, a series of expenses are incurred which directly
relates to Revenue which is broadly called “Cost of Sales” Expenses can be made in the form or
cash or they can be accrued. Cost of sales includes following types of expenses that represents
major part of Cost of sale:
Salaries, wages & other benefits provided to company employees
Depreciation or amortization of fixed & intangible assets which are used for
production of goods.
Purchase of Raw material.
Other expense includes Bad debts, administrative, selling & distribution expenses. Expenses
are summarized and charged in the income statement as deductions from the income before
assessing income tax. It is to be understood that all type of expense are called cost while all cost
are not categorized as an expense e.g. cost spent for the purpose of gaining benefits from assets
(Michelle & Stergios, 1996).
(2) Disbursement:
Disbursement is called payment of money.
Payment from running business of any purpose is called disbursements, cash expenditures,
dividend payments, as well as the amounts that a lawyer might have to pay out on a person’s
behalf in connection with a transaction. Disbursing money is part of cash flow, insolvency of the
business can been assessed when cash flow is negative during the period because negative cash
flow shows that payments made during the period was higher than revenue generated (Erik &
Henrik, 2015).
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(3) Encumbrance:
A financial claim made against any property by third party is called Encumbrance which
indicate and implement law that asset can not be used freely nor to be transferred or sale unless
or until claim is settled or lifted. These types of claim are charged upon some specific fix asset in
the form of Mortgages, property tax liens, easements that applies to real estates. Encumbrances
are not always in the form of financial, easements being an example of non-financial
encumbrances. It also applies to personal – as opposed to real – property. The phrase restricted
funds are used in accountings that are reserved for a specified liability.
(4) Other Financing Use:
Other Financing Sources and Uses. Other financing sources and uses include a limited
number of special transactions that are used to account for non-operating revenues/receipts and
expenditures/disbursements. Included in this financial reporting category are operating transfers
and proceeds from debt transactions.
(5)
Freeman Town’s General Fund 2005 budgetary and operating statement accounts were closed
before the December 31 balance sheet could be prepared. Therefore, the $173,600 is the excess
of General Fund assets over liabilities to be paid from those assets, and the $1,325,200 figure is
the excess of assets and resources as of June 30 over liabilities on that date.
In order to determine the financial management of Freeman Town’s General Fund, one would
need to know:
- The relation of actual revenues to budgeted revenues, and
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- the relation of expenditures and encumbrances to appropriations
More important than the expenditures/encumbrances are whether services financed from the
General Fund are performed economically, efficiently, and meet the needs of the residents at a
level that is acceptable (Erik & Henrik, 2015).
Question 2
Johnstown is considering a capital project. For each of the following legally feasible
alternatives, compare and contrast the desirability of each from the viewpoint of (1)
the official in charge of administering capital projects funds, and (2) taxpayers
residing in the governmental unit.
From the official prospective/point of view who hold or control the administering the
funds of capital projects, which funds are provided by bond issues under possibilities (a) & (c).
Under (b), the fund receives $100,000 less than the amount authorized.
Under (d), the fund receives $150,000 more than originally authorized. The administrator is not
typically concerned with the nominal or effective rate of interest in their role with the capital
projects fund.
From the taxpayer’s point of view:
Taxpayers would bear a lower effective interest rate if the 6 percent bonds are sold at 98 than if
the 9 percent bonds are sold at 103. Under (a), taxpayers would have to make up the $100,000
discount because more taxes or other revenues would have to be raised for debt service than if
the bonds had been sold at par.
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Under (b), since $100,000 less of the financial resources are available to the capital
projects fund, it might not be possible to accomplish some elements of the project as originally
planned, which may be good or bad. Under (c), taxpayers should save $150,000 that would have
had to have been raised for debt service. Under (d), taxpayers could get more, or even better,
capital facilities than originally planned. That, or allow the $150,000 to simply be used as
discretionary money (wasted money).
References
Erik. L & Henrik. M. (2015). Statistics for Finance: Concepts and practice. Washington, DC:
CRC Retrieved from
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Michelle R.G & Stergios S. (1996). The Political Economy of Conflict and Appropriation, New
York: press
William G.A (2012). The Appropriations Law Answer Book, New York: Management Concept,
