In this video, we walk through 6 BAR practice questions teaching about governmental funds statement of revenues, expenditures and changes in fund balances. These questions are from BAR content area 3 on the AICPA CPA exam blueprints: State and Local Governments
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Governmental Funds Statement of Revenues, Expenditures and Changes in Fund Balances
The Statement of Revenues, Expenditures, and Changes in Fund Balances is a central component of governmental fund financial reporting. It provides insight into how a government raises and uses financial resources within its major governmental funds. Preparation of this statement requires careful classification of trial balance amounts and supporting documentation into revenues, expenditures, and other financing sources or uses, all in accordance with the modified accrual basis of accounting.
The following sections highlight the primary considerations for constructing this statement.
Revenues and Expenditures
Revenues are recognized when they are both measurable and available, consistent with the modified accrual basis. “Available” typically means collectible within the current period or soon enough thereafter (often within 60 days of year-end) to finance current period expenditures. For example, property taxes expected to be received within this period are recognized as revenue, while amounts beyond this window are reported as deferred inflows.
Expenditures represent decreases in current financial resources. These include outflows such as salaries, supplies, construction costs, and debt service payments. Under the modified accrual basis, expenditures are generally recorded when the liability is incurred, provided it is expected to be liquidated with current resources. However for debt service, only principal and interest due during the year are reported as expenditures.
Other Financing Sources and Uses
Certain inflows and outflows of resources are not classified as revenues or expenditures. Instead, they are reported as Other Financing Sources (OFS) and Other Financing Uses (OFU).
Examples include:
- Bond proceeds (OFS)
- Proceeds from the sale of capital assets (OFS)
- Transfers between governmental funds (OFS or OFU)
For instance, a Capital Projects Fund receiving $10 million in bond proceeds and $2 million in transfers from the General Fund would record these as OFS rather than revenue, distinguishing them from regular inflows such as grant revenues.
Fund-Specific Classification
Proper classification of inflows and outflows depends on the purpose and restrictions of resources. The General Fund accounts for unrestricted resources available for general governmental activities. By contrast, resources restricted for debt repayment are reported in the Debt Service Fund, while resources restricted for acquiring or constructing capital assets are reported in the Capital Projects Fund.
For example, property tax revenues restricted by law for debt service must be recorded in the Debt Service Fund rather than in the General Fund.
Statement Format
The standard format of the Statement of Revenues, Expenditures, and Changes in Fund Balances is consistent across governmental entities. The structure includes:
- Revenues
- Expenditures
- Excess (Deficiency) of Revenues over Expenditures
- Other Financing Sources and Uses
- Special items and extraordinary items, reported separately when applicable
- Net Change in Fund Balances
- Beginning Fund Balances and Ending Fund Balances
This order of presentation allows users to trace how operating results, financing activities, and unusual events collectively affect the year-end fund balance.
Illustrative Example
Consider a Capital Projects Fund with the following trial balance data:
- State capital grant: $2,000,000 (revenue)
- Bond proceeds: $5,000,000 (OFS)
- Investment income: $50,000 (revenue)
- Construction expenditures: $3,500,000 (expenditures)
- Bond issuance costs: $100,000 (expenditures)
The statement would present $2,050,000 in revenues, $3,600,000 in expenditures, and $5,000,000 in OFS. The resulting increase in fund balance would be $3,450,000.
Significance
This statement provides accountability by demonstrating how resources were obtained and used within governmental funds. Unlike government-wide statements, which emphasize economic resources and long-term obligations, this fund statement focuses on current financial resources and short-term fiscal capacity. Users—including citizens, legislators, and oversight bodies—rely on it to evaluate whether resources were raised and spent in accordance with the budget and legal restrictions.
