In this video, we walk through 5 BAR practice questions teaching about preparing the statement of activities. 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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Preparing the Statement of Activities
The government-wide statement of activities is one of the most informative parts of state and local government financial reporting. Unlike the fund financial statements, it uses the accrual basis of accounting and the economic resources measurement focus. This means it looks at the long-term picture: capital assets, depreciation, and the full cost of services are reported here. To prepare this statement from trial balances and supporting documentation, you need to understand how revenues and expenses are classified and displayed.
Below are the central ideas, with examples, that guide the preparation of the statement of activities.
Program Revenues Reported by Function
Program revenues are the first major building block. They are shown alongside the specific functions or programs they support—public safety, transportation, education, and so on. The goal is to demonstrate how much of a program’s cost is recovered from revenues generated by or restricted to that program.
Program revenues fall into three categories:
- Charges for services: Exchange-like transactions where users pay for a benefit. Examples include water utility charges, recreation center fees, or tuition at a community college.
- Operating grants and contributions: Restricted revenues intended to support the day-to-day operations of a program. For instance, a state grant restricted to fund local police operations.
- Capital grants and contributions: Restricted resources for capital improvements, like federal funds earmarked for road construction.
Example: If a city spends $1,000,000 on police salaries but collects $150,000 in traffic fines and receives a $200,000 operating grant for public safety, the statement of activities shows $1,000,000 in expenses, $350,000 in program revenues, and a net cost of $650,000 for public safety.
Nonexchange Revenues as General Revenues
Not all revenues are tied to specific programs. Taxes and unrestricted grants are classic nonexchange revenues because citizens or other governments give resources without receiving equal value in return. These are reported as general revenues at the bottom of the statement of activities, where they help cover the net cost of government functions.
Example: Property taxes of $10,000,000 and state aid with no restrictions would appear as general revenues, not program revenues. In contrast, a restricted federal grant for road repair would show up under the transportation function as a program revenue.
Property Tax Recognition
One of the key adjustments in preparing the statement is recognizing property tax revenue. On the government-wide statements, revenue is recognized when levied, not when collected. The total levy is reduced by the estimated uncollectible portion. Collections from prior levies do not affect current-year revenue.
Example: If a city levies $12,000,000 in property taxes with an estimated 4% uncollectible, revenue of $11,520,000 is reported for the year—even if collections come in higher or lower, or if delinquent prior-year taxes are collected.
Depreciation of Capital Assets
Government-wide statements account for the cost of using capital assets. Roads, bridges, and buildings are capitalized and depreciated over their useful lives. This matches expenses with the periods benefited. The only exception is when a government elects the modified approach for infrastructure, under which depreciation is not recorded, but the government must demonstrate that it is maintaining assets at a designated condition level.
Example: If a county builds roads for $18,500,000 with a 25-year life, it reports annual depreciation of $740,000 under the public works/transportation function. If the modified approach were used instead, the county would show annual preservation costs, such as resurfacing expenses, rather than depreciation.
Putting It All Together
The statement of activities is designed to show both the full cost of each program and the extent to which those costs are offset by revenues that are directly linked to them. Expenses are reported by function, reduced by related program revenues, and the net cost is shown. General revenues are then added at the bottom, reconciling how the government finances its activities.
In practice, preparing this statement from a trial balance involves:
- Identifying program revenues and linking them to the right functions.
- Classifying nonexchange revenues as general revenues.
- Adjusting property tax revenues to the amount levied minus estimated uncollectibles.
- Recording depreciation (unless the modified approach applies).
- Presenting each function’s net cost and showing how general revenues cover the remainder.
This structure allows citizens, creditors, and oversight bodies to see clearly whether government services are largely self-supported or primarily funded through taxes and unrestricted resources.
