BAR CPA Practice Questions: Proprietary Funds Statement of Revenues, Expenses and Fund Balances

In this video, we walk through 5 BAR practice questions teaching about proprietary funds statement of revenues, expenses and 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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Proprietary Funds Statement of Revenues, Expenses and Fund Balances

The statement of revenues, expenses, and changes in fund net position is a central component of proprietary fund reporting for state and local governments. This statement provides a clear picture of how an enterprise fund or internal service fund generates income, incurs costs, and experiences changes in its financial position during a given period. Unlike governmental funds, which emphasize the flow of current financial resources, proprietary funds are reported using the accrual basis of accounting. As such, they resemble private sector financial reporting and highlight whether the fund is self-sustaining.

Structure of the Statement

This statement typically includes the following sections:

1. Operating Revenues
   These represent revenues earned from providing goods and services to customers. For an airport enterprise fund, for instance, operating revenues may include landing fees, terminal rentals, or parking charges. The defining feature is that these revenues arise from the fund’s principal activities.
2. Operating Expenses
   Operating expenses capture the costs directly associated with delivering services. Examples include personnel costs, utilities, maintenance, and depreciation on assets used in operations. Because proprietary funds use accrual accounting, depreciation is reported even though it is a non-cash expense.
3. Operating Income (Loss)
   The difference between operating revenues and operating expenses yields operating income or loss. This subtotal is an important indicator of whether the fund’s core services generate sufficient income to cover their costs.
4. Nonoperating Revenues and Expenses
   Transactions not directly tied to service delivery are reported in this section. Interest income, interest expense, and operating grants fall under this heading. For example, if an airport receives a federal operating grant to support security staffing, it would be classified here as nonoperating revenue.
5. Capital Contributions and Transfers
   Proprietary funds also report contributions and transfers separately. A capital grant from the federal government to improve security facilities would be shown as a capital contribution. Transfers from the General Fund, such as funds allocated to subsidize operations, are presented as transfers in. This section makes it clear which inflows are tied to investment or interfund support rather than operations.
6. Change in Net Position
   After aggregating operating income, nonoperating results, capital contributions, and transfers, the statement reports the overall change in net position. This figure reflects whether the fund’s net assets increased or decreased during the reporting period.
7. Net Position—Beginning and Ending
   Finally, the statement shows beginning net position and reconciles it with the ending balance, thereby providing a full view of financial performance over time.

Illustrative Examples

Consider an airport enterprise fund:

• The fund earns $2,000,000 in landing fees and $500,000 in parking revenue. These amounts are recorded as operating revenues.
• Expenses for salaries, utilities, and maintenance total $1,800,000, and depreciation is $300,000. These are operating expenses.
• The fund receives a $200,000 federal operating grant for security staffing, which is reported as nonoperating revenue.
• It also receives a $500,000 capital grant for terminal security improvements, which is reported as a capital contribution.
• In addition, the city transfers $400,000 from the General Fund to help support operations. This is presented as a transfer in.

The statement would show operating income of $400,000 ($2,500,000 revenues minus $2,100,000 expenses), plus $200,000 of nonoperating revenue, plus $500,000 of capital contributions, and $400,000 of transfers in. The result is a total increase in net position of $1,100,000.

Key Takeaways

The preparation of this statement requires careful classification of transactions. Operating activities must be distinguished from nonoperating activities, and capital-related inflows must be separated from regular revenues. Transfers should never be confused with revenues, since they represent internal reallocations rather than earned resources.

In practice, the statement of revenues, expenses, and changes in fund net position demonstrates whether a proprietary fund is sustainable on its own, how it interacts with other funds, and how external support (such as grants) contributes to its growth. Proper preparation from trial balances and supporting documentation ensures accuracy and compliance with governmental accounting standards, while also offering transparency to stakeholders who rely on these funds to deliver essential public services.