Chapter 4
Reporting Principles and Preparation of Fund Financial Statements
Introduction
GASB Concepts Statement No. 1, “Objectives of Financial Reporting” (May 1987), suggests that
state and local governmental financial reporting should meet the needs of three major groups of
external users:
The citizenry—those to whom the government is primarily accountable
Legislative and oversight bodies—those who directly represent the citizens
Lenders and creditors—those who provide resources to the government through the capital
markets
The GASB considered the financial reporting needs of intergovernmental resource providers and
other users of external financial reporting to be encompassed by the needs of the three primary
external user groups.
The GASB issued Concepts Statement No. 1 after undertaking a user needs study. Based on the
study, the GASB concluded that governmental financial reporting should provide information to
assist users in assessing the accountability of public officials and in making economic, social, and
political decisions. Accountability was considered to be the paramount objective from which all
other objectives must flow. Specifically:
1. Financial reporting should assist in fulfilling government’s duty to be publicly accountable and
should enable users to assess that accountability by
providing information to determine whether current-year revenues were sufficient to pay
for current-year services.
demonstrating whether resources were obtained and used in accordance with the
government’s legally adopted budget, and demonstrating compliance with other finance
related legal or contractual requirements.
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providing information to assist users in assessing the service efforts and accomplishments
of the government.
2. Financial reporting should assist users in evaluating the operating results of the government for
the year by
providing information about sources and uses of financial resources
providing information about how it financed its activities and met its cash requirements
providing information necessary to determine whether its financial position improved or
deteriorated as a result of the year’s operations
3. Financial reporting should assist users in assessing the level of services that can be provided by
the government and its ability to meet its obligations as they become due by
providing information about its financial position and condition
providing information about its physical and other nonfinancial resources having useful
lives that extend beyond the current year, including information that can be used to assess
the service potential of those resources
disclosing legal or contractual restrictions on resources and the risk of potential loss of
resources.
Final accounts of state corporations
Final accounts of the state corporations consist of the following: -
1. Revenue Account
2. Net Revenue Account
3. Balance sheet
2
Example 1: The following balances were extracted from the books of African post and
Telecommunication Corporation for the year ended 31 st December 2018.
Trial Balance
Particular DR CR
$(000) $(000)
Equity 75,200
General reserve- surplus retained 1,278,600
Pension liability fund 151,300
Loans 10,253,500
Land and buildings 2,451,700
Plant and machinery 10,695,900
Motor vehicles 451,700
Furniture and office equipment 252,750
Investment 572,850
Pension liability fund (cost) 271,400
Debtors – services 551,900
Short term deposits 351,600
Cash and cash balance 250,700
Creditors – services 1,312,400
Stock – stores 545,600
Depreciation provision of fixed assets 2,421,400
Postal revenue 451,500
Telephone revenue 2,252,800
Miscellaneous revenue 842,700
Administration expenses 254,700
Operational expenses 670,500
International services expenses 845,700
Miscellaneous expenses 421,500
Maintenance expenses 78,200
Loan interest 372,800
19,039,500 19,039,500
Additional information
Provisions are to be made as under: -
a. Depreciation $453,400
b. Pension liability $175,600
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c. Provision for corporation tax $535,400
d. Dividends $238,500
Required:
Prepare the revenue account, net revenue account of African post and Telecommunication
Corporation for the year ended 31 st December 2018 and a balance sheet on that date.
Solution
African post and Telecommunication Corporation
Revenue Account
For the year ended 31st December 2018
Expenditure Revenue
$(000) $(000)
Administration 535,400 Postal 451,500
Operational 670,500 Telephone 2,252,500
International services 845,700 Miscellaneous 842,700
Miscellaneous expenses 421,500
Maintenance 78,200
Loan interest 372,800
Depreciation 453,800
Pension liability 175,600
Surplus c/d t net
revenue account 274,600
3,547,000 3,547,000
Working
1. Surplus c/d to net revenue account = revenue – expenses
3,547,000 – 3,272,400 = 274,400
Net Revenue Account
For the year ended 31st December 2018
$ $
(000) (000)
Corporation tax 535,400 Surplus transferred from
Dividend – proposed 238,500 revenue account 274,600
Retained surplus Bal: c/f 779,300 Retained surplus Bal: b/f 1,278,600
1,553,200 1,553,200
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Working
1. Retained surplus Bal: c/f = 1,553,300 – 773,900 = 779,300
Balance sheet
As at 31st December 2018
$ $
(000) (000)
Fixed Assets
Land and buildings 2,451,700
Equity 75,200
Plant & machinery 10,695,900
General reserve
Motor vehicles 451,700 - Retained surplus 779,300
Furniture & office Loans 10,253,500
equipment 251,750
Pension liability fund 326,900
13,852,050 Current liabilities
Less depreciation (2,874,900)
Creditors 1,312,400
10,977,150 Corporation tax 535,400
Investment 572,850 Proposed dividends 238,500
Pension liability
fund (cost) 271,400
Current Assets
Stock store 545,600
Debtors 55,900
Short term deposit 351,600
Cash and bank balance 250,700
13,521,200
13,521,200
Working
1. Depreciation provision = 2,421,500 + 453,400 = 2,874,900
2. Pension liability fund = 151,300 + 175,600 = 326,900
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EXAMPLE 2: The following balances were extracted from the books of continental
power and lighting Co. Ltd. For the year ended 31st December 2018:-
Trial Balance
Particulars DR CR
$(000) $(000)
Authorized and issued share capital 700,000
12% Debentures 450,000
Freehold land 279,000
Buildings 180,000
Plant & machinery 300,000
Mains 240,000
Transformers, motor etc. 60,000
Meters 45,000
Electrical instruments 12,000
General store (cable, lamps ets.) 70,500
Office furniture 7,500
Coal and fuel 52,500
Oil and engine room stores 30,000
Wages – at station 75,000
Repairs and replacements 30,000
Rates 9,000
Salaries of supervisors 60,000
Director`s fees 15,000
Stationery, printing and advertising 18,000
Incidental expenses 3,000
Legal charges 6,000
Retained surplus 50,000
Sales – by meters 262,500
- by contracts 150,000
Meter rent 9,000
Sundry creditors 60,000
Sundry debtors 90,000
Cash in hand and at bank 99,000
1,681,500 1,681,500
Additional information:
1. Advertising has been prepaid $5,000
2. Make provision of 5% for doubtful debts.
3. Depreciation is to be charged as under: -
1
a. Buildings 2 2 %
1
b. Machinery 7 %
2
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c. Transformers 10%
d. Meters and electrical instruments 15%
e. Office furniture 10%
4. Make provision of corporation tax for $5,700.
Required: Prepare the Revenue Account, Net Revenue Account of the Continental Power and
Lighting Co. Ltd. For the year ended 31st December 1998 and a Balance Sheet on that date.
Solution
Continental Power and Lighting Co. Ltd.
Revenue Account and Net Revenue Account
For the year ended 31st December 2018
$ $
(000) (000)
Coal and fuel 52,500 Sales
Oil and engine room stores 30,000 - by meters 262,500
Wages – at station 75,000 - by contracts 150,000
Repairs and replacements 30,000 Meter rent 9,000
Rates 9,000
Salaries of supervisors 60,000
Director`s fees 15,000
Stationery, printing
and advertising 18,000
less prepaid (5,000) 130,000
Incidental expenses 3,000
Legal charges 6,000
Interest on debenture
- Accrued 54,000
Provision for doubtful debts 4,500
Depreciation :-
Buildings 4,500
Machinery 22,500
Mains 12,000
Transformers 6,000
Meters 6,750
Electrical instruments 1,800
Office furniture 750
Surplus c/d 15,200
421,500 421,500
Corporation tax 5,700 Surplus b/d 15,200
Surplus c/f 59,500 Surplus balance b/f 50,000
65,200 65,200
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Working
1. Interest on debentures accrued = (debenture) 450,000 x 12% = 54,000
2. Provision for doubtful debt = (sundry debtors) 90,000 x 5% = 4,500
3. Surplus = Revenue – Expenses = 421,500 – 406,300 = 15,200
4. Depreciation :-
1
a. Buildings = 180,000 x 2 % = 4,500
2
1
b. Machinery = 300,000 x 7 % = 22,500
2
c. Mains = 240,000 x 5% = 12,000
d. Transformers = 60,000 x 10% = 6,000
e. Meters = 45,000 x 15% = 6,750
f. Electrical instruments = 12,000 x 15% = 1,800
g. Office furniture = 7,500 x 10% = 750
Balance sheet
As at 31st December 1998
Fixed assets Authorized and issued
(Net of depreciation) share capital 700,000
Freehold land 279,000 surplus retained 59,500
Buildings 175,500 12% Debenture 450,000
Plant & machinery 277,500
Mains 228,000 Current liabilities
Transformers, motor etc. 54,000 Creditors 60,000
Meters 38,250 Accrued debenture interest 54,000
Electrical instruments 10,200 Corporation tax 5,700
Office furniture 6,750
1,069,200
Current Assets
General stores 70,500
Debtors 90,000
(less provision ) (4,500) 85,500
Prepaid 5,000
Cash in hand and at bank 99,000
1,329,200 1,329,200
