A city government uses modified accrual accounting for its governmental funds. During the current fiscal year, the General Fund recorded a $100,000 purchase of office supplies. At year-end, $30,000 of these supplies remained unused. The city uses the purchases method for supplies. What effect will this have on the General Fund's fund balance at year-end, assuming no other adjustments related to supplies?
- ADecrease fund balance by $100,000.
- BIncrease fund balance by $30,000.
- CNo effect on fund balance.
- DDecrease fund balance by $70,000.
Show answer & explanationAnswer & explanation
Correct answer: A. Decrease fund balance by $100,000.
Under the purchases method in governmental funds (modified accrual), the entire cost of supplies purchased during the year is recorded as an expenditure. The amount of supplies remaining at year-end is typically not adjusted for in the General Fund's operating statements, although it may be reported as a nonspendable fund balance component. Thus, the full $100,000 purchase decreases fund balance.
Why the other options are wrong
- B. Incorrect. Unused supplies do not increase fund balance under the purchases method.
- C. Incorrect. The purchase of supplies is an expenditure that reduces fund balance.
- D. Incorrect. This would be the consumption method, which is not typically used for supplies in governmental funds.
Purchases Method (Governmental Funds - Supplies)
Under the purchases method (used by governmental funds under modified accrual accounting), the entire cost of supplies acquired during the fiscal period is recorded as an expenditure. No adjustment is made at year-end for unused supplies in the operating statement.
- Used for supplies in governmental funds
- Entire cost of purchases is expensed
- No year-end adjustment for unused supplies in the operating statement
- Unused supplies may be shown as nonspendable fund balance.
Memory trick: P-M = Purchases Method for Modified Accrual