A municipal utility provides electricity to its residents. For the year, the utility reported operating revenues of $20,000,000, operating expenses (including depreciation) of $15,000,000, and non-operating revenues (e.g., interest income) of $500,000. It also made a transfer of $1,000,000 to the General Fund. What is the change in net position for this enterprise fund for the year?
- A$6,000,000 increase
- B$4,500,000 increase
- C$4,000,000 increase
- D$5,500,000 increase
Show answer & explanationAnswer & explanation
Correct answer: B. $4,500,000 increase
Enterprise funds use full accrual accounting. The change in net position is calculated as total revenues (operating + non-operating) minus total expenses (operating) minus transfers out. Operating Income: $20,000,000 - $15,000,000 = $5,000,000. Total Change in Net Position: $5,000,000 (operating income) + $500,000 (non-operating revenue) - $1,000,000 (transfer out) = $4,500,000 increase.
Why the other options are wrong
- A. This sums all positive amounts without subtracting expenses or transfers.
- C. This incorrectly subtracts the transfer from operating income only, ignoring non-operating revenue.
- D. This correctly sums operating income and non-operating revenue but does not subtract the transfer out.
Enterprise Fund Change in Net Position
The change in net position for an Enterprise Fund (a proprietary fund) is calculated by taking operating revenues minus operating expenses, plus non-operating revenues (and expenses), plus capital contributions, less transfers out.
- Proprietary fund, full accrual basis.
- Calculated like a business's net income.
- Transfers are not revenues/expenses but affect net position.
Memory trick: Enterprise funds run like a 'BUSINESS': 'REVENUES' - 'EXPENSES' + 'OTHER' - 'TRANSFERS'.