CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A municipality's General Fund transferred $500,000 to its Debt Service Fund to cover the principal and interest payment due on general obligation bonds. How should this transaction be reported in the governmental funds' Statement of Revenues, Expenditures, and Changes in Fund Balances?
- AAs an 'Expenditure' in the General Fund and 'Revenue' in the Debt Service Fund.
- BAs an 'Expenditure' in the General Fund and a 'Transfer In' in the Debt Service Fund.
- CAs a 'Reduction of Fund Balance' in the General Fund and 'Increase of Fund Balance' in the Debt Service Fund.
- DAs an 'Other Financing Use' in the General Fund and 'Other Financing Source' in the Debt Service Fund.
Show answer & explanationAnswer & explanation
Correct answer: D. As an 'Other Financing Use' in the General Fund and 'Other Financing Source' in the Debt Service Fund.
Interfund transfers that do not represent reimbursements for services or goods provided are reported as 'Other Financing Uses' by the transferring fund and 'Other Financing Sources' by the receiving fund in the governmental funds' operating statement.
Why the other options are wrong
- A. Transfers between funds are not classified as expenditures or revenues unless they are reimbursements for services, which this is not.
- B. While 'Transfer In' is a common term, the official GASB classification for such non-reciprocal transfers is 'Other Financing Source'/'Use'.
- C. While fund balances are affected, the statement reports the 'changes' through operating and other financing activities, not direct balance adjustments.
Interfund Transfers (Governmental Funds)
Non-reciprocal flows of assets between funds are reported as 'Other Financing Sources' in the receiving fund and 'Other Financing Uses' in the transferring fund in the Statement of Revenues, Expenditures, and Changes in Fund Balances.
- Non-reciprocal (not for goods/services).
- Affects 'Other Financing Sources/Uses'.
- Reported in operating statement.
Memory trick: Transfers are 'Other' ways funds 'Source' or 'Use' resources, not 'Earn' or 'Spend'.