CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A state government operates a lottery system, with a portion of the proceeds legally mandated to be transferred to the state's General Fund to support education programs. In the government-wide financial statements, how would this transfer be presented?
- AAs revenue in the General Fund.
- BAs an interfund transfer, eliminated in consolidation.
- CAs an interfund transfer, reported as a separate line item.
- DAs an expense in the Lottery Enterprise Fund.
Show answer & explanationAnswer & explanation
Correct answer: B. As an interfund transfer, eliminated in consolidation.
In government-wide financial statements, interfund transfers within the primary government are eliminated in consolidation to prevent double-counting and misrepresenting the government's overall financial position and activities.
Why the other options are wrong
- A. This is how it would be treated in the governmental fund statements, not government-wide.
- C. This would be true for transfers between the primary government and component units, or for individual fund statements.
- D. Transfers are not expenses; they are non-reciprocal flows of assets.
Interfund Transfers (Government-Wide)
In government-wide financial statements, interfund transfers between different funds of the primary government are eliminated in consolidation to avoid inflating revenues and expenditures, presenting a clearer picture of the government as a single economic entity.
- Between primary government funds
- Eliminated in consolidation
- Prevents double-counting
Memory trick: Consolidation joins the parts, eliminating internal transactions.