CPA Exam - FAR (Financial Accounting and Reporting)State and Local GovernmentsMedium
A city government uses the purchases method for accounting for its supplies in the General Fund. During the fiscal year, the city purchased $80,000 worth of office supplies. At the beginning of the year, the inventory of supplies was $10,000, and at year-end, it was $15,000. Under the modified accrual basis of accounting, what amount should be reported as 'Expenditures - Supplies' in the General Fund for the year?
- A$75,000
- B$80,000
- C$85,000
- D$90,000
Show answer & explanationAnswer & explanation
Correct answer: B. $80,000
Under the purchases method, when using modified accrual accounting for governmental funds, the entire cost of supplies purchased during the fiscal year is recognized as an expenditure. Changes in inventory balances are not typically adjusted for when using this method.
Why the other options are wrong
- A. This would be the amount if the consumption method was used and ending inventory decreased.
- C. This would be the amount if the consumption method was used and ending inventory increased.
- D. Incorrect calculation; the purchases method focuses solely on purchases.
Purchases Method (Governmental Funds)
Under the modified accrual basis for governmental funds, the purchases method records the entire cost of supplies or other current assets as an expenditure when purchased. Inventory balances are typically maintained for control purposes but do not affect reported expenditures.
- Used for governmental funds
- Entire cost expensed upon purchase
- Inventory changes do not affect expenditures
Memory trick: Modified accrual expenses when due, and supplies are 'purchased' or 'consumed'.