Question 1: Governmental Reporting
You have recently graduated from an accounting program and been hired for a position in the administrative office of the City of East Chester. The city has just elected a new mayor who was a local football hero and is fond of saying he is “not good with numbers.” However, he is interested in learning about the city’s financial situation because he made a lot of expensive campaign promises and needs to figure out whether he can keep them.
He has been given four statements – the government-wide statement of net assets, the government-wide statement of activities, the balance sheet for the General Fund, and the statement of revenues, expenditures and changes in the fund balances of the General Fund. He needs help with the following:
1. He has noticed that sometimes the expenses on one statement equal the expenditures on another. What is the difference between expenses and expenditures and why do they (only) sometimes equal each other?
2. He has also noticed that assets minus liabilities equals net assets on one statement but assets minus liabilities equals the fund balance on the other. How can this be? Shouldn’t they be the same? What is the difference between the two? Please explain.
3. The total fund balance seems to have increased in the past year, but total net assets decreased. How could this happen?
4. He decides he doesn’t want to look at all four statements and wants to know which one he should look at to figure out how much he can spend on his campaign promises. What is your response?
Note: The mayor has never taken an accounting class and does not understand journal entries, so please do not include any in your memo.
Question 2. Foreign Currency Translation and Remeasurement
You have been recently hired as a staff accountant at Global Design, Inc., a small chain of retail home furnishing stores. You report directly to the Chief Financial Officer (CFO). The company specializes in home products with high-quality “European” design, but reasonable prices. Most of their products are manufactured in foreign countries but purchased from domestic wholesalers; these transactions are therefore denominated in U.S. dollars. However, the company’s president is entertaining the idea of acquiring subsidiaries in several foreign countries to ensure a reliable supply chain. He also believes that the exchange rates of some foreign currencies will rise about 10% in the next year and he is keen on reporting a gain in Global Design’s income statement when it does.
The president has asked you to prepare a memo outlining the effects of his plan, including 1) the financial reporting effects of acquiring a foreign subsidiary; 2) how changes in the foreign currency exchange rate will affect Global Design’s financial statements; and 3) under what circumstances Global Design could record a gain from a foreign subsidiary. The president has also asked you to make a clear recommendation on whether he should proceed with his plan.
Note: The company president has never taken an accounting class and does not understand journal entries, so please do not include any in your memo.
