Quiz 6: Proprietary Funds
THE SOLUTION TO THIS AND THE FIRST EXERCISE OF CHAPTERS 1 THROUGH 9 WILL DIFFER FROM STUDENT TO STUDENT ASSUMING EACH HAS A DIFFERENT CAFR.
Internal service fund is a proprietary fund. And they are reported in the proprietary fund financial statements in a separate column. The purpose of internal service fund is to account for all the services and goods provided to other departments of the primary government on a cost reimbursement basis. Thus, it can be concluded that an internal service fund that accounts all its services and goods provided to other department of primary government at no gain or no loss basis or at break even basis. In the given choice of situation where the problem that one may face if an internal service fund is operated at a significant profit or significant loss is as illustrated below. Internal service fund is meant to account for services and goods provided to other department of primary government at cost and hence no operating income or loss can be reported. However, in case an internal service fund is operated at a significant profit, then that implies to show that the expenditure reported in the general fund is incorrect since it exceeds the factual cost of operating government or otherwise overstated true cost of operating government. Similarly, if an internal service fund is operated at a significant loss, then it demonstrates to say that the expenditure reported in the general fund is understated true cost of the operating government and thus incurring an operative loss. These are the accounting problem that persists when internal service fund is operated either at significant profit income or significant loss.
Enterprise fund is a proprietary fund. In fact Proprietary fund consist of internal service fund and Enterprise fund. Enterprise fund is most opted kind of fund in the governmental organization to carry on their enterprising activity. As the name itself describe enterprise fund is used to record commercial activities carried out by primary government and its component units. For example, water utility or supply of electricity, public transports are few to mention. They all are known to provide goods and services to the general public and known to be exchange transaction. Enterprise fund is reported based on economic resource measurement focus and accrual basis of accounting. However, why operating enterprises fund at a profit is desirable is illustrated here under. As mentioned above, Enterprise fund is used by the government to account for the commercial value of the goods and services supplied to the general public. Therefore, it may be concluded that, unlike Internal service fund, Enterprise fund is similar to commercial business operating on profits which is necessary to sufficiently fund working capital. Funding working capital from profits generated is only to ensure that expansion of facilities to the general public is properly and effectively rendered. However, the profit so generated can also be used to pay off debts, if any and also to support government expenditure which otherwise enforce government to impose more taxes. Therefore, in view of the explanation and the facts put forth above, it is conclusively found that operating Enterprises Fund at a Profit is desirable.