Chapter 5

------------------------------------------------- Governmental Activities—
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Expenditures and Expenses

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Questions for Review and Discussion

1. Expenditures are decreases in net financial resources, whereas expenses are reductions in overall net assets. Expenditures are governmental fund equivalents of expenses. In effect, expenditures are expenses that are determined on the modified accrual rather than the full accrual basis of accounting. 2. Expenditures should be recognized on an accrual basis unless they qualify as one of the exceptions specifically set forth by the GASB. Utility costs are not such an exception and should thereby be recognized as expenditures in the period in which the utility services are used.
3. Wages and salaries are accounted for on an accrual basis. The change would have no impact on reported expenditures under GAAP. The expenditure would be charged in the year in which the employees provided their services, irrespective of when they are paid.
4. Current standards state that vacation leave and other compensated absences with similar characteristics should be accrued as a liability as the benefits are earned by the employees if both of the following conditions are met:
a. The employees’ rights to receive compensation are attributable to services already rendered.
b. It is probable that the employer will compensate the employees for the benefits through paid time off or some other means, such as cash payments at termination or retirement. By contrast, sick leave need be accrued only to the extent that it will be paid as a termination benefit. The difference in accrual requirements is based on the degree of control over the absences. The employer and employee can control if