For what types of activities are internal service funds used to account? Provide several examples. Is a government required to account for the activities you cite in an internal service fund, or may it account for them instead in its general fund? What is the rationale for accounting for nonexpendable endowment funds on a full, rather than a modified, accrual basis? Why is it important that depreciation be charged on long-term assets held as fiduciary fund investments? Solution Part A Internal service funds are similar to enterprise funds, only the customers are other governmental agencies and departments within the municipality. This is more or less a cost reimbursement account. A printing center, media center, purchasing department, data processing center, etc are all examples of internal service funds. You shouldn\'t use the general fund to account for these services because in doing so you would lose transparency over what things actually cost. Part B The full accrual basis helps to assure that administrators of endowment funds do not dissipate fund assets by inappropriately basing distributions on cash flows rather than economic earnings. By charging depreciation, they reduce reported earnings to reflect the economic decline of the related asset. Consequently, if they distribute all reported earnings, when the asset is fully depreciated, they will have resources on hand equal to the original cost of the asset. These resources could then be used to replace the asset..

1. For what types of activities are internal service funds used to account? Provide several examples.
Is a government required to account for the activities you cite in an internal service fund, or may
it account for them instead in its general fund?
What is the rationale for accounting for nonexpendable endowment funds on a full, rather than a
modified, accrual basis? Why is it important that depreciation be charged on long-term assets
held as fiduciary fund investments?
Solution
Part A
Internal service funds are similar to enterprise funds, only the customers are other governmental
agencies and departments within the municipality. This is more or less a cost reimbursement
account. A printing center, media center, purchasing department, data processing center, etc are
all examples of internal service funds. You shouldn't use the general fund to account for these
services because in doing so you would lose transparency over what things actually cost.
Part B
The full accrual basis helps to assure that administrators of endowment funds do not dissipate
fund assets by inappropriately basing distributions on cash flows rather than economic earnings.
By charging depreciation, they reduce reported earnings to reflect the economic decline of the
related asset. Consequently, if they distribute all reported earnings, when the asset is fully
depreciated, they will have resources on hand equal to the original cost of the asset. These
resources could then be used to replace the asset.