This is from a test review. I\'m pretty lost on where to go with this problem. T

Question

This is from a test review. I'm pretty lost on where to go with this problem.

The GASB option that allows governments to account for inventories in their governmental funds by either the consumption or the purchases method predates the issuance of GASB Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments (1999) by many years. GASB Statement 34 requires governments to account for inventories in their government-wide statements using the consumption method. Some observers believe that the GASB should no longer allow governments the option to use either of the two methods in their governmental funds statements; that it should permit only a single method. Do you agree? If so, which of the two methods would you require be used? If not, defend the status quo. Explain and justify your response.

Explanation / Answer

The GASB option that allows governments to account for inventories in their governmental funds by either the consumption or the purchases method. The purchases method is inconsistent with full accrual accounting. Hence GASB has recommended every government funds to report the inventory on a consumption basis. Thus, the supplies are used and termed as supplies expense rather than supplies expenditure would be debited. There would be no need for any reclassification of net position (the government-wide equivalent of fund balance). Also, as per GASB standards, the use of the purchases method in full accrual government-wide statements is as inappropriate for prepayments as for inventories, only the consumption method may be used.

Still the GASB has made it optional for the government fund to select the method for accounting and reporting the inventories only on the volume basis because where in the department, the inventories are carried from one period to another of a considerable amount, use of purchases method and carried forward of inventories account is more suitable. In the case, if the inventories purchase and use of inventories is not that voluminous, than the consumption method should be opted as no carried forward of the inventories is there.

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