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Why do governments focus on current financial resources and use the modified accrual basis to account for their governmental funds in the fund financial statements?

Governments focus on current financial resources in their governmental fund financial statements because these funds are intended to show fiscal accountability. It helps illustrate how well the government is meeting its budgetary obligations in the short term. The modified accrual basis supports this by recognizing revenues when they are measurable and available and expenditures when the related liability is incurred. The approach shows that spendable financial resources can help align the purpose of governmental funds. It helps to ensure that tax revenues and other revenues are used for their legally restricted purposes. Additionally, it helps stakeholders, such as taxpayers and legislators to monitor compliance with the budget and assess the government's ability to finance current services (GASB, 2020).

Additionally, by focusing on near-term resources, modified accrual can help show a link between budgetary policies and actual financial performance. This allows to avoid recognizing revenues that are not yet available to fund current operations, which can help prevent an overstated view of resources. This method is effective for evaluating how well a government can meet its short-term obligations without risking its future financial stability (MRSC, 2020).

Why do governments use the full accrual basis to account for their government-wide financial statements? Governments use the full accrual basis to account for their government wide financial statements because their objective is to show an economic resources measurement focus, showing the government's overall financial position and changes in net position over time. In full accrual, revenues are recognized when earned and expenses when incurred, regardless of when cash is received or paid. This captures the cost of using long-lived assets which recognizes long-term obligations and includes depreciation. These provide an overview of the government's financial health. By using full accrual, government-wide statements allow stakeholders to evaluate operational accountability, long-term sustainability, and the government's ability to maintain services in the future (GASB, 2020).

Additionally, this approach facilitates better comparison with private-sector financial reporting, It allows it to make it easier for investors and analysts to assess performance. Also, it helps ensure that all assets and liabilities are reported, which helps reduce the risk of hidden obligations. Furthermore, full accrual accounting can provide decision-makers with accurate picture of the cost of services. This will help supports strategic planning and resource allocation (MRSC, 2020).