In the reconciliation from fund balances to the change in net position of governmental activities, which item would be added to net change in fund balances?

• A. Debt service payments
• B. Reclassifications of fund balances
• C. Construction of capital assets
• D. Depreciation expense

Answer: (C)

When moving from the governmental funds balance sheet to the government-wide statements, you adjust for how transactions are reported on a different basis. Construction of capital assets is treated as an outlay in the funds (a reduction in fund balance) but as a capital asset on the government-wide statements. That increase in capital assets will later contribute to higher net position (through depreciation and asset value over time), so you add the amount spent on construction of capital assets in the reconciliation to net change in government activities.

The other items don’t fit this addition. Debt service payments reduce fund balance but affect long‑term liabilities in a way that isn’t an additive increase to net position in the reconciliation, reclassifications of fund balances are transfers with no net effect on overall net position, and depreciation expense is a noncash charge that reduces net position on the government-wide statements rather than increasing it, so it’s not added in this step.