Which statement is true about internal service funds?

• A. They use the accrual basis of accounting and are reported with net position.
• B. They use the modified accrual basis of accounting.
• C. They do not report a net position.
• D. They report only revenue and expenses, not changes in net position.

Answer: (A)

Internal service funds are proprietary funds used to account for services provided by one department to other departments on a cost-reimbursement basis. They follow the accrual basis of accounting, recognizing revenues when earned and expenses when incurred, which leads to reporting assets, liabilities, and net position. Because they use accrual accounting, they prepare a statement of net position and a statement of revenues, expenses, and changes in net position, showing how resources are available and how they change over time.

The modified accrual basis is restricted to governmental funds, not internal service funds, so that option isn’t correct. They do report net position, so saying they do not is also not correct. They also report changes in net position, not just revenue and expenses, so stating that they report only revenue and expenses wouldn’t be accurate.