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Understanding the Primary Components of the Annual Financial Report of 
the United States Government: 

September 2005: 

GAO-05-958SP: 

Preface: 

The U.S. government is the largest, most diverse, most complex, and 
arguably the most important entity on earth today. Useful, timely, and 
reliable financial and performance information is needed to make sound 
decisions on the current results and future direction of vital federal 
programs and polices. The Department of the Treasury, in coordination 
with the Office of Management and Budget, annually prepares the 
Financial Report of the United States Government, hereafter referred to 
as the Consolidated Financial Report (CFR). The CFR is a general-
purpose report of accountability intended internally for members of 
Congress, federal executives and federal program managers, and 
externally primarily for citizens and citizen intermediaries who are 
interested in and have a reasonable understanding of federal government 
activities and are willing to study the information with reasonable 
diligence. Citizen intermediaries include members of the news media, 
analysts, and others who analyze and interpret for the general public 
the more complex and detailed information in the CFR. 

The goal of the CFR, and the subject of this guide, is to make 
available to every American a comprehensive overview of the federal 
government’s finances. As described in the CFR, significant issues 
regarding the reliability and presentation of the federal government’s 
financial information still need to be addressed. For example, the 
Department of Defense’s current financial management problems present a 
significant impediment to our being able to express any opinion on the 
federal government’s consolidated financial statements. Also, 
additional transparency is needed in connection with intragovernmental 
debt, on-budget deficits, and the large and growing per capita and 
intergenerational burden associated with the federal government’s 
growing liabilities and unfunded commitments. At the same time, in its 
current form, the CFR offers certain valuable insights into the overall 
financial operations, condition, and financial outlook of the federal 
government. This information is becoming increasingly more useful as 
the nation’s accounting and reporting issues are resolved. 

GAO prepared this guide to the CFR to help those who seek to gain a 
baseline understanding of the significant information provided in the 
primary components that make up the CFR, especially the financial 
statements. This guide explains the purpose of each CFR component and 
provides illustrative financial information using actual fiscal year 
2004 and 2003 data to focus readers on the kinds of significant 
information found in the various parts of the CFR. Because the 
illustrative financial information contained in this guide minimizes 
detail in order to highlight significant line items, it does not show 
all of the items included in the federal government’s actual CFR or 
explain the less significant ones. Changes to accounting standards and 
reporting requirements may affect the applicability of certain portions 
of this guide to future CFRs. Also, this guide is not intended
to help people who are interested in understanding the financial 
statements of individual federal agencies, most of which publish their 
own financial statements. 

The annual financial reports of the United States Government, for which 
this guide was prepared, are available through Treasury’s Web site at 
[hyperlink, http://www.fms.treas.gov/fr/index.html]. 

This guide was prepared under the direction of Jeffrey C. Steinhoff, 
Managing Director, Financial Management and Assurance Team and Gary T. 
Engel, Director, Financial Management and Assurance Team, who may be 
reached at (202) 512-8815 or engelg@gao.gov. 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 

[End of section] 

Contents: 

The Consolidated Financial Report: 

Management’s Discussion and Analysis: 

Government Accountability Office Report: 

Financial Statements: 

Some Important Financial Statement Concepts: 

Composition of the Financial Statements: 

Statement of Net Cost: 

Statement of Operations and Changes in Net Position: 

Reconciliation of Net Operating Revenue (or Cost) and Unified Budget 
Surplus (or Deficit): 

Statement of Changes in Cash Balance from Unified Budget and Other 
Activities: 

Balance Sheet: 

Statement of Social Insurance (Stewardship Information): 

Stewardship Information - Other Stewardship Information: 

Notes to the Financial Statements: 

Supplemental Information: 

How the Federal Government’s Financial Statements Relate to One 
Another: 

[End of section] 

The Consolidated Financial Report: 

Similar to a corporation’s annual report, the Consolidated Financial 
Report (CFR) is the federal government’s general-purpose report of 
accountability to the American public on its finances. It is intended 
to: 

* provide an overall view of the annual financial results of operations 
and the financial position of the federal government, including long-
term commitments and obligations; 

* demonstrate accountability for the money the federal government 
raises through taxes and for spending money according to the laws and 
regulations that govern the federal government’s budgets and financial 
operations; 

* report on the federal government’s operating performance, accounting 
systems, and internal control; and: 

* demonstrate the federal government’s stewardship over its resources. 

The consolidated financial statements (CFS) in the CFR, submitted by 
the Department of the Treasury in coordination with the Office of 
Management and Budget, present consolidated and summarized financial 
information from the various federal government agencies and 
departments. The federal government is responsible for: 

* preparing the annual CFS in conformity with U.S. generally accepted 
accounting principles; 

* establishing, maintaining, and assessing internal control to provide 
reasonable assurance that the control objectives of the Federal 
Managers’ Financial Integrity Act, 31 U.S.C. 3512 (c), (d) are met; 
and: 

* complying with applicable laws and regulations. 

The Federal Accounting Standards Advisory Board (FASAB), after 
considering the financial and budgetary information needs of citizens, 
congressional oversight groups, executive agencies, and other users, 
promulgates the accounting and reporting standards essential for public 
accountability. 

GAO conducts the audit of the federal government’s financial 
information contained in the financial statements in the CFR, along 
with the accompanying notes to the financial statements, with the 
objective being to provide an opinion on the fairness of the financial
statements taken as a whole. 

The CFR is organized into six major sections: 

* Management’s Discussion and Analysis provides management’s insights 
into the information presented in the federal government’s financial 
statements and the Statement of Social Insurance. 

* Government Accountability Office Report presents the results of GAO’s 
audit of the financial statements. 

* Financial Statements consolidate financial information from federal 
entities to provide an overall view of the federal government’s 
financial operations and condition. 

* Stewardship Information provides information about the federal 
government’s resources and responsibilities that are not included on 
the federal government’s Balance Sheet, the largest of which relate to 
social insurance programs such as Social Security and Medicare. 

* Notes to the Financial Statements provide important disclosures and 
details related to information reported on the statements, and: 

* Supplemental Information provides additional information about 
selected financial operations of the federal government. 

This guide discusses the significant content of each section in the 
CFR, with a primary emphasis on the federal government’s financial 
statements. 

Management’s Discussion and Analysis: 

The Management’s Discussion and Analysis (MD&A) section of the CFR 
provides important insights into the information presented in the 
federal government’s financial statements and the Statement of Social 
Insurance. It presents management’s perspective on the financial 
information and overall operations of the federal government. 

The MD&A is intended to provide readers with a narrative overview and 
analysis of the federal government’s performance, financial position, 
and financial operations. It is also intended to address the federal 
government’s performance measures, financial statements, systems and 
controls, compliance with laws and regulations, and actions taken or 
planned to address problems. For example, the fiscal year 2004 MD&A: 

* includes a table under the heading Additional Responsibilities that 
shows the federal government’s summary of the nation’s total 
liabilities and responsibilities, including the projected continuing 
significant claims that Social Security and Medicare programs have on
the nation’s budgetary resources; 

* highlights the significant reporting items identified for the year, 
such as the estimated long-term (75-year) cost and financial impact of 
the new Medicare prescription drug plan and the increased debt ceiling; 

* discusses the federal government’s financial results for the year, 
including trends in net costs, assets, and liabilities, providing 
management’s explanations for significant changes; and: 

* discusses the nation’s economic and budget results, the federal 
government’s organization, and operating performance measures. 

Government Accountability Office Report: 

GAO’s report tells readers whether or not, or to what extent, they can 
rely on the information provided in the CFS. GAO conducts its audit of 
the CFS in accordance with U.S. generally accepted government auditing 
standards, obtains and evaluates evidence, and provides a formal written
conclusion on whether the financial statements taken as a whole are 
presented fairly, in all material respects, in conformity with U.S. 
generally accepted accounting principles. The MD&A, stewardship, and 
supplemental information in the CFR are not required to be audited. 

The auditor may express an unqualified opinion, a qualified opinion, or 
an adverse opinion, or disclaim an opinion on the fairness of the 
financial statements taken as a whole. In an unqualified opinion, the 
auditor states that the information in the financial statements and
accompanying notes is presented fairly, in all material respects, in 
conformity with U.S. generally accepted accounting principles. A 
qualified opinion discloses exceptions to an unqualified opinion, such 
as inadequate disclosures or selected nonconformities with U.S. 
generally accepted accounting principles. However, in a qualified 
opinion, the exceptions are not considered material enough to affect 
the fairness of the statements taken as a whole. Exceptions considered 
too serious or pervasive to justify a qualified opinion result in an 
adverse opinion, which states that the financial statements taken as a 
whole are not presented fairly, in all material respects, in conformity
with U.S. generally accepted accounting principles. The circumstances 
related to such exceptions are also disclosed in the auditor’s report. 
A disclaimer of opinion may result when the auditor is unable to obtain 
sufficient information upon which to base an opinion. The circumstances 
related to a disclaimer are described in the auditor’s report. For 
example, GAO disclaimed an opinion on the fiscal year 2004 CFS because 
of the effects of persistent material weaknesses in the federal
government’s internal control and certain accounting and reporting 
practices that limited the scope of work that could be performed, a 
major element of which relates to the Department of Defense’s continued 
inability to undergo an audit of its financial statements. 

GAO’s report also includes an opinion on whether the federal government 
had effective internal control over financial reporting and over 
compliance with laws and regulations. It also reports on any identified 
significant matters of noncompliance with selected provisions of 
applicable laws and regulations. 

Financial Statements: 

Some Important Financial Statement Concepts: 

Before considering the purpose and content of each of the federal 
government’s consolidated financial statements, it is important to 
understand certain concepts about the nature of the federal 
government’s financial statements, especially the federal government’s 
(1) use of cash and accrual accounting and (2) treatment of 
transactions between federal entities. 

Cash and Accrual Accounting: 

The federal government generally uses accrual accounting to record and 
report financial information contained in its financial statements. 
Accrual accounting, which is also used by private business enterprises, 
is the basis for U.S. generally accepted accounting principles for 
federal government entities. It is intended to provide a complete 
picture of the federal government’s financial operations and financial 
position. The federal government primarily uses the cash basis of 
accounting for its budget, which is the federal government’s primary 
financial planning and control tool. The budget helps establish 
national spending priorities and helps ensure that the federal 
government spends taxpayers’ money in accordance with applicable 
appropriations laws. Differences between the federal government’s 
operating results and its budget results are shown in the statement 
called the Reconciliation of Net Operating Revenue (or Cost) and Unified
Budget Surplus (or Deficit). Accordingly, understanding the basic 
concepts of the cash basis and accrual basis of accounting is important 
to understanding the information included in the federal government’s 
financial statements. 

Cash-Based Accounting: 

Because it is similar to keeping a checkbook, the cash basis of 
accounting (used to account for and report budget results) is perhaps 
the easier of the two bases of accounting to understand. The cash basis 
focus is on cash receipts, cash disbursements, and the difference 
between the two amounts. With relatively few exceptions, budget 
receipts are recorded when cash is received and budget outlays are 
recorded when cash is disbursed. The difference between cash receipts 
and cash disbursements at the end of the fiscal year is reported as the 
annual budget surplus or budget deficit. For example, for fiscal year 
2004 the federal government reported a unified budget deficit of about 
$412 billion (explained in more detail later in the guide). This 
deficit was based on reported cash outlays of about $2,292 billion 
compared with reported cash receipts of about $1,880 billion. It is 
important to note here that the federal government’s cash receipts used 
in determining the unified budget deficit include surplus funds 
earmarked for the Social Security trust funds and certain other trust 
funds. 

Accrual-Based Accounting: 

The accrual basis of accounting recognizes revenue when it is earned 
and recognizes expenses in the period incurred, without regard to when 
cash is received or disbursed. The federal government, which receives 
most of its revenue from taxes, nevertheless recognizes tax revenue 
when it is collected, under an accepted modified cash basis of 
accounting. 

Expenses are recognized during the period in which they are incurred. 
Accrual accounting, for example, recognizes that while the employee is 
working, the employee earns not only a salary but also health, pension, 
and other benefits that will be paid in the future during the employee’s
retirement. Accordingly, each year, on the basis of actuarial 
calculations of benefits earned, the federal government records as an 
expense (operating cost) an estimated amount for these earned benefits 
and increases the related liability—Federal Employee and Veteran 
Benefits Payable—for the amount owed to its employees, both civilian 
and military. Thus, the accrual basis of accounting is intended to 
provide a complete financial picture for the CFR reader of the federal 
government’s annual employee-related costs. 

Also under accrual accounting, the federal government reports physical 
assets when they are acquired and records the related expenses only 
when the assets are sold or when the federal government benefits from 
their use or consumption. Physical assets consist of inventories of
goods held for sale or for future consumption, and long-lived or fixed” 
assets such as land, buildings, and equipment. In the case of assets 
such as buildings and equipment, the measure of benefit consumption is 
known as depreciation. 

Treatment of Transactions between Federal Entities: 

In the normal course of federal government operations, federal agencies 
and departments purchase and sell goods and services among themselves. 
These types of activities between federal agencies and departments are 
called intragovernmental transactions. They also include amounts the
federal government borrows from the Social Security trust funds. 
Intragovernmental transactions are recorded in federal agencies’ and 
departments’ accounts and financial statements along with transactions 
conducted with outside entities. These intragovernmental transactions 
are to be eliminated from the federal government’s consolidated 
accounts and financial statements so that the totals for the affected 
accounts, when summarized for all federal government agencies and 
departments, are not overstated for the federal government as a whole. 

Composition of the Financial Statements: 

The federal government’s consolidated financial statements consist of 
five financial statements that are related and a Statement of Social 
Insurance (page 27 provides discussion and a simplified overview of how 
these five financial statements are related). Each of the five 
financial statements presents 2 years of financial data so that readers 
can compare the federal government’s financial information for the 
current and prior years. The financial statements are introduced below 
in the order in which they appear in the CFR. 

* The first statement shows how much it costs on the accrual basis of 
accounting to operate the federal government in total, and by major 
department and agency. This statement is called the Statement of Net 
Cost. 

* The second statement shows the accrual-based results of the federal 
government’s operations—the extent to which the federal government’s 
tax revenue covers the net cost. It also shows how these results 
(called the net operating revenue or net operating cost) affect the 
federal government’s net financial position—the difference between its 
assets (what it owns) and its liabilities (what it owes). This 
statement is called the Statement of Operations and Changes in Net 
Position. 

* The third statement shows the relationship between the accrual-based 
operating results and the cash-based budget results. It begins with the 
net operating result (revenue or cost) from the Statement of Operations 
and Changes in Net Position and shows the items that explain the 
difference between that amount and the federal government’s annual cash-
based budget surplus or deficit. This statement is called the 
Reconciliation of Net Operating Revenue (or Cost) and Unified Budget 
Surplus (or Deficit). 

* The fourth statement shows the relationship between the cash-based 
budget surplus or deficit and the change in the federal government’s 
operating cash balance. It begins with the cash-based budget surplus or 
deficit and shows the items that explain either how the federal 
government used a budget surplus or financed a budget deficit. This 
statement is called the Statement of Changes in Cash Balance from 
Unified Budget and Other Activities. 

* The fifth statement is the federal government’s Balance Sheet. It 
shows the nature and amount of the federal government’s assets (what it 
owns) and liabilities (what it owes) and the difference between the 
two, called the net position. This net position amount is the same as 
the net position amount reported in the Statement of Operations and 
Changes in Net Position. Under current federal accounting standards, 
the federal government’s powers to tax, certain natural resources not 
used in operations, and certain long-range commitments such as Social 
Security and Medicare are not included on the federal government’s 
Balance Sheet. These types of resources and responsibilities are 
discussed in the stewardship section of the CFR. 

The additional statement, titled the Statement of Social Insurance, 
shows how much money the federal government estimates it would need 
today to cover the projected long-term commitments of its major social 
insurance programs, such as Social Security and Medicare. For fiscal 
year 2004, this statement is presented in the stewardship section of 
the CFR. The federal government will be including a Statement of Social 
Insurance in the CFR as a sixth financial statement beginning in fiscal 
year 2006. 

Also, beginning with the fiscal year 2006 CFR, additional information 
will be provided for certain revenue. Currently, federal revenue 
earmarked for certain funds, such as the Social Security trust funds, 
is not separately presented on the face of the federal government’s 
consolidated financial statements. To improve the transparency of this 
important source of revenue, the Federal Accounting Standards Advisory 
Board (FASAB) has issued a standard for identifying and reporting 
earmarked funds. According to FASAB, an earmarked fund receives 
specifically identified revenue and other financing sources that (1) 
remain available over time, (2) are required by statute to be used for
designated activities, benefits, or purposes, and (3) must be accounted 
for separately from the government’s general revenues. At the 
governmentwide level, earmarked revenue will be shown separately on the 
Statement of Operations and Changes in Net Position. The Balance Sheet 
will show separately the portion of net position attributable to 
earmarked funds. This information is intended to assist users of 
financial statements in understanding the federal government’s results 
of operations and related commitments. 

Statement of Net Cost: 

The Statement of Net Cost is intended to show how much it cost to 
operate the federal government by federal agency and department, and in 
total. It provides costs on an accrual basis of accounting, which 
recognizes expenses when they are incurred, regardless of when cash is
disbursed. Thus, it provides cost information for the accounting period 
that can be related to the goods produced, services rendered, and the 
outcomes of the programs of the federal government’s agencies and 
departments for the same period. Since the actuarial calculations for 
social insurance costs are not reported as liabilities on the Balance 
Sheet, the corresponding costs also are excluded from the cost of 
government operations. An important concept of the Statement of Net 
Cost is that the revenue earned by federal agencies and departments 
from their operations, such as admissions to national parks and fees 
paid for postal services and stamps, is subtracted from their cost of
operations. The net cost is the amount to be financed from tax revenue 
and, as needed, borrowing. 

Readers can use information from this statement to identify such things 
as: 

* how much the federal government’s net cost increased or decreased 
from the prior fiscal year; 

* which agencies or departments accounted for most of the federal 
government’s net cost, and: 

* which agency or department experienced the largest increase and which 
experienced the largest decrease in net cost from the previous year. 

For example, from fiscal year 2003 to fiscal year 2004, the federal 
government’s total net cost increased about $36.8 billion. Also, the 
Department of Defense, the Department of Health and Human Services, and 
the Social Security Administration together accounted for about $1.7 
trillion, or about 68 percent, of the approximately $2.5 trillion total 
net cost reported for fiscal year 2004. And, for fiscal year 2004, the 
Department of Defense reported the largest cost increase, about $100.1 
billion, and the Department of Veterans Affairs reported the largest 
cost decrease, about $125.7 billion. 

It is important to note that agencies that use actuarial projections in 
determining their costs and related liabilities may experience large 
fluctuations in annual costs due to program benefit changes and changes 
to the actuarial assumptions. The MD&A explains that the primary cause 
of the Department of Defense’s increase was a new law that increased 
the Military Retirement Fund’s actuarial liability by about $91 
billion. The primary cause of the Department of Veterans Affairs’ 
decrease was changes in interest rates and other actuarial assumptions. 
Also, the agencies’ costs shown on the Statement of Net Cost include 
certain governmentwide allocated costs. The change in the U.S. Postal 
Service costs resulted primarily from a change in how certain long-
range pension costs were allocated to it beginning in fiscal year 2004. 

Table: Illustrative Net Cost Information (In billions of dollars): 

Department of Defense: 
Year ended Sept. 30, 2004, Gross Cost: 671.2; 
Year ended Sept. 30, 2004, Earned Revenue: 22.3; 
Year ended Sept. 30, 2004, Net Cost: 649.8; 
Year ended Sept. 30, 2003, Gross Cost: 562.2; 
Year ended Sept. 30, 2003, Earned Revenue: 12.5; 
Year ended Sept. 30, 2003, Net Cost: 549.7. 

Department of Health and Human Services: 
Year ended Sept. 30, 2004, Gross Cost: 583.9; 
Year ended Sept. 30, 2004, Earned Revenue: 33.4; 
Year ended Sept. 30, 2004, Net Cost: 550.5; 
Year ended Sept. 30, 2003, Gross Cost: 542.3; 
Year ended Sept. 30, 2003, Earned Revenue: 29.7; 
Year ended Sept. 30, 2003, Net Cost: 512.6. 

Social Security Administration: 
Year ended Sept. 30, 2004, Gross Cost: 534.9; 
Year ended Sept. 30, 2004, Earned Revenue: 2.6; 
Year ended Sept. 30, 2004, Net Cost: 532.3; 
Year ended Sept. 30, 2003, Gross Cost: 512.6; 
Year ended Sept. 30, 2003, Earned Revenue: 0.3; 
Year ended Sept. 30, 2003, Net Cost: 512.3. 

Department of Veterans Affairs: 
Year ended Sept. 30, 2004, Gross Cost: 51.1; 
Year ended Sept. 30, 2004, Earned Revenue: 3.2; 
Year ended Sept. 30, 2004, Net Cost: 47.9; 
Year ended Sept. 30, 2003, Gross Cost: 175.7; 
Year ended Sept. 30, 2003, Earned Revenue: 2.1; 
Year ended Sept. 30, 2003, Net Cost: 173.6. 

Interest on Treasury securities held by the public: 
Year ended Sept. 30, 2004, Gross Cost: 158.3; 
Year ended Sept. 30, 2004, Earned Revenue: [Empty]; 
Year ended Sept. 30, 2004, Net Cost: 158.3; 
Year ended Sept. 30, 2003, Gross Cost: 156.8; 
Year ended Sept. 30, 2003, Earned Revenue: [Empty]; 
Year ended Sept. 30, 2003, Net Cost: 156.8. 

U.S. Postal Service: 
Year ended Sept. 30, 2004, Gross Cost: 54.0; 
Year ended Sept. 30, 2004, Earned Revenue: 68.0; 
Year ended Sept. 30, 2004, Net Cost: (14.0); 
Year ended Sept. 30, 2003, Gross Cost: 81.5; 
Year ended Sept. 30, 2003, Earned Revenue: 67.6; 
Year ended Sept. 30, 2003, Net Cost: 13.9. 

Other components: 
Year ended Sept. 30, 2004, Gross Cost: 677.7; 
Year ended Sept. 30, 2004, Earned Revenue: 77.6; 
Year ended Sept. 30, 2004, Net Cost: 600.1; 
Year ended Sept. 30, 2003, Gross Cost: 621.8; 
Year ended Sept. 30, 2003, Earned Revenue: 52.6; 
Year ended Sept. 30, 2003, Net Cost: 569.2. 

Total: 
Year ended Sept. 30, 2004, Gross Cost: 2,732.0; 
Year ended Sept. 30, 2004, Earned Revenue: 207.1; 
Year ended Sept. 30, 2004, Net Cost: 2,524.9; 
Year ended Sept. 30, 2003, Gross Cost: 2,652.9; 
Year ended Sept. 30, 2003, Earned Revenue: 164.8; 
Year ended Sept. 30, 2003, Net Cost: 2,488.1. 

Gross Cost is the accrual-based total cost of the federal government’s 
operations for the year. The statement presents gross cost by federal 
agency and department from highest to lowest. Also, it includes the 
cost of interest on Treasury securities held by the public, which 
includes foreign investors. 

Earned Revenue comes from fees charged for goods and services. The fees 
charged for postal services such as stamps, is a well-known example of 
earned revenue. Earned revenue shows how much the federal agencies and 
departments earn from their operations to cover their gross costs, as 
opposed to relying on taxes and borrowing to cover the costs. 

Net Cost is the portion of the gross cost left after subtracting earned 
revenue. The federal government funds the net cost of government from 
tax revenue and, as needed, by borrowing. 

[End of table] 

Statement of Operations and Changes in Net Position: 

Similar to the income statement of a corporation, the Statement of 
Operations and Changes in Net Position shows the financial results of 
the federal government’s annual operations (tax revenue less net cost). 
It also shows the effect these results have on the federal government’s 
net position— the difference between its assets and liabilities. 

An important concept for this statement is the relationship between the 
results of operations and the Balance Sheet. The financial results of 
the federal government’s operations should be directly reflected in the 
values of its assets and liabilities, which determine the federal 
government’s net financial position. For example, a net operating cost 
of $500 billion also reduces the federal government’s net position by 
$500 billion. However, unexplained differences between the net 
operating cost and the changes in net position have been reported in 
the CFR. The federal government’s Statement of Operations and Changes 
in Net Position has included these unexplained differences as 
“Unreconciled transactions affecting the change in net position” (a net 
amount of $3.4 billion for fiscal year 2004). 

Adjustments to beginning balances, shown as a change in accounting 
principle and prior period adjustments in the financial statements, may 
also affect the federal government’s net position. Adjustments result 
from corrections of significant errors in the financial statements of 
prior years or the effect of using a new or different accounting 
principle. Such adjustments are reflected in the beginning net 
position. The note explaining adjustments on the fiscal year 2003 
Statement of Operations and Changes in Net Position shows that about 
$383 billion of the approximately $394 billion of adjustments was due 
to a change in accounting principle that eliminated the category of
national defense property, plant, and equipment as stewardship 
information, and included such assets on the Balance Sheet. 

Readers can use information from this statement to identify such things 
as: 

* how much tax revenue the federal government generated in total and 
from its various categories of taxes; 

* the extent to which tax revenue covered the federal government’s net 
cost, and; 

* whether the financial status of the federal government—its net 
position—has improved or deteriorated from the prior year. 

For example, about $1.5 trillion (approximately 79 percent) of the 
federal government’s 2004 reported tax revenue came from individual 
taxpayers. Also, the federal government’s 2004 reported net cost 
exceeded its tax revenue, culminating in a net operating cost for 2004 
of about $615.6 billion. Moreover, the reported net operating costs for 
fiscal years 2004 and 2003—about $615.6 billion and $667.6 billion, 
respectively—together decreased the federal government’s net position
by almost $1.3 trillion. 

Table: Illustrative Information on Operations and Changes in Net 
Position (In billions of dollars): 

Operations: Revenue; 
Individual income tax and tax withholdings: 
Year ended Sept. 30, 2004: 1,512.3; 
Year ended Sept. 30, 2003: 1,481.3. 

Operations: Revenue; 
Corporate and other taxes and miscellaneous revenues: 
Year ended Sept. 30, 2004: 400.4; 
Year ended Sept. 30, 2003: 314.7. 

Operations: Revenue; 
Total Revenue: 
Year ended Sept. 30, 2004: 1,912.7; 
Year ended Sept. 30, 2003: 1,796.0. 

Operations: Net Cost of Government Operations: 
Year ended Sept. 30, 2004: (2,524.9); 
Year ended Sept. 30, 2003: (2,488.1). 

Operations: Unreconciled transactions affecting the change in
net position: 
Year ended Sept. 30, 2004: (3.4); 
Year ended Sept. 30, 2003: (24.5). 

Operations: Net Operating Cost (Results of Operations): 
Year ended Sept. 30, 2004: (615.6); 
Year ended Sept. 30, 2003: (667.6). 

Changes in Net Position: Net Position, Beginning of Period: 
Year ended Sept. 30, 2004: (7,094.2); 
Year ended Sept. 30, 2003: (6,820.2). 

Changes in Net Position: Adjustments to beginning balances: 
Year ended Sept. 30, 2004: [Empty]; 
Year ended Sept. 30, 2003: 393.6. 

Changes in Net Position: Results of Operations: 
Year ended Sept. 30, 2004: (615.6); 
Year ended Sept. 30, 2003: (667.6). 

Net Position, End of Period: 
Year ended Sept. 30, 2004: (7,709.8); 
Year ended Sept. 30, 2003: (7,094.2). 

Revenue primarily comes from federal income tax collections, which 
includes taxes earmarked for Social Security and Medicare. 

Net Cost of Government Operations is the net cost from the Statement of 
Net Cost. 

Net Operating Cost is the financial Results of Operations—the 
difference between the tax revenue and the net cost of government 
operations plus the net amount of any unreconciled transactions 
affecting the change in net position. 

Net Position is the difference between the assets and liabilities 
reported on the Balance Sheet. 

[End of table] 

Reconciliation of Net Operating Revenue (or Cost) and Unified Budget 
Surplus (or Deficit): 

This statement is intended to demonstrate the federal government’s 
accountability to the budget by reconciling its accrual-based net 
operating results to its cash-based “unified budget” results. The term 
unified budget refers to the budget compilation that includes the full 
range of federal activities, both “on-budget” and “off-budget” amounts. 
By law, Social Security’s and the Postal Service’s activities are 
considered off-budget. On-budget programs and costs are those not 
excluded from the budget by law. The approximate $412 billion fiscal 
year 2004 unified budget deficit shown on this statement consists of 
about $567 billion on-budget deficit and approximately $155 billion off-
budget surplus. The off-budget surplus consists mostly of surplus 
revenue that the federal government borrowed from the Social Security 
trust funds (about $151 billion for fiscal year 2004) to finance the 
federal government’s current operations. Of the Social Security trust 
funds’ $151 billion fiscal year 2004 surplus, about $65 billion came 
from cash receipts and about $86 billion came from intragovernmental 
interest. 

Readers can use information from this statement to identify such things 
as: 

* major differences between the net operating cost and unified budget 
deficit; 

* how much of the federal government’s operating cost was attributable 
to the depreciation of its assets, and; 

* how much the federal government spent on capitalized fixed assets. 

A major difference between the two bases of accounting for fiscal year 
2004 is that changes in accrued expenses related to employee and 
veteran benefits, which totaled about $182 billion, are included in the 
net operating cost but not in the budget. In this statement, accrued 
benefit expenses are shown as an increase in liabilities for employee 
and veteran benefits. Also, the federal government reported about $89.9 
billion for depreciation expense for fiscal year 2004, which is 
included in the net operating cost but not in the budget. In addition, 
the amount identified on this statement for the purchase of capitalized 
fixed assets for fiscal year 2004 totaled about $112.1 billion, 
consisting of approximately $83.2 billion for the Department of Defense 
and about $28.9 billion for civilian agencies. 

Table: Illustrative Reconciliation of Net Operating Cost and Unified 
Budget Deficit (In billions of dollars): 

Net Operating Cost (Results of Operations): 
Year ended Sept. 30, 2004: (615.6); 
Year ended Sept. 30, 2003: (667.6). 

Components of Net Operating Cost Not Part of the Budget Deficit: 
Increase in liabilities for employee and veteran benefits: 
Year ended Sept. 30, 2004: 182.1; 
Year ended Sept. 30, 2003: 290.6. 

Components of Net Operating Cost Not Part of the Budget Deficit: 
Decrease in environmental liabilities: 
Year ended Sept. 30, 2004: (0.7); 
Year ended Sept. 30, 2003: (23.1). 

Components of Net Operating Cost Not Part of the Budget Deficit: 
Depreciation expense: 
Year ended Sept. 30, 2004: 89.9; 
Year ended Sept. 30, 2003: 71.2. 

Components of Net Operating Cost Not Part of the Budget Deficit: Other: 
Year ended Sept. 30, 2004: 34.2; 
Year ended Sept. 30, 2003: 47.1. 

Components of the Budget Deficit Not Part of the Net Operating Cost: 
Cash outlays for capitalized fixed assets: 
Year ended Sept. 30, 2004: (112.1); 
Year ended Sept. 30, 2003: (102.0). 

Components of the Budget Deficit Not Part of the Net Operating Cost: 
Other: 
Year ended Sept. 30, 2004: 9.9; 
Year ended Sept. 30, 2003: 9.0. 

The Unified Budget Deficit: 
Year ended Sept. 30, 2004: (412.3); 
Year ended Sept. 30, 2003: (374.8). 

The Net Operating Cost comes from the Statement of Operations and 
Changes in Net Position. It primarily represents the difference between 
the federal government’s tax revenue and expenses. 

Components of Net Operating Cost Not Part of the Budget Deficit are 
mostly current year expenses under accrual accounting that do not 
involve current-year cash outlays. Increases in liabilities such as 
employee and veteran benefits and depreciation expense are recognized as
current-year operating expenses under accrual accounting, but not in 
the budget. 

Components of the Budget Deficit Not Part of Net Operating Cost consist 
mostly of current-year cash outlays for transactions that do not 
involve current-year expenses, such as outlays to purchase buildings 
and equipment that the federal government capitalizes (records on its 
Balance Sheet as assets) and depreciates (expenses) as they are used in 
operations. The outlays to purchase these assets increase the unified 
budget deficit but not the current net operating cost. 

The Unified Budget Deficit represents the difference between cash 
receipts (primarily from taxes) and cash outlays for the year for all 
programs, on- and off-budget. As previously noted, it includes the 
surplus cash receipts earmarked for the Social Security trust funds, 
about $65 billion for fiscal year 2004. 

[End of table] 

Statement of Changes in Cash Balance from Unified Budget and Other 
Activities: 

Since the federal government operates its budget principally on a cash 
basis, the primary purpose of the Statement of Changes in Cash Balance 
from Unified Budget and Other Activities is to report how the annual 
unified budget surplus or deficit relates to the federal government’s 
borrowing (debt held by the public) and changes in operating cash. It 
explains why a unified budget surplus or deficit normally would not 
result in an equal change in the government’s operating cash balance. 

Readers can use the information provided in this statement to identify: 

* increases in federal borrowing as a result of the federal government 
spending more than it collected in taxes; 

* decreases in federal borrowing as a result of a budget surplus; 

* changes in the government’s operating cash balance, and; 

* how much cash the federal government spent to pay interest on debt 
held by the public. 

For example, for fiscal year 2004, the federal government reported that 
it increased its net borrowings from the public by about $379.7 billion 
to help finance the approximately $412.3 billion fiscal year 2004 
unified budget deficit. It did this by borrowing about $4,759.2 billion 
from the public and paying off debts of approximately $4,379.5 billion. 
The federal government also reported that it used about $144.7 billion 
of its cash to pay interest on debt held by the public. 

Table: Illustrative Information on Changes in Cash Balance from
Unified Budget and Other Activities (In billions of dollars): 

Unified Budget Deficit: 
Year ended Sept. 30, 2004: (412.3); 
Year ended Sept. 30, 2003: (374.8). 

Adjustments for Noncash Outlays Included in the Budget: Interest 
accrued by Treasury on debt held by the public: 
Year ended Sept. 30, 2004: 145.6; 
Year ended Sept. 30, 2003: 143.3. 

Adjustments for Noncash Outlays Included in the Budget: Subsidy 
expense: 
Year ended Sept. 30, 2004: (6.6); 
Year ended Sept. 30, 2003: (11.8). 

Adjustments for Noncash Outlays Included in the Budget: Subtotal: 
Year ended Sept. 30, 2004: 139.0; 
Year ended Sept. 30, 2003: 131.5. 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from financing activity, Borrowings from the public: 
Year ended Sept. 30, 2004: 4,759.2; 
Year ended Sept. 30, 2003: 4,289.1. 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from financing activity, Repayment of debt held by the 
public: 
Year ended Sept. 30, 2004: (4,379.5); 
Year ended Sept. 30, 2003: (3,914.7). 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from financing activity, Subtotal: 
Year ended Sept. 30, 2004: 379.7; 
Year ended Sept. 30, 2003: 374.4. 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from monetary and other activity, Interest paid by 
Treasury on debt held by the public: 
Year ended Sept. 30, 2004: (144.7); 
Year ended Sept. 30, 2003: (144.4). 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from monetary and other activity, Other: 
Year ended Sept. 30, 2004: 18.5; 
Year ended Sept. 30, 2003: 3.2. 

Items Affecting the Cash Balance Not Included in the Budget: Net 
transactions from monetary and other activity, Subtotal: 
Year ended Sept. 30, 2004: (126.2); 
Year ended Sept. 30, 2003: (141.2). 

Decrease in Operating Cash Balance: 
Year ended Sept. 30, 2004: (19.8); 
Year ended Sept. 30, 2003: (10.1). 

Operating Cash Balance, Beginning of Period: 
Year ended Sept. 30, 2004: 50.8; 
Year ended Sept. 30, 2003: 60.9. 

Operating Cash Balance, End of Period: 
Year ended Sept. 30, 2004: 31.0; 
Year ended Sept. 30, 2003: 50.8. 

An exception to the cash-based budget is the reporting of accrued 
interest on debt held by the public. To calculate the change in 
operating cash balance, interest for the unified budget results is
adjusted to include only the cash outlays. Specifically, the amount 
reported for interest accrued by Treasury on debt held by the public is 
added to the unified budget results and the amount reported for 
interest paid by Treasury on debt held by the public is subtracted from 
the unified budget results. 

The major financing activities include borrowings from the public and 
repayment of debt held by the public. Net borrowings provide operating 
cash needed to finance the budget deficit. 

[End of table] 

Balance Sheet: 

The Balance Sheet shows an end-of-year view of the federal government’s 
overall financial position, its assets (what it owns), its liabilities 
(what it owes), and the difference between the two (its net position). 
It is important to note that the Balance Sheet excludes the sovereign 
powers of the federal government to tax, regulate commerce, and set 
monetary policy, as well as certain nonoperational resources, including 
national parks and natural resources, over which the federal government 
is a steward. In addition, the federal government’s responsibilities 
are much broader than the liabilities reported on the Balance Sheet, 
including the potential commitments related to and the impact of social 
insurance programs such as Social Security and Medicare over the long
term. These resources and responsibilities are described in the 
Stewardship section of the CFR. 

Readers can use information from this statement to identify such things 
as: 

* the makeup of the federal government’s assets and liabilities; 

* which liabilities increased the most, and; 

* whether the federal government has a positive net position—more 
assets than liabilities—or a negative net position—more liabilities 
than assets. 

For example, the two largest liabilities are (1) about $4.3 trillion of 
debt held by the public, from whom the federal government borrowed 
money to pay for past deficits, and (2) about $4.1 trillion of pension 
and benefits owed to civilian employees and military personnel. These 
two items also account for the largest increases in liabilities for 
fiscal year 2004: federal debt held by the public and accrued interest 
increased by about $384.5 billion, and federal employee and veteran
benefits payable increased by approximately $182.1 billion. Also, for 
fiscal year 2004, the federal government’s negative net position was 
about $7.7 trillion. 

Other Considerations: 

Certain federal trust funds, such as the Social Security trust funds, 
have been running surpluses, which are loaned to the Treasury and 
reduce the current need for the federal government to borrow from the 
public to finance current operations. The transactions relating to the 
use of such surpluses are eliminated from the federal government’s 
Balance Sheet because, in effect, they represent loans from one part of 
the government to another. Importantly, these intragovernmental debt 
holdings, which are not shown on the Balance Sheet, also constitute 
future obligations of the Treasury because the Treasury must provide 
cash to redeem these securities in order for the trust funds to pay 
benefits or other obligations as they come due. 

Table: Illustrative Balance Sheet Information (In billions of dollars): 

Assets: Cash and other monetary assets: 
As of Sept. 30, 2004: 97.0; 
As of Sept. 30, 2004: 119.6. 

Assets: Loans receivable, net: 
As of Sept. 30, 2004: 220.9; 
As of Sept. 30, 2004: 221.1. 

Assets: Inventories and related property, net: 
As of Sept. 30, 2004: 261.5; 
As of Sept. 30, 2004: 252.7. 

Assets: Property, plant, and equipment, net: 
As of Sept. 30, 2004: 652.7; 
As of Sept. 30, 2004: 658.2. 

Assets: Other assets: 
As of Sept. 30, 2004: 165.2; 
As of Sept. 30, 2004: 153.8. 

Total assets: 
As of Sept. 30, 2004: 1,397.3; 
As of Sept. 30, 2004: 1,405.4. 

Liabilities: Federal debt securities held by the public and accrued 
interest: 
As of Sept. 30, 2004: 4,329.4; 
As of Sept. 30, 2004: 3,944.9. 

Liabilities: Federal employee and veteran benefits payable: 
As of Sept. 30, 2004: 4,062.1; 
As of Sept. 30, 2004: 3,880.0. 

Liabilities: Environmental and disposal liabilities: 
As of Sept. 30, 2004: 249.2; 
As of Sept. 30, 2004: 249.9. 

Liabilities: Other liabilities: 
As of Sept. 30, 2004: 466.4; 
As of Sept. 30, 2004: 424.8. 

Total liabilities: 
As of Sept. 30, 2004: 9,107.1; 
As of Sept. 30, 2004: 8,499.6. 

Commitments and Contingencies: 
As of Sept. 30, 2004: [Empty]; 
As of Sept. 30, 2004: [Empty]. 

Net Position: 
As of Sept. 30, 2004: (7,709.8); 
As of Sept. 30, 2004: (7,094.2). 

Total liabilities and net position: 
As of Sept. 30, 2004: 1,397.3; 
As of Sept. 30, 2004: 1,405.4. 

Assets are the operational resources the federal government has 
available as of the end of the fiscal year. The largest 
category—property, plant, and equipment, net—includes land and
buildings and the federal government’s military equipment, such as 
ships, aircraft, and tanks, after subtracting accumulated depreciation. 

Liabilities are the financial responsibilities of the federal 
government as of the end of the fiscal year. In addition to federal 
debt securities, liabilities include federal employee and veteran 
benefits payable—the amount the federal government estimates that it 
owes its military and civilian employees and veterans under its life 
and health insurance and pension plans. 

Not all Commitments and Contingencies of the federal government require 
recognition as liabilities on the Balance Sheet. Commitments that 
require the future use of resources, such as long-term leases, as well 
as loss contingencies that are assessed to be at least reasonably 
possible, are disclosed in the notes to the financial statements. 

Net Position is the difference between the federal government’s assets 
and liabilities. 

[End of table] 

Statement of Social Insurance (Stewardship Information): 

The Statement of Social Insurance shows how much more money would be 
needed, in today’s dollars, for the federal government’s social 
insurance programs to continue to operate over the long term as they 
are structured today. The estimates presented in these statements, 
while unaudited, are based on actuarial projections of persons who are 
or will be participants in these programs. Also, the estimates exclude 
related trust fund balances, primarily the special U.S. Treasury 
securities held by the trust funds. These securities are guaranteed for 
principal and interest by the full faith and credit of the U.S. 
government and, as of September 30, 2004, totaled about $1.9 trillion, 
of which the Social Security trust funds held about $1.6 trillion. 

Readers can use information from this statement to identify such things 
as: 

* the total amount of projected additional resources needed today to 
fully fund the major social insurance programs over the projected 
period; 

* which social insurance programs project the largest need for 
additional resources, and; 

* how much the projected needs for additional resources have changed 
from prior years. 

For example, at the beginning of 2004, the projected amounts needed for 
the next 75 years, the sum of the lines called the present value of 
resources needed, totaled about $33.4 trillion. The largest projected 
need was about $11.4 trillion to sustain Federal Supplementary Medical 
Insurance, Medicare Part B. Also, the present value of the projected 
long-term resources needed for Social Security and Medicare Parts A and 
B have almost doubled over the past 5 years from about $13.0 trillion 
for 2000 to about $25.2 trillion for 2004. In addition, the present 
value of the projected long-term resources needed for the next 75 years 
for the federal government’s new commitments for prescription drug 
benefits is about $8.1 trillion. 

Estimated amounts shown as needed over an infinite period, while not 
shown on the Statement of Social Insurance, are also presented in the 
Stewardship section of the CFR. The present value of the resources 
needed for programs noted above totaled about $74 trillion based on an 
infinite time period. 

Illustrative Social Insurance Information: 

Table: Present Value of Long-Range (75 Years, Except Black Lung) 
Actuarial Projections (In billions of dollars): 

Federal Old-Age, Survivors and Disability Insurance (Social Security): 
Contributions and earmarked taxes: 
As of January 1, 2004: 27,699; 
As of January 1, 2003: 26,148; 
As of January 1, 2004: 25,289; 
As of January 1, 2001: 23,693; 
As of January 1, 2000: 21,689. 

Federal Old-Age, Survivors and Disability Insurance (Social Security): 
Benefit payments: 
As of January 1, 2004: 32,928; 
As of January 1, 2003: 31,075; 
As of January 1, 2004: 29,851; 
As of January 1, 2001: 27,900; 
As of January 1, 2000: 25,534. 

Federal Old-Age, Survivors and Disability Insurance (Social Security): 
Present Value of Resources Needed: 
As of January 1, 2004: 5,229; 
As of January 1, 2003: 4,927; 
As of January 1, 2004: 4,562; 
As of January 1, 2001: 4,207; 
As of January 1, 2000: 3,845. 

Federal Hospital Insurance (Medicare Part A): Contributions and 
earmarked taxes: 
As of January 1, 2004: 8,976; 
As of January 1, 2003: 8,411; 
As of January 1, 2004: 8,286; 
As of January 1, 2001: 7,756; 
As of January 1, 2000: 7,033. 

Federal Hospital Insurance (Medicare Part A): Benefit payments: 
As of January 1, 2004: 17,468; 
As of January 1, 2003: 14,577; 
As of January 1, 2004: 13,412; 
As of January 1, 2001: 12,486; 
As of January 1, 2000: 9,732. 

Federal Hospital Insurance (Medicare Part A): Present Value of 
Resources Needed: 
As of January 1, 2004: 8,492; 
As of January 1, 2003: 6,166; 
As of January 1, 2004: 5,126; 
As of January 1, 2001: 4,730; 
As of January 1, 2000: 2,699. 

Federal Supplementary Medical Insurance (Medicare Part B): Premiums: 
As of January 1, 2004: 3,889; 
As of January 1, 2003: 3,120; 
As of January 1, 2004: 2,708; 
As of January 1, 2001: 2,696; 
As of January 1, 2000: 2,165. 

Federal Supplementary Medical Insurance (Medicare Part B): Benefit 
payments: 
As of January 1, 2004: 15,329; 
As of January 1, 2003: 12,773; 
As of January 1, 2004: 10,833; 
As of January 1, 2001: 10,780; 
As of January 1, 2000: 8,659. 

Federal Supplementary Medical Insurance (Medicare Part B): Present 
Value of Resources Needed: 
As of January 1, 2004: 11,440; 
As of January 1, 2003: 9,653; 
As of January 1, 2004: 8,125; 
As of January 1, 2001: 8,084; 
As of January 1, 2000: 6,494. 

Federal Supplementary Medical Insurance (Medicare Part D): Premiums: 
As of January 1, 2004: 2,651; 
As of January 1, 2003: [Empty]; 
As of January 1, 2004: [Empty]; 
As of January 1, 2001: [Empty]; 
As of January 1, 2000: [Empty]. 

Federal Supplementary Medical Insurance (Medicare Part D): Benefit 
payments: 
As of January 1, 2004: 10,770; 
As of January 1, 2003: [Empty]; 
As of January 1, 2004: [Empty]; 
As of January 1, 2001: [Empty]; 
As of January 1, 2000: [Empty]. 

Federal Supplementary Medical Insurance (Medicare Part D): Present 
Value of Resources Needed: 
As of January 1, 2004: 8,119; 
As of January 1, 2003: [Empty]; 
As of January 1, 2004: [Empty]; 
As of January 1, 2001: [Empty]; 
As of January 1, 2000: [Empty]. 

Other - Present Value of Resources Needed: 
As of January 1, 2004: 83; 
As of January 1, 2003: 79; 
As of January 1, 2004: 74; 
As of January 1, 2001: 73; 
As of January 1, 2000: (4). 

Total: Present Value of Resources Needed: 
As of January 1, 2004: 33,363; 
As of January 1, 2003: 20,825; 
As of January 1, 2004: 17,887; 
As of January 1, 2001: 17,094; 
As of January 1, 2000: 13,034. 

Social Security provides Federal Old-Age and Survivors Insurance and 
Disability Insurance. Both programs are financed by taxes on employees 
and employers, including the self-employed, and are administered by the 
Social Security Administration. 

Federal Hospital Insurance (Medicare Part A) covers inpatient hospital 
and related care. It is financed primarily by a payroll tax on 
employers and employees, including the self-employed, and a portion of 
the income taxes paid on Social Security benefits. Federal Hospital 
Insurance is administered by the Department of Health and Human 
Services. 

Federal Supplementary Medical Insurance, which also is administered by 
the Department of Health and Human Services, consists of two parts, 
called Medicare Part B and Medicare Part D. Medicare Part B covers 
hospital outpatient services, physicians’ services, and other assorted
products and services. Part D covers the federal government’s 
prescription drug program. Both parts are financed primarily by 
transfers from the general fund of the Treasury and premiums from 
participants. 

[End of table] 

Other Stewardship Information: 

The stewardship section of the CFR also provides the reader with 
unaudited information about assets that the federal government holds 
for the benefit of the nation, called stewardship assets. Stewardship 
assets are not used in federal government operations and, therefore, 
are not included on the Balance Sheet. These assets include: 

* natural heritage assets, such as national parks, national forests, 
and wilderness areas; 

* collection-type heritage assets, including museums, archives, and 
libraries such as the Smithsonian Institution, National Archives, and 
Library of Congress; and; 

* cultural heritage assets, including monuments and memorials such as 
the Washington Monument and Jefferson Memorial in Washington, D.C. 

The CFR provides information about these assets in terms of physical 
quantities, such as millions of acres of land; miles of rivers; numbers 
of buildings, monuments, memorials, and archaeological and historical 
sites; and items in national library and museum collections. 

The stewardship section also describes how much the federal government 
spent for programs that provide long-term benefits to the public. These 
programs include grants for construction and major renovation of state 
and local government property, such as bridges and roads, and grants for
education and training. The stewardship section also describes the 
expenses the federal government has incurred in its basic and applied 
research and in development programs. 

Readers can use information from this section to identify such things 
as: 

* how many acres of stewardship land the federal government owns and 
whether the number of acres has increased or decreased in total and by 
category; 

* how much the federal government spent on nonfederal physical property 
such as state and local bridges and roads, and whether such spending 
has increased or decreased; and; 

* how much the federal government spent on educating and training the 
public and whether such spending has increased or decreased. 

For example, the illustrative table below on stewardship land reports 
the number of acres of stewardship land held by the federal government 
in various categories for fiscal years 2003 and 2004. It shows, for 
instance, that the Bureau of Land Management, with about 261.8 million 
acres, is responsible for approximately 40 percent of the federal 
government’s stewardship land. The table on stewardship investments 
reports annual expenditures from fiscal year 2000 through fiscal year
2004. It includes things that the government considers investments in 
the future of the nation, such as public education and training, under 
investments in human capital, and various categories of research and 
development. 

Illustrative Stewardship Information: 

Table: Stewardship Land as of September 30: 

Agency: Bureau of Land Management; 
Predominant use: Public land; 
Millions of Acres 2004: 261.8; 
Millions of Acres 2003: 262.0; 
Percentage 2004: 40.5; 
Percentage 2003: 39.9. 

Agency: U.S. Forest Service; 
Predominant use: National forest system; 
Millions of Acres 2004: 192.9; 
Millions of Acres 2003: 192.5; 
Percentage 2004: 29.8; 
Percentage 2003: 29.3. 

Agency: U.S. Fish and Wildlife Service; 
Predominant use: National wildlife refuge system; 
Millions of Acres 2004: 90.3; 
Millions of Acres 2003: 95.9; 
Percentage 2004: 14.0; 
Percentage 2003: 14.6. 

Agency: National Park Service; 
Predominant use: National park system; 
Millions of Acres 2004: 79.0; 
Millions of Acres 2003: 84.2; 
Percentage 2004: 12.2; 
Percentage 2003: 12.8. 

Agency: Department of Defense; 
Predominant use: Defense facilities; 
Millions of Acres 2004: 16.7; 
Millions of Acres 2003: 16.7; 
Percentage 2004: 2.6; 
Percentage 2003: 2.5. 

Agency: Bureau of Reclamation; 
Predominant use: Water, power, and recreation; 
Millions of Acres 2004: 5.7; 
Millions of Acres 2003: 5.9; 
Percentage 2004: 0.9; 
Percentage 2003: 0.9. 

Total acres: 
Millions of Acres 2004: 646.4; 
Millions of Acres 2003: 657.2; 
Percentage 2004: 100.0; 
Percentage 2003: 100.0. 

[End of table] 

Table: Stewardship Investments for the Years Ended September 30 (In 
billions of dollars): 

Investments in nonfederal physical property: 
Fiscal Year 2004: 45.3; 
Restated Fiscal Year 2003: 46.8; 
Restated Fiscal Year 2002: 47.6; 
Restated Fiscal Year 2001: 37.9; 
Restated Fiscal Year 2000: 38.9. 

Investments in human capital: 
Fiscal Year 2004: 77.1; 
Restated Fiscal Year 2003: 71.3; 
Restated Fiscal Year 2002: 54.7; 
Restated Fiscal Year 2001: 44.3; 
Restated Fiscal Year 2000: 36.8. 

Research and development: Investments in basic research: 
Fiscal Year 2004: 32.9; 
Restated Fiscal Year 2003: 24.6; 
Restated Fiscal Year 2002: 22.8; 
Restated Fiscal Year 2001: 18.9; 
Restated Fiscal Year 2000: 18.2. 

Research and development: Investments in applied research: 
Fiscal Year 2004: 23.9; 
Restated Fiscal Year 2003: 21.5; 
Restated Fiscal Year 2002: 21.6; 
Restated Fiscal Year 2001: 17.5; 
Restated Fiscal Year 2000: 16.3. 

Research and development: Investments in development: 
Fiscal Year 2004: 60.2; 
Restated Fiscal Year 2003: 48.3; 
Restated Fiscal Year 2002: 44.4; 
Restated Fiscal Year 2001: 39.4; 
Restated Fiscal Year 2000: 38.1. 

Total investments: 
Fiscal Year 2004: 239.4; 
Restated Fiscal Year 2003: 212.5; 
Restated Fiscal Year 2002: 191.1; 
Restated Fiscal Year 2001: 158.0; 
Restated Fiscal Year 2000: 148.3. 

[End of table] 

Notes to the Financial Statements: 

The notes to the financial statements are an important source of 
information about the financial operations and condition of the federal 
government. As stated on the bottom of each of the statements, notes 
are considered an integral part of the financial statements. Moreover, 
most of the consolidated financial statements contain references to one 
or more notes. 

The 21 notes to the federal government’s fiscal year 2004 consolidated 
financial statements provided 36 pages of important and required 
disclosures. The notes addressed the following topics: 

1. Significant Accounting Policies. 
2. Cash. 
3. Accounts Receivable. 
4. Loans Receivable and Loan Guarantees. 
5. Taxes Receivable. 
6. Inventories and Related Property. 
7. Property, Plant, and Equipment. 
8. Other Assets. 
9. Accounts Payable. 
10. Debt Held by the Public. 
11. Federal Employee and Veteran Benefits Payable. 
12. Environmental and Disposal Liabilities. 
13. Benefits Due and Payable. 
14. Other Liabilities. 
15. Collections and Refunds of Federal Revenue. 
16. Unreconciled Transactions Affecting the Change in Net Position. 
17. Change in Accounting Principle and Prior Period Adjustments. 
18. Contingencies. 
19. Commitments. 
20. Dedicated Collections. 
21. Indian Trust Funds. 

The first note to the federal government’s consolidated statements 
summarizes the significant accounting policies used in accounting for 
and reporting on the federal government’s consolidated financial 
information. Other notes provide important disclosures and details 
about the items on the statements. For example, the Federal Employee 
and Veteran Benefits Payable note provides details about the 
composition of benefits payable to federal civilian employees, military 
personnel, and disabled veterans, which exceeded $4 trillion for fiscal 
year 2004. Because this estimated amount is based on actuarial 
calculations, the note also identifies the significant long-term 
assumptions used in determining these liabilities and related expenses. 
In addition, the note discloses that the Department of Veterans Affairs 
(VA) provides medical care to veterans on an “as available” basis, 
subject to the limits of the annual appropriations. VA does not report 
an accrued long-term actuarial liability for this medical care, but 
recognizes the medical care expenses in the period the services are
provided. For the time period 2000 through 2004, the note states that 
the average medical cost per year was $22 billion. Further, the note 
discloses that VA provides pension benefits to certain veterans and 
their dependents based on annual eligibility reviews. Although VA does 
not recognize a long-term actuarial liability for these pension 
benefits, VA discloses the projected amounts of future payments for 
pension benefits, $102.2 billion as of September 30, 2004, and $102.7 
billion as of September 30, 2003. Readers can use this information to 
learn which benefit programs are primarily responsible for changes in 
the federal government’s liability to its civilian employees, military 
personnel, and veterans and thus to better understand factors likely to 
drive future federal disbursements. 

The table below is the summary table from the fiscal year 2004 note for 
Federal Employee and Veteran Benefits Payable, which shows how much the 
federal government estimates it owes civilian and military employees in 
various categories of benefits. The full note also provides additional 
tables depicting the details of the changes in the pension and post-
retirement health benefits categories from fiscal year 2003 to fiscal 
year 2004 for both civilian and military employees, and discusses the
various categories. 

Illustrative Note Information: 

Table: Federal Employee and Veteran Benefits Payable as of September 30 
(In billions of dollars): 

Pension and accrued benefits: 
Civilian, 2004: 1,230.2; 
Civilian, 2003: 1,190.4; 
Military, 2004: 837.7; 
Military, 2003: 739.0; 
Total, 2004: 2,067.9; 
Total, 2003: 1,929.4. 

Post-retirement health benefits: 
Civilian, 2004: 266.1; 
Civilian, 2003: 244.4; 
Military, 2004: 725.3; 
Military, 2003: 683.0; 
Total, 2004: 991.4; 
Total, 2003: 927.4. 

Veteran compensation and burial benefits: 
Civilian, 2004: N/A; 
Civilian, 2003: N/A; 
Military, 2004: 924.8; 
Military, 2003: 954.8; 
Total, 2004: 924.8; 
Total, 2003: 954.8. 

Liability for other benefits: 
Civilian, 2004: 54.4; 
Civilian, 2003: 47.2; 
Military, 2004: 23.6; 
Military, 2003: 21.2; 
Total, 2004: 78.0; 
Total, 2003: 68.4. 

Total: 
Civilian, 2004: 1,550.7; 
Civilian, 2003: 1,482.0; 
Military, 2004: 2,511.4; 
Military, 2003: 2,398.0; 
Total, 2004: 4,062.1; 
Total, 2003: 3,880.0. 

[End of table] 

Supplemental Information: 

The supplemental information section, the final section of the CFR, is 
intended to provide additional information about the federal 
government’s finances that may affect future operations or help 
taxpayers better understand how the federal tax burden is distributed. 
The supplemental information is not required to be audited. 

Readers can use information from this section to identify such things 
as: 

* the estimated costs of maintenance needed to bring property owned by 
the federal government to an acceptable condition, called deferred 
maintenance (e.g., for fiscal year 2004, the estimated cost of deferred 
maintenance on such property ranged from about $13.4 billion to 
approximately $25.4 billion); 

* the amount of funds authorized by Congress that have not been spent 
or committed for the year, called unexpended budget authority; 

* the estimated amount of income tax refunds that may be paid on 
taxpayers’ claims against the federal government (e.g., the federal 
government reported for fiscal year 2004, that it estimated $8.4 
billion may be paid on taxpayers’ claims); and; 

* the amount of federal taxes paid by groups of individuals by income 
level (e.g., individuals with adjusted gross incomes over $200,000 paid 
about 40 percent of the individual federal income taxes collected for 
fiscal year 2002). 

The following table is taken from the supplemental information section 
of the CFR. It is intended to provide additional information about 
individual taxable income and taxes paid. Although the data are from 
the 2002 tax year, the information nonetheless helps readers understand 
how the federal tax burden is distributed based on adjusted gross 
income. 

Illustrative Supplemental Information: 

Table: Individual Income Tax Returns for Tax Year 2002: 

Adjusted gross income (AGI): Under $15,000; 
Number of taxable returns (in thousands): 38,133; 
AGI (dollars in millions): 211,417; 
Total income tax (dollars in millions): 3,942; 
Average AGI per return (in whole dollars): 5,544; 
Average income tax per return (in whole dollars): 103; 
Income tax as a percentage of AGI: 1.9%. 

Adjusted gross income (AGI): $15,000 to under $30,000; 
Number of taxable returns (in thousands): 29,964; 
AGI (dollars in millions): 657,946; 
Total income tax (dollars in millions): 27,621; 
Average AGI per return (in whole dollars): 21,958; 
Average income tax per return (in whole dollars): 922; 
Income tax as a percentage of AGI: 4.2%. 

Adjusted gross income (AGI): $30,000 to under $50,000; 
Number of taxable returns (in thousands): 24,556; 
AGI (dollars in millions): 959,677; 
Total income tax (dollars in millions): 70,761; 
Average AGI per return (in whole dollars): 39,081; 
Average income tax per return (in whole dollars): 2,882; 
Income tax as a percentage of AGI: 7.4%. 

Adjusted gross income (AGI): $50,000 to under $100,000; 
Number of taxable returns (in thousands): 26,687; 
AGI (dollars in millions): 1,864,379; 
Total income tax (dollars in millions): 196,005; 
Average AGI per return (in whole dollars): 69,862; 
Average income tax per return (in whole dollars): 7,345; 
Income tax as a percentage of AGI: 10.5%. 

Adjusted gross income (AGI): $100,000 to under $200,000; 
Number of taxable returns (in thousands): 8,442; 
AGI (dollars in millions): 1,112,924; 
Total income tax (dollars in millions): 175,904; 
Average AGI per return (in whole dollars): 131,834; 
Average income tax per return (in whole dollars): 20,837; 
Income tax as a percentage of AGI: 15.8%. 

Adjusted gross income (AGI): $200,000 or more; 
Number of taxable returns (in thousands): 2,419; 
AGI (dollars in millions): 1,233,062; 
Total income tax (dollars in millions): 323,558; 
Average AGI per return (in whole dollars): 509,695; 
Average income tax per return (in whole dollars): 133,745; 
Income tax as a percentage of AGI: 26.2%. 

Adjusted gross income (AGI): Total; 
Number of taxable returns (in thousands): 130,201; 
AGI (dollars in millions): 6,039,405; 
Total income tax (dollars in millions): 797,791. 

[End of table] 

How the Federal Government’s Financial Statements Relate to One 
Another: 

The federal government’s consolidated financial statements consist of 
five interrelated statements. The chart on the next page provides an 
overview of the five statements and how selected components of those 
statements are related. 

* The total operating expense, called Net Cost, presented in the 
Statement of Net Cost is used in the Statement of Operations and 
Changes in Net Position to determine whether the federal government’s 
financial operations (revenue less expenses) resulted in net operating
cost or net operating revenue for the year. 

* The operating result from the Statement of Operations and Changes in 
Net Position explains the change in the federal government’s net 
position. It is also the beginning balance in the Reconciliation of Net 
Operating Revenue (or Cost) and Unified Budget Surplus (or Deficit). 

* The Net Position from the Statement of Operations and Changes in Net 
Position agrees to the Net Position on the Balance Sheet, which is 
based on the difference between the federal government’s reported 
assets and liabilities. 

* The unified budget result is used in the Reconciliation of Net 
Operating Revenue (or Cost) and Unified Budget Surplus (or Deficit) and 
the Statement of Changes in Cash Balance from Unified Budget and Other 
Activities to show how the federal government’s financial operations 
and changes in operating cash are connected to the unified budget 
results. 

* The federal government’s ending operating cash balance from the 
Statement of Changes in Cash Balance from Unified Budget and Other 
Activities is the same as the operating cash component of the “Cash and 
other monetary assets” line on the Balance Sheet. The operating cash 
amount can be found in the Balance Sheet note for Cash and other 
monetary assets. 

How the Federal Government’s Financial Statements Relate to One 
Another: 

[See PDF for image] 

This chart illustrates the relationships between Government Financial 
Statements. Numbers 1 through 10 indicate portions of statements that 
relate (using letters A through E) to portions of other statements. The 
following data is illustrated: 

Statement of Net Cost: 
Gross Cost minus Earned Revenue equals Net Cost(1). 
A: Net Cost (1) is used to compute net operating costs, and relates to 
(2), below. 

Statement of Operations and Changes in Net Position: 
Revenue minus Net Cost of Government Operations (2) equals Net 
Operating Cost(3). Net Position (beginning) plus Net Operating Cost 
equals Net Position (new)(10). 
B: Net Operating Cost (3) is used as opening balance to show 
relationship to budget deficit or surplus, and relates to (4) below. 

Reconciliation of Net Operating Revenue (or Cost) and Unified Budget 
Surplus (or Deficit): 
Net Operating Revenue (or Cost)(4) plus or minus Reconciliation 
Transactions equals Budget (Deficit) or Surplus (5). 
C: Budget (Deficit) or Surplus (5) is used as opening balance to show 
relationship to operating cash, and relates to (6) below. 

Statement of Changes in Cash Balance from Unified Budget and Other 
Activities: 
Budget (Deficit) or Surplus (6) plus or minus Adjustments for non-cash 
budget outlays, plus or minus Items affecting the cash balance not 
included in the budget, equals Increase (or decrease) in operating cash 
balance, plus Operating Cash (beginning) equals Operating Cash 
(ending)(7). 
D: Operating Cash (ending)(7) should agree to operating cash balance 
included in the cash line, and relates to (8) below. 

Balance Sheet: 
Total Assets, Cash (8) minus Total Liabilities equals Net Position (9). 
E: Net Position (9) agrees to net position, calculated by adding 
operating costs to beginning net position, and relates to (10) above 
(Net Position (end)). 

Statement of Social Insurance: 
* Social Insurance Programs; 
* Present Value of Resources Needed. 

[End of figure] 

[End of report] 

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