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What is your view on this student's response from the example on school lunches? Please see below.

The example involves a public school cafeteria serving lunch. Some students pay full price for their food, but others receive lunch for a reduced price or for free under the federal National School Lunch Program. For simplicity's sake, let's assume the school cafeteria meets all nutritional requirements to qualify for NSLP - all it needs to do now is serve the lunches. The grant is expenditure driven - when the school district proves the reduced price and free meals have been provided, the federal government owes it a grant payment. (Again, we'll ignore the part of the program that involves school districts receiving free food products from the USDA to use in the meals.)

Student's Response: The school district should recognize food expenses when the liability is incurred - as consistent with proprietary fund accounting. - I assumed a proprietary fund based on the use of the word expense rather than expenditure which would be used for a special revenue fund. In this case, the food would be considered an inventory item and the school could use the purchases method or the consumption method to account. Under the purchases method, inventories and prepaid items are reported as expenditures when purchased. If using the consumption method, governments can initially report inventories as an asset and recognize the expense in the period the inventory items are actually consumed - or in this case used to create the meals. The money the school is receiving from the federal government program is a reimbursement.

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