When adjusting governmental fund data for financial statement inclusion, what must be reversed?

When preparing governmental fund data for financial statement inclusion, reversing indirect cost allocations is essential to ensure the financial statements reflect the true costs associated with specific functions. Indirect costs often include overhead expenses that cannot be directly attributed to a specific program or function. By reversing these allocations, the financial statements can more accurately depict the operational costs directly related to governmental activities, as well as maintain consistency in reporting and ensure clarity in financial performance.

Direct cost allocations, on the other hand, typically represent costs that can be directly assigned to a specific function or program, meaning they should remain as recorded. Similarly, fixed costs, which are constant in nature and typically do not change with the level of activity, also do not need to be reversed because they are relevant for financial reporting. The emphasis on reversing indirect costs is critical for presenting a clear and accurate financial picture that aligns with the purposes of governmental accounting and reporting standards.