What type of fund balance includes long-term loans and inventories?

The nonspendable fund balance is the correct type of fund balance that includes long-term loans and inventories. This category represents amounts that are not in spendable form or are legally or contractually required to be maintained intact. For instance, inventories are physical goods that are not available for current expenditures because they are necessary for operational purposes. Similarly, long-term loans, which are amounts not expected to be used within the fiscal year, also fit into this category because they indicate a commitment of resources that are not liquid and cannot be converted to current spendable resources without a significant change in their nature.

Understanding the distinction of nonspendable fund balance is crucial in budgeting and financial reporting as it helps ensure that financial statements accurately reflect the availability of resources. It indicates that certain resources are earmarked for specific purposes and cannot be easily redirected to fund other expenses or obligations within the budgeting framework.