INSTRUCTOR’S MANUAL
TO ACCOMPANY
ESSENTIALS OF ACCOUNTING FOR GOVERNMENTAL
AND NOT-FOR-PROFIT ORGANIZATIONS:
13TH EDITION
PREPARED BY:
PAUL A. COPLEY
MARY LORETTA MANKTELOW
JAMES MADISON UNIVERSITY
,CHAPTER 1 Introduction to Accounting and Financial Reporting for Governmental and
Not-for-Profit Organizations
1-1. THE SOLUTION TO THIS AND THE FIRST EXERCISE OF CHAPTERS 2 THROUGH 9 WILL DIFFER
FROM STUDENT TO STUDENT ASSUMING EACH HAS A DIFFERENT CAFR.
1-2.
1) ORGANIZATIONAL PURPOSES: WHILE THE PURPOSE OF A COMMERCIAL BUSINESS IS TO
GENERATE A PROFIT FOR THE BENEFIT OF ITS OWNERS, GOVERNMENTS EXIST FOR THE WELL
BEING OF CITIZENS BY PROVIDING PUBLIC SERVICES – WHETHER OR NOT THE SERVICES ARE
PROFITABLE UNDERTAKINGS.
2) SOURCES OF REVENUES: GOVERNMENTS DERIVE MANY OF THEIR RESOURCES FROM TAXES.
INDIVIDUALS AND BUSINESSES PAY TAXES TO AVOID PENALTY, NOT VOLUNTARILY BECAUSE
THEY PERCEIVE GOVERNMENT SERVICES TO BE OF VALUE AND FAIRLY PRICED . SINCE TAXES
DO NOT INVOLVE AN EARNINGS PROCESS, THE TIMING OF THE RECOGNITION OF TAX
REVENUE IS NOT ALWAYS CLEAR.
3) POTENTIAL FOR LONGEVITY: BECAUSE THE U.S. AND STATE CONSTITUTIONS GRANT STATE
AND LOCAL GOVERNMENTS THE ABILITY TO TAX, GOVERNMENTS VERY RARELY GO OUT OF
BUSINESS. THIS LONG-TERM VIEW OF OPERATIONS CHANGES THE FOCUS OF ACCOUNTING
FROM ONE OF NEAR-TERM RECOVERY OF AMOUNTS INVESTED IN ASSETS TO A LONGER-TERM
FOCUS ON THE SUSTAINABILITY OF SERVICES AND THE ABILITY TO MEET FUTURE DEMAND.
4) RELATIONSHIP WITH STAKEHOLDERS: TAXES ARE CREATED THROUGH THE LEGISLATIVE
PROCESS BY OFFICIALS ELECTED BY THE CITIZENS. BECAUSE CITIZENS AND BUSINESSES ARE
THEN REQUIRED TO PAY THESE TAXES, GOVERNMENTS HAVE AN OBLIGATION TO
DEMONSTRATE ACCOUNTABILITY FOR THESE PUBLIC FUNDS.
5) ROLE OF THE BUDGET: GOVERNMENT BUDGETS ARE EXPRESSIONS OF PUBLIC POLICY AND
OFTEN CARRY THE AUTHORITY OF LAW, PREVENTING PUBLIC OFFICIALS FROM SPENDING
OUTSIDE THEIR BUDGETARY AUTHORITY. THE INCREASED IMPORTANCE OF BUDGETS IS
REFLECTED IN GOVERNMENT FINANCIAL REPORTS BY A REQUIRED REPORT COMPARING
BUDGETED AND ACTUAL AMOUNTS.
1-3. THE THREE STANDARDS SETTING BODIES IN QUESTION ARE THE FEDERAL ACCOUNTING
STANDARDS ACCOUNTING ADVISORY BOARD (FASAB), THE GOVERNMENTAL ACCOUNTING
STANDARDS BOARD (GASB), AND THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).
THE FASAB ESTABLISHES ACCOUNTING AND REPORTING STANDARDS FOR THE FEDERAL
GOVERNMENT AND ITS AGENCIES UNLESS OBJECTED TO BY ONE OF THE "PRINCIPALS" (THE
,DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET, THE COMPTROLLER GENERAL OF THE
UNITED STATES, AND THE SECRETARY OF THE TREASURY). WHEN THE "PRINCIPALS" APPROVE,
THE FASAB STANDARDS BECOME GAAP. THE GASB SETS ACCOUNTING AND FINANCIAL
REPORTING STANDARDS FOR STATE AND LOCAL GOVERNMENTAL ORGANIZATIONS, INCLUDING
THOSE NOT-FOR-PROFIT ORGANIZATIONS THAT ARE DETERMINED TO BE STATE AND LOCAL
GOVERNMENTS. THE FASB SETS ACCOUNTING AND FINANCIAL REPORTING STANDARDS FOR
PROFIT SEEKING BUSINESSES AND FOR NONGOVERNMENTAL, NOT-FOR-PROFIT ENTITIES.
, 1-4. THE DEFINITION OF A GOVERNMENT, AS AGREED TO BY THE FASB AND THE GASB IS AS
FOLLOWS:
“PUBLIC CORPORATIONS AND BODIES CORPORATE AND POLITIC ARE GOVERNMENTAL
ORGANIZATIONS. OTHER ORGANIZATIONS ARE GOVERNMENTAL ORGANIZATIONS IF THEY HAVE
ONE OR MORE OF THE FOLLOWING CHARACTERISTICS:
1. POPULAR ELECTION OF OFFICERS OR APPOINTMENT (OR APPROVAL) OF A CONTROLLING
MAJORITY OF THE MEMBERS OF THE ORGANIZATION’S GOVERNING BODY BY OFFICIALS
OF ONE OR MORE STATE OR LOCAL GOVERNMENTS;
2. THE POTENTIAL FOR UNILATERAL DISSOLUTION BY A GOVERNMENT WITH THE NET
ASSETS REVERTING TO A GOVERNMENT, OR
3. THE POWER TO ENACT AND ENFORCE A TAX LEVY.
FURTHERMORE, ORGANIZATIONS ARE PRESUMED TO BE GOVERNMENTAL IF THEY HAVE THE
ABILITY TO ISSUE DIRECTLY (RATHER THAN THROUGH A STATE OR MUNICIPAL AUTHORITY ) DEBT
THAT PAYS INTEREST EXEMPT FROM FEDERAL TAXATION.
TO ACCOMPANY
ESSENTIALS OF ACCOUNTING FOR GOVERNMENTAL
AND NOT-FOR-PROFIT ORGANIZATIONS:
13TH EDITION
PREPARED BY:
PAUL A. COPLEY
MARY LORETTA MANKTELOW
JAMES MADISON UNIVERSITY
,CHAPTER 1 Introduction to Accounting and Financial Reporting for Governmental and
Not-for-Profit Organizations
1-1. THE SOLUTION TO THIS AND THE FIRST EXERCISE OF CHAPTERS 2 THROUGH 9 WILL DIFFER
FROM STUDENT TO STUDENT ASSUMING EACH HAS A DIFFERENT CAFR.
1-2.
1) ORGANIZATIONAL PURPOSES: WHILE THE PURPOSE OF A COMMERCIAL BUSINESS IS TO
GENERATE A PROFIT FOR THE BENEFIT OF ITS OWNERS, GOVERNMENTS EXIST FOR THE WELL
BEING OF CITIZENS BY PROVIDING PUBLIC SERVICES – WHETHER OR NOT THE SERVICES ARE
PROFITABLE UNDERTAKINGS.
2) SOURCES OF REVENUES: GOVERNMENTS DERIVE MANY OF THEIR RESOURCES FROM TAXES.
INDIVIDUALS AND BUSINESSES PAY TAXES TO AVOID PENALTY, NOT VOLUNTARILY BECAUSE
THEY PERCEIVE GOVERNMENT SERVICES TO BE OF VALUE AND FAIRLY PRICED . SINCE TAXES
DO NOT INVOLVE AN EARNINGS PROCESS, THE TIMING OF THE RECOGNITION OF TAX
REVENUE IS NOT ALWAYS CLEAR.
3) POTENTIAL FOR LONGEVITY: BECAUSE THE U.S. AND STATE CONSTITUTIONS GRANT STATE
AND LOCAL GOVERNMENTS THE ABILITY TO TAX, GOVERNMENTS VERY RARELY GO OUT OF
BUSINESS. THIS LONG-TERM VIEW OF OPERATIONS CHANGES THE FOCUS OF ACCOUNTING
FROM ONE OF NEAR-TERM RECOVERY OF AMOUNTS INVESTED IN ASSETS TO A LONGER-TERM
FOCUS ON THE SUSTAINABILITY OF SERVICES AND THE ABILITY TO MEET FUTURE DEMAND.
4) RELATIONSHIP WITH STAKEHOLDERS: TAXES ARE CREATED THROUGH THE LEGISLATIVE
PROCESS BY OFFICIALS ELECTED BY THE CITIZENS. BECAUSE CITIZENS AND BUSINESSES ARE
THEN REQUIRED TO PAY THESE TAXES, GOVERNMENTS HAVE AN OBLIGATION TO
DEMONSTRATE ACCOUNTABILITY FOR THESE PUBLIC FUNDS.
5) ROLE OF THE BUDGET: GOVERNMENT BUDGETS ARE EXPRESSIONS OF PUBLIC POLICY AND
OFTEN CARRY THE AUTHORITY OF LAW, PREVENTING PUBLIC OFFICIALS FROM SPENDING
OUTSIDE THEIR BUDGETARY AUTHORITY. THE INCREASED IMPORTANCE OF BUDGETS IS
REFLECTED IN GOVERNMENT FINANCIAL REPORTS BY A REQUIRED REPORT COMPARING
BUDGETED AND ACTUAL AMOUNTS.
1-3. THE THREE STANDARDS SETTING BODIES IN QUESTION ARE THE FEDERAL ACCOUNTING
STANDARDS ACCOUNTING ADVISORY BOARD (FASAB), THE GOVERNMENTAL ACCOUNTING
STANDARDS BOARD (GASB), AND THE FINANCIAL ACCOUNTING STANDARDS BOARD (FASB).
THE FASAB ESTABLISHES ACCOUNTING AND REPORTING STANDARDS FOR THE FEDERAL
GOVERNMENT AND ITS AGENCIES UNLESS OBJECTED TO BY ONE OF THE "PRINCIPALS" (THE
,DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET, THE COMPTROLLER GENERAL OF THE
UNITED STATES, AND THE SECRETARY OF THE TREASURY). WHEN THE "PRINCIPALS" APPROVE,
THE FASAB STANDARDS BECOME GAAP. THE GASB SETS ACCOUNTING AND FINANCIAL
REPORTING STANDARDS FOR STATE AND LOCAL GOVERNMENTAL ORGANIZATIONS, INCLUDING
THOSE NOT-FOR-PROFIT ORGANIZATIONS THAT ARE DETERMINED TO BE STATE AND LOCAL
GOVERNMENTS. THE FASB SETS ACCOUNTING AND FINANCIAL REPORTING STANDARDS FOR
PROFIT SEEKING BUSINESSES AND FOR NONGOVERNMENTAL, NOT-FOR-PROFIT ENTITIES.
, 1-4. THE DEFINITION OF A GOVERNMENT, AS AGREED TO BY THE FASB AND THE GASB IS AS
FOLLOWS:
“PUBLIC CORPORATIONS AND BODIES CORPORATE AND POLITIC ARE GOVERNMENTAL
ORGANIZATIONS. OTHER ORGANIZATIONS ARE GOVERNMENTAL ORGANIZATIONS IF THEY HAVE
ONE OR MORE OF THE FOLLOWING CHARACTERISTICS:
1. POPULAR ELECTION OF OFFICERS OR APPOINTMENT (OR APPROVAL) OF A CONTROLLING
MAJORITY OF THE MEMBERS OF THE ORGANIZATION’S GOVERNING BODY BY OFFICIALS
OF ONE OR MORE STATE OR LOCAL GOVERNMENTS;
2. THE POTENTIAL FOR UNILATERAL DISSOLUTION BY A GOVERNMENT WITH THE NET
ASSETS REVERTING TO A GOVERNMENT, OR
3. THE POWER TO ENACT AND ENFORCE A TAX LEVY.
FURTHERMORE, ORGANIZATIONS ARE PRESUMED TO BE GOVERNMENTAL IF THEY HAVE THE
ABILITY TO ISSUE DIRECTLY (RATHER THAN THROUGH A STATE OR MUNICIPAL AUTHORITY ) DEBT
THAT PAYS INTEREST EXEMPT FROM FEDERAL TAXATION.
