Governmental Exam (rated 100%
correct).
Identify and describe the five environmental differences between governments and for-profit business
enterprises as identified in the Governmental Accounting Standards Board's Why Governmental
Accounting and Financial Reporting Is—and Should Be—Different. ANS -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.
Identify and briefly describe the three organizations that set standards for state and local governments,
the federal government, and nongovernmental not-for-profit organizations. ANS -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 (GAO), 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.
, What is the definition of a government as agreed upon by the FASB and GASB? ANS -"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.
Distinguish between private and public sector organizations. ANS -Private sector organizations are
organizations that are not owned or controlled by governments and include businesses as well as private
not-for-profit organizations. Public sector organizations are governments or organizations owned or
controlled by governments.
Go to the GASB website (www.gasb.org). What is the mission of GASB? ANS -According to the web site,
"The mission of the Governmental Accounting Standards Board is to establish and improve standards of
state and local governmental accounting and financial reporting that will:
* Result in useful information for users of financial reports and
* Guide and educate the public, including issuers, auditors, and users of those financial reports."
With regard to GASB rules for the financial reporting entity, define
a. The financial reporting entity.
b. A primary government; given an example.
c. A component unit; give an example.
d. And describe the two methods of reporting the primary government and component units in the
financial reporting entity. ANS -is the primary government together with its component units.
Component units are organizations for which the primary government is financially accountable, and
other organizations for which the nature and significance of their relationship with the primary
government are such that exclusion would cause the reporting entity's financial statements to be
misleading or incomplete.
correct).
Identify and describe the five environmental differences between governments and for-profit business
enterprises as identified in the Governmental Accounting Standards Board's Why Governmental
Accounting and Financial Reporting Is—and Should Be—Different. ANS -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.
Identify and briefly describe the three organizations that set standards for state and local governments,
the federal government, and nongovernmental not-for-profit organizations. ANS -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 (GAO), 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.
, What is the definition of a government as agreed upon by the FASB and GASB? ANS -"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.
Distinguish between private and public sector organizations. ANS -Private sector organizations are
organizations that are not owned or controlled by governments and include businesses as well as private
not-for-profit organizations. Public sector organizations are governments or organizations owned or
controlled by governments.
Go to the GASB website (www.gasb.org). What is the mission of GASB? ANS -According to the web site,
"The mission of the Governmental Accounting Standards Board is to establish and improve standards of
state and local governmental accounting and financial reporting that will:
* Result in useful information for users of financial reports and
* Guide and educate the public, including issuers, auditors, and users of those financial reports."
With regard to GASB rules for the financial reporting entity, define
a. The financial reporting entity.
b. A primary government; given an example.
c. A component unit; give an example.
d. And describe the two methods of reporting the primary government and component units in the
financial reporting entity. ANS -is the primary government together with its component units.
Component units are organizations for which the primary government is financially accountable, and
other organizations for which the nature and significance of their relationship with the primary
government are such that exclusion would cause the reporting entity's financial statements to be
misleading or incomplete.
