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Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critical distinction between for-profit businesses and not-for-profits including
governments is that businesses have profit as their main motive whereas the others have service.
A primary purpose of financial reporting is to report on an entity‘s accomplishments — how well
it achieved its objectives. Accordingly, the financial statements of businesses measure
profitability, their key objective. Financial reports of governments and other not-for-profits
should not focus on profitability, since it is not a relevant objective. Ideally, therefore, they
should focus on other performance objectives, such as how well the organizations met their
service goals. In reality, however, the goal of reporting on how well they have achieved such
goals has proven difficult to attain and the financial reports have focused mainly on financially-
related data.
2. Governments and not-for-profits are ―governed‖ by the budget, whereas businesses are
governed by the marketplace. The budget is the key political and fiscal document of
governments and not-for-profits. It determines how an entity obtains its resources and how it
allocates them. It encapsulates most key decisions of consequence made by the organization. In a
government the budget is not merely a managerial document; it is the law.
3. Owing to the significance of the budget, constituents want assurance that the entity
achieves its revenue estimates and complies with its spending mandates. They expect the
financial statements to report on how the budget was administered.
4. Interperiod equity is the concept that taxpayers of today pay for the services that they
receive and not shift the payment burden to taxpayers of the future. Financial reporting must
indicate the extent to which interperiod equity has been achieved. Therefore, it must determine
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and report upon the economic costs of the services performed (not merely the cash costs) and of
the taxpayers‘ contribution toward covering those costs.
5. The matching concept may be less relevant for governments and not-for-profits than for
businesses because there may be no connection between revenues generated and the quantity,
quality or cost of services performed. An increase in the demand for, or cost of, services
provided by a homeless shelter would not necessarily result in an increase in the amount of
donations that it receives. Of course, governments and not- for-profits are concerned with
measuring interperiod equity and for that purpose the matching concept may be very relevant.
6. Governments must maintain an accounting system that assures that restricted resources
are not inadvertently expended for inappropriate purposes. Moreover, statement users may need
separate information on the restricted resources by category of restriction and the unrestricted
resources. In practice, these requirements have led governments to adopt a system of ―fund‖
accounting and reporting.
7. Even governments within the same category may engage in different types of activities.
For example, some cities operate a school system whereas others do not. Those that are not
within the same category may have relatively little in common. For example, a state government
shares few characteristics with a city.
8. If a government has the power to tax, then it has command over, and access to, resources.
Therefore, its fiscal well-being cannot be assessed merely by measuring the assets that it
―owns.‖ For example, the fiscal condition of a city should incorporate the wealth of the
residents and businesses within the city, their earning capacity, and the city‘s willingness to
exploit its tax base.
9. Many governments budget on a cash or near-cash basis. However, the cash basis of
accounting does not provide adequate information with which to assess interperiod equity.
Financial statements that satisfy the objective of reporting on interperiod equity may not satisfy
that of reporting on budgetary compliance. Moreover, statements that report on either interperiod
https://www.stuvia.com/user/asolution
,Created By: A Solution
Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critical distinction between for-profit businesses and not-for-profits including
governments is that businesses have profit as their main motive whereas the others have service.
A primary purpose of financial reporting is to report on an entity‘s accomplishments — how well
it achieved its objectives. Accordingly, the financial statements of businesses measure
profitability, their key objective. Financial reports of governments and other not-for-profits
should not focus on profitability, since it is not a relevant objective. Ideally, therefore, they
should focus on other performance objectives, such as how well the organizations met their
service goals. In reality, however, the goal of reporting on how well they have achieved such
goals has proven difficult to attain and the financial reports have focused mainly on financially-
related data.
2. Governments and not-for-profits are ―governed‖ by the budget, whereas businesses are
governed by the marketplace. The budget is the key political and fiscal document of
governments and not-for-profits. It determines how an entity obtains its resources and how it
allocates them. It encapsulates most key decisions of consequence made by the organization. In a
government the budget is not merely a managerial document; it is the law.
3. Owing to the significance of the budget, constituents want assurance that the entity
achieves its revenue estimates and complies with its spending mandates. They expect the
financial statements to report on how the budget was administered.
4. Interperiod equity is the concept that taxpayers of today pay for the services that they
receive and not shift the payment burden to taxpayers of the future. Financial reporting must
indicate the extent to which interperiod equity has been achieved. Therefore, it must determine
https://www.stuvia.com/user/asolution
, Created By: A Solution
and report upon the economic costs of the services performed (not merely the cash costs) and of
the taxpayers‘ contribution toward covering those costs.
5. The matching concept may be less relevant for governments and not-for-profits than for
businesses because there may be no connection between revenues generated and the quantity,
quality or cost of services performed. An increase in the demand for, or cost of, services
provided by a homeless shelter would not necessarily result in an increase in the amount of
donations that it receives. Of course, governments and not- for-profits are concerned with
measuring interperiod equity and for that purpose the matching concept may be very relevant.
6. Governments must maintain an accounting system that assures that restricted resources
are not inadvertently expended for inappropriate purposes. Moreover, statement users may need
separate information on the restricted resources by category of restriction and the unrestricted
resources. In practice, these requirements have led governments to adopt a system of ―fund‖
accounting and reporting.
7. Even governments within the same category may engage in different types of activities.
For example, some cities operate a school system whereas others do not. Those that are not
within the same category may have relatively little in common. For example, a state government
shares few characteristics with a city.
8. If a government has the power to tax, then it has command over, and access to, resources.
Therefore, its fiscal well-being cannot be assessed merely by measuring the assets that it
―owns.‖ For example, the fiscal condition of a city should incorporate the wealth of the
residents and businesses within the city, their earning capacity, and the city‘s willingness to
exploit its tax base.
9. Many governments budget on a cash or near-cash basis. However, the cash basis of
accounting does not provide adequate information with which to assess interperiod equity.
Financial statements that satisfy the objective of reporting on interperiod equity may not satisfy
that of reporting on budgetary compliance. Moreover, statements that report on either interperiod
https://www.stuvia.com/user/asolution
