1-1
, Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critica l d istinct ion bet ween fo r-p ro fit businesses and not-fo r-p ro fits includ ing For matted: S ection start: C ontinuou
S uppress E ndnotes, F rom text: 1.02
governments is that businesses have profit as their main motive whereas the others cm
have serv ice. A p rimary pu rpose of financial repo rt ing is to report on an ent ity ‘s
acco mplish ments — ho w well it ach ieved its object ives. Accord ing ly , the financial
statements of businesses measure p rofitab ility, their key ob ject ive. Finan cial repo rts
of govern ments and other not -fo r-pro fits should not focus on p rofitab ility , sin ce it is
not a relev ant object ive. Ideally , therefore, they shou ld fo cus on other performance
object ives, such as how well the o rgan izat ions met their serv ice goals. In reality,
howev er, the goal o f report ing on ho w well they have achieved such goals has
proven difficu lt to attain and the financial repo rts have focused main ly on financially -
related data.
2. Govern ments and not -for-p rofits are ―govern ed‖ by the budget, whereas businesses
are governed by the marketp lace. Th e budget is the key po lit ical and fiscal docu ment
of govern ments and not -for-p rofits. It determin es ho w an ent ity obtains its resources
and ho w it allocates them. It encapsulates most key decis ions of consequence made
by the o rgan ization . In a govern ment the budget is not merely a managerial
document; it is the law.
3. Owing to the significan ce of th e budget, const ituents want assurance that the ent ity
achieves its revenue estimates and co mplies with its spending mand ates. They exp ect
the financial statements to report on how the budget was administered.
4. Interperiod equity is the concept th at taxpayers of today pay fo r the services that
they receive and not sh ift the pay ment burden to taxp ayers o f the futu re. Financial
repo rting must ind icate th e extent to wh ich interp eriod equity h as been ach ieved.
Therefo re, it must d etermine and repo rt upon the econo mic costs of th e serv ices
performed (not merely the cash costs) and o f the taxp ayers ‘ cont ribut ion to ward
covering those costs.
5. The matching concept may be less relevant fo r govern ments and not-for-p rofits than
for businesses because there may be no connection between revenues generated and
2-2
, the quantity , quality o r cost of serv ices performed. An increase in the demand for, o r
cost of, serv ices p rov ided by a ho meless shelter wou ld not necessarily resu lt in an
increase in the amount o f donat ions that it receives. Of cou rse, gov ern ments and not -
for-p rofits are concerned with measuring interp eriod equ ity and for that purpose the
matching concept may be very relevant.
6. Govern ments must maintain an account ing system that ass ures that restricted
resources are not in advertently expend ed fo r inapp rop riate pu rposes. Moreover,
statement users may n eed separate info rmat ion on the restricted resources by
category o f restrict ion and the un restrict ed resources. In practice, these requ irements
have led governments to adopt a system of ―fund‖ accounting and reporting.
7. Even govern ments with in the same catego ry may engage in d ifferent types of
activ it ies. Fo r examp le, so me cities operate a school system wh ereas others do not.
Those that are not with in the same catego ry may have relativ ely little in co mmon.
For example, a state government shares few characteristics with a city.
8. If a gov ern ment has the po wer to tax, then it has co mmand over, and access to,
resources. Therefo re, its fiscal well-being cannot b e assessed merely by measu ring
the assets that it ―o wns.‖ For examp le, the fiscal cond ition of a city should
inco rporate the wealth of the res idents and businesses with in the city , their earning
capacity, and the city‘s willingness to exploit its tax base.
9. Many gov ern ments budget on a cash o r nea r-cash bas is. Ho wever, the cash basis o f
accounting does not prov ide adequate in fo rmation with wh ich to assess interperiod
equity . Financial statements that satisfy the object ive o f report ing on interp eriod
equity may not sat isfy th at o f repo rt ing on budgeta ry co mpliance . Moreover,
statements that repo rt on either interperiod equity o r budget ary co mp liance are
unlikely to p rov ide sufficient in format ion with wh ich to assess servi ce efforts and
accomplishments.
10. Measures of service efforts and acco mplish ments are mo re sign ificant in govern ments
and not-fo r-p ro fits because their ob ject ives are to p rovid e serv ice. By contrast, the
object ive o f bus inesses is to earn a p ro fit . Therefo re, businesses can repo rt on their
acco mplish ments by report ing on their p ro fit ability . Gov ern ments and not-fo r-p ro fits
must report on other measures of accomplish ment .
11. The FASB in fluences generally accepted account ing p rincip les o f govern ments in
two key ways. First, FA SB p ronouncements are included in the GA SB ―hierarchy‖ o f
GAA P. FA SB pronouncements that the GASB has specifically mad e app licab le to
govern ments are included in the h ighest catego ry; those that the GA SB h as not
specifically adopted are included in the lo west catego ry. Second , the business -type
activ it ies of govern ments are requ ired (with a few exceptions ) to fo llo w the bus iness
accounting principles as set forth by the FASB.
3-3
, 12. It is more d ifficu lt to d istingu ish bet ween internal and external users in gov ern ments
than in businesses because const ituents, such as taxpayers, may p lay sign ificant ro les
in estab lishing po licies that are often considered with in the realm o f manag ers. A lso,
leg islators are internal to the extent they set po licy, but external insofar as the
executive branch must account to the legislative branch.
Exercises
EX 1-1
1. a
2. c
3. c
4. c
5. b
6. c
7. d
8. c
9. b
10. c
EX 1-2
1. b
2. b
3. d
4. b
5. a
6. c
7. a
8. b
9. a
10. b
EX 1-3
a. 1. The Govern mental Account ing Standards Bo ard (GA SB) is the independent
organ izat ion that estab lishes and improves standards of account ing and financ ial repo rting
for U.S. state and lo cal govern ments. Estab lished in 1984 by ag reement o f the Financial
Accounting Foundat ion (FAF) and 10 nat ional associat ions of state and local gov ern ment
officials, the GA SB is recogn ized by gov ern ments, the account ing industry, and the cap ital
markets as the official source o f generally accepted account ing p rincip les (GAA P) for
state and local governments.
4-4
, Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critica l d istinct ion bet ween fo r-p ro fit businesses and not-fo r-p ro fits includ ing For matted: S ection start: C ontinuou
S uppress E ndnotes, F rom text: 1.02
governments is that businesses have profit as their main motive whereas the others cm
have serv ice. A p rimary pu rpose of financial repo rt ing is to report on an ent ity ‘s
acco mplish ments — ho w well it ach ieved its object ives. Accord ing ly , the financial
statements of businesses measure p rofitab ility, their key ob ject ive. Finan cial repo rts
of govern ments and other not -fo r-pro fits should not focus on p rofitab ility , sin ce it is
not a relev ant object ive. Ideally , therefore, they shou ld fo cus on other performance
object ives, such as how well the o rgan izat ions met their serv ice goals. In reality,
howev er, the goal o f report ing on ho w well they have achieved such goals has
proven difficu lt to attain and the financial repo rts have focused main ly on financially -
related data.
2. Govern ments and not -for-p rofits are ―govern ed‖ by the budget, whereas businesses
are governed by the marketp lace. Th e budget is the key po lit ical and fiscal docu ment
of govern ments and not -for-p rofits. It determin es ho w an ent ity obtains its resources
and ho w it allocates them. It encapsulates most key decis ions of consequence made
by the o rgan ization . In a govern ment the budget is not merely a managerial
document; it is the law.
3. Owing to the significan ce of th e budget, const ituents want assurance that the ent ity
achieves its revenue estimates and co mplies with its spending mand ates. They exp ect
the financial statements to report on how the budget was administered.
4. Interperiod equity is the concept th at taxpayers of today pay fo r the services that
they receive and not sh ift the pay ment burden to taxp ayers o f the futu re. Financial
repo rting must ind icate th e extent to wh ich interp eriod equity h as been ach ieved.
Therefo re, it must d etermine and repo rt upon the econo mic costs of th e serv ices
performed (not merely the cash costs) and o f the taxp ayers ‘ cont ribut ion to ward
covering those costs.
5. The matching concept may be less relevant fo r govern ments and not-for-p rofits than
for businesses because there may be no connection between revenues generated and
2-2
, the quantity , quality o r cost of serv ices performed. An increase in the demand for, o r
cost of, serv ices p rov ided by a ho meless shelter wou ld not necessarily resu lt in an
increase in the amount o f donat ions that it receives. Of cou rse, gov ern ments and not -
for-p rofits are concerned with measuring interp eriod equ ity and for that purpose the
matching concept may be very relevant.
6. Govern ments must maintain an account ing system that ass ures that restricted
resources are not in advertently expend ed fo r inapp rop riate pu rposes. Moreover,
statement users may n eed separate info rmat ion on the restricted resources by
category o f restrict ion and the un restrict ed resources. In practice, these requ irements
have led governments to adopt a system of ―fund‖ accounting and reporting.
7. Even govern ments with in the same catego ry may engage in d ifferent types of
activ it ies. Fo r examp le, so me cities operate a school system wh ereas others do not.
Those that are not with in the same catego ry may have relativ ely little in co mmon.
For example, a state government shares few characteristics with a city.
8. If a gov ern ment has the po wer to tax, then it has co mmand over, and access to,
resources. Therefo re, its fiscal well-being cannot b e assessed merely by measu ring
the assets that it ―o wns.‖ For examp le, the fiscal cond ition of a city should
inco rporate the wealth of the res idents and businesses with in the city , their earning
capacity, and the city‘s willingness to exploit its tax base.
9. Many gov ern ments budget on a cash o r nea r-cash bas is. Ho wever, the cash basis o f
accounting does not prov ide adequate in fo rmation with wh ich to assess interperiod
equity . Financial statements that satisfy the object ive o f report ing on interp eriod
equity may not sat isfy th at o f repo rt ing on budgeta ry co mpliance . Moreover,
statements that repo rt on either interperiod equity o r budget ary co mp liance are
unlikely to p rov ide sufficient in format ion with wh ich to assess servi ce efforts and
accomplishments.
10. Measures of service efforts and acco mplish ments are mo re sign ificant in govern ments
and not-fo r-p ro fits because their ob ject ives are to p rovid e serv ice. By contrast, the
object ive o f bus inesses is to earn a p ro fit . Therefo re, businesses can repo rt on their
acco mplish ments by report ing on their p ro fit ability . Gov ern ments and not-fo r-p ro fits
must report on other measures of accomplish ment .
11. The FASB in fluences generally accepted account ing p rincip les o f govern ments in
two key ways. First, FA SB p ronouncements are included in the GA SB ―hierarchy‖ o f
GAA P. FA SB pronouncements that the GASB has specifically mad e app licab le to
govern ments are included in the h ighest catego ry; those that the GA SB h as not
specifically adopted are included in the lo west catego ry. Second , the business -type
activ it ies of govern ments are requ ired (with a few exceptions ) to fo llo w the bus iness
accounting principles as set forth by the FASB.
3-3
, 12. It is more d ifficu lt to d istingu ish bet ween internal and external users in gov ern ments
than in businesses because const ituents, such as taxpayers, may p lay sign ificant ro les
in estab lishing po licies that are often considered with in the realm o f manag ers. A lso,
leg islators are internal to the extent they set po licy, but external insofar as the
executive branch must account to the legislative branch.
Exercises
EX 1-1
1. a
2. c
3. c
4. c
5. b
6. c
7. d
8. c
9. b
10. c
EX 1-2
1. b
2. b
3. d
4. b
5. a
6. c
7. a
8. b
9. a
10. b
EX 1-3
a. 1. The Govern mental Account ing Standards Bo ard (GA SB) is the independent
organ izat ion that estab lishes and improves standards of account ing and financ ial repo rting
for U.S. state and lo cal govern ments. Estab lished in 1984 by ag reement o f the Financial
Accounting Foundat ion (FAF) and 10 nat ional associat ions of state and local gov ern ment
officials, the GA SB is recogn ized by gov ern ments, the account ing industry, and the cap ital
markets as the official source o f generally accepted account ing p rincip les (GAA P) for
state and local governments.
4-4
