Chapter 1 End of Chapter Materials Solutions
REVIEW QUESTIONS
Q 1 – 1 Not-for-profit organizations: (a) receive contributions of significant amounts of resources from
resource providers who do not expect equivalent pecuniary return; (b) operate for purposes other than to
provide goods and services at a profit; and (c) lack ownership interests like those of a business enterprise.
Q 1 – 2 Governmental entities include: the federal government; general-purpose
political subdivisions (such as states, counties, cities, and towns); special-purpose
political subdivisions (such as school districts); and public corporations and bodies
corporate and politic (such as state-operated toll roads and toll bridges).
Other organizations created by governments by statute or under not-for-profit
corporation laws are governmental if they possess one or more of the following
characteristics:
a. Their officers are popularly elected or a controlling majority of their
governing body is appointed or approved by governmental officials;
b. They have the power to enact and enforce a tax levy;
c. They have the power to directly issue debt whose interest is exempt
from federal tax; or
d. There is a potential for a government to dissolve them unilaterally and
assume their assets and liabilities.
Q 1 – 3 Major environmental characteristics of governmental and not-for-profit organizations are:
, a. Organizational purposes. Governmental and not-for-profit entities exist to provide services to
their constituents, not to maximize profits. A reported excess of revenues over expenditures
does not mean that they have made a profit, have operated efficiently, or have served their
constituents effectively. Therefore, financial reporting for these entities requires an emphasis on
accountability.
b. Sources of revenue and relationship with stakeholders . Governments derive revenues primarily
from taxpayers. Individual taxpayers are involuntary resource providers whose tax payments
may or may not bear a direct relationship to the services they want or need. Not-for-profit
entities obtain significant resources from donors who receive no service or product in exchange,
but who nonetheless are concerned with whether their donations are achieving the intended
purposes. These relationships again emphasize a need for reporting models that emphasize
accountability.
c. Potential for longevity. Business enterprises are at risk of going out of business or being bought
out. Governments, on the other hand, tend to exist in perpetuity because of the nature of the
services they provide. This has caused governmental accounting standards-setters to take a
longer term perspective regarding certain measurements.
d. Role of the budget and legal requirements. Governmental entities are required by law to provide
certain services. Their budgets are legal documents and generally cannot be exceeded without
specific legislative approval. Their borrowings are also constrained by law as to purpose. Some
not-for-profit entities obtain significant resources from contributions that are subject to specific
restrictions as to how they may be used. This has tended towards standards that take account of
the need for demonstrating budgetary and legal compliance.
Q 1 – 4 Regarding government: Budgets generally cannot be exceeded without specific legislative approval;
borrowings are generally specifically limited as to the purposes for which they may be used; and grants from
higher level governments are generally specifically limited as to purpose.
Regarding not-for-profit entities: Donors often place specific restrictions on contributions as to what they
may be used for and when they may be used.
Q 1 – 5 Users of governmental and not-for-profit entity accounting information are both internal and
external. Major external users are:
a. Resource providers (taxpayers, donors and potential donors, investors and potential investors,
bond-rating agencies, and grant-providing organizations)
b. Oversight bodies (higher-level governments, regulatory bodies)
c. Service recipients (citizen advocate groups)
Users might use accounting information to:
, a. determine the likelihood of repaying short-term and long-term debt;
b. determine the likelihood of continuing to provide a particular level of service;
c. determine the availability of resources to cushion against economic downturns;
d. determine whether the organization has complied with restrictions on the use of resources;
e. determine the extent to which existing resource levels are free from restrictions as to use.
Q 1 – 6 The GASB is responsible for establishing and improving accounting and financial reporting standards
for all state and local governmental entities (including government-sponsored colleges and universities,
health care providers, and utilities).
The FASB establishes standards for all other entities, including not-for-profit colleges and universities and
health care providers.
The FASAB establishes standards for the federal government.
Q 1 – 7 Accounting and financial reporting guidance is provided not only by the two major accounting
standards-setting bodies, but also by the AICPA, the staffs of the accounting standards-setting bodies, and
even professional literature. Because of the heavy workloads of the standards-setting bodies, they may not
have issued guidance on a particular issue of concern to a practitioner. A hierarchy of generally accepted
accounting principles allows a practitioner to look to the guidance of other bodies in the event the Board with
jurisdiction has not issued a standard on a particular matter.
Q 1 – 8 The three ways identified by the GASB in which financial reporting can assist users in assessing
governmental accountability are:
a. by showing if current-year revenues were sufficient to pay for current-year services;
b. by showing whether resources were obtained and used in accordance with the legally adopted
budget; and
c. by providing data to help users assess the entity’s service efforts, costs and accomplishments.
Q 1 – 9 The three objectives of not-for-profit entity financial reporting, as identified by the FASB, are to help
users assess:
a. the services provided by the entity and its ability to continue to provide them;
b. how the entity’s managers discharged their stewardship responsibilities; and
, c. the entity’s performance, including its service efforts and accomplishments.
Q 1 – 10 State and local governments use fund accounting; incorporate budgetary accounting into their
accounting systems; use modified accrual accounting (rather than full accrual accounting) for certain
activities; and use a two-level system of financial reporting.
CASES
C 1 – 1 The County comptroller should take the position that Croton Hospital must follow the accounting and
financial reporting standards promulgated by the Governmental Accounting Standards Board, which has
standards-setting jurisdiction for all governmental entities, including government-sponsored hospitals.
Croton Hospital is now a governmental hospital by virtue of the control exercised over it by the county. (The
general subject of a parent government’s component units will be discussed in a later chapter.)
C 1 – 2 This problem raises questions involving legal requirements, investment prudence and ethics. The
County Administrator should tell the Treasurer to drop his proposal for the following reasons:
a. Investing in “junk bonds” may not meet legal requirements for permissible investments.
b. Investing in “junk bonds” imposes unwarranted risks on the school district’s taxpayers. There is
strong likelihood that the Treasurer is not acting in a fiscally prudent manner.
c. The Treasurer’s proposal is unethical (and probably illegal) because it enables the county to
benefit from risks imposed on the school districts.
EXERCISES
E 1 – 1 The CYO is a not-for-profit organization, rather than a governmental entity. Even though its activities
are financed by governmental grants and its programs are held in a local high school, its day-to-day
operations are controlled by a group of citizens, rather than by governmental officials. To be a governmental
entity, the CYO would need to possess one of the characteristics of a governmental entity. For example, if the
mayor appointed a majority of the board of directors and approved the hiring of the executive director, the
CYO would be a governmental entity.
REVIEW QUESTIONS
Q 1 – 1 Not-for-profit organizations: (a) receive contributions of significant amounts of resources from
resource providers who do not expect equivalent pecuniary return; (b) operate for purposes other than to
provide goods and services at a profit; and (c) lack ownership interests like those of a business enterprise.
Q 1 – 2 Governmental entities include: the federal government; general-purpose
political subdivisions (such as states, counties, cities, and towns); special-purpose
political subdivisions (such as school districts); and public corporations and bodies
corporate and politic (such as state-operated toll roads and toll bridges).
Other organizations created by governments by statute or under not-for-profit
corporation laws are governmental if they possess one or more of the following
characteristics:
a. Their officers are popularly elected or a controlling majority of their
governing body is appointed or approved by governmental officials;
b. They have the power to enact and enforce a tax levy;
c. They have the power to directly issue debt whose interest is exempt
from federal tax; or
d. There is a potential for a government to dissolve them unilaterally and
assume their assets and liabilities.
Q 1 – 3 Major environmental characteristics of governmental and not-for-profit organizations are:
, a. Organizational purposes. Governmental and not-for-profit entities exist to provide services to
their constituents, not to maximize profits. A reported excess of revenues over expenditures
does not mean that they have made a profit, have operated efficiently, or have served their
constituents effectively. Therefore, financial reporting for these entities requires an emphasis on
accountability.
b. Sources of revenue and relationship with stakeholders . Governments derive revenues primarily
from taxpayers. Individual taxpayers are involuntary resource providers whose tax payments
may or may not bear a direct relationship to the services they want or need. Not-for-profit
entities obtain significant resources from donors who receive no service or product in exchange,
but who nonetheless are concerned with whether their donations are achieving the intended
purposes. These relationships again emphasize a need for reporting models that emphasize
accountability.
c. Potential for longevity. Business enterprises are at risk of going out of business or being bought
out. Governments, on the other hand, tend to exist in perpetuity because of the nature of the
services they provide. This has caused governmental accounting standards-setters to take a
longer term perspective regarding certain measurements.
d. Role of the budget and legal requirements. Governmental entities are required by law to provide
certain services. Their budgets are legal documents and generally cannot be exceeded without
specific legislative approval. Their borrowings are also constrained by law as to purpose. Some
not-for-profit entities obtain significant resources from contributions that are subject to specific
restrictions as to how they may be used. This has tended towards standards that take account of
the need for demonstrating budgetary and legal compliance.
Q 1 – 4 Regarding government: Budgets generally cannot be exceeded without specific legislative approval;
borrowings are generally specifically limited as to the purposes for which they may be used; and grants from
higher level governments are generally specifically limited as to purpose.
Regarding not-for-profit entities: Donors often place specific restrictions on contributions as to what they
may be used for and when they may be used.
Q 1 – 5 Users of governmental and not-for-profit entity accounting information are both internal and
external. Major external users are:
a. Resource providers (taxpayers, donors and potential donors, investors and potential investors,
bond-rating agencies, and grant-providing organizations)
b. Oversight bodies (higher-level governments, regulatory bodies)
c. Service recipients (citizen advocate groups)
Users might use accounting information to:
, a. determine the likelihood of repaying short-term and long-term debt;
b. determine the likelihood of continuing to provide a particular level of service;
c. determine the availability of resources to cushion against economic downturns;
d. determine whether the organization has complied with restrictions on the use of resources;
e. determine the extent to which existing resource levels are free from restrictions as to use.
Q 1 – 6 The GASB is responsible for establishing and improving accounting and financial reporting standards
for all state and local governmental entities (including government-sponsored colleges and universities,
health care providers, and utilities).
The FASB establishes standards for all other entities, including not-for-profit colleges and universities and
health care providers.
The FASAB establishes standards for the federal government.
Q 1 – 7 Accounting and financial reporting guidance is provided not only by the two major accounting
standards-setting bodies, but also by the AICPA, the staffs of the accounting standards-setting bodies, and
even professional literature. Because of the heavy workloads of the standards-setting bodies, they may not
have issued guidance on a particular issue of concern to a practitioner. A hierarchy of generally accepted
accounting principles allows a practitioner to look to the guidance of other bodies in the event the Board with
jurisdiction has not issued a standard on a particular matter.
Q 1 – 8 The three ways identified by the GASB in which financial reporting can assist users in assessing
governmental accountability are:
a. by showing if current-year revenues were sufficient to pay for current-year services;
b. by showing whether resources were obtained and used in accordance with the legally adopted
budget; and
c. by providing data to help users assess the entity’s service efforts, costs and accomplishments.
Q 1 – 9 The three objectives of not-for-profit entity financial reporting, as identified by the FASB, are to help
users assess:
a. the services provided by the entity and its ability to continue to provide them;
b. how the entity’s managers discharged their stewardship responsibilities; and
, c. the entity’s performance, including its service efforts and accomplishments.
Q 1 – 10 State and local governments use fund accounting; incorporate budgetary accounting into their
accounting systems; use modified accrual accounting (rather than full accrual accounting) for certain
activities; and use a two-level system of financial reporting.
CASES
C 1 – 1 The County comptroller should take the position that Croton Hospital must follow the accounting and
financial reporting standards promulgated by the Governmental Accounting Standards Board, which has
standards-setting jurisdiction for all governmental entities, including government-sponsored hospitals.
Croton Hospital is now a governmental hospital by virtue of the control exercised over it by the county. (The
general subject of a parent government’s component units will be discussed in a later chapter.)
C 1 – 2 This problem raises questions involving legal requirements, investment prudence and ethics. The
County Administrator should tell the Treasurer to drop his proposal for the following reasons:
a. Investing in “junk bonds” may not meet legal requirements for permissible investments.
b. Investing in “junk bonds” imposes unwarranted risks on the school district’s taxpayers. There is
strong likelihood that the Treasurer is not acting in a fiscally prudent manner.
c. The Treasurer’s proposal is unethical (and probably illegal) because it enables the county to
benefit from risks imposed on the school districts.
EXERCISES
E 1 – 1 The CYO is a not-for-profit organization, rather than a governmental entity. Even though its activities
are financed by governmental grants and its programs are held in a local high school, its day-to-day
operations are controlled by a group of citizens, rather than by governmental officials. To be a governmental
entity, the CYO would need to possess one of the characteristics of a governmental entity. For example, if the
mayor appointed a majority of the board of directors and approved the hiring of the executive director, the
CYO would be a governmental entity.
