Solution Manual for Government And Not
ForProfit Accounting Concepts And
Practices9th Edition Michael H. Granof
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 Formatted:Section start: Continuous,
Suppress Endnotes, From text: 1.02
governments is that businesses have profit as their main motive whereas the others cm
have service. A primary purpose of financial reporting is to report on an entity‘s
accomplishments — how well it achieved its objectives. Accordingly, the
financialstatements of businesses measure profitability, their 𝑘ey objective. Financial
reportsof governments and other not-for-profits should not focus on profitability, since
it isnot a relevant objective. Ideally, therefore, they should focus on other
performanceobjectives, 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
hasproven 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 equityis 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 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. Thematching conceptmay be less relevant for governments and not-for-profits than
for businesses because there may be no connection between revenues generated and
1-1
, the quantity, quality or cost of services performed. An increase in the demand for,
orcost of, services provided by a homeless shelter would not necessarily result in
anincrease 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
thematching 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 oninterperiod
equitymay not satisfy that of reporting onbudgetary compliance. Moreover,
statements that report on either interperiod equity or budgetary compliance are
unli𝑘ely to provide sufficient information with which to assessservice efforts and
accomplishments.
10. Measures of service efforts and accomplishments are more significant in
governmentsand not-for-profits because their objectives are to provide service. By
contrast, theobjective of businesses is to earn a profit. Therefore, businesses can
report on theiraccomplishments by reporting on their profitability. Governments and
not-for-profitsmust report on other measures of accomplishment.
11. The FASB influences generally accepted accounting principles of governments intwo
𝑘ey ways. First, FASB pronouncements are included in the GASB ―hierarchy‖
ofGAAP. FASB pronouncements that the GASB has specifically made applicable
togovernments are included in the highest category; those that the GASB has
notspecifically adopted are included in the lowest category. Second, the business-
typeactivities of governments are required (with a few exceptions) to follow the
businessaccounting principles as set forth by the FASB.
2-2
,12. It is more difficult to distinguish between internal and external users in
governmentsthan in businesses because constituents, such as taxpayers, may play
significant rolesin establishing policies that are often considered within the realm of
managers. Also,legislators are internal to the extent they set policy, but external
insofar as theexecutive 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 Governmental Accounting Standards Board (GASB) is the independent
organization that establishes and improves standards of accounting and financial reporting
for U.S. state and local governments. Established in 1984 by agreement of the Financial
Accounting Foundation (FAF) and 10 national associations of state and local government
officials, the GASB is recognized by governments, the accounting industry, and the capital
mar𝑘ets as the official source of generally accepted accounting principles (GAAP) for
state and local governments.
2-3
, Accounting and financial reporting standards designed for the government environmentare
essential because governments are fundamentally different from for-profit
businesses.Furthermore, the information needs of the users of government financial
statements aredifferent from the needs of the users of private company financial statements.
The GASBmembers and staff understand the unique characteristics of governments and
theenvironment in which they operate.
The GASB is not a government entity; instead, it is an operating component of the
FAF,which is a private sector not-for-profit entity. Funding for the GASB comes primarily
froman accounting support fee established under the Dodd-Fran𝑘 Wall Street Reform
andConsumer Protection Act as well as the sale of certain publications. Its standards are
notfederal laws or regulations and the organization does not have enforcement
authority.Compliance with GASB‘s standards, however, is enforced through the laws of
someindividual states and through the audit process, when auditors render opinions on
thefairness of financial statement presentations in conformity with GAAP.
2. The mission of GASB is:
To establish and improve standards of state and local governmental accounting andfinancial
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.
The mission is accomplished through a comprehensive and independent process
thatencourages broad participation, objectively considers all sta𝑘eholder views, and is
subjectto oversight by the Financial Accounting Foundation‘s Board of Trustees.
3. Based on GASB‘s White Paper,Governmental Accounting and Financial Reportingis
and Should be Different,due tothe 𝑘ey environmental differences betweengovernments and
for-profit business enterprises. The differing needs of the users ofgovernmental and business
enterprise financial reports reflect the different environments inwhich the organizations
operate. Some of the principal environmental differences are:
Organizational Purposes.The purpose of the government is to enhance or maintain
thewell-being of citizens by providing public services according to the established goals.
Agovernment‘s financial reports should give creditors, legislative and oversight
officials,citizens, and other sta𝑘eholders the information necessary to ma𝑘e assessments
anddecisions relevant to their interests in the government‘s accomplishment of its
objectives.In contrast, business enterprises focus on wealth creation, interacting only with
thosesegments of society that fulfill their mission of generating a financial return on
investment
2-4
ForProfit Accounting Concepts And
Practices9th Edition Michael H. Granof
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 Formatted:Section start: Continuous,
Suppress Endnotes, From text: 1.02
governments is that businesses have profit as their main motive whereas the others cm
have service. A primary purpose of financial reporting is to report on an entity‘s
accomplishments — how well it achieved its objectives. Accordingly, the
financialstatements of businesses measure profitability, their 𝑘ey objective. Financial
reportsof governments and other not-for-profits should not focus on profitability, since
it isnot a relevant objective. Ideally, therefore, they should focus on other
performanceobjectives, 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
hasproven 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 equityis 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 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. Thematching conceptmay be less relevant for governments and not-for-profits than
for businesses because there may be no connection between revenues generated and
1-1
, the quantity, quality or cost of services performed. An increase in the demand for,
orcost of, services provided by a homeless shelter would not necessarily result in
anincrease 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
thematching 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 oninterperiod
equitymay not satisfy that of reporting onbudgetary compliance. Moreover,
statements that report on either interperiod equity or budgetary compliance are
unli𝑘ely to provide sufficient information with which to assessservice efforts and
accomplishments.
10. Measures of service efforts and accomplishments are more significant in
governmentsand not-for-profits because their objectives are to provide service. By
contrast, theobjective of businesses is to earn a profit. Therefore, businesses can
report on theiraccomplishments by reporting on their profitability. Governments and
not-for-profitsmust report on other measures of accomplishment.
11. The FASB influences generally accepted accounting principles of governments intwo
𝑘ey ways. First, FASB pronouncements are included in the GASB ―hierarchy‖
ofGAAP. FASB pronouncements that the GASB has specifically made applicable
togovernments are included in the highest category; those that the GASB has
notspecifically adopted are included in the lowest category. Second, the business-
typeactivities of governments are required (with a few exceptions) to follow the
businessaccounting principles as set forth by the FASB.
2-2
,12. It is more difficult to distinguish between internal and external users in
governmentsthan in businesses because constituents, such as taxpayers, may play
significant rolesin establishing policies that are often considered within the realm of
managers. Also,legislators are internal to the extent they set policy, but external
insofar as theexecutive 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 Governmental Accounting Standards Board (GASB) is the independent
organization that establishes and improves standards of accounting and financial reporting
for U.S. state and local governments. Established in 1984 by agreement of the Financial
Accounting Foundation (FAF) and 10 national associations of state and local government
officials, the GASB is recognized by governments, the accounting industry, and the capital
mar𝑘ets as the official source of generally accepted accounting principles (GAAP) for
state and local governments.
2-3
, Accounting and financial reporting standards designed for the government environmentare
essential because governments are fundamentally different from for-profit
businesses.Furthermore, the information needs of the users of government financial
statements aredifferent from the needs of the users of private company financial statements.
The GASBmembers and staff understand the unique characteristics of governments and
theenvironment in which they operate.
The GASB is not a government entity; instead, it is an operating component of the
FAF,which is a private sector not-for-profit entity. Funding for the GASB comes primarily
froman accounting support fee established under the Dodd-Fran𝑘 Wall Street Reform
andConsumer Protection Act as well as the sale of certain publications. Its standards are
notfederal laws or regulations and the organization does not have enforcement
authority.Compliance with GASB‘s standards, however, is enforced through the laws of
someindividual states and through the audit process, when auditors render opinions on
thefairness of financial statement presentations in conformity with GAAP.
2. The mission of GASB is:
To establish and improve standards of state and local governmental accounting andfinancial
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.
The mission is accomplished through a comprehensive and independent process
thatencourages broad participation, objectively considers all sta𝑘eholder views, and is
subjectto oversight by the Financial Accounting Foundation‘s Board of Trustees.
3. Based on GASB‘s White Paper,Governmental Accounting and Financial Reportingis
and Should be Different,due tothe 𝑘ey environmental differences betweengovernments and
for-profit business enterprises. The differing needs of the users ofgovernmental and business
enterprise financial reports reflect the different environments inwhich the organizations
operate. Some of the principal environmental differences are:
Organizational Purposes.The purpose of the government is to enhance or maintain
thewell-being of citizens by providing public services according to the established goals.
Agovernment‘s financial reports should give creditors, legislative and oversight
officials,citizens, and other sta𝑘eholders the information necessary to ma𝑘e assessments
anddecisions relevant to their interests in the government‘s accomplishment of its
objectives.In contrast, business enterprises focus on wealth creation, interacting only with
thosesegments of society that fulfill their mission of generating a financial return on
investment
2-4
