SOLUTION MANUAL FOR
GOVERNMENT AND NOT FOR PROFIT
ACCOUNTING CONCEPTS AND
PRACTICES 9TH EDITION MICHAEL H.
GRANOF
Chapter 1
The Government And Not-For-Profit Environment
Questions For Review And Discussion
1. The Critical Distinctio n Between For-Pro fit Bus inesses And Not-For-Pro fits
Including Gover nments Is That Business es Ha ve Pr ofit As Their Main M otiv e
Whereas The Others
Ha ve Ser vice. A Primary Purpose Of Financia l Rep orting Is To Report On An
Entity‗S Acco mp lis hments — Ho w Well It Achieved Its Objectives.
Accord ingly, The Fina ncial Sta tements Of Businesses Meas ure Pro fitab ility,
Their Key Ob jective. Fina ncial Reports Of Governments And Other No t-For -
Profits Sho uld Not Focus On Profitab ility, Since It Is Not A Releva nt
Objective. Ideally, Therefore, They Sho uld Fo cus On Other Perfor ma nce
Objectives, Such As Ho w Well The Orga niza tio ns M et Their Service Goals. In
Reality, Ho wever, The Goa l Of Repor ting On Ho w Well They Ha ve Achieved
Such Go als Has Pro ven Difficult To Attain And The Fina ncial Repor ts Ha ve
Focused Mainly On Financially- Related Data.
2. Go ver nments And No t-For -Pr ofits Are ―Go ver ned‖ By The Bud get, Whereas
Businesses Are Go ver ned By The M arketpla ce. The Budget Is The Key Political
And Fis cal Do cument Of Gover nments And No t-For -Profits. It Deter mines
Ho w An Entity Ob tains Its Reso urces And Ho w It Allo ca tes Them. It
Encaps ula tes M ost Key Decisio ns Of Co nseq uence M ade By The
Orga nizatio n. In A Go ver nment The Budg et Is Not Mer ely A Ma na geria l
Document; It Is The Law.
1-1
,3. Owing To The Sig nifica nce Of The Budg et, Co ns tituents Wa nt Ass ura nce
Tha t The Entity Achieves Its Revenue Estima tes And Co mp lies With Its
Spend ing Ma ndates. They E xpect The Fina ncia l Sta tements To Repor t On
How The Budget Was Administered.
4. Interper iod Equity Is The Co ncep t That Taxpayers Of To da y Pa y For The
Services Tha t They Receive And No t Shift The Pa yment Burd en To Taxpa yers
Of The Future. Fina ncial Repor ting M us t Indicate The Extent To Which
Interperiod Eq uity Has Been Achieved. Ther efore, It Mus t Deter mine And
Repor t Up on The Eco no mic Cos ts Of The Ser vices Perfor med (No t Merely
The Cas h Costs ) And Of The Taxpa yers‗ Co ntrib utio n To war d Covering
Those Costs.
5. The Matc hing Concept Ma y Be Less Releva nt For Governments And No t-For-
Profits Tha n For Businesses Beca use Ther e Ma y Be No Connection Between
Revenues Generated And
2-2
, The Qua ntity, Quality Or Cos t Of Ser vices Per for med. An Increas e In The
Dema nd For, Or Cos t Of, Ser vices Pro vided By A Ho meless Shelter Wo uld
Not Necessar ily Res ult In An Increas e In The Amo unt Of Do na tio ns Tha t It
Receives. Of Co urse, Gover nments And No t- For -Profits Are Co ncer ned With
Meas uring Interper iod Eq uity And For That Purpos e The Ma tching Co ncep t
May Be Very Relevant.
6. Go ver nments M us t Mainta in An Acco unting Sys tem That Ass ures Tha t
Restr icted Reso ur ces Are No t Inad ver tently Expend ed For Inappro pria te
Purposes. Moreo ver, Sta tement Users Ma y Need Separa te Infor ma tio n On
The Res tricted Reso ur ces By Ca tegor y Of Restr ictio n And The Unres tricted
Reso urces. In Pra ctice, These Req uirements Ha ve Led Go ver nments To
Adopt A System Of ―Fund‖ Accounting And Reporting.
7. Even Go ver nments Within The Sa me Ca tegor y Ma y Engage In Differ ent
Typ es Of Activities. For Exa mp le, So me Cities Opera te A School Sys tem
Wher eas Others Do No t. Thos e Tha t Are No t Within The Sa me Ca tegor y
May Have Rela tively Little In Co mmo n. For Exa mple, A Sta te Go ver nment
Shares Few Characteristics With A City.
8. If A Government Has The Po wer To Ta x, Then It Has Co mma nd Over, And
Access To , Reso urces. Therefore, Its Fis cal Well-Being Ca nno t Be Assessed
Merely By Meas ur ing The Assets Tha t It ―Owns.‖ For Exa mple, The Fiscal
Co nditio n Of A City Sho uld Incorpora te The Wealth Of The Res idents And
Businesses Within The City, Their Ear ning Ca pacity, A nd The City‗S
Willingness To Exploit Its Tax Base.
9. Ma ny Go ver nments Budget On A Cas h Or Near-Cas h Basis. Ho wever, The
Cas h Basis Of Acco unting Do es No t Provide Adeq ua te Infor matio n With
Which To Ass ess Interp eriod E q uity. Fina ncial Sta tements Tha t Sa tis fy The
Objective Of Reporting On Inter per iod Equity Ma y Not Sa tis fy Tha t Of
Repor ting On Budgetar y Complianc e. Mor eo ver, Sta tements Tha t Rep ort On
Either Interper iod E quity Or Budg etar y Co mp lia nce Are Unlikely To Pro vide
Sufficient Infor ma tio n With Which To Ass ess Ser vice Effor ts And
Accomplishments.
10. Measures Of Service Efforts And Acco mplishments Are More Significant In
Gover nments And Not-For-Pro fits Beca use Their Ob jectives Are To Pro vid e
Service. By Contras t, The Objective Of Businesses Is To Ear n A Pro fit.
Therefor e, Businesses Ca n Repor t On Their Acco mplis hments By Rep orting
On Their Profitab ility. Gover nments And No t-For -Pr ofits M ust Rep ort On
3-3
, Other Measures Of Accomplishment.
11. The FASB Influences Genera lly Accep ted Acco unting Pr inciples Of
Go ver nments In Two Key Wa ys. First, FASB Pro no uncements Are Includ ed In
The GASB ―Hierarchy‖ Of GAAP. FASB Pro no uncements That The GASB Has
Specifica lly Made App licable To Gover nments Are Includ ed In The Hig hes t
Ca tegor y; Thos e Tha t The GASB Has No t Specifica lly Adop ted Ar e Includ ed
In The Lo wes t Categor y. Second, The Business -Type Activities Of
Go ver nments Are Req uired (With A Few Excep tio ns) To Follo w The Bus iness
Accounting Principles As Set Forth By The FASB.
4-4
GOVERNMENT AND NOT FOR PROFIT
ACCOUNTING CONCEPTS AND
PRACTICES 9TH EDITION MICHAEL H.
GRANOF
Chapter 1
The Government And Not-For-Profit Environment
Questions For Review And Discussion
1. The Critical Distinctio n Between For-Pro fit Bus inesses And Not-For-Pro fits
Including Gover nments Is That Business es Ha ve Pr ofit As Their Main M otiv e
Whereas The Others
Ha ve Ser vice. A Primary Purpose Of Financia l Rep orting Is To Report On An
Entity‗S Acco mp lis hments — Ho w Well It Achieved Its Objectives.
Accord ingly, The Fina ncial Sta tements Of Businesses Meas ure Pro fitab ility,
Their Key Ob jective. Fina ncial Reports Of Governments And Other No t-For -
Profits Sho uld Not Focus On Profitab ility, Since It Is Not A Releva nt
Objective. Ideally, Therefore, They Sho uld Fo cus On Other Perfor ma nce
Objectives, Such As Ho w Well The Orga niza tio ns M et Their Service Goals. In
Reality, Ho wever, The Goa l Of Repor ting On Ho w Well They Ha ve Achieved
Such Go als Has Pro ven Difficult To Attain And The Fina ncial Repor ts Ha ve
Focused Mainly On Financially- Related Data.
2. Go ver nments And No t-For -Pr ofits Are ―Go ver ned‖ By The Bud get, Whereas
Businesses Are Go ver ned By The M arketpla ce. The Budget Is The Key Political
And Fis cal Do cument Of Gover nments And No t-For -Profits. It Deter mines
Ho w An Entity Ob tains Its Reso urces And Ho w It Allo ca tes Them. It
Encaps ula tes M ost Key Decisio ns Of Co nseq uence M ade By The
Orga nizatio n. In A Go ver nment The Budg et Is Not Mer ely A Ma na geria l
Document; It Is The Law.
1-1
,3. Owing To The Sig nifica nce Of The Budg et, Co ns tituents Wa nt Ass ura nce
Tha t The Entity Achieves Its Revenue Estima tes And Co mp lies With Its
Spend ing Ma ndates. They E xpect The Fina ncia l Sta tements To Repor t On
How The Budget Was Administered.
4. Interper iod Equity Is The Co ncep t That Taxpayers Of To da y Pa y For The
Services Tha t They Receive And No t Shift The Pa yment Burd en To Taxpa yers
Of The Future. Fina ncial Repor ting M us t Indicate The Extent To Which
Interperiod Eq uity Has Been Achieved. Ther efore, It Mus t Deter mine And
Repor t Up on The Eco no mic Cos ts Of The Ser vices Perfor med (No t Merely
The Cas h Costs ) And Of The Taxpa yers‗ Co ntrib utio n To war d Covering
Those Costs.
5. The Matc hing Concept Ma y Be Less Releva nt For Governments And No t-For-
Profits Tha n For Businesses Beca use Ther e Ma y Be No Connection Between
Revenues Generated And
2-2
, The Qua ntity, Quality Or Cos t Of Ser vices Per for med. An Increas e In The
Dema nd For, Or Cos t Of, Ser vices Pro vided By A Ho meless Shelter Wo uld
Not Necessar ily Res ult In An Increas e In The Amo unt Of Do na tio ns Tha t It
Receives. Of Co urse, Gover nments And No t- For -Profits Are Co ncer ned With
Meas uring Interper iod Eq uity And For That Purpos e The Ma tching Co ncep t
May Be Very Relevant.
6. Go ver nments M us t Mainta in An Acco unting Sys tem That Ass ures Tha t
Restr icted Reso ur ces Are No t Inad ver tently Expend ed For Inappro pria te
Purposes. Moreo ver, Sta tement Users Ma y Need Separa te Infor ma tio n On
The Res tricted Reso ur ces By Ca tegor y Of Restr ictio n And The Unres tricted
Reso urces. In Pra ctice, These Req uirements Ha ve Led Go ver nments To
Adopt A System Of ―Fund‖ Accounting And Reporting.
7. Even Go ver nments Within The Sa me Ca tegor y Ma y Engage In Differ ent
Typ es Of Activities. For Exa mp le, So me Cities Opera te A School Sys tem
Wher eas Others Do No t. Thos e Tha t Are No t Within The Sa me Ca tegor y
May Have Rela tively Little In Co mmo n. For Exa mple, A Sta te Go ver nment
Shares Few Characteristics With A City.
8. If A Government Has The Po wer To Ta x, Then It Has Co mma nd Over, And
Access To , Reso urces. Therefore, Its Fis cal Well-Being Ca nno t Be Assessed
Merely By Meas ur ing The Assets Tha t It ―Owns.‖ For Exa mple, The Fiscal
Co nditio n Of A City Sho uld Incorpora te The Wealth Of The Res idents And
Businesses Within The City, Their Ear ning Ca pacity, A nd The City‗S
Willingness To Exploit Its Tax Base.
9. Ma ny Go ver nments Budget On A Cas h Or Near-Cas h Basis. Ho wever, The
Cas h Basis Of Acco unting Do es No t Provide Adeq ua te Infor matio n With
Which To Ass ess Interp eriod E q uity. Fina ncial Sta tements Tha t Sa tis fy The
Objective Of Reporting On Inter per iod Equity Ma y Not Sa tis fy Tha t Of
Repor ting On Budgetar y Complianc e. Mor eo ver, Sta tements Tha t Rep ort On
Either Interper iod E quity Or Budg etar y Co mp lia nce Are Unlikely To Pro vide
Sufficient Infor ma tio n With Which To Ass ess Ser vice Effor ts And
Accomplishments.
10. Measures Of Service Efforts And Acco mplishments Are More Significant In
Gover nments And Not-For-Pro fits Beca use Their Ob jectives Are To Pro vid e
Service. By Contras t, The Objective Of Businesses Is To Ear n A Pro fit.
Therefor e, Businesses Ca n Repor t On Their Acco mplis hments By Rep orting
On Their Profitab ility. Gover nments And No t-For -Pr ofits M ust Rep ort On
3-3
, Other Measures Of Accomplishment.
11. The FASB Influences Genera lly Accep ted Acco unting Pr inciples Of
Go ver nments In Two Key Wa ys. First, FASB Pro no uncements Are Includ ed In
The GASB ―Hierarchy‖ Of GAAP. FASB Pro no uncements That The GASB Has
Specifica lly Made App licable To Gover nments Are Includ ed In The Hig hes t
Ca tegor y; Thos e Tha t The GASB Has No t Specifica lly Adop ted Ar e Includ ed
In The Lo wes t Categor y. Second, The Business -Type Activities Of
Go ver nments Are Req uired (With A Few Excep tio ns) To Follo w The Bus iness
Accounting Principles As Set Forth By The FASB.
4-4
