Solutions
̦̣ Manual
̦̣ for Government and Not-for-Profit Accounting:
̦̣ Concepts and Practices 10th Edition
by Michael H. Granof, Saleha B. Khumawala,
̦̣ Thad D. Calabrese, and Dean Mead
, Solution
̦̣ Manual̦̣ for Government And Not For
Profit Accounting
̦̣ Concepts And Practices 10th
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 businesseș̣ and not-for-profits including
̦̣ Formatted: Section start:
Continu
Su
̦̣ ppress
̦̣ ou
̦̣ Endnotes,
s, 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 financial
statements of businesses
̦̣ measure
̦̣ profitability, their key objective. Financial reports of
governments and other not-for-profits should ̦̣ not focuș̣ on profitability, since it is not a
relevant objective. Ideally, therefore, they should ̦̣ focuș̣ 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
difficulț̣ 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 consequence̦̣ 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 revenue̦̣ estimates and complies with its spending mandates. They expect
the financial statements to report on how the budget
̦̣ was administered.
4. Interperiod equity̦̣ is the concept that taxpayers of today pay for the services that
they receive and not shift the payment burden̦̣ to taxpayers of the futu
̦̣ re.
̦̣ Financial
reporting musț̣ indicate the extent to which interperiod equity ̦̣ has been achieved.
Therefore, it must ̦̣ determine and report upon̦̣ 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
1-1
, 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 resulț̣ in an
increase in the amounț̣ of donations that it receives. Of course,
̦̣ governments and not-
for-profits are concerned with measuring̦̣ 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 pu rposes.
̦̣ Moreover,
statement users
̦̣ may need separate information on the restricted resources
̦̣ by
category of restriction and the unrestricted
̦̣ resou rces.
̦̣ In practice, these requirements
̦̣
have led governments to adopt a system of ―fund‖ ̦̣ accou nting
̦̣ 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
accounting̦̣ does not provide adequate̦̣ 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 equity ̦̣ or bu dgetary
̦̣ compliance are
unlikely
̦̣ to provide sufficient
̦̣ information with which to assess service efforts and
accomplishments.
10. Measures
̦̣ of service efforts and accomplishments are more significant in governments
and not-for-profits because̦̣ their objectives are to provide service. By contrast, the
objective of businesses
̦̣ is to earn a profit. Therefore, businesses
̦̣ can report on their
accomplishments by reporting on their profitability. Governments and not-for-profits
must
̦̣ report on other measureș̣ of accomplishment.
11. The FASB influences
̦̣ generally accepted accounting ̦̣ principles of governments in two
key ways. First, FASB pronouncements ̦̣ are included̦̣ in the GASB ―hierarchy‖ of
GAAP. FASB pronouncementș̣ that the GASB has specifically made applicable to
governments are included ̦̣ in the highest category; those that the GASB has not
specifically adopted are included ̦̣ in the lowest category. Second, the business-type
̦̣
activities of governments are required ̦̣ (with a few exceptions) to follow the business
̦̣
accounting
̦̣ principles as set forth by the FASB.
2-2
, 12. It is more difficulț̣ to distinguish̦̣ between internal and external users
̦̣ in governments
than in businesses
̦̣ becau se
̦̣ constitu ents,
̦̣ su ch
̦̣ as taxpayers, may play significant roles
in establishing policies that are often considered within the realm of managers. Also,
legislators are internal to the extent they set policy, buț̣ 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 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
̦̣ Manual
̦̣ for Government and Not-for-Profit Accounting:
̦̣ Concepts and Practices 10th Edition
by Michael H. Granof, Saleha B. Khumawala,
̦̣ Thad D. Calabrese, and Dean Mead
, Solution
̦̣ Manual̦̣ for Government And Not For
Profit Accounting
̦̣ Concepts And Practices 10th
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 businesseș̣ and not-for-profits including
̦̣ Formatted: Section start:
Continu
Su
̦̣ ppress
̦̣ ou
̦̣ Endnotes,
s, 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 financial
statements of businesses
̦̣ measure
̦̣ profitability, their key objective. Financial reports of
governments and other not-for-profits should ̦̣ not focuș̣ on profitability, since it is not a
relevant objective. Ideally, therefore, they should ̦̣ focuș̣ 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
difficulț̣ 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 consequence̦̣ 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 revenue̦̣ estimates and complies with its spending mandates. They expect
the financial statements to report on how the budget
̦̣ was administered.
4. Interperiod equity̦̣ is the concept that taxpayers of today pay for the services that
they receive and not shift the payment burden̦̣ to taxpayers of the futu
̦̣ re.
̦̣ Financial
reporting musț̣ indicate the extent to which interperiod equity ̦̣ has been achieved.
Therefore, it must ̦̣ determine and report upon̦̣ 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
1-1
, 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 resulț̣ in an
increase in the amounț̣ of donations that it receives. Of course,
̦̣ governments and not-
for-profits are concerned with measuring̦̣ 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 pu rposes.
̦̣ Moreover,
statement users
̦̣ may need separate information on the restricted resources
̦̣ by
category of restriction and the unrestricted
̦̣ resou rces.
̦̣ In practice, these requirements
̦̣
have led governments to adopt a system of ―fund‖ ̦̣ accou nting
̦̣ 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
accounting̦̣ does not provide adequate̦̣ 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 equity ̦̣ or bu dgetary
̦̣ compliance are
unlikely
̦̣ to provide sufficient
̦̣ information with which to assess service efforts and
accomplishments.
10. Measures
̦̣ of service efforts and accomplishments are more significant in governments
and not-for-profits because̦̣ their objectives are to provide service. By contrast, the
objective of businesses
̦̣ is to earn a profit. Therefore, businesses
̦̣ can report on their
accomplishments by reporting on their profitability. Governments and not-for-profits
must
̦̣ report on other measureș̣ of accomplishment.
11. The FASB influences
̦̣ generally accepted accounting ̦̣ principles of governments in two
key ways. First, FASB pronouncements ̦̣ are included̦̣ in the GASB ―hierarchy‖ of
GAAP. FASB pronouncementș̣ that the GASB has specifically made applicable to
governments are included ̦̣ in the highest category; those that the GASB has not
specifically adopted are included ̦̣ in the lowest category. Second, the business-type
̦̣
activities of governments are required ̦̣ (with a few exceptions) to follow the business
̦̣
accounting
̦̣ principles as set forth by the FASB.
2-2
, 12. It is more difficulț̣ to distinguish̦̣ between internal and external users
̦̣ in governments
than in businesses
̦̣ becau se
̦̣ constitu ents,
̦̣ su ch
̦̣ as taxpayers, may play significant roles
in establishing policies that are often considered within the realm of managers. Also,
legislators are internal to the extent they set policy, buț̣ 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 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
