CHAPTER 1
GOVERNMENTAL AND NONPROFIT ACCOUNTING:
ENVIRONMENT AND CHARACTERISTICS
ANSWERS TO QUESTIONS
Question 1-1
a. The similarities of accounting for profit-seeking and G&NP organizations include:
1. Double-entry system of accounts.
2. Most accounting mechanics, e.g., basic transaction documents, journals, ledgers, charts of
accounts.
3. Where a G&NP organization has a business-type activity, e.g., a municipal electric utility,
the accounting largely parallels that for a similar private business (e.g., electric utility).
b. Among the unique aspects of G&NP organization accounting are:
1. Fund accounting—designed to separate resources according to the purposes for which
they may be used and to account for their uses and balances.
2. Budgetary control techniques—to help assure appropriations are not overexpended and
all resources due the G&NP organization are received by it.
Difficulty: 1
Learning Objective: 1
AACSB: Reflective thinking
Question 1-2
,a. A fund of a government organization is an independent fiscal and accounting entity. Each fund
has a separate self-balancing set of accounts in which are recorded the resources segregated
for specific purposes, the related liabilities and residual equity (fund balance or net assets),
and the changes therein. Financial statements typically must be presented to report the
financial position and operating activities of a fund of a government.
b. As the term is generally used in commercial accounting, a "fund" merely indicates that a
portion of an organization's assets is set aside and/or restricted to certain uses, e.g., a petty
cash fund or a bond sinking fund. Such "funds" are not separate accounting entities, but are
accounted for by establishing appropriately titled asset and liability accounts within the
organization's general ledger.
c. No, the creation of a fund does not constitute authority to spend or obligate its resources. In
most not-for-profit organizations, particularly governments, authority to spend or obligate
fund resources is conferred only upon an appropriation(s) being made by the legislative body
or governing board.
Difficulty: 2
Learning Objective: 1
AACSB: Reflective thinking
Question 1-3
1. Governmental (expendable) funds are used to account for the financial assets; related
liabilities; changes in net financial assets from revenues, expenditures, and other financing
sources (uses); and the balances that may be expended in a G&NP organization's
"governmental" or other" nonproprietary" activities.
2. Proprietary (nonexpendable) funds are used to account for the revenues, expenses, assets,
liabilities, and equity of a G&NP organization's "business-type" activities, which in the most
clear cut situations are intended to sustain their operations through user charges.
Difficulty: 1
, Learning Objective: 4
AACSB: Reflective thinking
Question 1-4
"Expenditures" may be defined as the amount of net financial resources expended during an
accounting period for current operations, capital outlay, and long-term debt principal retirement
and interest. (Expenditures are measured in governmental fund accounting.) "Expenses," on the
other hand, are the costs of assets or services consumed (expired) during an accounting period.
(Expenses are measured in proprietary fund accounting.) When equipment is purchased for
instance, expenditures are incurred; but expenses are incurred during its period of use.
Difficulty: 1
Learning Objective: 2
AACSB: Reflective thinking
Question 1-5
, a. Organizational objectives. The determination of net income, earnings per share, change in
owner(s) equity, and the like are very important in accounting for profit-seeking organizations.
Because the basic purpose of a business is to generate revenues sufficient to cover all costs of
providing the services and to generate a return for owners, these measurements relate directly
to the objectives of the owners and are seen to indicate management success or failure during
a given period of time.
On the other hand, a G&NP organization exists to provide certain goods or services to a
community or society as a whole. The objective of such organizations is to provide as many
goods or as much service as available resources permit. For most government and not-for-
profit entity services, there is no expectation that providing the services will generate revenues
or that any revenues raised through user charges will cover costs. Emphasis in this
environment is therefore upon acquiring and using appropriable financial resources—cash
flow, working capital, and budgetary position—rather than the determination of net income or
earnings per share.
b. Sources of financial resources. Profit-seeking organizations generally rely on equity
investors, debt issuances, and profits from the sale of goods and services to its customers to
generate financial resources. In contrast, G&NP organizations do not have “investors,” and
generally do not have a profit motive. G&NP organizations generally rely on the receipt of
taxes and donations as their primary sources of financial resources although they also rely, to
some degree, on proceeds from debt issuances. Grants and subsidies from governments are
primary sources of financial resources for many G&NP organizations as well. Bureau of the
Census statistics indicate that resources received from senior levels of government actually
exceed taxes for many local governments.
a) Evaluating Performance and Operating Results. Profit-seeking organizations rely on profits
from the sale of its goods or services to continue to operate. The operations of a profit-seeking
organization generally are evaluated based on the amounts of profits (or its net income) over a
period of time. G&NP organizations must be measured differently because G&NP organizations
generally do not have a profit motive. Evaluating the performance of governments is extremely
difficult because there is no open market supply and demand test of the value of the services
that they provide. Also, the relationship between resource providers and the recipients of
services is remote and indirect for G&NP organizations. Therefore, other controls must be
substituted for the profit test/regulator where G&NP organizations are involved. Thus, G&NP
organizations, particularly governments, are subjected to a variety of legal and administrative
controls over such factors as (1) organization structure, (2) personnel policies and procedures,
(3) sources of resources, (4) uses of resources, (5) accounting, (6) reporting, and (7) auditing.
The most obvious result of such alternative controls is the extensive use of fund accounting and
reporting and budgetary accounting and reporting by G&NP organizations
GOVERNMENTAL AND NONPROFIT ACCOUNTING:
ENVIRONMENT AND CHARACTERISTICS
ANSWERS TO QUESTIONS
Question 1-1
a. The similarities of accounting for profit-seeking and G&NP organizations include:
1. Double-entry system of accounts.
2. Most accounting mechanics, e.g., basic transaction documents, journals, ledgers, charts of
accounts.
3. Where a G&NP organization has a business-type activity, e.g., a municipal electric utility,
the accounting largely parallels that for a similar private business (e.g., electric utility).
b. Among the unique aspects of G&NP organization accounting are:
1. Fund accounting—designed to separate resources according to the purposes for which
they may be used and to account for their uses and balances.
2. Budgetary control techniques—to help assure appropriations are not overexpended and
all resources due the G&NP organization are received by it.
Difficulty: 1
Learning Objective: 1
AACSB: Reflective thinking
Question 1-2
,a. A fund of a government organization is an independent fiscal and accounting entity. Each fund
has a separate self-balancing set of accounts in which are recorded the resources segregated
for specific purposes, the related liabilities and residual equity (fund balance or net assets),
and the changes therein. Financial statements typically must be presented to report the
financial position and operating activities of a fund of a government.
b. As the term is generally used in commercial accounting, a "fund" merely indicates that a
portion of an organization's assets is set aside and/or restricted to certain uses, e.g., a petty
cash fund or a bond sinking fund. Such "funds" are not separate accounting entities, but are
accounted for by establishing appropriately titled asset and liability accounts within the
organization's general ledger.
c. No, the creation of a fund does not constitute authority to spend or obligate its resources. In
most not-for-profit organizations, particularly governments, authority to spend or obligate
fund resources is conferred only upon an appropriation(s) being made by the legislative body
or governing board.
Difficulty: 2
Learning Objective: 1
AACSB: Reflective thinking
Question 1-3
1. Governmental (expendable) funds are used to account for the financial assets; related
liabilities; changes in net financial assets from revenues, expenditures, and other financing
sources (uses); and the balances that may be expended in a G&NP organization's
"governmental" or other" nonproprietary" activities.
2. Proprietary (nonexpendable) funds are used to account for the revenues, expenses, assets,
liabilities, and equity of a G&NP organization's "business-type" activities, which in the most
clear cut situations are intended to sustain their operations through user charges.
Difficulty: 1
, Learning Objective: 4
AACSB: Reflective thinking
Question 1-4
"Expenditures" may be defined as the amount of net financial resources expended during an
accounting period for current operations, capital outlay, and long-term debt principal retirement
and interest. (Expenditures are measured in governmental fund accounting.) "Expenses," on the
other hand, are the costs of assets or services consumed (expired) during an accounting period.
(Expenses are measured in proprietary fund accounting.) When equipment is purchased for
instance, expenditures are incurred; but expenses are incurred during its period of use.
Difficulty: 1
Learning Objective: 2
AACSB: Reflective thinking
Question 1-5
, a. Organizational objectives. The determination of net income, earnings per share, change in
owner(s) equity, and the like are very important in accounting for profit-seeking organizations.
Because the basic purpose of a business is to generate revenues sufficient to cover all costs of
providing the services and to generate a return for owners, these measurements relate directly
to the objectives of the owners and are seen to indicate management success or failure during
a given period of time.
On the other hand, a G&NP organization exists to provide certain goods or services to a
community or society as a whole. The objective of such organizations is to provide as many
goods or as much service as available resources permit. For most government and not-for-
profit entity services, there is no expectation that providing the services will generate revenues
or that any revenues raised through user charges will cover costs. Emphasis in this
environment is therefore upon acquiring and using appropriable financial resources—cash
flow, working capital, and budgetary position—rather than the determination of net income or
earnings per share.
b. Sources of financial resources. Profit-seeking organizations generally rely on equity
investors, debt issuances, and profits from the sale of goods and services to its customers to
generate financial resources. In contrast, G&NP organizations do not have “investors,” and
generally do not have a profit motive. G&NP organizations generally rely on the receipt of
taxes and donations as their primary sources of financial resources although they also rely, to
some degree, on proceeds from debt issuances. Grants and subsidies from governments are
primary sources of financial resources for many G&NP organizations as well. Bureau of the
Census statistics indicate that resources received from senior levels of government actually
exceed taxes for many local governments.
a) Evaluating Performance and Operating Results. Profit-seeking organizations rely on profits
from the sale of its goods or services to continue to operate. The operations of a profit-seeking
organization generally are evaluated based on the amounts of profits (or its net income) over a
period of time. G&NP organizations must be measured differently because G&NP organizations
generally do not have a profit motive. Evaluating the performance of governments is extremely
difficult because there is no open market supply and demand test of the value of the services
that they provide. Also, the relationship between resource providers and the recipients of
services is remote and indirect for G&NP organizations. Therefore, other controls must be
substituted for the profit test/regulator where G&NP organizations are involved. Thus, G&NP
organizations, particularly governments, are subjected to a variety of legal and administrative
controls over such factors as (1) organization structure, (2) personnel policies and procedures,
(3) sources of resources, (4) uses of resources, (5) accounting, (6) reporting, and (7) auditing.
The most obvious result of such alternative controls is the extensive use of fund accounting and
reporting and budgetary accounting and reporting by G&NP organizations
