governmental and notforprofit accounting 5th chapter 1 solution.docx

governmental and notforprofit accounting 5th chapter 1 solution.docx

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governmentalandnotforprofitaccounting5thchapter1solution

Chapter1

TheGovernmentandNot-For-ProfitEnvironment

QuestionsforReviewandDiscussion

1.Thecriticaldistinctionbetweenfor-profitbusinessesandnot-for-profitsincludinggovernmentsisthatbusinesseshaveprofitastheirmainmotivewhereastheothershaveservice.Aprimarypurposeoffinancialreportingistoreportonanentity’saccomplishments — howwellitachieveditsobjectives.Accordingly,thefinancialstatementsofbusinessesmeasureprofitability,theirkeyobjective.Financialreportsofgovernmentsandothernot-for-profitsshouldnotfocusonprofitability,sinceitisnotarelevantobjective.Ideally,therefore,theyshouldfocusonotherperformanceobjectives,suchashowwelltheorganizationsmettheirservicegoals.Inreality,however,thegoalofreportingonhowwelltheyhaveachievedsuchgoalshasprovendifficulttoattainandthefinancialreportshavefocusedmainlyonfinancially-relateddata.

2.Governmentsandnot-for-profitsare“governed”bythebudget,whereasbusinessesaregovernedbythemarketplace.Thebudgetisthekeypoliticalandfiscaldocumentofgovernmentsandnot-for-profits.Itdetermineshowanentityobtainsitsresourcesandhowitallocatesthem.Itencapsulatesmostkeydecisionsofconsequencemadebytheorganization.Inagovernmentthebudgetisnotmerelyamanagerialdocument;itisthelaw.

3.Owingtothesignificanceofthebudget,constituentswantassurancethattheentityachievesitsrevenueestimatesandcomplieswithitsspendingmandates.Theyexpectthefinancialstatementstoreportonhowthebudgetwasadministered.

4.Interperiodequityistheconceptthattaxpayersoftodaypayfortheservicesthattheyreceiveandnotshiftthepaymentburdentotaxpayersofthefuture.Financialreportingmustindicatetheextenttowhichinterperiodequityhasbeenachieved.Therefore,itmustdetermineandreportupontheeconomiccostsoftheservicesperformed（notmerelythecashcosts）andofthetaxpayers’contributiontowardcoveringthosecosts.

5.Thematchingconceptmaybelessrelevantforgovernmentsandnot-for-profitsthanforbusinessesbecausetheremaybenoconnectionbetweenrevenuesgeneratedandthequantity,qualityorcostofservicesperformed.Anincreaseinthedemandfor,orcostof,servicesprovidedbyahomelessshelterwouldnotnecessarilyresultinanincreaseintheamountofdonationsthatitreceives.Ofcourse,governmentsandnot-for-profitsareconcernedwithmeasuringinterperiodequityandforthatpurposethematchingconceptmaybeveryrelevant.

6.Governmentsmustmaintainanaccountingsystemthatassuresthatrestrictedresourcesarenotinadvertentlyexpendedforinappropriatepurposes.Moreover,statementusersmayneedseparateinformationontherestrictedresourcesbycategoryofrestrictionandtheunrestrictedresources.Inpractice,theserequirementshaveledgovernmentstoadoptasystemof“fund”accountingandreporting.

7.Evengovernmentswithinthesamecategorymayengageindifferenttypesofactivities.Forexample,somecitiesoperateaschoolsystemwhereasothersdonot.Thosethatarenotwithinthesamecategorymayhaverelativelylittleincommon.Forexample,astategovernmentsharesfewcharacteristicswithacity.

8.Ifagovernmenthasthepowertotax,thenithascommandover,andaccessto,resources.Therefore,itsfiscalwell-beingcannotbeassessedmerelybymeasuringtheassetsthatit“owns.”Forexample,thefiscalconditionofacityshouldincorporatethewealthoftheresidentsandbusinesseswithinthecity,theirearningcapacity,andthecity’swillingnesstoexploititstaxbase.

9.Manygovernmentsbudgetonacashornear-cashbasis.However,thecashbasisofaccountingdoesnotprovideadequateinformationwithwhichtoassessinterperiodequity.Financialstatementsthatsatisfytheobjectiveofreportingoninterperiodequitymaynotsatisfythatofreportingonbudgetarycompliance.Moreover,statementsthatreportoneitherinterperiodequityorbudgetarycomplianceareunlikelytoprovidesufficientinformationwithwhichtoassessserviceeffortsandaccomplishments.

10.Measuresofserviceeffortsandaccomplishmentsaremoresignificantingovernmentsandnot-for-profitsbecausetheirobjectivesaretoprovideservice.Bycontrast,theobjectiveofbusinessesistoearnaprofit.Therefore,businessescanreportontheiraccomplishmentsbyreportingontheirprofitability.Governmentsandnot-for-profitsmustreportonothermeasuresofaccomplishment.

11.TheFASBinfluencesgenerallyacceptedaccountingprinciplesofgovernmentsintwokeyways.First,FASBpronouncementsareincludedintheGASB“hierarchy”ofGAAP.FASBpronouncementsthattheGASBhasspecificallymadeapplicabletogovernmentsareincludedinthehighestcategory;thosethattheGASBhasnotspecificallyadoptedareincludedinthelowestcategory.Second,thebusiness-typeactivitiesofgovernmentsarerequired（withafewexceptions）tofollowthebusinessaccountingprinciplesassetforthbytheFASB.

12.Itismoredifficulttodistinguishbetweeninternalandexternalusersingovernmentsthaninbusinessesbecauseconstituents,suchastaxpayers,mayplaysignificantrolesinestablishingpoliciesthatareoftenconsideredwithintherealmofmanagers.Also,legislatorsareinternaltotheextenttheysetpolicy,butexternalinsofarastheexecutivebranchmustaccounttothelegislativebranch.

Exercises

EX1-1

1.a

2.c

3.c

4.c

5.b

6.c

7.d

8.c

9.b

10.c

EX1-2

1.b

2.b

3.d

4.b

5.a

6.c

7.a

8.b

9.a

10.b

Problems

P.1-1.

a.Theauthority’scashrequirementsinYear1wouldbeasfollows（inmillions）:

Wages,salariesandotheroperatingcosts$6.0

Purchaseofequipment$10.0

Less:

Issuanceofbonds10.00.0

Interestonbonds0.5

Purchaseofadditionalequipment0.9

Totalcashoutlays（revenuerequirements）$7.4

b.InYear2,theywouldbe:

Wages,salariesandotheroperatingcosts$6.0

Interestonbonds0.5

Totalcashoutlays（revenuerequirements）$6.5

c.InYear10,theywouldbe:

Wages,salariesandotheroperatingcosts$6.0

Interestonbonds0.5

Repaymentofbonds10.0

Totalcashoutlays（revenuerequirements）$16.5

d.Thebudgetingandtaxingpoliciesfailtopromoteinterperiodequity.Theeconomiccostsincurredbytheauthority—thewages,salaries,otheroperatingcosts,andportionofequipmentconsumed—werethesameeachyear.Yet,taxpaymentswilldependonwhentheequipmentwaspurchasedandwhenthedebtwasrepaid.TaxpayersofYear10willhavetopayforequipmentthatprovidedservicestothetaxpayersofthepreviousnineyears.

Interperiodequitycouldbeachievedbybudgetingonanaccrualratherthanacashbasis.Thebudgetwouldthenincludeanannualchargeof$1.3millionfordepreciation—$1millionontheten-yearequipment;$0.3milliononthethree-yearequipment.Annualrequiredrevenueswouldbe$7.8million:

Wages,salariesandotheroperatingcosts$6.0

Interestonbonds0.5

Depreciationonequipment1.3

Totalrevenuerequirements$7.8

Thispracticemight,however,beobjectionabletosometaxpayersbecauseitrequiresthattheycontributecashtotheauthorityinyearspriortothoseinwhichitwillactuallybeexpended.Thus,forexample,attheendofYear1theauthoritywillhaveacash“reserve”of$0.4million—thedifferencebetweenthe$7.8millionintaxescollectedandthe$7.4millionincashoutlays.Theauthoritycouldalsoachieveinterperiodequitybyissuingserialbonds（thoseinwhichaportionoftheprincipalmatureseachyearoverthelifeoftheissue）orbyestablishingandcontributingtoadebtservice“sinkingfund.”Bytakingeitheroftheseapproaches,theauthoritywould,ineffect,berepayingthebondsovertheperiodinwhichtheequipmentisusedandtherebymatchingequipmentcostswithequipmentbenefits.

P.1-2

1.Theinformationprovidedshould,byitself,posenoobstacletoapprovingtheloan.Forsure,revenuesjustcoverexpenditures,allowingfornoexcesstocoverthedebtserviceontheloanandtheadditionaloperatingexpendituresthatwillbeincurredwhentheclassroombuildingisputintouse.Thekeyissuefacingaloanofficer,however,iswhetherthechurchmembersarebothwillingandfiscallyabletopayforthenewfacilityandtocovertheadditionaloperatingcosts.Thefiscalcapacityofthechurchcannotbeassessedindependentlyofthatofitsmembers.

Thefinancialstatementsrevealthatthechurch’sassetswillhaveamarketvalueof$7.2million（newandoldfacilitiespluscashandinvestments）whentheclassroombuildingiscomplete.Ifsomeoralloftheseassetsareusedtosecuretheloan,thenthebankmayhaveareasonablecushionagainstdefault.However,marketvaluesofchurchesorotherspecial-purposefacilitiesarenotoriouslyunreliable.Moreover,forobviousreasons,banksarereluctanttoforecloseonlocalchurches.

2.Theloanofficermaywishtoreviewthefinancialstatementsfor“smokingguns”suchascontingentliabilities,litigation,orunusualtransactions.However,assumingthatnonearefound,thereislikelytobelittleinthefinancialstatementstoprovidethebasisforaloandecision.

3.Iftheloanofficerweretoapprovetheloan,hewouldlikelydosoinlargemeasurebecausehehashadabusinessrelationshipwithmembersofthechurchandhasconfidenceintheirabilitytomanagethechurchandassurethattheloanisrepaid.Accordingly,hewouldprobablywanttoreviewwhateverinformationisavailableastothecharacterandcreditworthinessofkeychurchmembersandofficers.

4.Asimpliedinparta,asamatterofpolicythe