Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations Short Answer Questions

Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations Short Answer Questions 121. Contrast revenue recognition under the accrual and modified accrual bases of accounting. Answer: Under modified accrual accounting, revenues should be recognized when measurable and available to finance expenditures of the current period. Under accrual accounting, revenues are recognized when earned and realizable. 122.Identify the accounting standard setting bodies for U.S. commercial, private not-forprofits, public not-for-profits, state and local governments, and the federal government. Answer: Commercial enterprises: The Financial Accounting Standards Board establishes accounting principles for all commercial enterprises in the U.S. Private Not-for-profits: The Financial Accounting Standards Board establishes accounting principles for all Private Not-for-Profits in the U.S. Public Not-for-profits: The Governmental Accounting Standards Board establishes accounting principles for all governmentally related not-for-profit organizations in the U.S. State and Local Governments: The Governmental Accounting Standards Board establishes accounting principles for all U.S. state and local governments. Federal government: The Federal Accounting Standards Advisory Board establishes accounting principles for the federal government and its agencies. 123.Contrast the economic resources measurement focus and the current financial resources measurement focus with regard to the accounting treatment of capital assets. Answer: Under the economic resources measurement focus, capital assets are capitalized and depreciated. Under the current financial resources measurement focus, capital assets are not capitalized or depreciated, but are charged to expenditures when received. 23 Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations 124. What are the five environmental factors relating to how governments are different from commercial businesses as described by GASB in a white paper entitled: Why Governmental Accounting and Financial Reporting Is – and Should Be – Different: Answer: The five environmental differences are: Organizational Purpose Governments exist for the well-being of citizens by providing public services. Unlike businesses, profit is not an objective so a measure other than net income is needed. In addition, the stakeholders and the information they require are very different. Governments report information that is far more disaggregated than a commercial enterprise. Sources of Revenue Governments derive many of their resources from taxes. Individuals and businesses pay taxes because they are legally bound. Since there is no “product or service” being conveyed at the time of payment, it is difficult determine when to recognize revenue. Potential for Longevity Governments rarely go out of business, so they have an accounting focus with a long term view of operations and the sustainability of services and the ability of meet future demand. Relationship with Stakeholders Governments have an obligation to demonstrate accountability for public funds. Fund accounting is used by governments to provide assurance that resources are used according to legal or donor restrictions. Role of the Budget Budgets are expressions of public policy and often carry the authority of law. Public officials must stay within their budgets. Required budget vs. actual comparisons indicate the degree of compliance in this area. 125. Identify the three basic fund categories, the funds that make up each of them, and the category’s basis of accounting. Answer: 1. 2. 3. Governmental – Funds include permanent, debt service, capital project, special revenue, and general. The basis of accounting is modified accrual. Proprietary – Funds include internal service and enterprise. The basis of accounting is accrual. Fiduciary – Funds include private purpose trust, investment trust, pension trust, and agency. The basis of accounting is accrual. 24 Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations 126.Contrast the economic resources measurement focus and the current financial resources measurement focus with regard to the accounting treatment of long-term debt. Answer: Under the economic resources measurement focus, long-term debt is recorded as a liability and payments for principal are treated as a reduction in the liability. Since long-term liabilities do not require current financial resources to settle, they are not recorded under the current financial resources measurement focus. Payments of principal are charged to expenditures. 127. The FASB, GASB, and FASAB have each established a hierarchy of GAAP for financial statements preparers? List one category A and one category B item for each organization. Answer: FASAB Statement 162, GASB Statement 55, FASAB (exposure draft) Category A FASB: FASB Statements & Interpretations FASB Staff Positions AICPA Accounting Research Bulletins and Accounting Principles Board Opinions not superseded by the FASB GASB: GASB Statements and interpretations FASAB: FASAB Statements and interpretations AIACPA and FASB pronouncements specifically made applicable to federal governmental entities by FASAB statements and interpretations Category B FASB: FASB Technical Bulletins AICPA Industry Audit and Accounting Guides and Statements Position if cleared by the FASB GASB: GASB Technical Bulleting AICPA Industry Audit and Accounting Guides and Statements Position if cleared by the GASB FASAB: FASAB Technical Bulletins AICPA Industry Audit and Accounting Guides and Statements Position if specifically made applicable to federal governmental entities by the AICPA and cleared by the FASAB 25 Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations 128. What are the four objectives that should be followed with respect to federal financial reporting according to SFFAC #1 as issued by the FASAB? Answer: Budgetary integrity Financial reporting should demonstrate accountability with regard to raising and expending money in accord with the budgetary process, laws and regulations. Operating performance Financial reporting should enable evaluation of service efforts, costs and accomplishments. Stewardship Financial reporting should enable assessment of the impact on the nation of government operations and investments Systems and controls Financial reporting should reveal whether financial systems and controls are adequate 129. In its Statement of Financial Accounting Concepts #4, the FASB identifies the information needs of the users of non-business financial statements. These include providing information that is useful to present and potential resource providers in which four evaluation areas? Answer: A) Making decisions about the allocation of resources B) Assessing services provided by a non-business organization and its ability to continue to provide those services C) Assessing managements’ stewardship and performance D) Evaluation of an organization’s resources, obligations and effects of changes in net resources 130. Provide the definition of the following terms as outlined by GASB Concepts Statement No. 4, Elements of Financial Statements: Assets Liabilities Net position Inflows of resources Outflows of resources Answer: Assets: Resources with present service capacity that the government presently controls. Liabilities: 26 Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations Present obligations to sacrifice resources that the government has little or no discretion to avoid Net position: The residual of all other elements presented in a statement of financial position Inflows of resources: Acquisitions of net assets by the government that are applicable to the reporting period Outflows of resources: Consumption of net assets by the government that are applicable to the reporting period 131. What are the fund-basis financial statements for each of the following fund categories? Fiduciary Proprietary Governmental Answer: Fiduciary: Statement of Fiduciary Net assets (or Net Position) Statement of Changes in Fiduciary Net assets (or Net Position) Proprietary: Statement of Net assets (or Net Position) Statement of Revenues, Expenses, and Changes in Net assets (or Net Position) Statement of Cash flows Governmental: Balance sheet Statement of Revenues, Expenditures and Changes in Fund Balance 132. List and define the five classifications of governmental funds. Answer: 1. General Fund This fund accounts for most of the basic services provided by the government. It accounts for and reports all financial resources not accounted for and reported in another fund. 2. Capital Projects Fund This fund accounts for and reports financial resources that are committed or assigned to expenditure for capital outlays. It accounts for the purchase or construction of major capital improvements except those purchased or constructed by a proprietary or fiduciary fund 3. Debt Service Fund This fund accounts for and reports financial resources that are restricted, committed or 27 Chapter 1 Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit Organizations assigned to expenditure for specified purposes other than debt service or capital projects. Included in this category are activities funded by federal or state grants or by taxes specifically restricted to certain activities. 4. Permanent Fund This fund accounts for and reports resources that are restricted to the extent that only earnings, and not principal, may be used for purposes that support the reporting of government programs. 5. Special Revenue Fund This fund accounts for and reports the proceeds of specific revenue sources that are restricted or committed to expenditure for a specified purpose other than debt service or capital projects. 28