Solutions Manual for

Solutions Manual for Government and Not- for-Profit Accounting Concepts and Practices, 8e Michael Granof, Saleha Khumawala, Thad Calabrese, Daniel Smith (All Chapters) 1 / 4

1-1 Chapter 1 The Government and Not-For-Profit Environment Questions for Review and Discussion

• The critical distinction between for-profit businesses and not-for-profits including

governments is that businesses have profit as their main motive whereas the others 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 focus on profitability, since it is not a relevant objective. Ideally, therefore, they should focus 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 difficult to attain and the financial reports have focused mainly on financially-related data.

• 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 consequence made by the organization. In a government the budget is not merely a managerial document; it is the law.

• Owing to the significance of the budget, constituents want assurance that the entity

achieves its revenue estimates and complies with its spending mandates. They expect the financial statements to report on how the budget was administered.

• Interperiod equity is the concept that taxpayers of today pay for the services that

they receive and not shift the payment burden to taxpayers of the future. Financial reporting must indicate the extent to which interperiod equity has been achieved.Therefore, it must determine and report upon the economic costs of the services performed (not merely the cash costs) and of the taxpayers’ contribution toward covering those costs.

• 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 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 result in an increase in the amount of donations that it receives. Of course, governments and not-for-profits are concerned with measuring interperiod equity and for that purpose the matching concept may be very relevant. 2 / 4

Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting 1-2

• Governments must maintain an accounting system that assures that restricted

resources are not inadvertently expended for inappropriate purposes. Moreover, statement users may need separate information on the restricted resources by category of restriction and the unrestricted resources. In practice, these requirements have led governments to adopt a system of “fund” accounting and reporting.

• 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.

• 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.

• Many governments budget on a cash or near-cash basis. However, the cash basis of

accounting does not provide adequate 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 budgetary compliance are unlikely to provide sufficient information with which to assess service efforts and accomplishments.

• Measures of service efforts and accomplishments are more significant in

governments and not-for-profits because 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 measures of accomplishment.

• The FASB influences generally accepted accounting principles of governments in

two key ways. First, FASB pronouncements are included in the GASB “hierarchy” of GAAP. FASB pronouncements 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.

• It is more difficult to distinguish between internal and external users in governments

than in businesses because constituents, such 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, but external insofar as the executive branch must account to the legislative branch. 3 / 4

Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting 1-3 Exercises

EX 1-1

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EX 1-2

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EX 1-3

• 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.

Accounting and financial reporting standards designed for the government environment are essential because governments are fundamentally different from for-profit businesses.Furthermore, the information needs of the users of government financial statements are different from the needs of the users of private company financial statements. The GASB members and staff understand the unique characteristics of governments and the

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