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Chapter 1
The Government and Not-For-Profit Environment
TRUE/FALSE (CHAPTER 1)
1.
The main
objective of a typical governmental entity is to earn a profit.
2.
A government’s
budget may be backed by the force of law.
3.
Governmental
entities have no need for an accounting system.
4.
Governments and
not-for-profits employ a system of accounting known as fund accounting.
5.
Governments and
not-for-profits may never engage in business-type activities.
6.
Lenders use the
financial statements of governments and not-for profits just as they would
those of businesses, that is, to help assess the borrower’s credit-worthiness.
7.
Financial
statements, no matter how prepared, do not directly impact the economic worth
of an entity.
8.
Cash flow
statements are governments’ paramount financial documents.
9.
Most governments
budget on an accrual basis.
10.
The Governmental
Accounting Standards Board established generally accepted accounting principles
for all state and local government entities, as well as all nongovernment
entities.
MULTIPLE CHOICE (CHAPTER 1)
1. A primary characteristic that distinguishes
governmental entities from business entities is
a) the need to generate revenues equal to or in excess of
expenditures/expenses.
b) the importance of the budget in the governing process.
c) the need to provide goods or services.
d) the correlation between revenues generated and demand
for goods or services.
2. Which of
the following characteristics is NOT a characteristic that may distinguish a
governmental or not-for-profit entity from a business entity?
a) There is often no direct link between revenues
generated and expenditures/expenses incurred.
b) Capital assets may neither produce revenues nor save
costs.
c) Revenues may not be indicative of demand for goods and
services.
d) The mission of the entity will determine the goods or
services provided.
3. The most significant financial document
provided by a governmental entity may be
a) the balance sheet.
b) the operating statement.
c) the operating budget.
d) the cash flow statement.
4. Which of the following statements is NOT
true?
a) All governmental entities engage in similar
activities.
b) There are many different types of governments.
c) Governments may engage in activities similar to
activities engaged in by for-profit entities.
d) Managers may have a short-term focus and thereby
sacrifice the long-term viability of the entity.
5. Which of
the following activities is NOT an activity in which a governmental entity
might engage?
a) Selling electric power.
b) Operating a golf course.
c) Operating a book store.
d) All of the above are activities that might be carried
out by a government.
6. In which of the following activities is a
not-for-profit entity least likely to engage?
a) Providing educational services.
b) Providing health-care services.
c) Providing for the national defense.
d) Retail sales of cookies.
7. To obtain
a comprehensive understanding of a government’s fiscal health, a financial
analyst should obtain an understanding of which of the following?
a) All of the resources owned by the governmental entity.
b) All of the resources which may be summoned by a
governmental entity.
c) Demographic data about the residents served by the
governmental entity.
d) All of the above.
8. Which of
the following is common to both governments and not-for-profit entities but
distinguishes these entities from for-profit entities?
a) The budget is generally the most significant financial
document.
b) Revenues are not necessarily indicative of demand for
goods or services.
c) There is frequently no direct link between revenues
and expenses.
d) All of the above are common to both governments and
not-for-profit entities but distinguish them from for-profit entities.
9. Which of
the following is NOT a purpose of external financial reporting by
governments? External financial reports
should allow users to
a) Assess financial condition.
b) Compare actual results with the budget.
c) Assess the ability of elected officials to effectively
manage people.
d) Evaluate efficiency and effectiveness.
10. Which of
the following is NOT a reason that users of government and not-for-profit
external financial statements need to have information to enable them to assess
the financial condition of a government?
a) To determine the ability of the entity to meet its
obligations.
b) To determine the ability of the entity to continue to
provide services.
c) To predict future fiscal developments.
d) To evaluate the overall profitability of the entity.
11. Users of
financial statements should be interested in information about compliance with
laws and regulations for which of the following reasons?
a) To determine if the entity has complied with bond
covenants.
b) To determine if the entity has complied with taxing
limitations.
c) To determine if the entity has complied with donor
restrictions on the use of funds.
d) To determine all of the above.
12. Which of
the following is NOT generally considered a main user of government and
not-for-profit entity external financial statements?
a) Investors and creditors.
b) Taxpayers.
c) Donors.
d) Management.
13. Which of
the following is NOT a probable use a donor would make of the external
financial statements of a not-for-profit entity?
a) To determine the creditworthiness of the entity for
investment purposes.
b) To determine the proportion of entity resources
directed to programs as opposed to fund-raising.
c) To determine the salaries paid to the top officials of
the entity.
d) To determine the allocation of resources within the
entity.
14. A regulatory agency would use the external
financial statements of a local government for which of the following purposes?
a) To assure that the entity is spending and receiving
resources in accordance with laws, regulations or policies.
b) To help assess management’s performance.
c) To exercise general oversight responsibility.
d) To do all of the above.
15. Which of
the following objectives is considered to be the cornerstone of financial
reporting by a governmental entity?
a) Accountability.
b) Budgetary compliance.
c) Interperiod equity.
d) Service efforts and accomplishments.
16. Which of
the following is NOT an objective of financial reporting by governmental
entities as established by GASB?
a) Financial reporting should assist users in determining
if current period revenues were sufficient to pay for current-period services.
b) Financial reporting should assist users in assessing
the management skills of top management.
c) Financial reporting should assist users in evaluating
the operating results of the governmental entity for the year.
d) Financial reporting should assist users in assessing
the level of services that can be provided by the governmental entity and its
ability to meet its obligations as they come due.
17. Which of
the following is NOT an objective of financial reporting for not-for-profit
entities as established by FASB?
Financial reporting should provide information that is useful to present
and potential resource providers and other users in:
a) Making rational decisions about the allocation of
resources to those organizations.
b) Assessing the services provided and the entity’s
ability to continue to provide those services.
c) Assessing the types of services provided and the need
for those services.
d) Assessing how managers have discharged their
stewardship responsibilities.
18. As used by
GASB, interperiod equity refers to which of the following? Financial reporting should:
a) Demonstrate compliance with finance-related
contractual requirements.
b) Provide information to determine whether current-year
revenues were sufficient to pay for current-year services.
c) Demonstrate whether resources were obtained and used
in accordance with the entity’s legally adopted budget.
d) Provide information to assist users in assessing the
government’s economy, efficiency, and effectiveness.
19. Given a
specific set of data, the basis of accounting selected by or imposed on a
governmental entity will least affect which of the following?
a) Determining whether or not the governmental entity has
a balanced budget.
b) Determining whether or not the governmental entity has
the ability to issue debt.
c) Determining whether or not certain events occurred.
d) Determining the annual payments to a
government-sponsored pension plan.
20. The Governmental Accounting Standards Board
is the primary standard-setting body for:
a) All governments.
b) All state and local governmental entities.
c) All governments and all not-for-profit entities.
d) All state and local governments and all not-for-profit
entities.
21. Under
certain circumstances a governmental entity might use standards established by
which of the following standard-setting bodies?
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.
22. The primary
standard-setting body for accounting and financial reporting by a state-supported
college or university is:
a) GASB.
b) FASB.
c) AICPA.
d) All of the above.
23. In descending order, the hierarchy of GAAP
applicable to a church-owned college may be:
a) FASB Statements, AICPA Industry Audit Guides, FASB
Implementation Guides, GASB Standards.
b) FASB Statements, FASB Technical Bulletins, FASB
Implementation Guides, AICPA Practice Bulletins (if cleared by FASB).
c) GASB Statements, AICPA Industry Audit Guides, GASB
Implementation Guides, FASB Standards.
d) GASB Statements, GASB Technical Bulletins, GASB
Implementation Guides, AICPA Practice Bulletins (if cleared by GASB).
24. Governments and not-for-profits employ a system of
accounting known as
a) budget
accounting.
b)
financial accounting.
c) fund accounting
d)
tax accounting.
25. Which of the following rule-making authorities would
establish accounting standards for all nongovernment not-for-profits?
a) AICPA.
b)
FASB.
c)
GASB.
d)
APB.
PROBLEMS (CHAPTER 1)
1. Thorn County
adopted a cash budget for FY2000 as follows.
The City budget laws prohibit budgeting or operating at a deficit. During the year the County collected or spent
the following amounts. Was the County
in compliance with the budget? Did the
County accomplish the goal of interperiod equity? Explain your answers in detail.
Budgeted Collected/Spent
Receipts
from Property tax collections
From the 1999 levy $
100,000 $ -0-
From the 2000 levy $1,000,000 $ 900,000
In advance for 2001 $ 50,000 $ -0-
Receipts
from Bonds Issued $ 500,000 $ 500,000
Borrowed
from Bank (due in 5 years) $ -0- $ 75,000
Disbursements
Salaries and Wages $
500,000 $ 500,000
Operating Expenses $
200,000 $ 275,000
City Hall Annex purchased $ 500,000 $ 500,000
Payments on Debt-Principal $ 150,000 $ 150,000
Payments on Interest $
50,000 $ 50,000
Pension Contribution $
80,000 $ -0-
Explanations
provided by the City for the differences between budget and actual are as
follows. Property tax collections are
down because the major industry in the community closed and many citizens are
currently unemployed. Operating expenses
are up because the only bridge over a river bisecting the City sustained
damages by an uninsured motorist and had to be repaired immediately. The repair was not budgeted.
2.
Save-the-Birds (STB), a not-for-profit entity dedicated to acquiring and
preserving habitat for upland birds, prepares financial statements in
accordance with generally accepted accounting principles. Currently, standards require that a
not-for-profit entity report as revenue in the year received virtually all
contributions. During the current year
STB received a donation of several hundred acres of prime habitat for upland
birds. STB will require several hundred
thousand dollars in additional donations in order to make the land completely
suitable for the birds. Before embarking
on its fund-raising campaign STB prepares financial statements which are
summarized as follows.
Statement
of Financial Position (Balance Sheet)
Cash $ 8,000
Supplies $ 2,000
Equipment
(net of depreciation) $ 5,000
Land $1,000,000
Total Assets $1,015,000
Liabilities $ 1,000
Net Assets—Unrestricted $ 14,000
Net
Assets—Restricted $1,000,000
Total Liabilities and Net Assets $1,015,000
Statement
of Activities (Income Statement)
Revenues $1,030,000
Expenses:
Salaries $ 30,000
Change
in Net Assets $1,000,000
What
difficulties, if any, will Save-the-Birds encounter in their new fund-raising
drive? Knowing that the donation of the
land accounted for $1,000,000 of the revenue reported by Save-the-Birds, do you
think the financial statements present fairly the financial position and
results of operations of this not-for-profit entity?
3. Johnson
City prepares its budget on the cash basis and prepares its external financial
statements on the accrual basis. From
the following data prepare statements of activity (income statements) on both
the cash basis and the accrual basis.
Which statement best represents the results of operation of the
City? Which statement best demonstrates
compliance with laws and regulations?
Which statement would you rather see?
Which conveys the best information to the citizens of Johnson City?
The
City levies taxes in the current year of $1 million. Of this amount $.9 million is collected
during the current year, $.05 will be collected next year, and $.04 will be
collected in the future. $.01 will never
be collected. During the current year
the City pays bills from prior periods $.06 million, bills of the current
period $.8 million, and defers payment until future periods bills that were
received for services consumed during the current period $.1 million.
ESSAY (CHAPTER 1)
1.
In the United States, educational services can be
provided by federal governmental entities, by non-federal governmental
entities, by not-for-profit entities, and by for-profit entities. Are the accounting and financial reporting
standards the same for each of these entities?
Should they be the same?
2.
The Governmental Accounting Standards Board (GASB)
stated that an objective of financial
reporting should be to measure interperiod equity. “Financial reporting should provide
information to determine whether current-year revenues were sufficient to pay
for current-year services.” What is your
understanding of ‘interperiod equity.’?
What costs incurred in the current year should be paid for by the
taxpayers of the current period? What
costs incurred in the current year should be paid for by future taxpayers?
3.
A not-for-profit entity raises funds to support
specific programs, services, and activities.
The recipients of the programs, services, and activities are frequently
not the providers of the resources to deliver the programs, services, and
activities. What information would
donors to these not-for-profit entities be interested in seeing? What information would program beneficiaries be
interested in seeing? Identify other
users of the financial statements of a not-for-profit and the types of
information in which they would be interested.
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