Type:
Instructor Manual
Resource:
Governmental and Nonprofit Accounting
Edition:
11th Edition
Author(s):
Robert J. Freeman Craig Shoulders Dwayne McSwain Robert Scott
CHAPTER ONE GOVERNMENTAL AND NONPROFIT ACCOUNTING: ENVIRONMENT AND CHARACTERISTICS (Pages 1–30) CHAPTER ONE OUTLINE 1) Characteristics and types of G&NP organizations a) G&NP sector significance b) The G&NP environment i) Organizational objectives ii) Sources of financial resources iii) Evaluating performance and operating results 2) Objectives of G&NP accounting and financial reporting 3) Authoritative sources of G&NP accounting principles and reporting standards a) The FAF b) The FASB c) FASB-GASB jurisdictions d) “Government” defined e) The GASB f) GAAP hierarchies 4) Concepts and objectives of SLG accounting and financial reporting a) Governmental-type activities i) Purpose ii) Sources of financial resources (1) Taxation (2) Intergovernmental revenues iii) Financial resource allocation mechanisms (1) Restrictions on resource use (2) The budget iv) Accountabilities (1) To whom accountable (2) Accountability focuses v) Reporting issues and problems b) Financial report users c) Financial report uses d) Business-type activities i) The relationship between services received and resources provided by the consumer ii) Revenue-producing capital assets iii) Similarly designed activities and potential for comparison iv) The nature of the political process 1 ..
v) Budgets and fund accounting e) Users and uses of financial reports f) Financial reporting objectives 5) Characteristics of SLG accounting and financial reporting a) Fund accounting b) Budgets and appropriations c) Other distinguishing characteristics d) Commercial accounting comparison 6) Concluding comments 7) Appendix 1-1: Evolution of Accounting Principles and Standards—Prior to the GASB a) Initial evolution (1900–1933) b) National Committees on Municipal and Governmental Accounting (1934–1974) c) National Council on Governmental Accounting (1974–1984) 8) Questions 9) Exercises 10) Problems
CHAPTER LEARNING OBJECTIVES 1.1
Describe the key unique characteristics and major types of government and nonprofit (G&NP) organizations.
1.2
Describe the objectives of G&NP accounting and financial reporting.
1.3
Identify the authoritative sources of financial reporting standards for various types of G&NP organizations and the level of authority (hierarchy) of various pronouncements and guides.
1.4
Summarize the key distinguishing characteristics, concepts, and objectives of G&NP accounting and financial reporting.
1.5
Explain the key characteristics of state and local government financial reporting.
2 ..
CHAPTER OVERVIEW AND SYNOPSIS Chapter 1 provides a general overview of the governmental and not-for-profit accounting and financial reporting environment, as follows: •
An introduction to the text.
•
A summary overview of the government and not-for-profit (G&NP) environment—the types of G&NP organizations; their characteristics, growth and importance, and distinguishing characteristics; and how these factors have led to distinctive G&NP accounting and reporting objectives.
•
A discussion of the authoritative sources of G&NP accounting principles and reporting standards—including the standards setting bodies, the types of authoritative pronouncements, and the GAAP “Hierarchy” established in GASB Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments, and the guidance for determining which entities are considered governments for purposes of GAAP.
•
A review of G&NP financial report users and uses, as well as an overview of governmental and business-type activities. Students are introduced to the concepts of: o Taxation o Intergovernmental revenues o Resource restrictions
•
Identification of the unique characteristics of state and local government accounting and financial reporting, such as: o Fund accounting o Budgets and appropriations o Measurement focus
•
An appendix with brief discussions of the evolution of accounting principles applicable to state and local governments and of the related standards setting processes that led to the formation of the Governmental Accounting Standards Board.
It should be noted that most of the topics and concepts introduced in this chapter will be addressed in much greater detail later in the text. It is recommended that students be reminded of this several times, especially in classes devoted to the early chapters of this text. This is not only reassuring to those new to the G&NP environment, but also to reinforce that these topics will be more thoroughly studied. This chapter typically is the basis for part of the orientation lecture during the first class meeting. Accordingly, it may be assigned for the first class meeting—with students instructed to review it 3 ..
in preparation for the second class meeting. Such review might include scan reading of the first two main topics listed above for their main points with more careful study attention being given to the remaining topics.
CRITICAL OBJECTIVES There are three essential learning objectives for your students in this chapter. Your students should be able to: • • •
Describe the fundamental ways that governments and not-for-profit organizations differ from business enterprises. Identify whether an entity meets the definition of government in the accounting literature, making it subject to GASB standards instead of FASB standards. (In the text, Illustration 1-1 provides a detailed definition of a government entity—refer to page 8.) Summarize the role of and application of the government GAAP hierarchy. (Refer to the GAAP Hierarchy as provided on page 11 of the text.)
Quizzes can provide effective motivation for students to learn material that you consider essential to understanding subsequent material or that you otherwise consider essential for them to know. You may want to try telling students very precisely what you will cover on some of your quizzes. For this chapter, you might want to tell students that a quiz on the government GAAP hierarchy will be given at the beginning of the second class meeting. QUESTIONS/EXERCISES/PROBLEMS — SUMMARY AND COMMENTARY In the text Number of Questions Number of Exercises Number of Problems
10 2 (includes 10 multiple-choice questions in one exercise) 4 (includes 2 Internet research problems)
Exercise 1-2 (Expenditures vs. Expenses) Students have some difficulty grasping the differences between expenditures and expenses. This simple exercise should provide a concrete basis for exposing them to the differences and for discussing the concepts. Questions 1-6, 1-8, and 1-10 These questions focus a student’s attention on the reasons for and jurisdictions of the two standards setting bodies—the GASB and the FASB. Problem 1-2 This problem provides a good basis for discussing the government GAAP hierarchy and its importance. 4 ..
Problems 1-3 and 1-4 These problems may be used to familiarize students with websites that are useful in G&NP accounting and financial reporting environment. Additional questions for in-class or homework assignments 1. What characteristics differentiate G&NP organizations from profit-seeking entities? Suggested Solution The following characteristics differentiate government and nonprofit (or not-forprofit) organizations from profit-seeking (or for-profit) organizations: o Government and nonprofit (G&NP) organizations are service-oriented and there is no profit motive inherent in their inception or operation; o They usually are “owned” collectively, and ownership interests cannot be sold or traded; contributors of financial resources to G&NP organizations do not necessarily receive any direct or proportionate shares of their goods or services; o They often provide goods or services that are not feasibly provided through the private sector; and o Their major policy decisions, and perhaps some operating decisions, typically are made by consensus vote of an elected or appointed governing body whose members serve part-time and have diverse backgrounds, philosophies, capabilities, and interests. 2. List four factors that cause society to subject G&NP organizations to more stringent legal, regulatory, and other controls than it imposes on private businesses. Suggested Solution o The lack of the profit test as a regulator and control device. o Governments have the power of taxation. o There is no open market for most G&NP organization goods and services. o Resources made available to G&NP organizations often are restricted for specified services. 3. Legal and administrative constraints are society’s tools for directing G&NP institutions in achieving their objectives. This results in an emphasis on control of and accountability for expendable financial resources in G&NP organization accounting and financial reporting rather than on net income determination. Why can’t the profitability measure provide this direction? Identify various legal and administrative control provisions unique to G&NP organizations and explain their impact on accounting and reporting for such organizations. Suggested Solution G&NP organizations are, by definition, not profit-seeking organizations. Thus, their goal is not to maximize profits, but to provide as many goods and services as possible 5 ..
within the constraints of the resources available to them. Furthermore, many of the goods and services provided by G&NP organizations are not profitable for business organizations to provide. In the absence of the profit measure and its regulatory benefits, society substitutes alternative controls over G&NP organizations. The two major control devices are funds and the budgetary/appropriations process. Other control devices include restrictions as to their organizational structure, personnel policies and procedures, sources of financial resources, uses of financial resources, accounting, reporting, and auditing. The impact of society’s control devices is seen in the use of fund accounting, budgetary control, and financial reporting emphasizing accountability for financial resources received, used, and held in terms of the constraints within which the G&NP organization functions. 4. Discuss the “funds flow” concept as it applies to the operations of G&NP organizations. Suggested Solution The focal point of much of G&NP organization accounting and financial reporting is expendable financial resources, accounted for in expendable funds and allocated by the budgetary process. In this context, “funds-flow” refers to the beginning balances, inflows, outflows, and ending balances of the net expendable financial resources of expendable funds. (A narrower type of “funds-flow” statement—a statement of cash flows—is prepared for the “proprietary” funds of G&NP organizations.) 5. Contrast the cost measurement focus used by proprietary (nonexpendable) funds and governmental (expendable) funds. Suggested Solution The cost measurement focus of proprietary (nonexpendable) funds is expenses. Expenses are the cost of assets and services that are consumed during a period. This is the cost measurement focus used by businesses. The cost measurement focus of governmental (expendable) funds is expenditures. Expenditures are the amount of financial resources expended for a period for: o Current operations o Capital outlay o Long-term debt principal retirement and interest. Expenditures decrease net expendable available financial assets. 6. Contrast the following concepts as they are used in commercial and G&NP accounting: a. Accounting entity b. Periodicity c. Matching d. Going concern 6 ..