Solutions Manual for th’e textbook 1
Ch. 1
1. Th’e critical distinction between for-profit businesses an’d not-for-profits including governments is that
businesses have profit as their main motive whereas th’e others have service. A primary purpose of financial
reporting is t’o report o_n an entity’s accomplishments — how well it achieved its objectives. Accordingly, th’e
financial statements of businesses measure profitability, their key objective. Financial reports of governments
an’d other not-for-profits should not focus o_n profitability, since it is not a relevant objective. Ideally,
therefore, they should focus o_n other performance objectives, such as how well th’e organizations met their
service goals. In reality, however, th’e goal of reporting o_n how well they have achieved such goals has proven
difficult t’o attain an’d th’e financial reports have focused mainly o_n financially-related data.
2. Governments an’d not-for-profits are “governed” by th’e budget, whereas businesses are
governed by th’e marketplace. Th’e budget is th’e key political an’d fiscal document of governments an’d
not-for-profits. It determines how an entity obtains its resources an’d how it allocates them. It encapsulates
most key decisions of consequence made by th’e organization. In a government th’e budget is not merely a
managerial document; it is th’e law.
3. Owing t’o th’e significance of th’e budget, constituents want assurance that th’e entity achieves
its revenue estimates an’d complies wit’h its spending mandates. They expect th’e financial statements t’o
report o_n how th’e budget was administered.
4. Interperiod equity is th’e concept that taxpayers of today pay for th’e services that they receive
an’d not shift th’e payment burden t’o taxpayers of th’e future. Financial reporting must indicate th’e
extent t’o which interperiod equity has been achieved. Therefore, it must determine an’d report upon th’e
economic costs of th’e services performed (not merely th’e cash costs) an’d of th’e taxpayers’ contribution
toward covering those costs.
5. Th’e matching concept may be less relevant for governments an’d not-for-profits than for
businesses because there may be no connection between revenues generated an’d th’e quantity, quality or
cost of services performed. An increase in th’e demand for, or cost of, services provided by a homeless
shelter would not necessarily result in an increase in th’e amount of donations that it receives. Of course,
governments an’d not-for-profits are concerned wit’h measuring interperiod equity an’d for that purpose
th’e matching concept may be very relevant.
6. 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 o_n th’e restricted resources by category of restriction an’d th’e unrestricted resources. In
practice, these requirements have led governments t’o adopt a system of “fund” accounting an’d reporting.
7. Even governments within th’e 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 th’e same
category may have relatively little in common. For example, a state government shares few characteristics
wit’h a city.
8. If a government has th’e power t’o tax, then it has command over, an’d access t’o, resources.
Therefore, its fiscal well-being cannot be assessed merely by measuring th’e assets that it “owns.” For
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example, th’e fiscal condition of a city should incorporate th’e wealth of th’e residents an’d businesses
within th’e city, their earning capacity, an’d th’e city’s willingness t’o exploit its tax base.
9. Many governments budget o_n a cash or near-cash basis. However, th’e cash basis of accounting
does not provide adequate information wit’h which t’o assess interperiod equity. Financial statements that
satisfy th’e objective of reporting o_n interperiod equity may not satisfy that of reporting o_n budgetary
compliance. Moreover, statements that report o_n either interperiod equity or budgetary compliance are
unlikely t’o provide sufficient information wit’h which t’o assess service efforts an’d accomplishments.
10. Measures of service efforts an’d accomplishments are more significant in governments an’d not-
for-profits because their objectives are t’o provide service. By contrast, th’e objective of businesses is t’o
earn a profit. Therefore, businesses can report o_n their accomplishments by reporting o_n their
profitability. Governments an’d not-for-profits must report o_n other measures of accomplishment.
11. Th’e FASB influences generally accepted accounting principles of governments in two key ways.
First, FASB pronouncements are included in th’e GASB “hierarchy” of GAAP. FASB pronouncements
that th’e GASB has specifically made applicable t’o governments are included in th’e highest category;
those that th’e GASB has not specifically adopted are included in th’e lowest category. Second, th’e
business-type activities of governments are required (wit’h a few exceptions) t’o follow th’e business
accounting principles as set forth by th’e FASB.
12. It is more difficult t’o distinguish between internal an’d external users in governments than in
businesses because constituents, such as taxpayers, may play significant roles in establishing policies that
are often considered within th’e realm of managers. Also, legislators are internal t’o th’e extent they set
policy, but external insofar as th’e executive branch must account t’o th’e legislative branch.
Th’e_Exercises
EX 1-1
a
c
c
c
b
c
d
c
b
c
EX 1-2
b
b
d
b
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a
c
a
b
a
b
EX 1-3
1. Th’e Governmental Accounting Standards Board (GASB) is th’e independent organization that
establishes an’d improves standards of accounting an’d financial reporting for U.S. state an’d local
governments. Established in 1984 by agreement of th’e Financial Accounting Foundation (FAF) an’d 10
national associations of state an’d local government officials, th’e GASB is recognized by governments, th’e
accounting industry, an’d th’e capital markets as th’e official source of generally accepted accounting principles
(GAAP) for state an’d local governments.
Accounting an’d financial reporting standards designed for th’e government environment are essential because
governments are fundamentally different fro’m for-profit businesses. Furthermore, th’e information needs of
th’e users of government financial statements are different fro’m th’e needs of th’e users of private company
financial statements. Th’e GASB members an’d staff understand th’e unique characteristics of governments
an’d th’e environment in which they operate.
Th’e GASB is not a government entity; instead, it is an operating component of th’e FAF, which is a private
sector not-for-profit entity. Funding for th’e GASB comes primarily fro’m an accounting support fee established
under th’e Dodd-Frank Wall Street Reform an’d Consumer Protection Act as well as th’e sale of certain
publications. Its standards are not federal laws or regulations an’d th’e organization does not have enforcement
authority. Compliance wit’h GASB’s standards, however, is enforced through th’e laws of some individual
states an’d through th’e audit process, when auditors render opinions o_n th’e fairness of financial statement
presentations in conformity wit’h GAAP.
Th’e mission of GASB is:
T’o establish an’d improve standards of state an’d local governmental accounting an’d financial reporting that
will:
Result in useful information for users of financial reports, an’d
Guide an’d educate th’e public, including issuers, auditors, an’d users of those financial reports.
Th’e mission is accomplished through a comprehensive an’d independent process that encourages broad
participation, objectively considers all stakeholder views, an’d is subject t’o oversight by th’e Financial
Accounting Foundation’s Board of Trustees.
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Based o_n GASB’s White Paper, Governmental Accounting an’d Financial Reporting is an’d Should be
Different, due t’o th’e key environmental differences between governments an’d for-profit business enterprises.
Th’e differing needs of th’e users of governmental an’d business enterprise financial reports reflect th’e
different environments in which th’e organizations operate. Some of th’e principal environmental differences
are:
Organizational Purposes. Th’e purpose of th’e government is t’o enhance or maintain th’e well-being of
citizens by providing public services according t’o th’e established goals. A government’s financial reports
should give creditors, legislative an’d oversight officials, citizens, an’d other stakeholders th’e information
necessary t’o make assessments an’d decisions relevant t’o their interests in th’e government’s accomplishment
of its objectives. In contrast, business enterprises focus o_n wealth creation, interacting only wit’h those
segments of society that fulfill their mission of generating a financial return o_n investment for shareholders.
It's primary focus of reporting has been o_n earnings an’d its components, wit’h little or no explicit focus o_n
nonfinancial measures of performance.
Sources of Revenue. Th’e principal source of revenue for government is taxation, which is a legally mandated
involuntary transaction between individual citizens an’d businesses an’d their government. Th’e principal
source of revenue of business enterprises is voluntary exchange transactions between willing buyers an’d
sellers.
Potential for Longevity Because of their ongoing power t’o tax an’d because of th’e ongoing need for public
services, governments rarely liquidate. Th’e possibility of achieving longevity, however, is not as likely for
business enterprises. Business enterprises will go out of existence if, for an extended period of time, they are
unable t’o sell their products or services for more than it costs t’o produce them. Further, a business may also
cease t’o exist if it is acquired by another entity.
Relationship wit’h Stakeholders. Th’e governments should meet a standard of accountability, since th’e
citizens are interested in evaluating inter-period equity by determining whether current taxpayers an’d users of
government services fully financed th’e costs of providing current-period services or whether taxes an’d user
fees fro’m prior or future periods were, or will be, needed t’o finance th’e current services provided. For
business, their financial reports show changes in equity of th’e enterprise during th’e current period.
Role of th’e Budget. For governments, a budget takes o_n a special legal significance. Governmental budgets
are expressions of public policy priorities an’d legally authorize th’e purposes for which public resources may
be spent. In fact, governmental budgets can be th’e primary method by which citizens an’d their elected
representatives hold th’e government’s management financially accountable. For business enterprises, th’e
budget represents an internal financial management tool that is controlled entirely by management an’d is
considered proprietary in nature.
b. 1. Th’e purpose of th’e Government Finance Officers Association is t’o enhance an’d promote th’e
professional management of governments for th’e public benefit by identifying an’d developing financial
policies an’d best practices an’d promoting their use through education, training, facilitation of member
networking, an’d leadership.
Th’e objectives of th’e GFOA are:
