Solution Manual for Government And Not For
8 8 8 8 8 8 8
Profit Accounting Concepts And Practices 9th
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Edition Michael H. Granof
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Chapter 1 8
The8Government8and8Not-For-Profit8Environment
Questions8for8Review8and8Discussion
1. The8critical8distinction8between8for-profit8businesses8and8not-for- Formatted:8Section8start:8Continuo
s,8Suppress8Endnotes,8From8text:8 1
profits8including8governments8is8that8businesses8have8profit8as8their8main8motive8 28cm
whereas8the8others8have8service.8A8primary8purpose8of8financial8reporting8is8to8rep
ort8on8an8entity‘s8accomplishments8—
8how8well8it8achieved8its8objectives.8Accordingly,8the8financial8statements8of8busin
esses8measure8profitability,8their8key8objective.8Financial8reports8of8governments8a
nd8other8not-for-
profits8should8not8focus8on8profitability,8since8it8is8not8a8relevant8objective.8Ideally,
8therefore,8they8should8focus 8on8other8performance 8objectives,8such8as8how8well8th
e8organizations8met8their8service8goals.8In8reality,8however,8the8goal8of8reporting8o
n8how8well8they8have8achieved8such8goals8has8proven8difficult8to8 attain8and8the8fin
ancial8reports8have8focused8mainly8on8financially-8related8data.
2. Governments8 and8 not-for-
profits8 are8 ―governed‖8 by8 the8 budget,8 whereas8 businesses8are8governed8by8the8mar
ketplace.8The8budget8is8the8key8political8and8fiscal8document8of8governments8and8n
ot-for-
profits.8It8determines8how8an8entity8obtains8its8resources8and8how8it8allocates8them.
8It8encapsulates8most8key8decisions8of8consequence 8made8by8the8organization.8In8a
8government 8the8budget8is8not8merely8a8managerial 8document;8it8 is8the8law.
3. Owing8to8the8significance8of8the8budget,8constituents8want8assurance8that8the8entit
y8achieves8its8revenue8estimates8and8complies8with8its8spending8mandates.8They8ex
pect8the8financial8statements8to8report8on8how8the8budget8was8administered.
4. Interperiod8equity8is8the8concept8that8taxpayers8of8today8pay8for8the8services8that8t
hey8receive8and8not8shift8the8payment8burden8to8taxpayers8of8the8future.8Financial8
reporting8must8indicate8the8extent8to8which8interperiod8equity8has8been8achieved.8
Therefore,8it8must8determine 8and8report8upon8the8economic8costs8of8the8services8p
erformed8(not8merely8the8cash8costs)8and8of8the8taxpayers‘8contribution8toward8co
vering8those8costs.
5. The8matching8concept8may8be8less8relevant8for8governments8and8not-for-
profits8than8for8businesses8because8there8may8be8no8connection8between8revenues8g
1-1
,enerated8and
2-1
, the8quantity,8quality8or8cost8of8services8performed.8An8increase8in8the8demand8for,8
or8cost8of,8services8provided8by8a8homeless8shelter8would8not8necessarily8result8in8
an8increase8in8the8amount8of8donations8that8it8receives.8Of8course,8governments8and
8not-8for-
profits8are8concerned8with8measuring8interperiod8equity8and8for8that8purpose8the8m
atching8concept8 may8be8very8relevant.
6. Governments8must8maintain8an8accounting8system8that8assures8that8restricted8reso
urces8are8not8inadvertently8expended8for8inappropriate8purposes.8Moreover,8statem
ent8users8may8need8separate8information8on8the8restricted8resources8by8category8of
8restriction8and8the8unrestricted8resources.8In8practice,8these8requirements 8have8 led8 g
overnments8to8 adopt8 a8system8of8―fund‖8accounting8 and8 reporting.
7. Even8governments8within8the8same8category8may8engage8in8different8types8of8acti
vities.8For8example,8some8cities8operate8a8school8system8whereas8others8do8not.8T
hose8that8are8not8within8the8same8category8may8have8relatively8little8in8common.8F
or8example,8a8state8government8shares8few8characteristics8with8a8city.
8. If8a8government8has8the8power8to8tax,8then8it8has8command8over,8and8access8to,8re
sources.8Therefore,8its8fiscal8well-
being8cannot8be8assessed8merely8by8measuring8the888assets888that888it888―owns.‖88 For88
8example,888the88 fiscal88 condition88 of88 a88 city88 should 8incorporate8the8wealth8of8the8re
sidents8and8businesses8within8the8city,8their8earning8capacity,8and8the8city‘s8willin
gness8to8exploit8its8tax8base.
9. Many8governments8budget8on8a8cash8or8near-
cash8basis.8However,8the8cash8basis8of8accounting8does8not8provide8adequate8infor
mation8with8which8to8assess8interperiod8equity.8Financial8statements8that8satisfy8th
e8objective8of8reporting8on8interperiod8equity8may8not8satisfy8that8of8reporting8on8
budgetary8compliance.8Moreover,8statements8that8report8on8either8interperiod8equit
y8or8budgetary8compliance8are8unlikely8to8provide8sufficient8information8with8whi
ch8to8assess8service8efforts8and8accomplishments.
10. Measures8of8service8efforts8and8accomplishments8are8more8significant8in8government
s8and8not-for-
profits8because8their8objectives8are8to8provide8service.8By8contrast,8the8objective8o
f8businesses8is8to8earn8a8profit.8Therefore,8businesses8can8report8on8their8accomplis
hments8by8reporting8on8their8profitability.8Governments8and8not-for-
profits8must8report8 on8other8measures8of8accomplishment.
11. The8FASB8influences8generally8accepted8accounting8principles8of8governments8in8
two8 key8ways.8 First,8 FASB8pronouncements8are8included8 in8the8GASB8―hierarchy‖8o
f8GAAP.8FASB8pronouncements8that8the8GASB8has8specifically8made8applicable8t
o8governments8are8included8in8the8highest8category;8those8that8the8GASB8has8not8
specifically8adopted8are8included8in8the8lowest8category.8Second,8the8business-
type8activities8of8governments8are8required8(with8a8few8exceptions)8to8follow8the8b
usiness8accounting8principles8as8set8forth8by8the8FASB.
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, 12. It8is8more8difficult8to8distinguish8between8internal8and8external8users8in8governmen
ts8than8in8businesses8because8constituents,8such8as8taxpayers,8may8play8significant8r
oles8in8establishing8policies8that8are8often8considered8within8the8realm8of8managers.
8Also,8legislators8are8internal 8to8the8extent 8they8set8policy,8but8external8insofar8as8t
he8executive8branch8must8account8to8the8legislative8branch.
Exercises
EX81-1
1. a
2. c
3. c
4. c
5. b
6. c
7. d
8. c
9. b
10. c
EX81-2
1. b
2. b
3. d
4. b
5. a
6. c
7. a
8. b
9. a
10. b
EX81-3
a. 1.8The8Governmental8Accounting8Standards8Board8(GASB)8is8the8independent8org
anization8that8establishes8and8improves8standards8of8accounting8and8financial8reporting8f
or8U.S.8state8and8local8governments.8Established8in819848by8agreement8of8the8Financial
8Accounting8Foundation8(FAF)8and8108national8associations 8of8state8and8local8governme
nt8officials,8the8GASB8is8recognized8by8governments,8the8accounting8industry,8and8the8ca
pital8markets8as8the8official8source8of8generally8accepted8accounting8principles8(GAAP)8
for8state8and8local8governments.
4-1
