Accounting for Governmental and
Nonprofit Organizations 1/E Patton
Chapter 1
Governmental and Nonprofit Accounting
Environment and Characteristics
Learning Objectives – Coverage by Question
True / False Multiple Choice Exercises Problems
LO1 – Understand the
difference between
governmental and nonprofit 1-7 1-10 2
entities and commercial
businesses.
LO2 – Understand objectives
and distinctive
characteristics of financial 8-15 10-16 1-2
reporting for governments
and nonprofit entities.
LO3 – Understand the
sources of generally
accepted accounting 16-19 17-21 2-3
principles for governments
and nonprofit entities.
,Chapter 1: Governmental and Nonprofit Accounting Environment
and Characteristics
True / False
Topic: Governmental and Nonprofit Organizations
LO: 1
1. An entity is likely to be a governmental entity if a controlling majority of its governing body is
appointed by governmental officials.
Answer: True
Rationale: Entities created by governments by statute or under nonprofit laws are governmental if
their officers are popularly elected, or a controlling majority of their governing body is appointed or
approved by governmental officials.
Topic: Governmental and Nonprofit Organizations
LO: 1
2. Characteristics that distinguish nonprofits from business enterprises include nonprofits receiving
significant contributions from resource providers without an expectation of receive an equivalent
return and the lack of a profit motive.
Answer: True
Rationale: Businesses seldom receive charitable contributions and exist to make profits to enhance
the wealth of their owners. Nonprofits receive significant charitable contribution and are not in
business to make a profit.
Topic: Operating Environment
LO: 1
3. A purpose of a government is to provide services to its constituents.
Answer: True
Rationale: Business enterprises exist to enhance the wealth of its owners, but a government exist to
provide services to its constituents.
Topic: Operating Environment
LO: 1
4. A purpose of a nonprofit is to provide services to its constituents.
Answer: True
Rationale: Business enterprises exist to enhance the wealth of its owners, but a nonprofit exists to
provide services to its constituents.
Topic: Operating Environment
LO: 1
5. Governments receive most of their revenues through exchange transactions.
Answer: False
Rationale: Governments obtain most of their revenues from taxation.
,Topic: Operating Environment
LO: 1
6. Unlike businesses enterprises, Governments and nonprofits acquire resources through taxes or
donations. Transactions related to taxes and donations require special accounting standards.
Answer: True
Rationale: A reason for unique accounting standards for governments and nonprofits is that they
obtain most of their revenues from nonexchange transactions, such as taxes and donations.
Topic: Operating Environment
LO: 1
7. Governmental and nonprofit accounting standards-setters tend to take a longer-term perspective in
developing accounting measurements for certain of their transactions because they rarely go out of
business.
Answer: False
Rationale: Governmental accounting standards-setters tend to take a longer-term perspective in
developing accounting measurements for governments because governments rarely go out of
business because of their power to tax and the types of services that governments provide.
Nonprofits, however, are at risk of going out of business for many reasons, such as competition,
inefficiencies, and changes in constituent needs.
Topic: Users and Uses of Accounting Information
LO: 2
8. Major external users of governmental and nonprofit entity financial reports are oversight bodies,
service recipients, and owners.
Answer: False
Rationale: Although it is true that oversight bodies and service recipients are major external users of
governmental and nonprofit entity financial reports, neither governments or nonprofits have owners.
Instead, they are accountable to resource providers, such as taxpayers, donors, investors, and grant-
providing organizations.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
9. State and local governments and nonprofit entities are required to prepare fund-based reports for
external financial reporting purposes.
Answer: False
Rationale: State and local governments prepare fund-based reports for external financial reporting
purposes, but FASB does not require nonprofit entities to prepare fund-based reports although FASB
does not preclude such reporting if the nonprofit entity complies with FASB’s financial reporting
requirements.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
10. The federal government, state and local governments, and nonprofit entities are required to prepare
financial statements on the accrual basis for external financial reporting purposes.
Answer: True
Rationale: The financial statements of the federal government and nonprofit entities are prepared on
the accrual basis of accounting. State and local governments use the accrual basis to prepare
financial statements for their business-type activities and their government-wide financial statements.
, Topic: Accounting and Financial Reporting Characteristics
LO: 2
11.All governments prepare fund financial statements for external financial reporting purposes.
Answer: False
Rationale: State and local governments prepare fund financial statements, but funds are not used in
the federal financial statements.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
12. The federal government and state and local governments use the modified accrual basis of
accounting.
Answer: False
Rationale: State and local governments use the modified accrual basis of accounting to account for
their basic government functions and the accrual basis of accounting to account for business-type
activities and for their government-wide financial statements. The federal government, however, only
uses the accrual basis of accounting for financial reporting purposes.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
13. The FASAB establishes financial reporting standards for all governments.
Answer: False
Rationale: The Federal Accounting Standards Advisory Board (FASAB) sets financial reporting
standards for the federal government, but the Governmental Accounting Standards Board (GASB)
sets financial reporting standards for state and local governments.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
14. The GASB establishes financial reporting standards for state and local governments and nonprofit
entities.
Answer: False
Rationale: The GASB establishes financial reporting standards for state and local governments, but
the FASB establishes financial reporting standards for nonprofit entities.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
15. In their objectives of financial reporting, both the FASAB and GASB state that financial reporting
should assist in the government’s duty to be publicly accountable.
Answer: True
Rationale: Public accountability is an important objective in both the FASAB and GASB’s Concepts
Statements.
Topic: Accounting Principles and Standards
LO: 3
16. The FASB establishes financial reporting standards for all nongovernmental entities, including
nonprofit colleges and universities and health care providers.
Answer: True
Rationale: The FASB establishes financial reporting standards for all nongovernmental entities,
including nonprofits, such as nonprofit colleges and universities and nonprofit health care providers.
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