ACG4501 Chapter 01 Governmental and Not-for-Profit Accounting Environment and Characteristics Flashcards
Q1-1 Describe the characteristics that distinguish not-for-profit organizations from business enterprises.
Not-for-profit organizations:
(a) receive contributions of significant amounts of resources from resource providers who do not expect equivalent pecuniary return;
(b) operate for purposes other than to provide goods and services at a profit; and
(c) lack ownership interests like those of a business enterprise.
Q1-2 Identify the various types of entities that constitute governmental organizations, and describe the characteristics of other organizations that, when created by governments, are also considered to be governmental entities.
Governmental entities include: the federal government; general-purpose political subdivisions (such as states, counties, cities, and towns); special-purpose political subdivisions (such as school districts); and public corporations and bodies corporate and politic (such as state-operated toll roads and toll bridges).
Other organizations created by governments by statute or under not-for-profit corporation laws are governmental if they possess one or more of the following characteristics:
a. Their officers are popularly elected or a controlling majority of their governing body is appointed or approved by governmental officials;
b. They have the power to enact and enforce a tax levy;
c. They have the power to directly issue debt whose interest is exempt from
federal tax; or
d. There is a potential for a government to dissolve them unilaterally and
assume their assets and liabilities.
Q1-3 Identify and briefly explain three major environmental characteristics of governmental and not-for-profit organizations.
Major environmental characteristics of governmental and not-for-profit organizations are:
a. Organizational purposes. Governmental and not-for-profit entities exist to provide services to their constituents, not to generate profits. A reported excess of revenues over expenditures does not mean that they have made a profit, have operated efficiently, or have served their constituents effectively. Therefore, financial reporting for these entities requires an emphasis on accountability.
b. Sources of revenue and relationship with stakeholders. Governments derive revenues primarily from taxpayers. Individual taxpayers are involuntary resource providers whose tax payments may or may not bear a direct relationship to the services they want or need. Not-for-profit entities obtain significant resources from donors who receive no service or product in exchange, but who nonetheless are concerned with whether their donations are achieving the intended purposes. These relationships again emphasize a need for reporting models that emphasize accountability.
c. Potential for longevity. Business enterprises are at risk of going out of
business or being bought out. Governments, on the other hand, tend to exist in perpetuity because of the nature of the services they provide. This has caused governmental accounting standards-setters to take a longer term perspective regarding certain measurements.
d. Role of the budget and legal requirements. Governmental entities are required by law to provide certain services. Their budgets are legal documents and generally cannot be exceeded without specific legislative approval. Their borrowings are also constrained by law as to purpose. Some not-for-profit entities obtain significant resources from contributions that are subject to specific restrictions as to how they may be used. This has led to standards that take account of the need for demonstrating budgetary and legal compliance.
Q1-4 Illustrate the kinds of restrictions placed by laws on the ability of governments to use resources, and by donors on the ability of not-for-profit entities to use resources.
Regarding government: Budgets generally cannot be exceeded without specific legislative approval; borrowings are generally specifically limited as to the purposes for which they may be used; and grants from higher level governments are generally specifically limited as to purpose.
Regarding not-for-profit entities: Donors often place specific restrictions on contributions as to what they may be used for and when they may be used.
Q1-5 Who are the users of governmental and not-for-profit entity accounting information, and for what purposes might they use that information?
Users of governmental and not-for-profit entity accounting information are both internal and external. Major external users include:
a. Resource providers (taxpayers, donors and potential donors, investors and potential investors, bond-rating agencies, and grant-providing organizations)
b. Oversight bodies (higher-level governments, regulatory bodies)
c. Service recipients (citizen advocate groups)
Users might use accounting information to:
a. see if the entity has sufficient financial resources to cushion against economic contraction.
b. determine the likelihood of repaying short-term and long-term financial obligations;
c. determine the likelihood of continuing to provide a particular level of service;
d. see if the entity uses resources consistent with budget limits; donor restrictions, legal limits;
e. see if financial data shows evidence of inefficiency, such as slow collection of receivables;
f. and to see if restrictions on the use of resources reduces the organizations flexibility in meeting program goals.
Q1-6 List the three ways identified by the GASB in which financial reporting can help users assess governmental accountability
The three ways identified by the GASB in which financial reporting can assist users in assessing governmental accountability are:
a. by showing if current-year revenues were sufficient to pay for current-year services;
b. by showing whether resources were obtained and used in accordance with the legally adopted budget; and
c. by providing data to help users assess the entity’s service efforts, costs and accomplishments.
Q1-7 List three unique characteristics of state and local governmental accounting as contrasted with business enterprise accounting.
State and local governments use fund accounting; incorporate budgetary accounting into their accounting systems; use modified accrual accounting (rather than full accrual accounting) for certain activities; use a two-level system of financial reporting; and report extensively on restricted resources.
Q1-8 What are the jurisdictions of the accounting standards-setting bodies: GASB, FASAB, and FASB?
The GASB is responsible for establishing and improving accounting and financial reporting standards for all state and local governmental entities (including government-sponsored colleges and universities, health care providers, and utilities). The FASAB establishes accounting standards for the federal government. The FASB establishes standards for all other entities, including not-for-profit colleges and universities and health care providers.
Q1-9 Why is a hierarchy of generally accepted accounting principles needed?
Accounting and financial reporting guidance is provided not only by the two major accounting standards-setting bodies, but also by the AICPA, the staffs of the accounting standards-setting bodies, and even professional literature. Because of the heavy workloads of the standards-setting bodies, they may not have issued guidance on a particular issue of concern to a practitioner. A hierarchy of generally accepted accounting principles allows a practitioner to look to the guidance of other bodies in the event the Board with jurisdiction has not issued a standard on a particular matter.
D1-1 Croton Hospital was a not-for-profit entity. Because it experienced financial difficulties, the county in which the hospital was located assumed control of Croton’s assets and liabilities. The county executive appointed all five members of the hospitals new board of trustees. The hospitals chief accountant, who was not replaced, continued to use the same accounting principles and financial reporting used before the county takeover. Explain the position the county comptroller should take regarding Croton’s accounting and financial reporting.
Governmental and non-profit organizations:
- This organization does not function for profit as the sole motive of the company.
- The distinction majority lies in functioning of how the entities are organized, governed, and financed.
- Hospitals can be for profit but the government organizations function not-for-profit.
Croton Hospital was a not-for-profit organization; due to financial crisis, the government took over the assets and liabilities of the hospital. Now, Croton is a governmental hospital.
The government companies generally follow GASB principles.
The county comptroller should take the following position with regard to the accounting and financial reporting standards:
- Financial reports should enable the users to assess the accountability of Croton Hospital.
- They should assist the users in analyzing the operating results of Croton Hospital.
- They should help the users in identifying the capability of Croton Hospital to meet their obligations.
- The accounting principles followed previously before take over should be verified and the need for disclosure should be identified
D1-2
D1-2 answer
D1-3
D1-3 answer
E1-1 The mayor of a large city approaches a group of citizens and suggests that they form an organization to provide social, educational, and recreational programs for local youth. The group agrees and forms an entity called the Community Youth Organization (CYO). The group also chooses a board of directors, and the board hires an executive director and several staff members. CYO’s activities are financed entirely by grants from the city and many of CYO’s programs are held after-hours in the high school. Is the CYO a not-for-profit or a government organization? Why? What changes in characteristics would be needed to change it from one type of entity to the other?
Community Youth organization is a not-for-profit organization.
Reasons:
- All activities of the entity are managed and controlled by the group of citizens instead of appropriate governmental officials
- Community Youth Organizations is financed entirely by the grants from the city and many of its programs are held in the local high schools
Changes in characteristics needed to change the entity into a governmental entity:
- The mayor of the Community Youth Organization should be appointed by the board of directors of the organization.
- The appointed mayor should be approved by the administrative director of the entity:
- All activities of the organization should be managed and controlled by the governmental officials.
E1-2 Three accountants started talking about hospitals. One said he was treated at a not-for-profit hospital, another said she was treated at a county hospital, and the third said he had just returned from the hospital run by the U.S. Veterans Administration. They wondered why three different bodies established accounting standards for hospitals. Give reasons for and against the existence of three accounting standards-setting bodies.
Accounting standards setting body: An organization which primarily concentrates on developing, coordinating, amending, reissuing, interpreting, and revising the accounting standards is known as accounting standards setting body. The main purpose of accounting standards setting bodies is to provide timely and useful financial information to the investors, and other interested third parties of the organization.
The following are the major advantages of having a single standards setting body of different organizations:
- Comparison of financial reports of different organizations is possible because of a similar reporting process.
- The financial reports are more reliable and the financial performance can be measured.
The following are the major disadvantages of having a single standards setting body for different organizations:
- The members of the standards setting board should be form different fields with different experience to match the requirements.
- The purpose of the organization may be different and the services provided may not be the same fort all organizations.
- The usage of financial reports is diverse and a single reporting procedure may not serve the different users.
- The amount of funds reported by each organization is different
E1-3 Several not-for-profit organizations use television campaigns to obtain pledges to contribute cash. Some people think that not-for-profit entities should recognize pledges as revenues when the cash is actually received. Others would recognize revenues when the pledges are made, subject to a provision for amounts not likely to be collected. Based on that scenario, discuss (a) the need for an accounting standards-setting body, (b) the qualifications that members of that body should possess, and (c) the procedures that body should adopt in establishing accounting standards.
a. the following are the reasons for the need for an accounting standards setting body:
- Accounting standards setting body helps to provide transparency in financial reporting.
- Accounting standards setting body provide similarity in the reports generate by the organization. This helps the interested parties to understand the financial reports.
- Accounting standards setting body assures reliability of the financial statements and reports of the organization.
b. Qualification of the members of the standards-setting boar can be divided into professional qualification and personal qualification.
The following are the professional qualities required to be a member of the standards setting board.
- Training and experience in the field of business
- Legal knowledge to handle the problems and prospects of the business.
- Professional certification from any professional body.
- Other Qualities.
The following are some of the personal qualities required to be a member of the standards setting boards:
- Honesty
- Leadership Skills
- Competing Skills.
