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Question 1

What are the eight principles of GAAP?

Answer 1

1. Entity principle
2. Cost principle: money as a measure
3. The going concern principle
4. The conservatism and cost principle
5. The matching principle
6. The consistency principle
7. The materiality principle
8. The accrual principle

Question 2

What is GAAP?

Answer 2

GAAP is the generally accepted accounting principle.
GAAP is a set of principles that guide the government and the non-profit sector in Canada on how financial information will be created, reported, audited, and generally understood.

Question 3

What is the entity principle?

Answer 3

This principle defines the unit or entity being reported. You have to be able to determine what is in and what is out of the unit for which you are preparing reports. The users have to know what these reports refer to and exclude anything that is not related to that entity.

Question 4

What is the cost principle: money as measure?

Answer 4

All information in the financial statement must be monetized. Accounting recognizes only those activities that can be expressed in monetary terms. This principle pulls together hetergenous information in terms of costs.

The monetization or cost principle permits an organization to develop an understanding of the value of its assets (in terms of costs). The tool most commonly used in placing monetized value on asset is the historic cost (recording what was paid for the asset orginally)

This principle reflects the conservatism principle

Question 5

What is the going concern principle?

Answer 5

This principle states that the organization will continue to operate for the foreseeable future in the absence of evidence to the contrary.

Assets are treated according to what is expected to happen over the normal course of operations and over their anticipated useful lifetime. They will be expected to depreciate in value or to be amortized.

The heart of this principle remains that only what is known can be used in financial statements and unless some information is available that indicates otherwise, the organization will carry on

Question 6

What is the conservatism and cost principle

Answer 6

This principle requires that accountants value assets at the lower of their historical cost or market value

This has been described as a principle by which accountants recognize no gains until they happen, but record all possible losses even before they take place

When in doubt, it is better to overstate expense and understate revenue

Question 7

What is the matching principle?

Answer 7

The matching principle states that all expenses must be recorded in the same accounting period as the revenue that they helped to generate

The matching principle normally refers to the matching of revenue and expenses

for government entities: revenues should be recognized when the goods and/or services have been rendered and expenses should be matched to program delivery outputs of services to the public

Question 8

What is the consistency principle?

Answer 8

This principle holds that, once an organization has adopted a set of standards for accounting and financial reporting it will continue to use them, so as to allow for consistent comparisons between time periods

When they change them, they have to provide what is a called a “cross walk” to explain where changes have been made in the financial information in order to permit comparisons

Question 9

What is the materiality principle?

Answer 9

Whether the information being reported is significant to users of financial statements in making decisions or arriving at an understanding of the organization’s financial position

Question 10

What is the accrual principle?

Answer 10

The elements of the accrual basis that are significant to this principle are that:

• revenue is recognized when goods and services are provided, even if payment has not occurred
• expenses are recorded on consumption of the assets
• a full set of financial statements are used to support the accrual basis

Accrual is seen as providing a much more complete picture of the financial condition of an organization

Question 11

Key differences between cash and accrual accounting

Answer 11

Cash Accounting

• Does not record the impacts of assets and liabilities
• money borrowed with a long-term liability is considered as a cash inflow and it not stated in the financial statements until it is due and payable
• Recognition and transparency are diminished

Accrual accounting

• Recognizes events and transactions when they occur by recording accounts payable and receivable and the changes in the values of the assets and liabilities
• It keeps a tally of what the organization own and owes, it also depletes the values of those assets as it uses them up
• Liabilities and expenses are recorded when the event occurred. The cash is paid, the liability is removed
• Upon receipt of goods this system provides two information: creation of liability or obligation to pay and information about the level of inventory (asset)

Question 12

Name and describe two advantages of accrual accounting

Answer 12

1. little to no cash manipulation of cash

2. records assets including depreciation and replacement

Question 13

Name and describe two disadvanatages of accrual accounting

Answer 13

1. Standards are open to manipulation
   distortions of the accrual system through manipulation in 2 ways:
   -revenue is recognized on the basis of flimsy evidence (record sale as income even though it was only an agreement)
   -the write-off of bad debts or deferral of the timing of certain cost flows is manipulated to make the organization’s performance look better in a specified period
2. Poor linkage to budget information when the budgets are on cash basis making financial reports difficult to understand and create the need for “cross-over” reports

Question 14

Name two objectives that a budget accomplishes

Answer 14

A budget translates policy intention into specific activities through the allocation of resources to that goal or to one or more objectives

A budget sets limits on expenditures to guide managers within the organization

Question 15

What is budgeting in the public sector?

Answer 15

For government, a budget is necessary to allocate resources and get the authority to spend

The public sector working within an approved budget is a distinct measure of sound management. This works in two ways:
-managers faces criticism for overspending and underspending

Question 16

What is budgeting in the private sector?

Answer 16

A budget is a flexible set of planning parameters that can change as market conditions change and input cost variation

The bottom line of accountability lies with profitability, share value, and the economic sustainability of the firm. Compliance with a budget is more of a short term internal control, subject to fairly rapid fluctuations

Question 17

Define capital budgeting?

Answer 17

Contain the plans and resource allocations for capital acquisitions to support the program of the organizations

Capital budgets involve multi-year expenditure projections with approval for the current-year expenditures

Capital budget focuses on non-recurring goods

Buildings are built on a one-time basis, and the capital budget would not automatically contain a plan for another building once one was built

Capital budget: capital expenditure refers to any significant expenditure to acquire or improve land, buildings, engineering structures, machinery equipment and related services used in providing municipal services. Those normally confer benefits lasting beyond one year

Land and buildings are well-known capital goods and information technology infrastructure is part of the capital budgets
• Determining is in and what is not treated as a capital item is a matter of policy within public-sector organization

Question 18

Explain two characteristics of capital assets

Answer 18

Characteristics of capital assets

1. Productivity criterion: they are used in production and supply of goods and services
2. Exclusive use criterion: they are not intended for resale in the ordinary course of operations

They are recorded as non-financial assets along with other such assets as prepaid expenses and inventories held for future use

Question 19

Why has Ontario steered towards alternate financing procurement (AFP) as a model for capital projects look at risks and costs (from the book)

Answer 19

Governments are looking for ways to finance expensive capital projects without the use of appropriated funds, or at least minimizing their use or spreading the high impact of capital funding over the many years

E.g. YORK region subway. Steven Del Duca

E.g. bidding to for snow plows removers

Question 20

Website definition of AFP

Answer 20

Alternative Financing and Procurement (AFP) is a made in Ontario approach to financing and procuring large, complex public infrastructure projects. It leverages partnerships with the private sector to expand, modernize and replace Ontario’s aging infrastructure.

Under AFP, provincial ministries and/or project owners establish the scope and purpose of a project, while design and construction work is financed and carried out by the private sector. Typically, only after a project is completed will the province complete payment to the private-sector company. In some cases, the private sector will also be responsible for the maintenance of a physical building or roadway.

The AFP model allows projects to be delivered more efficiently and more cost effectively than traditional procurement. AFP also protects taxpayers from cost overruns by transferring project risks to the party with the expertise, experience and ability to handle that risk best.

Question 21

Alternative financing schemes for the government (not as important)

Answer 21

Traditional: governments create the capital asset, finance it through appropriations or special borrowing (bonds) and operate the asset

Commercialization: government create the capital asset above but operates autonomously or is operated, through a contract, by the private-sector

Public Private partnership (PPPs): governments enter into complex arrangements for shared or private financing, building and operation of a facility that remains in the public realm and often reverts to public-sector ownership at the end of the pay-back period

Privatization: governments cease carrying out an activity. Taken up by the private sector or actioned by a part of government that has been privatized, all capital and operating spending is undertaken by the company with no direct government involved. This does not exclude government creating regulations or rules to govern these enterprises

Question 22

Describe two examples of risks that can affect capital planning projects

Answer 22

General Risks–examples include high-level concerns related to the decision to undertake an initiative. risk treatment may include documenting how an initiative fits with establishes strategic objectives; assessing the requirements for a new corporate structure

Policy risks–examples include the likelihood that an initiative represents, or may be affected by, a major shift in government or agency policy, or change in legislation

public interest risks–examples include the initiative’s environmental impact and its relation to public health, safety, and security issues. risk treatment may include working with the neighbours and the community to address public concerns in the initiative planning phase

Question 23

What is the time value of money?

Answer 23

Time value of money (TVM) is important in public-sector capital planning for organizations that will borrow money for the project or acquisition and must know the cost of the debt changes they will be paying

As they develop alternate financing schemes, the future coats of money have to be factored in assessing overall costs

The TVM technique such as net present value (NPV) can help determine the opportunity costs associated with funding the acquisition through debt or taxation

The simplest explanation of TVM is that a dollar today is worth more than a dollar tomorrow or at any time in the future, and the dollar today is worth less than the dollar you had yesterday or any time in the past

Many attribute this to inflation of the worth of the currency and compounding interest on funds borrowed

Organizations have choices about what to do with the money

This choice is called the opportunity cost, the cost being the

TVM is important in weighting the relative costs and benefits of s long-term capital program. The objective is to bring those costs onto a common field of analysis: the present value

Question 24

Factors associated with the TVM

Answer 24

Opportunity cost
• Opportunity cost is used to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity) or of the most valuable forgone alternative
o Spending it now means having the things that are needed now
o Investing it means deferring consumption and earning a return that will increase the value of the dollar, depending on the investment and time it is held
o Holding it, and making no decision, means deferring any use and foregoing the opportunity to either consume or earn

2. risk
   • The dollar in had today has little risk
   • It is within the control of the organization, which can dispose of it, save it or invest it as it sees fit
   • Generally, collection risk increases with distance from today, meaning a dollar owed to you tomorrow has less risk of not being paid than a dollar owed to your next year
   • More things can happen to prevent the future payment in the intervening time
3. Interest-rate risks is also involved in the concept of time value
   • Market rates fluctuate, and the expectation of whether rates will rise of fall can affect loan and investment decisions
   • Today’s dollar, then, has more value than the one you get tomorrow for yet another reason: if rates decline, not having the dollar today means that the opportunity to invest at the higher rate was lost
   • As with credit risk, the amount of interest-rate risk also increases the farther into the future the payment is expected

4.Inflation
• If prices are rising, that dollar in your hand will buy less tomorrow than it will today
• If you invest it, what return will be needed to keep ahead of rising prices as well as compensation for not having the use of money

Question 25

Explain the four strategies used to achieve budget reductions
name and explain

Answer 25

The fours strategies used to achieve reductions: (P140)

Across the Board Cuts
Strategic Reviews
Efficiency Gains
Outsourcing & privatization

Question 26

Across the board cuts

Answer 26

Across -the-board cuts
• Are budget reductions that apply to all budget in a more or less equal way
• They can take the form of a percentage budget cut to the total budget or cuts to budget categories
• The key feature is that it applies to all such areas within the government’s budget
• It is used frequently
• This form of budget decrement is the easiest

Criticisms of this approach
• Some argued that it is the fairest because it affects all programs in the same way

Advantages of this approach
1. It is fast, from the perspective of making decisions and announcements. Rolling out the decision takes time
2. It does distribute the burden of reductions across the entire government or organization
3. It does leave managers to sort out the best way to effect the reduction. this flexibility permits them to be more creative in
Often across the board cuts will involve proposals for rule changes, regulatory and policy changes, or efficiency gains to enable organizations to absorb the reduction

Question 27

Strategic reviews

Answer 27

Provide a more targeted and more institutionalized approach to find ways to reduce government expenditure

The objectives of strategic review process are to identify savings or make funds available for reallocation in a way the examines individual programs to see if they can be eliminated, reformed, reduced or change to yield the desired savings

These reviews are centrally driven by Treasury Board of the government

There will be a set of targets, as et of guiding principles for the review process, a central oversight provided either by politician or by senior bureaucrats

Operating with a reduction target, departments are asked to produce a plan based on the identification of their lowest priority programs or, alternatively, propose policy or delivery changes that will yield savings

Departments were review the relevance and performance of spending. They were to identify the lowest performing or lowest priority 5 percent of programs, seek outside advice and report to the Treasury Board

The reviews were to answer specific questions in key areas:
• Government priority, federal role, relevance (i.e., continued program need)
• Performance (effectiveness, efficiency, value for money)
• Management performance

Strategic reviews will have the opposite effect: interest or advocacy groups feel singled out (which they are) and take up the challenges of criticizing the government

Strategic reviews are targeted and not random. They also involve a deliberative process to get to a result

Finally, they open the door to policy and service delivery changes as part of the process that would modernize and improve the service

Strategic reviews involve the individual financial manager in many ways

Should decisions be made to reduce or eliminate a program, the manager then becomes engaged in change management as well as winding down the program

Question 28

Efficiency gains

Answer 28

Efficiency Gains

Efficiency measures are reductions resulting from minor or major changes in the way existing programs are delivered

The objective is to deliver the same program outputs and outcomes with fewer inputs (resources)

Efficiency gains take a number of forms:
• Integration points of service to the public among departments to reduce the number of offices and share services in each office
• Amalgamating support or back-office functions into centralized shared service units
• Replacing people (a high cost element of the budget) with automated systems (theoretically less expensive)
• Modernizing delivery systems and information systems to identify costs and control them better—this is different than using automated delivery systems in that it is intended to enhanced internal management
• Reducing travel costs through the increased use of videoconferencing
• Outsourcing elements of program delivery, or of support systems to lower cost, often to private sector providers

Efficiency gains drive at the heart of the productivity element of government
It is a means to avoid arbitrary cuts
They will involve some form of investments, “you have to spend money to save money”

Question 29

Outsourcing and privitization

Answer 29

Outsourcing and privatization

Outsourcing for efficiency gains

Privatization means that the government divests itself of the ownership of an asset or program and leaves its operation to the private sector

Airlines: It gains the capital from the sale, but loses the income (or operating loss) stream

• The asset leaves the balance sheet
• The net effect is a reduction in the size of the government and a lower budget figure

They exercise their interest through means such as legislation, regulation and creation of oversight bodies

Outsourcing means to buy goods or services that have been carried out by the government staff from an outside supplier on a contractual basis

Government remains in control of the funds used, assets created and the quality of service or good being provide

The objective of outsourcing is to reduce costs of a particular function

In essence, the function is purchased from a supplier

The use of consultant is a form of outsourcing

There are risks in outsourcing:

• Can lead to higher costs
• Can lead to corruption and misuse of funds

Question 30

Explain three approaches to budget reallocation

state the term and define

Answer 30

Service Level Changes
Reduction of salaries
Reducing staff size- permanent, temporary, through attrition

Reducing or Eliminating Discretionary Spending:
Amalgamate & Reorganize: bringing services together
Increase Fees & User Costs
Sell Off Asset

Understanding the risks and consequences of cutbacks
Timeline
Who it impacts
Infrastructure risks

Question 31

Provide three examples of drivers of budget reallocation. state each term then define them

Answer 31

1. Policy change
2. Fiscal change
3. Control adjustment
4. Cost adjustment
5. Performance adjustment

Question 32

Define accountability in the contexts of governments

Answer 32

Accountability: big idea with a board reach

Accountability is an essential part of delivering goods and policies

It encompasses operational processes, management control, the effectiveness of those controls, the efficiency with which the organization carries out its work and its adherence to the laws and requirement probity—executive accountability

Accountability extends to relationship with service providers both within the public and into the private sector through contracted services, contributions agreements, and funding supports

The public sector accountability landscape: accountable for what?
• Governments are held to a higher standard of accountability than a business or a non-profit organization
• Measuring financial performance in public sector financial statements suggests that there are broad accountabilities expected regarding the financial affairs of a public sector entity:
-Performance: the extent to which the entity performed in accordance with its financial plan by proving information on actual vs. budgeted results

• Forward impacts: the extent to which current activities and results have an effect on future activities and results and results, including inter-period equity, sustainability of policies and programs, annual accumulated surplus or deficit, and risks inherent or created by present behaviour
• Financial condition: based on accurate financial reports, reporting on key aspects of financial condition, including net assets, cash and cash flows, debt and other liabilities, capital assets. Further, reporting on the sustainability of the entity, the risks associated with its financial position and the annual and accumulated surplus or deficit

Question 33

Accountabiliy in the public sector characteristics

Answer 33

Accountabilities in the public sector contain the following characteristics:

1. Transparency: access rules that ensure that all information on performance, financial probity, results and evaluative information becomes public
   a. Public sector embraces transparency as a value
2. Multiplicity of accountabilities: public organizations work to achieve a number of concurrent ends: good policy, adherence, to the law, and financial probity and proficiency
3. Hierarchical and horizontal nature of accountability: there are accountabilities strictly within an organization: those are hierarchical in nature
   a. There are reporting and accountability requirements to legislatures and boards of directors

What accountability means
• Panel on accountability and governance in the voluntary sector:
o Defines accountability: is the requirement of explain and accept responsibility for carrying out an assigned mandate in light of agreed-up expectations. It is important in situations that involve public trust
• The application of accountability involves three elements:
o Taking into consideration the public trust in the exercise of responsibilities
o Providing detailed information, showing how responsibilities have been carried out, and what outcomes have been achieved
o Accepting the responsibility for outcomes, including problems created, or not corrected, by an organization or its financial or its officials and staff