Accounting for Governmental and Nonprofit
Organizations 1st Edition Patton
Chapter 1
Governmental and Nonprofit Accounting Environment
and Characteristics
QUESTIONS
Q1-1. 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. 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. 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. 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. Users of governmental and not-for-profit entity accounting information are both internal
and external. Major external users are:
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. see if restrictions on use of resources is reducing flexibility in meeting program goals.
Q1-6. 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. 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. 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. As business practices and new financial instruments continue to evolve, financial
statement preparers may encounter transactions not specifically addressed by their standards-
setting body. To deal with these situations, practitioners may be helped by documents issued by
the staff of the standards-setting body or by other organizations that issue relevant professional
guidance. They, therefore, need to know the relationships various sources of professional
guidance have with each other. 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.
, MULTIPLE CHOICE QUESTIONS
MC1-10. c
MC1-11. a
MC1-12. c
MC1-13. b
MC1-14. d
MC1-15. e
MC1-16. a
MC1-17. a
MC1-18. c
MC1-19. b
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