Test Bank for Government and Not-For-Profit Accounting: Concepts and Practices, 7th Edition

1 The Government and Not- for- Profit Environment 1

How Do Governments and Not- For- Profits Compare With Businesses? 2

In Practice: Why Is State And Local Government Accounting Important? 6

What Other Characteristics of Governments and Not- For- Profits Have Accounting Implications? 9

How Do Governments Compare With Not-For- Profits? 12

What Are The Overall Purposes of Financial Reporting? 14

Who are The Users, and What are The Uses of Financial Reports? 14

What are The Specific Objectives of Financial Reporting As Set Forth By The GASB and The FASB? 17

Example: Clash Among Reporting Objectives 19

Do Differences In Accounting Principles Really Matter? 22

In Practice: Will Accounting Changes Make A Difference? 24

Who Establishes Generally Accepted Accounting Principles? 24

In Practice: Assessing the Profitability of An Athletic Program 25

In Practice: Governments and Not- For- Profits May Also Be Aggressive In Their Accounting 26

Summary 29

Key Terms In This Chapter 30

Questions For Review and Discussion 30

Exercises 31

Continuing Problem 33

Problems 33

Questions For Research, Analysis, And Discussion 37

2 Fund Accounting 38

What is a Fund? 39

What are the Key Elements of Government Financial Statements? 39

What Characterizes Funds? 41

Use of Multiple Funds to Account for An Entity 44

Basis of Accounting and Measurement Focus 45

Example: Fund Accounting in a School District 46

Major VS. Nonmajor Funds 49

How Can Funds be Combined and Consolidated? 49

What are the Main Types of a Government’s Funds? 59

What’s Notable About Each Type of Governmental Fund? 61

What’s Notable About Each Type of Proprietary Fund? 64

What’s Notable About Each Type of Fiduciary Fund? 70

What is Included in a Government’s Annual Comprehensive Financial Report (ACFR)? 71

Example: Government-Wide Statement of Activities 74

How Do the Funds and Annual Reports of Not-For-Profits Differ From Those of Governments? 75

Summary 78

Key Terms In This Chapter 80

Exercise for Review and Self-Study 80

Questions for Review and Discussion 81

Exercises 82

Continuing Problem 85

Problems 86

Questions for Research, Analysis, and Discussion 91

Solution to Exercise for Review and Self-Study 92

3 Issues of Budgeting and Control 95

What are the Key Purposes of Budgets? 96

Why is More Than One Type of Budget Necessary? 96

How are Expenditures and Revenues Classified? 98

Why are Performance Budgets Necessary? 99

What are the Key Phases of the Budget Cycle? 101

In Practice: Budgeting In The Midst of a Pandemic 103

On What Basis of Accounting are Budgets Prepared? 105

In Practice: States Balance Their Budgets the Painless Way 106

In Practice: The Cost of GAAP 107

In Practice: Balancing the Budget by Selling Assets to Yourself 108

What Cautions Must be Taken in Budget-to-Actual Comparisons? 108

How Does Budgeting in Not-For-Profit Organizations Compare with that in Governments? 111

How Do Budgets Enhance Control? 112

What are the Distinctive Ways Governments Record Their Budgets? 114

Example: Budgetary Entries 115

An Alternative Method: Crediting or Debiting the Difference Between Revenues and Expenditures to “Budgetary Control” 117

How Does Encumbrance Accounting Prevent Overspending? 117

Example: The Encumbrance Cycle—Year 1 118

Example: The Encumbrance Cycle—Year 2 120

Example: Impact of Encumbrances on Fund Balance 121

Are Budgetary and Encumbrance Entries Really Needed? 124

Summary 125

Key Terms in this Chapter 125

Exercise for Review and Self-Study 126

Questions for Review and Discussion 126

Exercises 127

Continuing Problem 131

Problems 131

Questions for Research, Analysis, and Discussion 139

Solution to Exercise for Review and Self-Study 139

4 Recognizing Revenues in Governmental Funds 141

Why and How Do Governments Use the Modified Accrual Basis? 141

What are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can be Used? 145

How Should Property Taxes and Other Imposed Nonexchange Revenues be Accounted for? 146

I n Practice: In Practice: Just as it did with individuals, corona viruses make some governments

far more sick than others 146

Example: Property Taxes 148

Example: Fines 153

How Should Sales Taxes and Other Derived Tax Revenues be Accounted for? 154

Example: Sales Taxes 154

Example: Sales Taxes Collected by State 156

Example: Income Taxes 157

What are Tax Abatements and Why and How Must They be Disclosed? 159

How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues be Accounted For? 160

Example: Unrestricted Grant with Time Requirement 161

Example: Grant with Purpose Restriction 162

Example: Reimbursement (Eligibility Requirement) Grant 162

Example: Unrestricted Grant with Contingency Eligibility Requirement 163

Example: Endowment Gift 163

Example: Pledges 163

Example: Donations of Land for Differing Purposes 164

Example: On-Behalf Payments 167

How Should Sales of Capital Assets be Accounted For? 167

Example: Sales of Capital Assets 168

How Should Licenses, Permits, and Other Exchange Transactions be Accounted for? 169

Example: License Fees 169

How Should Governments Report Revenues in their Government-Wide Statements? 170

Summary 171

Key Terms In This Chapter 173

Exercise for Review and Self-Study 173

Questions for Review and Discussion 174

Exercises 174

Continuing Problem 178

Problems 178

Questions for Research, Analysis, and Discussion 184

Solution to Exercise for Review and Self-Study 185

5 Recognizing Expenditures in Governmental Funds 187

Hierarchical Approach to Transaction Analysis 187

How is the Accrual Concept Modified for Expenditures? 189

How Should Wages and Salaries be Accounted for? 190

Example: Wages and Salaries 190

How Should Compensated Absences Be Accounted For? 191

In Practice: Changing the Pay Date by One Day 191

Example: Vacation Leave 192

Example: Sick Leave 193

Example: Sabbatical Leave 196

How Should Pensions and Other Postemployment Benefits Be Accounted For? 197

Example: Pension Expenditure 197

How Should Claims and Judgments Be Accounted For? 198

Example: Claims and Judgments 198

How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 200

Example: Supplies 200

How Should Prepayments Be Accounted For? 203

Example: Prepayments 203

How Should Capital Assets Be Accounted For? 205

Example: Capital Assets 205

Example: Installment Notes 206

Example: Capital Leases 207

How Should Interest and Principal on Long-Term Debt Be Accounted For? 208

Example: Long-term Debt 209

In Practice: California School Children May Pay for Their Own Education 210

How Should Nonexchange Expenditures be Accounted for? 212

Example: Unrestricted Grant with Time Requirement 212

Example: Grant with Purpose Restriction 213

Example: Reimbursement (Eligibility Requirement) Grant 213

How Should Interfund Transactions Be Accounted For? 214

Example: Interfund Transfer 215

Example: Interfund Purchase/Sale 215

How Should Revenues, Expenditures, and Other Financing Sources and Uses Be Reported? 218

In Practice: Is the Coronavirus Pandemic an Extraordinary or Special Event? 218

What is the Significance of the Current Financial Governmental Fund Statements? An Overview 219

Summary 220

Key Terms In This Chapter 221

Exercise for Review and Self-Study 221

Questions for Review and Discussion 222

Exercises 223

Continuing Problem 227

Problems 227

Questions for Research, Analysis, and Discussion 233

Solution to Exercise for Review and Self-Study 233

6 Accounting for Capital Projects and Debt Service 236

How do Governments Account for Capital Projects Funds? 237

Example: Bond Issue Costs 239

Example: Bond Premiums and Discounts 239

Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 241

How do Governments Account for Resources Dedicated to Debt Service? 245

Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 246

How do Governments Handle Special Assessments? 250

In Practice: Use and Abuse of Special Assessments 252

In Practice: What We Might Learn from “Net Investment in Capital Assets” 256

Why is Arbitrage a Concern of Governments? 256

How can Governments Benefit from Debt Refundings? 258

Example: Debt Refundings 258

Example: In-Substance Defeasance 260

In Practice: Current and Advance Refundings 261

Summary 263

Key Terms in This Chapter 264

Exercise for Review and Self-Study 264

Questions for Review and Discussion 265

Exercises 265

Continuing Problem 270

Problems 270

Questions for Research, Analysis, and Discussion 277

Solution to Exercise for Review and Self-Study 278

7 Capital Assets and Investments in Marketable Securities 281

What Accounting Practices Do Governments Follow for General Capital Assets? 282

Acquiring and Placing Value on Capital Assets 285

Example: Trade-Ins 285

Why and How Should Governments Report Infrastructure? 287

In Practice: Nation’s Infrastructure Earns a Cumulative Grade of C-287

In Practice: Fair Values May (Or May not) Facilitate Sales Decisions 292

How Should Governments Account for Assets that Are Impaired? 294

Example: Restoration Approach 294

Example: Service Units Approach 295

Example: Deflated Depreciated Replacement Cost Approach 296

What Are the Critical Issues with Respect To Marketable Securities And Other Investments? 297

Investments Should Be Reported at Fair Values 297

Example: Investment Income 300

I n Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 301

Example: Interest Income 303

In Practice: One Common-Type Derivative 305

In Practice: Investment Debacles 305

In Practice: Common Sense Investment Practices 307

Summary 307

Key Terms In This Chapter 308

Exercise for Review and Self-Study 308

Questions for Review and Discussion 309

Exercises 309

Continuing Problem 312

Problems 313

Questions for Research, Analysis, and Discussion 320

Solution to Exercise for Review and Self-Study 320

8 Long-Term Obligations 321

Why is Information on Long-Term Debt Important to Statement Users? 322

Can Governments and Not-For-Profits Go Bankrupt? 322

In Practice: It is not So Easy to Declare Municipal Bankruptcy 323

How Do Governments Account for Long-Term Obligations? 325

Example: Accounting for Bonds in Government-Wide Statements 327

In Practice: Valuing a Lottery Prize 328

What Constitutes a Government’s Long-Term Debt? 329

Example: Demand Bonds 331

Example: Bond Anticipation Notes 332

Example: Tax Anticipation Notes 333

Example: Lessee Accounting 335

Example: Lessor Accounting 336

Example: Overlapping Debt 343

In Practice: 49Ers Score Big in the Financial Arena 346

I n Practice: Tobacco Bonds Are Both Risky and Inconsistent with Government Policies 347

What Other Information Do Users Want to Know About Outstanding Debt? 347

Example: Debt Margin 349

What are Bond Ratings, and Why are They Important? 351

In Practice: Bond Ratings 352

Summary 352

Key Terms in This Chapter 354

Exercise for Review and Self-Study 354

Questions for Review and Discussion 354

Exercises 355

Continuing Problem 359

Problems 359

Questions for Research, Analysis, and Discussion 365

Solution to Exercise for Review and Self-Study 366

9 Business-Type Activities 367

What Types of Funds Involve Business-Type Activities? 368

Why Do Governments and Not-For-Profits

Engage in Business-Type Activities? 368

Should Business-Type Activities be Accounted for Differently than Governmental Activities? 369

What are the Three Basic Statements of Proprietary Fund Accounting? 371

What Accounting Issues are Unique to Enterprise Funds of Governments? 377

Example: Revenue Bond Proceeds as Restricted Assets 380

Example: Landfill Costs in an Enterprise Fund 382

Example: Pollution Remediation Costs in an Enterprise Fund 385

What are Internal Service Funds, and How are they Accounted For? 386

Example: Internal Service Fund Accounting 390

In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 392

Accounting for Insurance Premiums 394

Example: Insurance Premiums 395

Example: Self-Insurance in a General Fund 396

How are Proprietary Funds Reported? 397

Example: Eliminating Interfund Balances and Transactions 399

PPPs and APAs 403

Example: Public-Private Partnership (PPP) 404

Example: PPP But Not a SCA 406

In Practice: Want to Own a Bridge? 409

What Do Users Want to Know About Revenue Debt? 409

Summary 411

Key Terms in This Chapter 412

Exercise for Review and Self-Study 413

Questions for Review and Discussion 413

Exercises 414

Continuing Problem 418

Problems 418

Questions for Research, Analysis, and Discussion 424

Solution to Exercise for Review and Self-Study 425

10 Pensions and Other Fiduciary Activities 426

Why is Pension Accounting so Important? 426

In Practice 428

How Do Defined Contribution Plans Differ from Defined Benefit Plans? 429

In Practice: Defined Benefit Plans Are More Efficient Than Defined Contribution Plans 430

In Practice: Can Defined Benefit Plans Be Saved? 431

What is the Relationship Between An Employer and its Pension Plan? 432

How Should the Pension Expense in Full Accrual Statements be Determined? 435

Example: The Pension Expense 437

How Should the Pension Expenditure In Governmental Funds be Determined? 441

What Special Problems Do Multiple-Employer Cost-Sharing Plans Pose? 441

How Should The Pension Plan be Accounted for? 442

What Types of Disclosures are Required? 444

How Should Post-Employment Benefits Other Than Pensions (OPEB) be Accounted for? 445

What Are Fiduciary Funds? 446

I n Practice: Difficulty of Determining Whether an Activity is Fiduciary or Governmental 451

Should Investment Income of A Permanent Fund be Reported in the Permanent Fund Itself or The Beneficiary Fund? 454

Example: Expendable Investment Income 455

Summary 455

Key Terms in This Chapter 457

Exercise for Review and Self-Study 457

Questions for Review and Discussion 458

Exercises 458

Continuing Problem 461

Problems 461

Questions for Research, Analysis, and Discussion 466

Solution to Exercise for Review and Self-Study 467