University of Texas ACCOUNTING 3321, Spring 2014 Chapter 1: Governmental and Not-for-Profit…PROBLEMS

Chapter 1: Governmental and Not-for-ProfitAccounting Environment and CharacteristicsProblems16. (True or false)State whether these statements are true or false. Discuss why the false statements are false.a. An entity is likely to be a governmental entity if a controlling majority of its governing body is appointed by governmental officials.b. The objective of a government is to provide services to its constituents.c. AICPA pronouncements have approximately the same level of authority as articles appearing in the Journal of Accountancy.d. The objective of a not-for-profit organization is to provide services to its constituents.e. By definition, all funds have cash, financial resources, and capital resources.f. The objective of a business organization is to enhance the wealth of its owners.17. (Discussion problem on fund accounting)Discuss the nature and purpose of “fund accounting.”18. (Matching organizational characteristics with different types of organizations.)Listed below are some identifying characteristics of organizations. Indicate with a check mark (U) in the appropriate column(s) those characteristics that apply to each type of organization. Some characteristics may apply to more than one type of organization.Characteristic Type of OrganizationBusiness Not-for-Profit GovernmentHas a need for accountingOperates according to a legal budgetHas equity shareholdersReceives voluntary contributionsLevies and enforces collection of taxesRevenues are based on exchange transactionsFollows fund accountingSubject to FASB pronouncementsIs exempt from federal income taxesFinancial reporting focuses on entity as a whole19. (Discussion problem on entity and GAAP hierarchy)A large private bus company in Empire City went bankrupt. At Empire City’s request, the state legislature established a legally separate public benefit corporation named Metro City Bus. In the law establishing Metro City Bus, Empire City was authorized to appoint Metro’s entire governing body, and Metro was authorized to issue tax-exempt debt to assume the assets of the private bus company.When Metro City Bus went to prepare its financial statements, two questions were raised. Was Metro City Bus a government? And if it were a government, how should it prepare its cash flow statement? Research showed that, when the bus company was a private organization, it followed FASB Statement No. 95, which required cash flow statements to be prepared using a particular format. However, GASB Statement No. 9 did not approve the use of FASB Statement No. 95, and instead required governmental enterprises to prepare cash flow statements using a different format. An article published in the Journal of Accountancy suggested that all business-type activities, private or governmental, ought to adopt FASB Statement No. 95.Required:a. Discuss whether Metro City Bus is or is not a governmental entity. What are the specific factors in this situation that cause Metro to be one or the other?b. Discuss whether Metro City Bus should prepare its cash flow statements using the FASB format or the GASB format. What are the factors that affect your conclusion?