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

Chapter 1: Governmental and Not-for-Profit
Accounting Environment and Characteristics

Multiple Choice

1. Which of the
following is a distinguishing characteristic of a nonbusiness organization?
a. Its revenues do not exceed its expenses
b. There is an
absence of ownership interests that can be sold, transferred, or redeemed
c. It does not depreciate its capital assets
d. It does not charge fees for any of its
services

2. Which of the
following activities is performed by governments but not by not-for-profit
organizations?
a. Issuing federal tax-free debt
b. Receiving grants
c. Preparing budgets
d. Providing services to constituents

3. Government and
nonprofit accounting focuses on which of the following?
a. Calculating profit or loss
b. Protecting investors from fraud
c. Demonstrating accountability
d. Reporting to management

4. Which of the
following is not a reason that
governmental accounting is different from business accounting?
a. Different
users of financial reports
b. Expected
long-life of governments
c. Capital assets
are used by governments
d. Revenues that
are unique to governments

5. Which basis of
accounting is used for the basic governmental functions of state and local
governments?
a. Cash basis of
accounting
b. Modified
accrual basis of accounting
c. Accrual basis
of accounting
d. Regulatory
basis of accounting

6. For which types of
organizations is the Financial Accounting Standards Board (FASB) responsible
for establishing accounting and financial reporting standards?
a. Business-type
organizations and not-for-profit organizations, including not-for-profit
colleges, universities and health care providers
b. Business-type
organizations; not-for-profit organizations; and all colleges, universities and
health care providers, whether organized as not-for-profit or governmental
entities
c. Business-type
organizations only
d. All entities,
except for those under the jurisdiction of the American Institute of CPAs

7. A not-for-profit
organization performs all of the following activities except
a. Charging a fee for services provided
b. Paying dividends to shareholders
c. Purchasing
long-lived (capital) assets
d. Paying overtime to employees

8. The Governmental
Accounting Standards Board (GASB) establishes financial reporting standards for
state and local governmental entities.
An entity possessing the following characteristics should follow GASB
standards:
a. The power to enact and levy a tax.
b. The power to issue debt, for which its
interest is exempt from federal taxation.
c. The potential
that a government could unilaterally dissolve the entity and assume their
assets and liabilities.
d. All of the
above.
e. Only a and b.

9. For which types of
organizations is the Governmental Accounting Standards Board (GASB) responsible
for establishing accounting and financial reporting standards?
a. All state, local, and Federal organizations
b. All state and
local governmental organizations, except for state and local governmental
colleges, universities, health care providers, and utilities
c. All state and
local governmental organizations, including government-sponsored colleges,
universities, health care providers, and utilities
d. All
governmental and not-for-profit organizations

10. Which entity
establishes financial accounting standards and principles for the federal
government?
a. FASB
b. GASB
c. FASAB
d. None of the above.

11. Which of the
following is the most authoritative source of accounting standards for cities
and counties?
a. Current practices widely used by
not-for-profit entities
b. GASB Statements and Interpretations
c. AICPA Industry Audit Guides
d. Implementation guides published by GASB staff

12. Concepts statements
issued by the GASB and the FASAB emphasize which of the following objectives of
governmental financial reporting?
a. It should help the chief executive assess
the entity’s financial condition.
b. It should help
department heads assess their department’s results of operations.
c. It should help
the judiciary determine whether the government has complied with the law.
d. It should help
report users assess accountability.

13. An activity that is
unique to governments is
a. Budgeting
b. Cash management
c. Levying taxes
d. Advertising

14. To what extent do
organizations that use fund accounting also report on the entity as a whole?
a. Organizations
that use fund accounting are not required to report on the entity as a whole
b. Organizations
that choose to report on the entity as a whole are not permitted to use fund
accounting for internal purposes
c. Organizations
that use fund accounting are required to report on the entity as a whole
d. Organizations
that use fund accounting have the option of reporting either on funds or on the
organization as a whole

15. Not-for-profit
organizations obtain their revenues primarily from
a. Sales to customers
b. Contributions from donors
c. Taxes on personal property
d. Taxes on real property

Problems

16. (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 Organization
Business Not-for-Profit Government
Has a need for accounting
Operates according to a legal budget
Has equity shareholders
Receives voluntary contributions
Levies and enforces collection of taxes
Revenues are based on exchange transactions
Follows fund accounting
Subject to FASB pronouncements
Is exempt from federal income taxes
Financial reporting focuses on entity as a
whole

19. (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?