Government and Not-for-Profit Accounting
Concepts and Practices
7th Edition
Published on 22. August 2016
Loose-leaf edition
864 pages
978-1-118-98327-0 (ISBN)
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Government and Not-for-Profit Accounting, 7th Edition by Michael Granof, Saleha Khumawala, Thad Calabrese, and Daniel Smith makes students aware of the dynamism of government and not-for-profit accounting and of the intellectual challenges that it presents. Not only does the 7th edition keep students informed of current accounting and reporting standards and practices, but it also ensures that they are aware of the reasons behind them, their strengths and limitations, and possible alternatives.
Government and Not-for-Profit Accounting, 7th Edition by Michael Granof, Saleha Khumawala, Thad Calabrese, and Daniel Smith makes students aware of the dynamism of government and not-for-profit accounting and of the intellectual challenges that it presents. Not only does the 7th edition keep students informed of current accounting and reporting standards and practices, but it also ensures that they are aware of the reasons behind them, their strengths and limitations, and possible alternatives.
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English
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Michael H. Granof | Saleha B. Khumawala
Government and Not-for-Profit Accounting
Concepts and Practices
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08/2016
6th Edition
Wiley
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Persons
Michael H. Granof is an accounting professor and expert on government and not-for-profit accounting and financial reporting standards, and is an influential writer and speaker on the topic of government budget issues including social security, entitlements, tax policy, and projected budgetary concerns in the U.S., including the long-term viability of the social security program.
Content
Preface vi
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? 5
What Other Characteristics of Governments and Not?]For?]Profits Have Accounting Implications? 8
How Do Governments Compare With Not?]For?]Profits? 11
What Are the Overall Purposes of Financial Reporting? 12
Who Are the Users, and What are the Uses of Financial Reports? 13
What Are the Specific Objectives of Financial Reporting as Set Forth by The GASB and FASB? 16
Example: Clash among Reporting Objectives 17
Do Differences in Accounting Principles Really Matter? 20
In Practice: Will Accounting Changes Make a Difference? 21
Who Establishes Generally Accepted Accounting Principles? 21
In Practice: Assessing the Profitability of a Football Program 22
In Practice: Governments and Not-For-Profits May Also Be Aggressive in Their Accounting 23
Summary 26
Key Terms in This Chapter 26
Questions For Review and Discussion 26
Exercises 27
Continuing Problem 30
Problems 30
Questions For Research, Analysis, And Discussion 36
2 Fund Accounting 37
What Is a Fund? 37
What Are the Key Elements of Government Financial Statements? 38
What Characterizes Funds? 39
Example: Fund Accounting in a School District 44
How Can Funds Be Combined and Consolidated? 46
What Are the Main Types of a Government's Funds? 57
What's Notable about Each Type of Governmental Fund? 58
What's Notable about Each Type of Proprietary Fund? 61
What's Notable about Each Type of Fiduciary Fund? 63
What Is Included in a Government's Comprehensive Annual Financial Report (CAFR)? 69
Example: Government?]Wide Statement of Activities 71
How Do the Funds and Annual Reports of Not?]For?]Profits Differ from Those of Governments? 73
Summary 75
Key Terms in This Chapter 77
Exercise for Review and Self-Study 77
Questions for Review and Discussion 78
Exercises 79
Continuing Problem 84
Problems 84
Questions for Research, Analysis, and Discussion 93
Solution to Exercise for Review and Self-Study 93
3 Issues of Budgeting and Control 97
What Are the Key Purposes of Budgets? 98
Why Is More Than One Type of Budget Necessary? 98
How Are Expenditures and Revenues Classified? 100
Why Are Performance Budgets Necessary? 101
What Are the Key Phases for the Budget Cycle? 104
In Practice: Budgeting and Legislative Constraints 106
On What Basis of Accounting Are Budgets Prepared? 108
In Practice: States Balance Their Budgets the Painless Way 109
In Practice: The Cost of GAAP 109
In Practice: Balancing the Budget by Selling Assets to Yourself 110
What Cautions Must Be Taken in Budget?]to?]Actual Comparisons? 110
How Does Budgeting in Not?]For?]Profit Organizations Compare with That in Governments? 114
How do Budgets Enhance Control? 114
What are the Distinctive Ways Governments Record their Budgets? 116
Example: Budgetary Entries 117
How Does Encumbrance Accounting Prevent Overspending? 119
Example: The Encumbrance Cycle-Year 1 120
Example: The Encumbrance Cycle-Year 2 122
Example: Impact of Encumbrances on Fund Balance 123
Are Budgetary and Encumbrance Entries Really Needed? 125
Summary 126
Key Terms in This Chapter 126
Exercise for Review and Self?]Study 127
Questions for Review and Discussion 127
Exercises 128
Continuing Problem 134
Problems 134
Questions for Research, Analysis, and Discussion 144
Solution to Exercise for Review and Self?]Study 145
4 Recognizing Revenues in Governmental Funds 147
Why and How Do Governments Use the Modified Accrual Basis? 148
What Are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can Be Used? 151
How Should Property Taxes and Other Imposed Nonexchange Revenues Be Accounted For? 152
In Practice: Housing Woes Raise New Problems for Accountants and Auditors 152
Example: Property Taxes 154
Example: Fines 157
How Should Sales Taxes and Other Derived Tax Revenues Be Accounted For? 158
Example: Sales Taxes 159
Example: Sales Taxes Collected by State 160
Example: Income Taxes 161
How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues Be Accounted For? 163
Example: Unrestricted Grant with Time requirement 164
Example: Grant with Purpose Restriction 164
Example: Reimbursement (Eligibility Requirement) Grant 164
Example: Unrestricted Grant with Contingency Eligibility Requirement 165
Example: Endowment Gift 165
Example: Pledges 165
Example: Payments in Lieu of Taxes 165
Example: Donations of Land for Differing Purposes 166
Example: On-Behalf Payments 169
How Should Sales of Capital
Assets Be Accounted For? 169
Example: Sales of Capital Assets 170
How Should Licenses, Permits, and Other Exchange Transactions Be Accounted For? 171
Example: License Fees 171
How Should Governments Report Revenues in Their Government-Wide Statements? 172
Summary 172
Key Terms in This Chapter 174
Exercise for Review and Self-Study 174
Questions for Review and Discussion 174
Exercises 175
Continuing Problem 180
Problems 181
Questions for Research, Analysis, and Discussion 189
Solution to Exercise for Review and Self?]Study 189
5 Recognizing Expenditures in Governmental Funds 192
How Is The Accrual Concept Modified for Expenditures? 193
How Should Wages and Salaries Be Accounted For? 194
In Practice: Tax Expenditures That Are Actually Reductions in Revenue 194
Example: Wages and Salaries 194
How Should Compensated Absences Be Accounted For? 195
In Practice: Changing the Pay Date by One Day 196
Example: Vacation Leave 196
Example: Sick Leave 197
Example: Sabbatical Leave 198
How Should Pensions and Other Postemployment Benefits Be Accounted for? 199
Example: Pension Expenditure 200
How Should Claims and Judgments Be Accounted For? 200
Example: Claims and Judgments 201
How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 202
Example: Supplies 202
How Should Prepayments Be Accounted For? 204
Example: Prepayments 204
How Should Capital Assets Be Accounted For? 205
Example: Capital Assets 206
Example: Installment Notes 207
Example: Capital Leases 208
How Should Interest and Principal on Long-Term Debt Be Accounted For? 209
Example: Long?]term Debt 209
In Practice: California Schoolchildren May Pay for Their Own Education 211
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 214
Example: Interfund Purchase/Sale 215
What Constitutes other Financing Sources and Uses? 216
How Should Revenues, Expenditures, and Other Financing Sources and Uses be Reported? 217
What Is the Significance of the Current Financial Governmental Fund Statements? An Overview 217
Summary 218
Key Terms in This Chapter 218
Exercise for Review and Self-Study 219
Questions for Review and Discussion 220
Exercises 221
Continuing Problem 227
Problems 228
Questions for Research, Analysis, and Discussion 236
Solution to Exercise for Review and Self-Study 237
6 Accounting for Capital Projects and Debt Service 240
How do Governments Account for Capital Projects Funds? 241
Example: Bond Issue Costs 243
Example: Bond Premiums and Discounts 243
Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 244
How do Governments Account for Resources Dedicated to Debt Service? 247
Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 249
How Do Governments Handle Special Assessments? 252
In Practice: Use and Abuse of Special Assessments 253
Accounting for Special Assessments in Proprietary Funds 255
In Practice: What We Might Learn From "Net Investment in Capital Assets" 257
How Can Governments Benefit from Debt Refundings? 258
Example: Debt Refundings 259
Example: In?]Substance Defeasance 260
Summary 262
Key Terms in This Chapter 263
Exercise for Review and Self?]Study 263
Questions for Review and Discussion 264
Exercises 264
Continuing Problem 270
Problems 270
Questions for Research, Analysis, and Discussion 280
Solution to Exercise for Review and Self?]Study 281
7 Capital Assets and Investments in Marketable Securities 285
What Accounting Practices Do Governments Follow for General Capital Assets? 286
Example: Trade-Ins 289
Why and How Should Governments Report Infrastructure? 290
In Practice: Nation's Infrastructure Earns a Cumulative Grade of D+ 291
In Practice: Fair Values May (Or May Not) Facilitate Sales Decisions 296
How Should Governments Account for Assets That Are Impaired? 297
Example: Restoration Approach 297
Example: Service Units approach 298
Example: Deflated Depreciated Replacement Cost Approach 299
What Issues Are the Critical Issues With Respect to Marketable Securities and Other Investments? 299
Example: Investment Income 303
In Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 304
Example: Interest Income 304
In Practice: One Common-Type Derivative 306
In Practice: Investment Debacles 306
In Practice: Common sense Investment Practices 308
Summary 308
Key Terms in this Chapter 309
Exercise for Review and Self-Study 309
Questions for Review and Discussion 310
Exercises 310
Continuing Problem 314
Problems 315
Questions for Research, Analysis, and Discussion 324
Solution to Exercise for Review and Self-Study 324
8 Long-Term Obligations 326
Why is Information on Long-Term Debt Important to Statement Users? 327
Can Governments and Not-For-Profits Go Bankrupt? 327
In Practice: It is Not So Easy to Declare Municipal Bankruptcy 328
How Do Governments Account for Long-Term Obligations? 329
Example: Accounting for Bonds in Government-Wide Statements 331
In Practice: Valuing a Lottery Prize 332
What Constitutes A Government's Long-Term Debt? 332
Example: Demand Bonds 334
Example: Bond Anticipation Notes 335
Example: Tax Anticipation Notes 335
Example: Capital Leases 338
Example: Overlapping Debt 341
In Practice: 49Ers Score Big in The Financial Arena 343
In Practice: Tobacco Bonds are Both Risky and Inconsistent with Government Policies 344
What Other Information Do Users Want to Know About Outstanding Debt? 344
Example: Debt Margin 346
What are Bond Ratings, and Why are They Important? 347
Summary 349
Key Terms in this Chapter 349
Exercise for Review and Self-Study 349
Questions for Review and Discussion 350
Exercises 350
Continuing Problem 356
Problems 356
Questions for Research, Analysis, and Discussion 363
Solution to Exercise for Review and Self-Study 364
9 Business-Type Activities 365
What Types of Funds Involve Business-Type Activities? 366
Why Do Governments and Not-For-Profits Engage in Business-Type Activities? 366
Should Business-Type Activities be Accounted for Differently than Governmental Activities? 367
What are the Three Basic Statements of Proprietary Fund Accounting? 369
What Accounting Issues are Unique to Enterprise Funds of Governments? 373
Example: Revenue Bond Proceeds as Restricted Assets 377
Example: Landfill Costs in an Enterprise Fund 379
Example: Pollution Remediation Costs in an Enterprise Fund 382
What are Internal Service Funds, and How are they Accounted For? 382
Example: Internal Service Fund Accounting 385
In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 387
What Special Problems are Created when An Internal Service Fund or the General Fund Accounts for "Self-Insurance"? 389
Example: Insurance Premiums 390
Example: Self-Insurance in a General Fund 391
How are Proprietary Funds Reported? 392
Example: Eliminating Interfund Balances and Transactions 393
In Practice: Want to Own a Bridge? 395
What do Users Want to Know about Revenue Debt? 396
Summary 397
Key Terms in this Chapter 398
Exercise for Review and Self-Study 398
Questions for Review and Discussion 399
Exercises 402
Continuing Problem 407
Problems 407
Questions for Research, Analysis, and Discussion 416
Solution to Exercise for Review and Self-Study 417
10 Pensions and Other Fiduciary Activities 419
Why is Pension Accounting so Important? 420
In Practice: Funded Status of State Defined Benefit Plans-Ten Best and Ten Worst 421
How do Defined Contribution Plans Differ From Defined Benefit Plans? 421
In Practice: Defined Benefit Plans are More Efficient than Defined Contribution Plans 422
In Practice: Can Defined Benefit Plans be Saved? 423
What are the Distinctions Among Single, Agent Multiple-Employer, and Cost-Sharing Plans? 424
What is the Relationship Between an Employer and its Pension Plan? 424
What is the Underlying Rationale for the Gasb Approach? 425
How Should the Employer Measure its Pension Obligation? 425
How is the Discount Rate Determined? 426
How Should the Pension Expense in Full Accrual Statements be Determined? 427
Example: The Pension Expense 429
How Should the Pension Expenditure in Governmental Funds be Determined? 432
What Special Problems do Multiple-Employer Cost-Sharing Plans Pose? 432
How Should the Pension Plan be Accounted For? 433
What Types of Disclosures are Required? 435
How Should Postemployment Benefits other than Pensions (Opeb) be Accounted For? 436
What are Fiduciary Funds? 437
What Is An Endowment? 437
What are Permanent Funds and How are they Distinguished from Fiduciary Funds? 438
Should Investment Income be Reported in an Expendable or A Nonexpendable Fund? 439
Example: Expendable Investment Income 440
How are The Assets Held in Fiduciary Funds Accounted For? 440
Example: Recognizing Declines in Fair Value 441
Should Investment Gains be Considered Net Additions to Principal or Expendable Income? 442
Example: Investment Gains 442
Example: Investment Losses 443
In Practice: Disconnect Between FASB and Legal Provisions 445
How can Institutions
Protect Against Inflation, Yet Reap the Benefits of Current Income? 446
Example: Fixed Rate of Return Approach 446
How are the Main Types of Transactions Recorded in Nonexpendable Trust Funds? 447
Example: Recording Transactions in a Permanent Fund 447
What Accounting Issues do Agency Funds Present? 452
Example: Agency Funds 452
What Accounting Issues do Investment Trust Funds Present? 454
Summary 456
Key Terms in this Chapter 457
Exercise for Review and Self-Study 457
Questions for Review and Discussion 459
Exercises 460
Continuing Problem 464
Problems 465
Questions for Research, Analysis, and Discussion 472
Solution to Exercise for Review and Self-Study 472
11 Issues of Reporting, Disclosure, and Financial Analysis 474
How Can a Government Prepare Government?]Wide Statements from Fund Statements? 474
Why is the Reporting Entity an Issue for Governments? 476
Example: The Reporting Entity 476
What Criteria Have Been Established for Government Reporting Entities? 477
Example: Financially Accountable Component Units 478
Example: Fiscal Dependency 479
Example: Blended Component Units 480
Example: A Closely Affiliated Organization 484
Example: Application of Current Standards 484
What Other Elements Make Up the Comprehensive Annual Financial Report? 486
What Are the Reporting Requirements for Special?]Purpose Governments? 490
How Can A Government's Fiscal Condition be Assessed? 492
In Practice: Balanced Budget Requirements Don't Always Result in Balanced Budgets 501
Drawing Conclusions 510
Summary 510
Key Terms in This Chapter 511
Exercise for Review and Self?]Study 511
Questions for Review and Discussion 512
Exercises 513
Continuing Problem 519
Problems 519
Questions for Research, Analysis, and Discussion 525
Solution to Exercise for Review and Self-Study 525
12 Not-for-Profit Organizations 528
Who's In Charge? 528
What Should be the Form and Content of Financial Statements? 529
Example: Reporting Revenues and Expenses 533
What Are the Main Types of Contributions, and How Should Pledges be Accounted for? 539
In Practice: Even the Very Wealthy Sometimes Renege on their Contributions 543
Example: Pledges 543
When Should Use-Restricted (Purpose-Restricted) Contributions Be Recognized? 545
Example: Use-Restricted Contributions 545
In Practice: A Gift With Strings Attached 546
Should Contributions of Services be Recognized? 546
Example: Service Contributions 547
Should Receipts of Collection Items Be Recognized As Revenues? 547
In Practice: Examples of Contributed Services 548
When Should Conditional Promises be Recognized? 548
In Practice: When a Contribution is Not A Contribution 549
Example: Conditional Promises 549
How Should "Pass-Through" Contributions be Accounted for? 550
Example: A Federated Fund-Raising Organization 550
Example: A Foundation That Transfers Assets to a Specified Organization 550
Example: A Foundation That Supports a Related Organization 550
When Should Gains and Losses on Investments be Recognized? 552
Example: Investment Gains 552
What Are Split Interest Agreements, And How Should They Be Accounted For? 553
How Should Depreciation be Reported? 554
Example: Depreciation 554
What Issues Does a Not?]For?]Profit Face in Establishing its Reporting Entity? 555
Comprehensive Example: Museum of American Culture 556
How Should the Costs of Fund-Raising Activities be Determined? 564
Example: Allocating Charitable Costs 565
How can a Not-For-Profit's Fiscal Condition be Assessed? 567
In Practice: Not-For Profits, Like Corporations, Tainted by Scandals 569
Summary 570
Key Terms in this Chapter 571
Exercise for Review and Self-Study 571
Questions for Review and Discussion 575
Exercises 575
Problems 581
Solution to Exercise for Review and Self-Study 586
13 Colleges and Universities 587
What Unique Issues do Colleges and Universities Face? 587
Accounting for Revenues and Expenses 596
In Practice: Which Set of Standards Do We Follow? 597
In Practice: Trying to Go Private 598
In Practice: How Should a University Classify a Gift that May Not Be a Gift? 598
Example: Tuition and Fee Revenues 599
Other Issues 600
Example: Grants 601
Example: Student Loans 602
In Practice: How Auxiliary Enterprises Can Be Misused 603
Comprehensive Example: Mars University 603
Evaluating the Fiscal Wherewithal of Colleges and Universities 608
Summary 610
Key Terms in this Chapter 610
Exercise for Review and Self-Study 610
Questions for Review and Discussion 613
Exercises 614
Problems 618
Solution to Exercise for Review and Self-Study 624
14 Health Care Providers 626
In Practice: Hospitals Face Economic Challenges While Also Implementing Policy Changes 627
What Unique Issues do Health Care Providers Face? 628
What are the Key Differences Between Private Not-For-Profit and Government Health Care Providers? 629
What Are The Basic Financial Statements? 629
How Are Key Revenues and Expenses Recognized? 634
Example: Patient Care Revenues 634
Example: Capitation Fee Revenues 635
Example: Charity Care 636
Example: Malpractice Claims 637
Example: Retrospective Premiums 638
Comprehensive Example: Medical Center Hospital 638
How can The Fiscal Wherewithal of Health care Organizations be Evaluated? 643
In Practice: Financial Problems Not Caused By Single Issue 645
Possible Future Changes 645
Summary 646
Key Terms in this Chapter 646
Exercise for Review and Self-Study 646
Questions for Review and Discussion 647
Exercises 648
Problems 654
Solution to Exercise for Review and Self-Study 660
15 Managing for Results 661
What Role do Accountants Play in the Management Cycle of Governments and Not?]For?]Profits? 662
How Can the Limits of Traditional Budgets Be Overcome? 663
What are the Characteristics of Sound Operational Objectives? 665
What are the Perils of Establishing Operational Objectives? 667
In Practice: A Classic Case of Reliance on Misspecified Objectives (Two Perspectives of the Vietnam War) 668
How Do Program Budgets Relate Expenditures to Operational Objectives? 669
How Should Service Efforts and Accomplishments Be Reported? 675
How Are Capital Expenditures Planned and Budgeted Within A Framework of Operational Objectives? 681
Example: Benefits Are Cash Savings 683
Example: Choosing among Options with Similar Benefits 684
In Practice: September 11 Victim Compensation Fund 686
Summary 688
Key Terms in this Chapter 688
Exercise for Review and Self?]Study 689
Questions for Review and Discussion 689
Exercises 690
Problems 693
Solution to Exercise for Review and Self?]Study 700
16 Auditing Governments and Not?]for?]Profit Organizations 702
How do Audits of Governments and Not?]For?]Profits Differ from Those of Businesses? 703
How has the Yellow Book Influenced Governmental and Not?]For?]Profit Auditing? 703
What Types Of Audits Do Governments Conduct? 704
What Levels of Standards are Applicable to all Engagements? 705
What are the Key Differences Between Government and Nongovernment Financial Audit Standards? 708
In Practice: To Whom Should a City Auditor Report? 708
In Practice: The Auditors' Dilemma 710
How Have the Single?]Audit Act and other Pronouncements Influenced Auditing? 711
What Approach do Auditors Take in Performing Single Audits? 712
What Reports Result from Single Audits? 716
What are Performance Audits? 718
In Practice: Targeting Seemingly Trivial Activities 721
Example: Evidence Gathering 724
In Practice: Findings Must Relate to Program Objectives 725
Example: Ethical Dilemma 728
Summary 729
Key Terms in this Chapter 730
Exercise for Review and Self?]Study 731
Questions for Review and Discussion 731
Exercises 732
Problems 735
Cases in Ethics 740
Solution to Exercise for Review and Self-Study 742
17 Federal Government Accounting 744
Which Agencies Are Responsible For Federal Accounting And Reporting? 746
What Constitutes The Federal Budget? 751
What Constitutes the Federal Government Reporting Entity? 752
What are the Form and Content of Government?]Wide Federal Statements? 754
What Types of Accounts are Maintained by Federal Entities? 759
What Statements are Required of Federal Agencies? 762
What are other key Features of the FASAB Model? 770
Example: Subsidized loan 777
Example: loan Guarantees 778
What Additional Steps Has The Federal Government Taken To Improve Its Fiscal Management? 779
What are the key International Trends in Governmental Accounting? 779
Summary 781
Key Terms in this Chapter 782
Exercise For Review And Self?]Study 783
Questions for Review and Discussion 783
Exercises 784
Problems 788
Solution to Exercise for Review and Self-Study 796
Glossary 797
Value Tables 816
Index 825
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? 5
What Other Characteristics of Governments and Not?]For?]Profits Have Accounting Implications? 8
How Do Governments Compare With Not?]For?]Profits? 11
What Are the Overall Purposes of Financial Reporting? 12
Who Are the Users, and What are the Uses of Financial Reports? 13
What Are the Specific Objectives of Financial Reporting as Set Forth by The GASB and FASB? 16
Example: Clash among Reporting Objectives 17
Do Differences in Accounting Principles Really Matter? 20
In Practice: Will Accounting Changes Make a Difference? 21
Who Establishes Generally Accepted Accounting Principles? 21
In Practice: Assessing the Profitability of a Football Program 22
In Practice: Governments and Not-For-Profits May Also Be Aggressive in Their Accounting 23
Summary 26
Key Terms in This Chapter 26
Questions For Review and Discussion 26
Exercises 27
Continuing Problem 30
Problems 30
Questions For Research, Analysis, And Discussion 36
2 Fund Accounting 37
What Is a Fund? 37
What Are the Key Elements of Government Financial Statements? 38
What Characterizes Funds? 39
Example: Fund Accounting in a School District 44
How Can Funds Be Combined and Consolidated? 46
What Are the Main Types of a Government's Funds? 57
What's Notable about Each Type of Governmental Fund? 58
What's Notable about Each Type of Proprietary Fund? 61
What's Notable about Each Type of Fiduciary Fund? 63
What Is Included in a Government's Comprehensive Annual Financial Report (CAFR)? 69
Example: Government?]Wide Statement of Activities 71
How Do the Funds and Annual Reports of Not?]For?]Profits Differ from Those of Governments? 73
Summary 75
Key Terms in This Chapter 77
Exercise for Review and Self-Study 77
Questions for Review and Discussion 78
Exercises 79
Continuing Problem 84
Problems 84
Questions for Research, Analysis, and Discussion 93
Solution to Exercise for Review and Self-Study 93
3 Issues of Budgeting and Control 97
What Are the Key Purposes of Budgets? 98
Why Is More Than One Type of Budget Necessary? 98
How Are Expenditures and Revenues Classified? 100
Why Are Performance Budgets Necessary? 101
What Are the Key Phases for the Budget Cycle? 104
In Practice: Budgeting and Legislative Constraints 106
On What Basis of Accounting Are Budgets Prepared? 108
In Practice: States Balance Their Budgets the Painless Way 109
In Practice: The Cost of GAAP 109
In Practice: Balancing the Budget by Selling Assets to Yourself 110
What Cautions Must Be Taken in Budget?]to?]Actual Comparisons? 110
How Does Budgeting in Not?]For?]Profit Organizations Compare with That in Governments? 114
How do Budgets Enhance Control? 114
What are the Distinctive Ways Governments Record their Budgets? 116
Example: Budgetary Entries 117
How Does Encumbrance Accounting Prevent Overspending? 119
Example: The Encumbrance Cycle-Year 1 120
Example: The Encumbrance Cycle-Year 2 122
Example: Impact of Encumbrances on Fund Balance 123
Are Budgetary and Encumbrance Entries Really Needed? 125
Summary 126
Key Terms in This Chapter 126
Exercise for Review and Self?]Study 127
Questions for Review and Discussion 127
Exercises 128
Continuing Problem 134
Problems 134
Questions for Research, Analysis, and Discussion 144
Solution to Exercise for Review and Self?]Study 145
4 Recognizing Revenues in Governmental Funds 147
Why and How Do Governments Use the Modified Accrual Basis? 148
What Are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can Be Used? 151
How Should Property Taxes and Other Imposed Nonexchange Revenues Be Accounted For? 152
In Practice: Housing Woes Raise New Problems for Accountants and Auditors 152
Example: Property Taxes 154
Example: Fines 157
How Should Sales Taxes and Other Derived Tax Revenues Be Accounted For? 158
Example: Sales Taxes 159
Example: Sales Taxes Collected by State 160
Example: Income Taxes 161
How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues Be Accounted For? 163
Example: Unrestricted Grant with Time requirement 164
Example: Grant with Purpose Restriction 164
Example: Reimbursement (Eligibility Requirement) Grant 164
Example: Unrestricted Grant with Contingency Eligibility Requirement 165
Example: Endowment Gift 165
Example: Pledges 165
Example: Payments in Lieu of Taxes 165
Example: Donations of Land for Differing Purposes 166
Example: On-Behalf Payments 169
How Should Sales of Capital
Assets Be Accounted For? 169
Example: Sales of Capital Assets 170
How Should Licenses, Permits, and Other Exchange Transactions Be Accounted For? 171
Example: License Fees 171
How Should Governments Report Revenues in Their Government-Wide Statements? 172
Summary 172
Key Terms in This Chapter 174
Exercise for Review and Self-Study 174
Questions for Review and Discussion 174
Exercises 175
Continuing Problem 180
Problems 181
Questions for Research, Analysis, and Discussion 189
Solution to Exercise for Review and Self?]Study 189
5 Recognizing Expenditures in Governmental Funds 192
How Is The Accrual Concept Modified for Expenditures? 193
How Should Wages and Salaries Be Accounted For? 194
In Practice: Tax Expenditures That Are Actually Reductions in Revenue 194
Example: Wages and Salaries 194
How Should Compensated Absences Be Accounted For? 195
In Practice: Changing the Pay Date by One Day 196
Example: Vacation Leave 196
Example: Sick Leave 197
Example: Sabbatical Leave 198
How Should Pensions and Other Postemployment Benefits Be Accounted for? 199
Example: Pension Expenditure 200
How Should Claims and Judgments Be Accounted For? 200
Example: Claims and Judgments 201
How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 202
Example: Supplies 202
How Should Prepayments Be Accounted For? 204
Example: Prepayments 204
How Should Capital Assets Be Accounted For? 205
Example: Capital Assets 206
Example: Installment Notes 207
Example: Capital Leases 208
How Should Interest and Principal on Long-Term Debt Be Accounted For? 209
Example: Long?]term Debt 209
In Practice: California Schoolchildren May Pay for Their Own Education 211
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 214
Example: Interfund Purchase/Sale 215
What Constitutes other Financing Sources and Uses? 216
How Should Revenues, Expenditures, and Other Financing Sources and Uses be Reported? 217
What Is the Significance of the Current Financial Governmental Fund Statements? An Overview 217
Summary 218
Key Terms in This Chapter 218
Exercise for Review and Self-Study 219
Questions for Review and Discussion 220
Exercises 221
Continuing Problem 227
Problems 228
Questions for Research, Analysis, and Discussion 236
Solution to Exercise for Review and Self-Study 237
6 Accounting for Capital Projects and Debt Service 240
How do Governments Account for Capital Projects Funds? 241
Example: Bond Issue Costs 243
Example: Bond Premiums and Discounts 243
Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 244
How do Governments Account for Resources Dedicated to Debt Service? 247
Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 249
How Do Governments Handle Special Assessments? 252
In Practice: Use and Abuse of Special Assessments 253
Accounting for Special Assessments in Proprietary Funds 255
In Practice: What We Might Learn From "Net Investment in Capital Assets" 257
How Can Governments Benefit from Debt Refundings? 258
Example: Debt Refundings 259
Example: In?]Substance Defeasance 260
Summary 262
Key Terms in This Chapter 263
Exercise for Review and Self?]Study 263
Questions for Review and Discussion 264
Exercises 264
Continuing Problem 270
Problems 270
Questions for Research, Analysis, and Discussion 280
Solution to Exercise for Review and Self?]Study 281
7 Capital Assets and Investments in Marketable Securities 285
What Accounting Practices Do Governments Follow for General Capital Assets? 286
Example: Trade-Ins 289
Why and How Should Governments Report Infrastructure? 290
In Practice: Nation's Infrastructure Earns a Cumulative Grade of D+ 291
In Practice: Fair Values May (Or May Not) Facilitate Sales Decisions 296
How Should Governments Account for Assets That Are Impaired? 297
Example: Restoration Approach 297
Example: Service Units approach 298
Example: Deflated Depreciated Replacement Cost Approach 299
What Issues Are the Critical Issues With Respect to Marketable Securities and Other Investments? 299
Example: Investment Income 303
In Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 304
Example: Interest Income 304
In Practice: One Common-Type Derivative 306
In Practice: Investment Debacles 306
In Practice: Common sense Investment Practices 308
Summary 308
Key Terms in this Chapter 309
Exercise for Review and Self-Study 309
Questions for Review and Discussion 310
Exercises 310
Continuing Problem 314
Problems 315
Questions for Research, Analysis, and Discussion 324
Solution to Exercise for Review and Self-Study 324
8 Long-Term Obligations 326
Why is Information on Long-Term Debt Important to Statement Users? 327
Can Governments and Not-For-Profits Go Bankrupt? 327
In Practice: It is Not So Easy to Declare Municipal Bankruptcy 328
How Do Governments Account for Long-Term Obligations? 329
Example: Accounting for Bonds in Government-Wide Statements 331
In Practice: Valuing a Lottery Prize 332
What Constitutes A Government's Long-Term Debt? 332
Example: Demand Bonds 334
Example: Bond Anticipation Notes 335
Example: Tax Anticipation Notes 335
Example: Capital Leases 338
Example: Overlapping Debt 341
In Practice: 49Ers Score Big in The Financial Arena 343
In Practice: Tobacco Bonds are Both Risky and Inconsistent with Government Policies 344
What Other Information Do Users Want to Know About Outstanding Debt? 344
Example: Debt Margin 346
What are Bond Ratings, and Why are They Important? 347
Summary 349
Key Terms in this Chapter 349
Exercise for Review and Self-Study 349
Questions for Review and Discussion 350
Exercises 350
Continuing Problem 356
Problems 356
Questions for Research, Analysis, and Discussion 363
Solution to Exercise for Review and Self-Study 364
9 Business-Type Activities 365
What Types of Funds Involve Business-Type Activities? 366
Why Do Governments and Not-For-Profits Engage in Business-Type Activities? 366
Should Business-Type Activities be Accounted for Differently than Governmental Activities? 367
What are the Three Basic Statements of Proprietary Fund Accounting? 369
What Accounting Issues are Unique to Enterprise Funds of Governments? 373
Example: Revenue Bond Proceeds as Restricted Assets 377
Example: Landfill Costs in an Enterprise Fund 379
Example: Pollution Remediation Costs in an Enterprise Fund 382
What are Internal Service Funds, and How are they Accounted For? 382
Example: Internal Service Fund Accounting 385
In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 387
What Special Problems are Created when An Internal Service Fund or the General Fund Accounts for "Self-Insurance"? 389
Example: Insurance Premiums 390
Example: Self-Insurance in a General Fund 391
How are Proprietary Funds Reported? 392
Example: Eliminating Interfund Balances and Transactions 393
In Practice: Want to Own a Bridge? 395
What do Users Want to Know about Revenue Debt? 396
Summary 397
Key Terms in this Chapter 398
Exercise for Review and Self-Study 398
Questions for Review and Discussion 399
Exercises 402
Continuing Problem 407
Problems 407
Questions for Research, Analysis, and Discussion 416
Solution to Exercise for Review and Self-Study 417
10 Pensions and Other Fiduciary Activities 419
Why is Pension Accounting so Important? 420
In Practice: Funded Status of State Defined Benefit Plans-Ten Best and Ten Worst 421
How do Defined Contribution Plans Differ From Defined Benefit Plans? 421
In Practice: Defined Benefit Plans are More Efficient than Defined Contribution Plans 422
In Practice: Can Defined Benefit Plans be Saved? 423
What are the Distinctions Among Single, Agent Multiple-Employer, and Cost-Sharing Plans? 424
What is the Relationship Between an Employer and its Pension Plan? 424
What is the Underlying Rationale for the Gasb Approach? 425
How Should the Employer Measure its Pension Obligation? 425
How is the Discount Rate Determined? 426
How Should the Pension Expense in Full Accrual Statements be Determined? 427
Example: The Pension Expense 429
How Should the Pension Expenditure in Governmental Funds be Determined? 432
What Special Problems do Multiple-Employer Cost-Sharing Plans Pose? 432
How Should the Pension Plan be Accounted For? 433
What Types of Disclosures are Required? 435
How Should Postemployment Benefits other than Pensions (Opeb) be Accounted For? 436
What are Fiduciary Funds? 437
What Is An Endowment? 437
What are Permanent Funds and How are they Distinguished from Fiduciary Funds? 438
Should Investment Income be Reported in an Expendable or A Nonexpendable Fund? 439
Example: Expendable Investment Income 440
How are The Assets Held in Fiduciary Funds Accounted For? 440
Example: Recognizing Declines in Fair Value 441
Should Investment Gains be Considered Net Additions to Principal or Expendable Income? 442
Example: Investment Gains 442
Example: Investment Losses 443
In Practice: Disconnect Between FASB and Legal Provisions 445
How can Institutions
Protect Against Inflation, Yet Reap the Benefits of Current Income? 446
Example: Fixed Rate of Return Approach 446
How are the Main Types of Transactions Recorded in Nonexpendable Trust Funds? 447
Example: Recording Transactions in a Permanent Fund 447
What Accounting Issues do Agency Funds Present? 452
Example: Agency Funds 452
What Accounting Issues do Investment Trust Funds Present? 454
Summary 456
Key Terms in this Chapter 457
Exercise for Review and Self-Study 457
Questions for Review and Discussion 459
Exercises 460
Continuing Problem 464
Problems 465
Questions for Research, Analysis, and Discussion 472
Solution to Exercise for Review and Self-Study 472
11 Issues of Reporting, Disclosure, and Financial Analysis 474
How Can a Government Prepare Government?]Wide Statements from Fund Statements? 474
Why is the Reporting Entity an Issue for Governments? 476
Example: The Reporting Entity 476
What Criteria Have Been Established for Government Reporting Entities? 477
Example: Financially Accountable Component Units 478
Example: Fiscal Dependency 479
Example: Blended Component Units 480
Example: A Closely Affiliated Organization 484
Example: Application of Current Standards 484
What Other Elements Make Up the Comprehensive Annual Financial Report? 486
What Are the Reporting Requirements for Special?]Purpose Governments? 490
How Can A Government's Fiscal Condition be Assessed? 492
In Practice: Balanced Budget Requirements Don't Always Result in Balanced Budgets 501
Drawing Conclusions 510
Summary 510
Key Terms in This Chapter 511
Exercise for Review and Self?]Study 511
Questions for Review and Discussion 512
Exercises 513
Continuing Problem 519
Problems 519
Questions for Research, Analysis, and Discussion 525
Solution to Exercise for Review and Self-Study 525
12 Not-for-Profit Organizations 528
Who's In Charge? 528
What Should be the Form and Content of Financial Statements? 529
Example: Reporting Revenues and Expenses 533
What Are the Main Types of Contributions, and How Should Pledges be Accounted for? 539
In Practice: Even the Very Wealthy Sometimes Renege on their Contributions 543
Example: Pledges 543
When Should Use-Restricted (Purpose-Restricted) Contributions Be Recognized? 545
Example: Use-Restricted Contributions 545
In Practice: A Gift With Strings Attached 546
Should Contributions of Services be Recognized? 546
Example: Service Contributions 547
Should Receipts of Collection Items Be Recognized As Revenues? 547
In Practice: Examples of Contributed Services 548
When Should Conditional Promises be Recognized? 548
In Practice: When a Contribution is Not A Contribution 549
Example: Conditional Promises 549
How Should "Pass-Through" Contributions be Accounted for? 550
Example: A Federated Fund-Raising Organization 550
Example: A Foundation That Transfers Assets to a Specified Organization 550
Example: A Foundation That Supports a Related Organization 550
When Should Gains and Losses on Investments be Recognized? 552
Example: Investment Gains 552
What Are Split Interest Agreements, And How Should They Be Accounted For? 553
How Should Depreciation be Reported? 554
Example: Depreciation 554
What Issues Does a Not?]For?]Profit Face in Establishing its Reporting Entity? 555
Comprehensive Example: Museum of American Culture 556
How Should the Costs of Fund-Raising Activities be Determined? 564
Example: Allocating Charitable Costs 565
How can a Not-For-Profit's Fiscal Condition be Assessed? 567
In Practice: Not-For Profits, Like Corporations, Tainted by Scandals 569
Summary 570
Key Terms in this Chapter 571
Exercise for Review and Self-Study 571
Questions for Review and Discussion 575
Exercises 575
Problems 581
Solution to Exercise for Review and Self-Study 586
13 Colleges and Universities 587
What Unique Issues do Colleges and Universities Face? 587
Accounting for Revenues and Expenses 596
In Practice: Which Set of Standards Do We Follow? 597
In Practice: Trying to Go Private 598
In Practice: How Should a University Classify a Gift that May Not Be a Gift? 598
Example: Tuition and Fee Revenues 599
Other Issues 600
Example: Grants 601
Example: Student Loans 602
In Practice: How Auxiliary Enterprises Can Be Misused 603
Comprehensive Example: Mars University 603
Evaluating the Fiscal Wherewithal of Colleges and Universities 608
Summary 610
Key Terms in this Chapter 610
Exercise for Review and Self-Study 610
Questions for Review and Discussion 613
Exercises 614
Problems 618
Solution to Exercise for Review and Self-Study 624
14 Health Care Providers 626
In Practice: Hospitals Face Economic Challenges While Also Implementing Policy Changes 627
What Unique Issues do Health Care Providers Face? 628
What are the Key Differences Between Private Not-For-Profit and Government Health Care Providers? 629
What Are The Basic Financial Statements? 629
How Are Key Revenues and Expenses Recognized? 634
Example: Patient Care Revenues 634
Example: Capitation Fee Revenues 635
Example: Charity Care 636
Example: Malpractice Claims 637
Example: Retrospective Premiums 638
Comprehensive Example: Medical Center Hospital 638
How can The Fiscal Wherewithal of Health care Organizations be Evaluated? 643
In Practice: Financial Problems Not Caused By Single Issue 645
Possible Future Changes 645
Summary 646
Key Terms in this Chapter 646
Exercise for Review and Self-Study 646
Questions for Review and Discussion 647
Exercises 648
Problems 654
Solution to Exercise for Review and Self-Study 660
15 Managing for Results 661
What Role do Accountants Play in the Management Cycle of Governments and Not?]For?]Profits? 662
How Can the Limits of Traditional Budgets Be Overcome? 663
What are the Characteristics of Sound Operational Objectives? 665
What are the Perils of Establishing Operational Objectives? 667
In Practice: A Classic Case of Reliance on Misspecified Objectives (Two Perspectives of the Vietnam War) 668
How Do Program Budgets Relate Expenditures to Operational Objectives? 669
How Should Service Efforts and Accomplishments Be Reported? 675
How Are Capital Expenditures Planned and Budgeted Within A Framework of Operational Objectives? 681
Example: Benefits Are Cash Savings 683
Example: Choosing among Options with Similar Benefits 684
In Practice: September 11 Victim Compensation Fund 686
Summary 688
Key Terms in this Chapter 688
Exercise for Review and Self?]Study 689
Questions for Review and Discussion 689
Exercises 690
Problems 693
Solution to Exercise for Review and Self?]Study 700
16 Auditing Governments and Not?]for?]Profit Organizations 702
How do Audits of Governments and Not?]For?]Profits Differ from Those of Businesses? 703
How has the Yellow Book Influenced Governmental and Not?]For?]Profit Auditing? 703
What Types Of Audits Do Governments Conduct? 704
What Levels of Standards are Applicable to all Engagements? 705
What are the Key Differences Between Government and Nongovernment Financial Audit Standards? 708
In Practice: To Whom Should a City Auditor Report? 708
In Practice: The Auditors' Dilemma 710
How Have the Single?]Audit Act and other Pronouncements Influenced Auditing? 711
What Approach do Auditors Take in Performing Single Audits? 712
What Reports Result from Single Audits? 716
What are Performance Audits? 718
In Practice: Targeting Seemingly Trivial Activities 721
Example: Evidence Gathering 724
In Practice: Findings Must Relate to Program Objectives 725
Example: Ethical Dilemma 728
Summary 729
Key Terms in this Chapter 730
Exercise for Review and Self?]Study 731
Questions for Review and Discussion 731
Exercises 732
Problems 735
Cases in Ethics 740
Solution to Exercise for Review and Self-Study 742
17 Federal Government Accounting 744
Which Agencies Are Responsible For Federal Accounting And Reporting? 746
What Constitutes The Federal Budget? 751
What Constitutes the Federal Government Reporting Entity? 752
What are the Form and Content of Government?]Wide Federal Statements? 754
What Types of Accounts are Maintained by Federal Entities? 759
What Statements are Required of Federal Agencies? 762
What are other key Features of the FASAB Model? 770
Example: Subsidized loan 777
Example: loan Guarantees 778
What Additional Steps Has The Federal Government Taken To Improve Its Fiscal Management? 779
What are the key International Trends in Governmental Accounting? 779
Summary 781
Key Terms in this Chapter 782
Exercise For Review And Self?]Study 783
Questions for Review and Discussion 783
Exercises 784
Problems 788
Solution to Exercise for Review and Self-Study 796
Glossary 797
Value Tables 816
Index 825