(Test Bank) Government And Not-For-Profit Accounting Concepts And Practices

Granof,Khumawala,Calabrese,Smith, 8

Business

Test Bank

8th Edition

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Author(s): Granof, Khumawala, Calabrese, Smith

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Test Bank for Government and Not - for-Profit Accounting Concepts and Practices, 8e Michael Granof, Saleha Khumawala, Thad Calabrese, Daniel Smith (All Chapters) Granof_ 8E_TestBank_ch 01 Page 1 Chapter 1 The Government and Not -For-Profit Environment TRUE/FALSE (CHAPTER 1) 1. The objective of a typical government or not -for-profit entity includes goals that are difficult to quantify 2. A government’s budget may be backed by the force of law. 3. Government s have no need for an accounting system. 4. A government’s constituants rely on general purpose financial statements for a considerable amount of information about their government. 5. Governments and not -for-profit entities may never engage in busi ness -type activities. 6. Lenders use the financial statements of governments and not -for-profit entities just as they would those of businesses, that is, to help assess the borrower’s credit -worthiness. 7. Financial statements, no matter how prepared, do not d irectly affect the economic worth of an entity. 8. The Federal Accounting Standards Advisory Board’s standards do not apply to the federal Department of the Treasury. 9. Sarbanes -Oxley was passed in 2002 to enhance the independence of the GASB . 10. The Governme ntal Accounting Standards Board establishes generally accepted accounting principles for all state and local government s and all not-for-profit entities. Granof_ 8E_TestBank_ch 01 Page 2 ANSWERS TO TRUE/FALSE QUESTIONS (CHAPTER 1) 1. T 2. T 3. F 4. T 5. F 6. T 7. T 8. F 9. T 10. F Granof_ 8E_TestBank_ch 01 Page 3 MULTIPLE CHOICE (CHAPTER 1) 1. A primary characteristic that distinguishes governments from business es is a. The need to generate revenues equal to or more than expenditures/expenses. b. The importance of the budget in the governing process. c. The need to provide goods or services. d. The correlat ion between revenues generated and demand for goods or services. 2. A primary characteristic that distinguishes government from not -for-profits is a. The need to generate revenues equal to or more than expenditures/expenses. b. The ability to levy taxes. c. The need to provide goods or services. d. The correlation between revenues generated and demand for goods or services. 3. Which of the following characteristics distinguishes a government or not -for- profit entity from a business? a. There is always a direct link between revenues generated and expenditures/expenses incurred. b. Capital assets are used to produce revenues and save costs. c. Revenues are always indicative of demand for goods and services. d. The mission of the entity may include goals other than maximizi ng profit. 4. The most significant financial document provided by a government is the a. Balance sheet. b. Operating statement. c. Operating budget. d. Cash flow statement. 5. Which of the following statements is true? a. Governments may engage in activities like activities engaged in by for - profit entities. b. There are a small number of different types of governments. c. All government s engage in the same activities. d. Managers may have a long -term focus and thereby sacrifice the short - term liquidity of the entity. Granof_ 8E_TestBank_ch 01 Page 4 6. Which of the following activities is NOT an activity in which a government might engage? a. Selling electric power. b. Operating a golf course. c. Operating a bookstore. d. All of the above are activities that might be carried out by a government. 7. In which of the following a ctivities is a not -for-profit entity least likely to engage? a. Providing educational services. b. Providing health -care services. c. Providing for terrorism defense. d. Retail sales of cookies 8. Which of the following can be affected by GAAP? a. Legal ability to issue b onds. b. Ability to balance the budget. c. Amount reported as employee pension plan contributions. d. Claims and judgments settled. 9. Which of the following characteristics is unique to government s? a. The ability to have activities financed with tax -exempt debt. b. The power to impose fees. c. The ability to issue tax -exempt debt. d. The ability to have activities financed by Federal grants. 10. To obtain a comprehensive understanding of a government’s fiscal health, a financial analyst should obtain an understanding of which of the following? a. All the resources owned by the government . b. All the resources that may be summoned by the government. c. Demographic data about the residents served by the government. d. All of the above. 11. Which of the following is common to both governments and not -for-profit entities but distinguishes these entities from for -profit entities? a. The budget is a legal, financial document. b. Revenues are usually indicative of demand for goods or services. c. There is direct matching of revenu es and expenses. d. There are no defined ownership interests. Granof_ 8E_TestBank_ch 01 Page 5 12. Which of the following is NOT a purpose of external financial reporting by governments? a. Assess financial condition. b. Compare actual results with the budget. c. Assess the ability of elected offici als to effectively manage people. d. Evaluate efficiency and effectiveness. 13. Which of the following is NOT a typical external user of a government or not - for-profit financial statements? a. Governing boards b. Securities and Exchange Commission c. Donors and grantors d. Taxpayers/citizens or organization members 14. Users of government financial statements should be interested in information about compliance with laws and regulations for which of the following reasons? a. To determine if the government has complied with bond covenants. b. To determine if the government has complied with taxing limitations. c. To determine if the government has complied with donor restrictions on the use of funds. d. To determine all of the above. 15. Which of the following is NOT generally considered a main user of government and not -for-profit entity external financial statements? a. Investors and creditors. b. Taxpayers. c. Donors. d. Internal managers. 16. Which of the following is a probable use a n individual donor would make of the external financial statements of a not -for-profit entity? a. To determine the proportion of entity resources directed to programs as opposed to fund -raising. b. To determine the creditworthiness of the entity for investment purposes. c. To determine the salaries paid to all employees of the en tity. d. To determine the budget of the entity. Granof_ 8E_TestBank_ch 01 Page 6 17. A regulatory agency would use the external financial statements of a local government for which of the following purposes? a. To ensure that the entity is spending and receiving resources in accordance with law s, regulations or policies. b. To determine how resources should be allocated. c. To exercise general oversight responsibility. d. To do all of the above. 18. A primary tool of both governments and not -for-profit to acquire funds to finance long -term projects is a. Levy of special purpose tax. b. Have a city -wide gala. c. Obtain line of credit on current assets. d. Issue bonds to individuals and institutional investors. 19. Which of the following objectives is considered the cornerstone of financial reporting by a state or local government? a. Accountability. b. Budgetary compliance. c. Interperiod equity. d. Service efforts and accomplishments. 20. Which of the following are objective s of financial reporting by state and local government s as established by the GASB? i. Accountability ii. Evaluation of legislative results iii. Level of service and ability to meet obligations a. I only b. II only c. I and III d. I, II and III 21. Which of the following is an objective of financial reporting by nongovernmental not-for-profit entities as establish ed by the FASB? a. Assessing the types of services provided and the need for those services. b. Assessing the services provided and the entity’s ability to earn a profit. c. Making rational decisions about the allocation of resources to those organizations. d. Assessing how managers have managed personnel. Granof_ 8E_TestBank_ch 01 Page 7 22. As used by the GASB, interperiod equity refers to which of the following? a. Demonstrate compliance with finance -related contractual requirements. b. Provide information to determine whether the constituents pay for what they receive . c. Demonstrate whether resources were obtained and used in accordance with the government’s legally adopted budget. d. Provide information to assist users in assessing the government’s economy, efficiency, and effectivenes s. 23. Given a specific set of data, the basis of accounting selected by or imposed on a government will impact which of the following the LEAST ? a. Determining whether the government has a balanced budget. b. Determining whether the government has the ability to issue debt. c. Determining whether certain economic events occurred. d. Determining the annual payments to a government -sponsored pension plan. 24. The basis of accounting selected by or imposed on a government can influence which of the following? a. A decision to co ntract -out a specific service rather than provide that service itself. b. The amount of annual contribution to keep pension fully funded . c. The amount that is available to spend on a donor -specified project or service. d. All of the above. 25. The Governmental Accoun ting Standards Board is the primary standard - setting body for: a. All governments. b. All state and local governments. c. All governments and all not -for-profit entities. d. All state and local governments and all not -for-profit entities. 26. Under certain circumstances a government might use standards established by which of the following standard -setting bodies? a. GASB. b. FASB. c. AICPA. d. All of the above. Granof_ 8E_TestBank_ch 01 Page 8 27. The primary standard -setting body for accounting and financial reporting by a state -supported college or university is: a. GASB. b. FASB. c. AICPA. d. All of the above. 28. In descending order, the hierarchy of GAAP applicable to a church -owned college may be: a. FASB Statements and Interpretations, AICPA Accounting Research Bulletins, Accounting Pri nciples Board Opinion , FASB Technical Bulletins, AICPA Industry Audit Guides, FASB Implementation Guides, other accounting literature —including GASB standards . b. FASB Statements and Interpretations, GASB standards, AICPA Practice Bulletins (if cleared by FAS B). c. GASB Statements and Interpretations, AICPA Industry Audit Guides, GASB Implementation Guides, other accounting literature —including FASB standards . d. GASB Statements and Interpretations, GASB Technical Bulletins, AICPA Industry Audit Guides, AICPA Practi ce Bulletins (if cleared by GASB), GASB Implementation Guides, other accounting literature — including FASB standards. 29. Which of the following entities was a principal in creating the FASAB? a. U.S. Congress. b. Office of Management and Budget. c. Governmental Accou nting Standards Board. d. Securities and Exchange Commission. 30. The purpose of the FASAB is to establish accounting standards for a. Not-for-profit entities. b. Federal government . c. All government s. d. Non-federal government s. Granof_ 8E_TestBank_ch 01 Page 9 ANSWERS TO MULTIPLE CHOICE (CHAPTER 1) 1. b 2. b 3. d 4. c 5. a 6. d 7. c 8. c 9. c 10. d 11. d 12. c 13. d 14. d 15. d 16. a 17. d 18. d 19. a 20. b 21. c 22. b 23. c 24. d 25. b 26. d 27. a 28. a 29. b 30. b Granof_ 8E_TestBank_ch 01 Page 10 PROBLEMS (CHAPTER 1) 1. Thorn County adopted a cash budget for FY2016 as follows. The City budget laws prohibit budgeting or operating at a deficit. During the year the County collected or spent the following amounts. Was the County in compliance with budget laws? Did the County accomplish the goal of interperiod equity ? Explain your answers in detail. Budgeted Collected/Spent Receipts from property tax collections From the 2015 levy $ 100,000 $ -0- From the 2016 levy $1,000,000 $ 900,000 In advance for 2017 $ 50,000 $ -0- Receipts from bonds issued $ 500,000 $ 500,000 Borrowed from bank (due in 5 years) $ -0- $ 75,000 Disbursements Salaries and wages $ 500,000 $ 500,000 Operating expenses $ 200,000 $ 275,000 City Hall annex purchased $ 500,000 $ 500,000 Payments on debt p rincipal $ 150,000 $ 150,000 Payments on interest $ 50,000 $ 50,000 Pension contribution $ 80,000 $ -0- Explanations provided by the City for the differences between budget and actual are as follows. Property tax collections are down because the major industry in the community closed and many citizens are currently unemployed. Operating expenses are up because the only bridge over a river bisecting the City sustained damages by an uninsured motorist and had to be repaired immediately. The repair was not budgeted. Granof_ 8E_TestBank_ch 01 Page 11 2. Save -the-Birds (STB), a not -for-profit entity dedicated to acquiring and preserving habitat for upland birds, prepares financial statements in accordance with generally accepted accounting principles. Currently, standards require that a not -for-profit entity report virtually all contributions as revenue in the year received. During the current year STB received a donation of several hundred acres of prime habi tat for upland birds. STB will require several hundred thousand dollars in additional donations in order to make the land completely suitable for the birds. Before embarking on its fund-raising campaign STB prepares financial statements which are summari zed as follows. Statement of Financial Position (Balance Sheet) Cash $ 8,000 Supplies $ 2,000 Equipment (net of depreciation) $ 5,000 Land $1,000,000 Total Assets $1,015,000 Liabilities $ 1,000 Net Assets —Unrestricted $ 14,000 Net Assets —Restricted $1,000,000 Total Liabilities and Net Assets $1,015,000 Statement of Activities (Income Statement) Revenues $1,030,000 Expenses: Salaries $ 30,000 Change in Net Assets $1,000,000 What difficulties, if any, will STB encounter in its new fund -raising drive? Knowing that the donation of the land accounted for $1,000,000 of the revenue reported by STB, do you think the financial statements present fairly the financial position and res ults of operations of this not -for-profit entity? Granof_ 8E_TestBank_ch 01 Page 12 3. Johnson City prepares its budget on the cash basis and prepares its external financial statements on the accrual basis. From the following data prepare statements of activity (income statements) on both the cash basis and the accrual basis. Which statement best represents the results of operations of the City? Which statement best demonstrates compliance with laws and regulations? Which statement would you rather see? Which conveys the best infor mation to the citizens of Johnson City? The City levies taxes in the current year of $1 million. Of this amount $.9 million is collected during the current year, $.05 will be collected next year, and $.04 will be collected in the future. $.01 will never be collected. During the current year the City pays bills from prior periods $.06 million, bills of the current period $.8 million, and defers payment until future periods on bills that were received for services consumed during the current period $.1 mi llion. Granof_ 8E_TestBank_ch 01 Page 13 4. Certain fiscal practices of governments promote interperiod equity while others do not. For the situations listed below, indicate whether interperiod equity is promoted or undermined. Why? a. Issuing 30 -year serial bonds to finance the construc tion of capital assets with estimated 30 -year lives. b. Paying for the pensions of retired employees out of resources provided by current -period taxpayers. c. Charging the cost of supplies as expenditures in the year in which they were used rather than when they were purchased. d. Issuing 30 -year bonds to finance a portion of the current -period operating costs of a city’s school system e. Charging payments of wages and salaries made in the first week of a new year to the previous fiscal year, the year in which the wages and salaries were earned. Granof_ 8E_TestBank_ch 01 Page 14 ANSWERS TO PROBLEMS (CHAPTER 1) 1. The City adopted a cash budget that projected an operating surplus of $170,000; therefore, it was in compliance with the “budgeting” portion of budget laws. In addition, the City “balanced” its current period operations. Total inflows are $1,475,000 and total outflows are $1,475,000. The City was seriously affected by the closure of the major employer in town. The City compensated for the shortfall in property tax revenues by failing to make the pension contribution in the current period and by borrowing on a long -term note at the bank. Although one expenditure category e xceeded the budgeted amount (operating expense was $75,000 more than budgeted), another was short by $80,000 (pension contributions). The City has probably complied with the budget laws that prohibit operating at a deficit (if deficit is defined as a cash deficit). It has probably not complied with the budget laws if the laws state that current revenues (not including borrowing) must be equal to or exceed current period costs. Interperiod equity is another issue. By failing to make the required pension contribution the City has passed on to future taxpayers costs that were associated with operations of the current period. Also, by borrowing at the bank the City has incurred obligations that must be borne by future taxpayers. 2. Save -the-Birds (STB) will be launching a major fund -raising drive with a financial statement that shows $1,030,000 in donations and only $30,000 in expenses. It may be difficult to explain to potential donors why the entity is conducting a fund -raising drive at the present time. The balance sheet should help STB explain why they need the additional monies. However, many people familiar with financial statements of for -profit entities may have difficulty understanding how an entity can generate a $1,000,000 ‘profit’ and still need to be soliciting funds. The equity section shows Net Assets of $1,000,000. It may be difficult for readers to understand that this is not similar to Retained Earnings in for -profit entities. The distinction between unrestricted and restricted may be mean ingless to the average reader. [ Note: Students may react as readers —why do they need another fund -raising drive now? If so, they have failed to grasp an important issue for many not -for-profit entities.] The financial statements of STB present fairly the financial position and results of operations of the entity. The financial statements do not tell the whole story. It will be necessary for STB to explain why they need the funds.