Questions and Exercises

1–2 Identify and describe the five environmental differences between governments and for-profit
business enterprises as identified in the Governmental Accounting Standards Board’s Why
Governmental Accounting and Financial Reporting Is—and Should Be—Different.

As of my last knowledge update in January 2022, I don't have specific information on the Governmental
Accounting Standards Board's document titled "Why Governmental Accounting and Financial Reporting
Is—and Should Be—Different." However, I can provide you with some general observations about the
environmental differences between governments and for-profit business enterprises in the context of
governmental accounting:

1. Purpose and Objectives:

 Governments: Public entities exist to serve the public interest and provide services that
benefit society as a whole. Their primary focus is on delivering services, such as
education, public safety, infrastructure, and social welfare.

 For-Profit Businesses: The primary goal of for-profit businesses is to generate profits for
their owners or shareholders. Their activities are driven by the aim of maximizing
shareholder wealth.

2. Sources of Revenue:

 Governments: Governments rely on a variety of revenue sources, including taxes,

grants, and fees. Taxation is a significant source of funding, and the collection of taxes is
often mandatory.

 For-Profit Businesses: For-profit entities generate revenue through the sale of goods and
services. They are market-driven and depend on consumer demand for their products or
services.

3. Accountability and Stakeholders:

 Governments: Governments are accountable to the public and various stakeholders,

including citizens, taxpayers, and regulatory bodies. Transparency and accountability in
the use of public funds are critical aspects of governmental accounting.

 For-Profit Businesses: For-profit enterprises are primarily accountable to their

shareholders. While accountability to other stakeholders, such as customers and
employees, is also important, the ultimate goal is often financial return for investors.

4. Legal and Regulatory Framework:

  Governments: Public sector accounting operates within a unique legal and regulatory
framework that is specific to governmental entities. This framework includes laws and
regulations that govern financial reporting, budgeting, and the use of public funds.

 For-Profit Businesses: For-profit entities adhere to generally accepted accounting

principles (GAAP) or international financial reporting standards (IFRS), depending on the
jurisdiction. These standards are designed to meet the needs of investors and creditors.

5. Budgeting and Planning:

 Governments: Budgets in the public sector are often subject to political processes, with
input from elected officials and the public. Governmental budgets focus on allocating
resources to provide public services efficiently.

 For-Profit Businesses: Business budgets are typically driven by market demands,

strategic planning, and profit objectives. Profitability and financial performance are key
considerations in business budgeting.

Keep in mind that specific details may vary based on the particular document you are referring to, and
it's always a good idea to consult the original source for the most accurate and up-to-date information.

1–3 Identify and briefly describe the three organizations that set standards for state and local
governments, the federal government, and nongovernmental notfor-profit organizations.

As of my last knowledge update in January 2022, three organizations are prominent in setting standards
for financial reporting and accounting practices in the United States. These organizations play a crucial
role in establishing and maintaining the standards for various entities, including state and local
governments, the federal government, and non-governmental not-for-profit organizations. Here are the
three organizations:

1. Governmental Accounting Standards Board (GASB):

 Focus: GASB is the organization responsible for establishing accounting and financial
reporting standards for state and local governments in the United States.

 Authority: It operates under the Financial Accounting Foundation (FAF) and is

recognized as the official standard-setting body for governmental accounting.

 Role: GASB sets standards to enhance the transparency and accountability of financial
reporting by state and local governments. Its standards are aimed at meeting the unique
needs and characteristics of the public sector.

2. Federal Accounting Standards Advisory Board (FASAB):

  Focus: FASAB is responsible for establishing accounting standards for the federal
government.

 Authority: It operates under a cooperative agreement among three organizations: the

Department of the Treasury, the Government Accountability Office (GAO), and the
Office of Management and Budget (OMB).

 Role: FASAB develops accounting principles and standards to improve federal financial
reporting. Its standards are designed to provide consistent, reliable, and relevant
information to support decision-making and accountability in the federal government.

3. Financial Accounting Standards Board (FASB):

 Focus: FASB is the organization that sets accounting and financial reporting standards
for non-governmental entities, including for-profit businesses and non-governmental
not-for-profit organizations.

 Authority: FASB operates under the Financial Accounting Foundation (FAF) and is
recognized as the authoritative standard-setting body for private-sector accounting in
the United States.

 Role: FASB establishes generally accepted accounting principles (GAAP) for private-
sector entities. Its standards are designed to ensure consistency and comparability in
financial reporting, providing useful information to investors, creditors, and other
stakeholders.

It's important to note that accounting standards are subject to updates and changes, and the roles of
these organizations may evolve over time. For the latest information, it's advisable to check the
respective websites of GASB, FASAB, and FASB or consult the most recent authoritative literature.
1–4 what is the definition of a government as agreed upon by the FASB and GASB?

1–5 describe the “hierarchy of GAAP” for state and local governments, the federal government, and
nongovernmental not-for-profit organizations.

1–6 Accounting and financial reporting for state and local governments use, in different places, either
the economic resources measurement focus and the accrual basis of accounting or the current financial
resources measurement focus and the modified accrual basis of accounting. Discuss the differences in
measurement focus and basis of accounting related to ( a ) the conceptual differences, ( b ) differences
in revenue recognition, ( c ) differences in expense/ expenditure recognition, ( d ) differences in
recognition of fixed assets, and ( e ) differences in the recording of long-term debt.

 The differences in measurement focus and basis of accounting between the economic resources
measurement focus/accrual basis and the current financial resources measurement focus/modified
accrual basis for state and local governments are significant. Here's a breakdown of the distinctions
in conceptual differences, revenue recognition, expense/expenditure recognition, recognition of
fixed assets, and recording of long-term debt:

(a) Conceptual Differences:

1. Economic Resources Measurement Focus/Accrual Basis:
 Focuses on the long-term financial health of the government.
 Recognizes revenues when earned and expenses when incurred, regardless of when
cash is received or paid.
2. Current Financial Resources Measurement Focus/Modified Accrual Basis:
 Emphasizes short-term inflows and outflows of financial resources.
 Recognizes revenues when they become measurable and available and recognizes
expenditures when they result in the use of financial resources.
(b) Differences in Revenue Recognition:
1. Economic Resources Measurement Focus/Accrual Basis:
 Recognizes revenues when they are earned, indicating that the government has fulfilled
its performance obligation.
2. Current Financial Resources Measurement Focus/Modified Accrual Basis:
 Recognizes revenues when they become measurable and available. Availability is often
determined by the timing of cash inflows.
(c) Differences in Expense/Expenditure Recognition:
1. Economic Resources Measurement Focus/Accrual Basis:
 Recognizes expenses when they are incurred, reflecting the economic resources
consumed in providing goods and services.
2. Current Financial Resources Measurement Focus/Modified Accrual Basis:
 Recognizes expenditures when the fund liability is incurred, indicating the consumption
of current financial resources.
(d) Differences in Recognition of Fixed Assets:
1. Economic Resources Measurement Focus/Accrual Basis:
 Recognizes fixed assets as assets on the statement of net position when acquired,
reflecting their economic value.
2. Current Financial Resources Measurement Focus/Modified Accrual Basis:
 Generally does not recognize fixed assets on the balance sheet. Instead, capital outlays
may be reported as expenditures in the governmental funds.
(e) Differences in Recording of Long-Term Debt:
1. Economic Resources Measurement Focus/Accrual Basis:
 Records long-term debt when incurred, reflecting the obligation to repay the borrowed
amount.
2. Current Financial Resources Measurement Focus/Modified Accrual Basis:
 Recognizes long-term debt only when the payment is due and payable, emphasizing the
impact on current financial resources.
In summary, the economic resources measurement focus and accrual basis provide a comprehensive,
long-term perspective on a government's financial position and performance, while the current financial
resources measurement focus and modified accrual basis emphasize short-term liquidity and resource
availability. The choice between these approaches depends on the goals and reporting needs of the
government entity.
1–7 Distinguish between private and public sector organization.

 Private sector organizations and public sector organizations differ in their ownership, objectives,
and sources of funding, governance, and overall purposes. Here are some key distinctions between
the private and public sector:

1. Ownership:
 Private Sector: Owned and operated by private individuals, partnerships, or corporations. The
goal is often profit maximization for owners or shareholders.
 Public Sector: Owned by the government or public authorities. Operates for the benefit of the
public and typically focuses on providing public services.
2. Objectives:
 Private Sector: Primarily driven by profit motives. The goal is to generate revenue, maximize
shareholder wealth, and remain competitive in the market.
 Public Sector: Focuses on providing public goods and services. Objectives include serving the
public interest, ensuring social welfare, and promoting the common good.
3. Sources of Funding:
 Private Sector: Relies on private investment, loans, and revenue generated from the sale of
goods or services.
 Public Sector: Funded through taxes, government appropriations, grants, and other public
revenues. The emphasis is on collective financing to meet public needs.
4. Governance:
 Private Sector: Governed by a board of directors or owners who make decisions to maximize
profits and ensure the success of the organization.
 Public Sector: Governed by elected officials, public administrators, and government agencies.
Decision-making is often subject to democratic processes and public accountability.
5. Accountability:
 Private Sector: Accountable primarily to shareholders and customers. Accountability is
measured through financial performance and market competitiveness.
 Public Sector: Accountable to the public, taxpayers, and elected officials. Transparency,
efficiency, and effective use of public resources are key accountability measures.
6. Flexibility and Efficiency:
 Private Sector: Generally characterized by a higher degree of flexibility and efficiency due to
market competition and profit incentives.
 Public Sector: May face bureaucratic processes and regulations, which can impact efficiency.
However, public organizations often prioritize equitable access to services over profit motives.
7. Risk-Taking:
 Private Sector: Encourages risk-taking to achieve higher returns. Success or failure is often
linked to market dynamics.
 Public Sector: Balances risk-taking with the need for stability and the responsible use of public
resources. Decisions consider the potential impact on citizens and the community.
8. Long-Term Focus:
 Private Sector: Focuses on both short-term and long-term goals to ensure sustained profitability
and growth.
 Public Sector: Tends to have a long-term focus on addressing societal needs, infrastructure
development, and public welfare.
Understanding these differences is essential for policymakers, business leaders, and the general public
as it influences the expectations, governance structures, and overall functioning of organizations in the
private and public sectors.
1–10 for each of the items below, identify which fund would be used to account for the item and
provide a justification for your answer.

a. A city government issued general obligation bonds to finance the construction of a new jail.
b. A state government collected a tax of $1.00 per pack of cigarettes which is (by law) required to be
used to fund health and fitness programs in public schools.
c. A county government expended $1 million to expand the water treatment plant.
d. A donor provided investments totaling $4 million to create an endowment, the earnings of which
will be used to provide scholarships.
e. A donor provided $50,000 to be used to purchase newspaper and magazine subscriptions for the
public library. There is no requirement that the original principal may not be spent.
f. A city government sold surplus street maintenance trucks for $10,000.

In governmental accounting, various funds are established to account for different types of transactions
and activities. The appropriate fund for each item can be determined based on the nature of the
transaction. Here's the identification and justification for each scenario:
a. City Government Issued General Obligation Bonds:
 Fund: Capital Projects Fund
 Justification: The construction of a new jail is a capital project, and general obligation bonds are
typically used to finance capital projects. The Capital Projects Fund is specifically designed to
account for the financial resources used for the acquisition or construction of major capital
facilities.
b. State Government Collected Tax for Health and Fitness Programs:
 Fund: Special Revenue Fund
 Justification: The tax collected for health and fitness programs is designated for a specific
purpose. Special Revenue Funds are used to account for the proceeds of specific revenue
sources that are legally restricted or committed to expenditure for specified purposes.
c. County Government Expanded Water Treatment Plant:
 Fund: Enterprise Fund
 Justification: The expansion of the water treatment plant involves providing goods and services
to external users (water customers) on a user-charge basis. Enterprise Funds are used for
operations that are financed and operated in a manner similar to private business enterprises.
d. Donor Provided Investments for Endowment:
 Fund: Permanent Fund (Endowment Fund)
 Justification: The donor's intent is to create an endowment, and the earnings will be used to
provide scholarships. Permanent Funds are used to account for resources that are legally
restricted to the extent that only earnings, and not principal, may be used for purposes that
support the government's programs.
e. Donor Provided Funds for Library Subscriptions:
 Fund: General Fund
 Justification: The donation is for a specific purpose (purchase of subscriptions), but there is no
requirement that the original principal may not be spent. Since there are no restrictions on
spending the principal, the funds are accounted for in the General Fund.
f. City Government Sold Surplus Street Maintenance Trucks:
 Fund: General Fund
 Justification: The sale of surplus assets is considered a general operating activity, and the
proceeds would typically go into the General Fund. This fund is used for general operations and
activities not covered by other funds.
With regard to the Comprehensive Annual Financial Report (CAFR):
a. What are the three major sections?
 b. List the government-wide statements. Indicate the measurement focus and basis of accounting
used for the government-wide statements.
c. List the governmental fund statements. Indicate the measurement focus and basis of accounting
used for the governmental fund statements.
d. List the proprietary fund statements. Indicate the measurement focus and basis of accounting
used for the proprietary fund statements.
e. List the fiduciary fund statements. Describe the measurement focus and basis of accounting
used for the fiduciary fund statements.
f. Outline the reports and schedules to be reported as required supplementary information.
ChatGPT
a. Three Major Sections of the CAFR:
1. Introductory Section:
 Includes a letter of transmittal, an organizational chart, and a list of principal officials.
2. Financial Section:
 Divided into two main parts: Government-Wide Financial Statements and Fund Financial
Statements.
3. Statistical Section:
 Contains additional financial and non-financial information in a multi-year format.
b. Government-Wide Statements:
1. Statement of Net Position:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis
2. Statement of Activities:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis
c. Governmental Fund Statements:
1. Balance Sheet:
 Measurement Focus: Current Financial Resources
 Basis of Accounting: Modified Accrual Basis
2. Statement of Revenues, Expenditures, and Changes in Fund Balances:
 Measurement Focus: Current Financial Resources
 Basis of Accounting: Modified Accrual Basis
d. Proprietary Fund Statements:
1. Statement of Net Position:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis
2. Statement of Revenues, Expenses, and Changes in Fund Net Position:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis
e. Fiduciary Fund Statements:
1. Statement of Fiduciary Net Position:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis
2. Statement of Changes in Fiduciary Net Position:
 Measurement Focus: Economic Resources
 Basis of Accounting: Accrual Basis