,Solution manual for Government and Not-for-
Profit Accounting Concepts and Practices, 8th
Edition by Michael H. Granof
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, Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critical distinction between for-profit businesses and not-for-profits including
governments is that businesses have profit as their main motive whereas the others
have service. A primary purpose of financial reporting is to report on an entity’s
accomplishments — how well it achieved its objectives. Accordingly, the financial
statements of businesses measure profitability, their key objective. Financial reports
of governments and other not-for-profits should not focus on profitability, since it is
not a relevant objective. Ideally, therefore, they should focus on other performance
objectives, such as how well the organizations met their service goals. In reality,
however, the goal of reporting on how well they have achieved such goals has
proven difficult to attain and the financial reports have focused mainly on
financially-related data.
2. Governments and not-for-profits are “governed” by the budget, whereas businesses
are governed by the marketplace. The budget is the key political and fiscal
document of governments and not-for-profits. It determines how an entity obtains its
resources and how it allocates them. It encapsulates most key decisions of
consequence made by the organization. In a government the budget is not merely a
managerial document; it is the law.
3. Owing to the significance of the budget, constituents want assurance that the entity
achieves its revenue estimates and complies with its spending mandates. They
expect the financial statements to report on how the budget was administered.
4. Interperiod equity is the concept that taxpayers of today pay for the services that
they receive and not shift the payment burden to taxpayers of the future. Financial
reporting must indicate the extent to which interperiod equity has been achieved.
Therefore, it must determine and report upon the economic costs of the services
performed (not merely the cash costs) and of the taxpayers’ contribution toward
covering those costs.
5. The matching concept may be less relevant for governments and not-for-profits than
for businesses because there may be no connection between revenues generated and
the quantity, quality or cost of services performed. An increase in the demand for, or
cost of, services provided by a homeless shelter would not necessarily result in an
increase in the amount of donations that it receives. Of course, governments and
not-for-profits are concerned with measuring interperiod equity and for that purpose
the matching concept may be very relevant.
1-1
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
6. Governments must maintain an accounting system that assures that restricted
resources are not inadvertently expended for inappropriate purposes. Moreover,
statement users may need separate information on the restricted resources by
category of restriction and the unrestricted resources. In practice, these requirements
have led governments to adopt a system of “fund” accounting and reporting.
7. Even governments within the same category may engage in different types of
activities. For example, some cities operate a school system whereas others do not.
Those that are not within the same category may have relatively little in common.
For example, a state government shares few characteristics with a city.
8. If a government has the power to tax, then it has command over, and access to,
resources. Therefore, its fiscal well-being cannot be assessed merely by measuring
the assets that it “owns.” For example, the fiscal condition of a city should
incorporate the wealth of the residents and businesses within the city, their earning
capacity, and the city’s willingness to exploit its tax base.
9. Many governments budget on a cash or near-cash basis. However, the cash basis of
accounting does not provide adequate information with which to assess interperiod
equity. Financial statements that satisfy the objective of reporting on interperiod
equity may not satisfy that of reporting on budgetary compliance. Moreover,
statements that report on either interperiod equity or budgetary compliance are
unlikely to provide sufficient information with which to assess service efforts and
accomplishments.
10. Measures of service efforts and accomplishments are more significant in
governments and not-for-profits because their objectives are to provide service. By
contrast, the objective of businesses is to earn a profit. Therefore, businesses can
report on their accomplishments by reporting on their profitability. Governments
and not-for-profits must report on other measures of accomplishment.
11. The FASB influences generally accepted accounting principles of governments in
two key ways. First, FASB pronouncements are included in the GASB “hierarchy”
of GAAP. FASB pronouncements that the GASB has specifically made applicable
to governments are included in the highest category; those that the GASB has not
specifically adopted are included in the lowest category. Second, the business-type
activities of governments are required (with a few exceptions) to follow the business
accounting principles as set forth by the FASB.
12. It is more difficult to distinguish between internal and external users in governments
than in businesses because constituents, such as taxpayers, may play significant
roles in establishing policies that are often considered within the realm of managers.
Also, legislators are internal to the extent they set policy, but external insofar as the
executive branch must account to the legislative branch.
1-2
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Exercises
EX 1-1
1. a
2. c
3. c
4. c
5. b
6. c
7. d
8. c
9. b
10. c
EX 1-2
1. b
2. b
3. d
4. b
5. a
6. c
7. a
8. b
9. a
10. b
EX 1-3
a. 1. The Governmental Accounting Standards Board (GASB) is the independent
organization that establishes and improves standards of accounting and financial
reporting for U.S. state and local governments. Established in 1984 by agreement of the
Financial Accounting Foundation (FAF) and 10 national associations of state and local
government officials, the GASB is recognized by governments, the accounting industry,
and the capital markets as the official source of generally accepted accounting principles
(GAAP) for state and local governments.
Accounting and financial reporting standards designed for the government environment
are essential because governments are fundamentally different from for-profit businesses.
Furthermore, the information needs of the users of government financial statements are
different from the needs of the users of private company financial statements. The GASB
members and staff understand the unique characteristics of governments and the
1-3
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
environment in which they operate.
The GASB is not a government entity; instead, it is an operating component of the FAF,
which is a private sector not-for-profit entity. Funding for the GASB comes primarily
from an accounting support fee established under the Dodd-Frank Wall Street Reform
and Consumer Protection Act as well as the sale of certain publications. Its standards are
not federal laws or regulations and the organization does not have enforcement authority.
Compliance with GASB’s standards, however, is enforced through the laws of some
individual states and through the audit process, when auditors render opinions on the
fairness of financial statement presentations in conformity with GAAP.
2. The mission of GASB is:
To establish and improve standards of state and local governmental accounting and
financial reporting that will:
Result in useful information for users of financial reports, and
Guide and educate the public, including issuers, auditors, and users of those
financial reports.
The mission is accomplished through a comprehensive and independent process that
encourages broad participation, objectively considers all stakeholder views, and is subject
to oversight by the Financial Accounting Foundation’s Board of Trustees.
3. Based on GASB’s White Paper, Governmental Accounting and Financial Reporting
is and Should be Different, due to the key environmental differences between
governments and for-profit business enterprises. The differing needs of the users of
governmental and business enterprise financial reports reflect the different environments
in which the organizations operate. Some of the principal environmental differences are:
Organizational Purposes. The purpose of the government is to enhance or maintain the
well-being of citizens by providing public services according to the established goals. A
government’s financial reports should give creditors, legislative and oversight officials,
citizens, and other stakeholders the information necessary to make assessments and
decisions relevant to their interests in the government’s accomplishment of its objectives.
In contrast, business enterprises focus on wealth creation, interacting only with those
segments of society that fulfill their mission of generating a financial return on
investment for shareholders. It's primary focus of reporting has been on earnings and its
components, with little or no explicit focus on nonfinancial measures of performance.
Sources of Revenue. The principal source of revenue for government is taxation, which
is a legally mandated involuntary transaction between individual citizens and businesses
and their government. The principal source of revenue of business enterprises is
voluntary exchange transactions between willing buyers and sellers.
1-4
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Potential for Longevity Because of their ongoing power to tax and because of the
ongoing need for public services, governments rarely liquidate. The possibility of
achieving longevity, however, is not as likely for business enterprises. Business
enterprises will go out of existence if, for an extended period of time, they are unable to
sell their products or services for more than it costs to produce them. Further, a business
may also cease to exist if it is acquired by another entity.
Relationship with Stakeholders. The governments should meet a standard of
accountability, since the citizens are interested in evaluating inter-period equity by
determining whether current taxpayers and users of government services fully financed
the costs of providing current-period services or whether taxes and user fees from prior or
future periods were, or will be, needed to finance the current services provided. For
business, their financial reports show changes in equity of the enterprise during the
current period.
Role of the Budget. For governments, a budget takes on a special legal significance.
Governmental budgets are expressions of public policy priorities and legally authorize
the purposes for which public resources may be spent. In fact, governmental budgets can
be the primary method by which citizens and their elected representatives hold the
government’s management financially accountable. For business enterprises, the budget
represents an internal financial management tool that is controlled entirely by
management and is considered proprietary in nature.
b. 1. The purpose of the Government Finance Officers Association is to enhance and
promote the professional management of governments for the public benefit by
identifying and developing financial policies and best practices and promoting their use
through education, training, facilitation of member networking, and leadership.
The objectives of the GFOA are:
Expert Knowledge. Continue to be recognized as a leading source of expert
knowledge in public financial management by exercising leadership in research,
recommended practice and policy development and information dissemination.
Education and Training. Enhance the expertise and professionalism of financial
managers and policy makers and provide recognition for their achievements.
Leadership Development. Engage in efforts to assist finance officers to develop the
skills and capabilities necessary to enable them to become organizational leaders as
well as technical experts.
Raising Public Awareness of Sound Financial Policy and Practice. Take leadership in
promoting public awareness of policies and practices that enhance sound financial
management of public resources.
Enhanced Cooperation. Cooperate with and complement the services provided by
other organizations (U.S., Canadian and international) to increase the effectiveness of
GFOA.
Strategic Use of Technology. Provide information and analytical tools to help
governments identify and apply appropriate, economical technologies to support
1-5
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
efficient resource allocation, quality services and effective decision-making and to
promote citizen involvement.
Association Operations. Conduct the operations of the Association in a manner that
exemplifies the highest standards of financial management and member service.
2. The GFOA established the Certificate of Achievement for Excellence in Financial
Reporting Program (CAFR Program) in 1945 to encourage and assist state and local
governments to go beyond the minimum requirements of generally accepted accounting
principles to prepare comprehensive annual financial reports that evidence the spirit of
transparency and full disclosure and then to recognize individual governments that
succeed in achieving that goal.
Reports submitted to the CAFR program are reviewed by selected members of the GFOA
professional staff and the GFOA Special Review Committee (SRC), which comprises
individuals with expertise in public-sector financial reporting and includes financial
statement preparers, independent auditors, academics, and other finance professionals.
3 The number of state and local governmental entities that were awarded the CAFR
Certificate for the fiscal year 2016 are:
Certificate of Achievement for Excellence in Financial Reporting 2016 Program
Results:
College/University - 84
Municipality - 2,078
Council of Government - 18
Employee Benefit - 173
County - 547
School District - 554
Enterprise Fund - 511
State - 43
Other 291
Total award recipients 4,299
http://www.gfoa.org/sites/default/files/FY2016CAFRStats.pdf
1-6
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Problems
P. 1-1.
a. The authority’s cash requirements in Year 1 would be as follows (in millions):
Wages, salaries and other operating costs $6.0
Purchase of equipment $10.0
Less: Issuance of bonds 10.0 0.0
Interest on bonds 0.5
Purchase of additional equipment 0.9
Total cash outlays (revenue requirements) $7.4
b. In Year 2, they would be:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Total cash outlays (revenue requirements) $6.5
c. In Year 10, they would be:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Repayment of bonds 10.0
Total cash outlays (revenue requirements) $16.5
d. The budgeting and taxing policies fail to promote interperiod equity. The economic
costs incurred by the authority — the wages, salaries, other operating costs, and
portion of equipment consumed — were the same each year. Yet, tax payments will
depend on when the equipment was purchased and when the debt was repaid.
Taxpayers of Year 10 will have to pay for equipment that provided services to the
taxpayers of the previous nine years.
Interperiod equity could be achieved by budgeting on an accrual rather than a cash
basis. The budget would then include an annual charge of $1.3 million for
depreciation — $1 million on the ten-year equipment; $0.3 million on the three-year
equipment. Annual required revenues would be $7.8 million:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Depreciation on equipment 1.3
Total revenue requirements $7.8
This practice might, however, be objectionable to some taxpayers because it
requires that they contribute cash to the authority in years prior to those in which it
will actually be expended. Thus, for example, at the end of Year 1 the authority will
have a cash “reserve” of $0.4 million — the difference between the $7.8 million in
1-7
, Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
taxes collected and the $7.4 million in cash outlays. The authority could also
achieve interperiod equity by issuing serial bonds (those in which a portion of the
principal matures each year over the life of the issue) or by establishing and
contributing to a debt service “sinking fund.” By taking either of these approaches,
the authority would, in effect, be repaying the bonds over the period in which the
equipment is used and thereby matching equipment costs with equipment benefits.
P. 1-2
1. The information provided should, by itself, pose no obstacle to approving the loan.
For sure, revenues just cover expenditures, allowing for no excess to cover the debt
service on the loan and the additional operating expenditures that will be incurred
when the classroom building is put into use. The key issue facing a loan officer,
however, is whether the church members are both willing and fiscally able to pay
for the new facility and to cover the additional operating costs. The fiscal capacity
of the church cannot be assessed independently of that of its members.
The financial statements reveal that the church’s assets will have a market value of
$7.2 million (new and old facilities plus cash and investments) when the classroom
building is complete. If some or all of these assets are used to secure the loan, then
the bank may have a reasonable cushion against default. However, market values of
churches or other special-purpose facilities are notoriously unreliable. Moreover, for
obvious reasons, banks are reluctant to foreclose on local churches.
2. The loan officer may wish to review the financial statements for “smoking guns”
such as contingent liabilities, litigation, or unusual transactions. However, assuming
that none are found, there is likely to be little in the financial statements to provide
the basis for a loan decision.
3. If the loan officer were to approve the loan, he would likely do so in large measure
because he has had a business relationship with members of the church and has
confidence in their ability to manage the church and assure that the loan is repaid.
Accordingly, he would probably want to review whatever information is available
as to the character and credit worthiness of key church members and officers.
4. As implied in part a, as a matter of policy the church, like many not-for-profit
organizations, generates only enough revenues to meet its expenditures. If the
members opt to enhance the level of services provided by the church by building a
new facility — and thereby increase expenditures — then presumably they will also
increase their dues and contributions.
Financial statements of many not-for-profits are inadequate for making loan
decisions because they report only on the entities themselves. However, the entities’
true fiscal condition cannot be determined apart from that of their constituents.
1-8
Profit Accounting Concepts and Practices, 8th
Edition by Michael H. Granof
Hello all ,
We have all what you need with best price
Our email :
Our website :
testbanks-store.com
, Chapter 1
The Government and Not-For-Profit Environment
Questions for Review and Discussion
1. The critical distinction between for-profit businesses and not-for-profits including
governments is that businesses have profit as their main motive whereas the others
have service. A primary purpose of financial reporting is to report on an entity’s
accomplishments — how well it achieved its objectives. Accordingly, the financial
statements of businesses measure profitability, their key objective. Financial reports
of governments and other not-for-profits should not focus on profitability, since it is
not a relevant objective. Ideally, therefore, they should focus on other performance
objectives, such as how well the organizations met their service goals. In reality,
however, the goal of reporting on how well they have achieved such goals has
proven difficult to attain and the financial reports have focused mainly on
financially-related data.
2. Governments and not-for-profits are “governed” by the budget, whereas businesses
are governed by the marketplace. The budget is the key political and fiscal
document of governments and not-for-profits. It determines how an entity obtains its
resources and how it allocates them. It encapsulates most key decisions of
consequence made by the organization. In a government the budget is not merely a
managerial document; it is the law.
3. Owing to the significance of the budget, constituents want assurance that the entity
achieves its revenue estimates and complies with its spending mandates. They
expect the financial statements to report on how the budget was administered.
4. Interperiod equity is the concept that taxpayers of today pay for the services that
they receive and not shift the payment burden to taxpayers of the future. Financial
reporting must indicate the extent to which interperiod equity has been achieved.
Therefore, it must determine and report upon the economic costs of the services
performed (not merely the cash costs) and of the taxpayers’ contribution toward
covering those costs.
5. The matching concept may be less relevant for governments and not-for-profits than
for businesses because there may be no connection between revenues generated and
the quantity, quality or cost of services performed. An increase in the demand for, or
cost of, services provided by a homeless shelter would not necessarily result in an
increase in the amount of donations that it receives. Of course, governments and
not-for-profits are concerned with measuring interperiod equity and for that purpose
the matching concept may be very relevant.
1-1
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
6. Governments must maintain an accounting system that assures that restricted
resources are not inadvertently expended for inappropriate purposes. Moreover,
statement users may need separate information on the restricted resources by
category of restriction and the unrestricted resources. In practice, these requirements
have led governments to adopt a system of “fund” accounting and reporting.
7. Even governments within the same category may engage in different types of
activities. For example, some cities operate a school system whereas others do not.
Those that are not within the same category may have relatively little in common.
For example, a state government shares few characteristics with a city.
8. If a government has the power to tax, then it has command over, and access to,
resources. Therefore, its fiscal well-being cannot be assessed merely by measuring
the assets that it “owns.” For example, the fiscal condition of a city should
incorporate the wealth of the residents and businesses within the city, their earning
capacity, and the city’s willingness to exploit its tax base.
9. Many governments budget on a cash or near-cash basis. However, the cash basis of
accounting does not provide adequate information with which to assess interperiod
equity. Financial statements that satisfy the objective of reporting on interperiod
equity may not satisfy that of reporting on budgetary compliance. Moreover,
statements that report on either interperiod equity or budgetary compliance are
unlikely to provide sufficient information with which to assess service efforts and
accomplishments.
10. Measures of service efforts and accomplishments are more significant in
governments and not-for-profits because their objectives are to provide service. By
contrast, the objective of businesses is to earn a profit. Therefore, businesses can
report on their accomplishments by reporting on their profitability. Governments
and not-for-profits must report on other measures of accomplishment.
11. The FASB influences generally accepted accounting principles of governments in
two key ways. First, FASB pronouncements are included in the GASB “hierarchy”
of GAAP. FASB pronouncements that the GASB has specifically made applicable
to governments are included in the highest category; those that the GASB has not
specifically adopted are included in the lowest category. Second, the business-type
activities of governments are required (with a few exceptions) to follow the business
accounting principles as set forth by the FASB.
12. It is more difficult to distinguish between internal and external users in governments
than in businesses because constituents, such as taxpayers, may play significant
roles in establishing policies that are often considered within the realm of managers.
Also, legislators are internal to the extent they set policy, but external insofar as the
executive branch must account to the legislative branch.
1-2
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Exercises
EX 1-1
1. a
2. c
3. c
4. c
5. b
6. c
7. d
8. c
9. b
10. c
EX 1-2
1. b
2. b
3. d
4. b
5. a
6. c
7. a
8. b
9. a
10. b
EX 1-3
a. 1. The Governmental Accounting Standards Board (GASB) is the independent
organization that establishes and improves standards of accounting and financial
reporting for U.S. state and local governments. Established in 1984 by agreement of the
Financial Accounting Foundation (FAF) and 10 national associations of state and local
government officials, the GASB is recognized by governments, the accounting industry,
and the capital markets as the official source of generally accepted accounting principles
(GAAP) for state and local governments.
Accounting and financial reporting standards designed for the government environment
are essential because governments are fundamentally different from for-profit businesses.
Furthermore, the information needs of the users of government financial statements are
different from the needs of the users of private company financial statements. The GASB
members and staff understand the unique characteristics of governments and the
1-3
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
environment in which they operate.
The GASB is not a government entity; instead, it is an operating component of the FAF,
which is a private sector not-for-profit entity. Funding for the GASB comes primarily
from an accounting support fee established under the Dodd-Frank Wall Street Reform
and Consumer Protection Act as well as the sale of certain publications. Its standards are
not federal laws or regulations and the organization does not have enforcement authority.
Compliance with GASB’s standards, however, is enforced through the laws of some
individual states and through the audit process, when auditors render opinions on the
fairness of financial statement presentations in conformity with GAAP.
2. The mission of GASB is:
To establish and improve standards of state and local governmental accounting and
financial reporting that will:
Result in useful information for users of financial reports, and
Guide and educate the public, including issuers, auditors, and users of those
financial reports.
The mission is accomplished through a comprehensive and independent process that
encourages broad participation, objectively considers all stakeholder views, and is subject
to oversight by the Financial Accounting Foundation’s Board of Trustees.
3. Based on GASB’s White Paper, Governmental Accounting and Financial Reporting
is and Should be Different, due to the key environmental differences between
governments and for-profit business enterprises. The differing needs of the users of
governmental and business enterprise financial reports reflect the different environments
in which the organizations operate. Some of the principal environmental differences are:
Organizational Purposes. The purpose of the government is to enhance or maintain the
well-being of citizens by providing public services according to the established goals. A
government’s financial reports should give creditors, legislative and oversight officials,
citizens, and other stakeholders the information necessary to make assessments and
decisions relevant to their interests in the government’s accomplishment of its objectives.
In contrast, business enterprises focus on wealth creation, interacting only with those
segments of society that fulfill their mission of generating a financial return on
investment for shareholders. It's primary focus of reporting has been on earnings and its
components, with little or no explicit focus on nonfinancial measures of performance.
Sources of Revenue. The principal source of revenue for government is taxation, which
is a legally mandated involuntary transaction between individual citizens and businesses
and their government. The principal source of revenue of business enterprises is
voluntary exchange transactions between willing buyers and sellers.
1-4
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Potential for Longevity Because of their ongoing power to tax and because of the
ongoing need for public services, governments rarely liquidate. The possibility of
achieving longevity, however, is not as likely for business enterprises. Business
enterprises will go out of existence if, for an extended period of time, they are unable to
sell their products or services for more than it costs to produce them. Further, a business
may also cease to exist if it is acquired by another entity.
Relationship with Stakeholders. The governments should meet a standard of
accountability, since the citizens are interested in evaluating inter-period equity by
determining whether current taxpayers and users of government services fully financed
the costs of providing current-period services or whether taxes and user fees from prior or
future periods were, or will be, needed to finance the current services provided. For
business, their financial reports show changes in equity of the enterprise during the
current period.
Role of the Budget. For governments, a budget takes on a special legal significance.
Governmental budgets are expressions of public policy priorities and legally authorize
the purposes for which public resources may be spent. In fact, governmental budgets can
be the primary method by which citizens and their elected representatives hold the
government’s management financially accountable. For business enterprises, the budget
represents an internal financial management tool that is controlled entirely by
management and is considered proprietary in nature.
b. 1. The purpose of the Government Finance Officers Association is to enhance and
promote the professional management of governments for the public benefit by
identifying and developing financial policies and best practices and promoting their use
through education, training, facilitation of member networking, and leadership.
The objectives of the GFOA are:
Expert Knowledge. Continue to be recognized as a leading source of expert
knowledge in public financial management by exercising leadership in research,
recommended practice and policy development and information dissemination.
Education and Training. Enhance the expertise and professionalism of financial
managers and policy makers and provide recognition for their achievements.
Leadership Development. Engage in efforts to assist finance officers to develop the
skills and capabilities necessary to enable them to become organizational leaders as
well as technical experts.
Raising Public Awareness of Sound Financial Policy and Practice. Take leadership in
promoting public awareness of policies and practices that enhance sound financial
management of public resources.
Enhanced Cooperation. Cooperate with and complement the services provided by
other organizations (U.S., Canadian and international) to increase the effectiveness of
GFOA.
Strategic Use of Technology. Provide information and analytical tools to help
governments identify and apply appropriate, economical technologies to support
1-5
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
efficient resource allocation, quality services and effective decision-making and to
promote citizen involvement.
Association Operations. Conduct the operations of the Association in a manner that
exemplifies the highest standards of financial management and member service.
2. The GFOA established the Certificate of Achievement for Excellence in Financial
Reporting Program (CAFR Program) in 1945 to encourage and assist state and local
governments to go beyond the minimum requirements of generally accepted accounting
principles to prepare comprehensive annual financial reports that evidence the spirit of
transparency and full disclosure and then to recognize individual governments that
succeed in achieving that goal.
Reports submitted to the CAFR program are reviewed by selected members of the GFOA
professional staff and the GFOA Special Review Committee (SRC), which comprises
individuals with expertise in public-sector financial reporting and includes financial
statement preparers, independent auditors, academics, and other finance professionals.
3 The number of state and local governmental entities that were awarded the CAFR
Certificate for the fiscal year 2016 are:
Certificate of Achievement for Excellence in Financial Reporting 2016 Program
Results:
College/University - 84
Municipality - 2,078
Council of Government - 18
Employee Benefit - 173
County - 547
School District - 554
Enterprise Fund - 511
State - 43
Other 291
Total award recipients 4,299
http://www.gfoa.org/sites/default/files/FY2016CAFRStats.pdf
1-6
,Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
Problems
P. 1-1.
a. The authority’s cash requirements in Year 1 would be as follows (in millions):
Wages, salaries and other operating costs $6.0
Purchase of equipment $10.0
Less: Issuance of bonds 10.0 0.0
Interest on bonds 0.5
Purchase of additional equipment 0.9
Total cash outlays (revenue requirements) $7.4
b. In Year 2, they would be:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Total cash outlays (revenue requirements) $6.5
c. In Year 10, they would be:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Repayment of bonds 10.0
Total cash outlays (revenue requirements) $16.5
d. The budgeting and taxing policies fail to promote interperiod equity. The economic
costs incurred by the authority — the wages, salaries, other operating costs, and
portion of equipment consumed — were the same each year. Yet, tax payments will
depend on when the equipment was purchased and when the debt was repaid.
Taxpayers of Year 10 will have to pay for equipment that provided services to the
taxpayers of the previous nine years.
Interperiod equity could be achieved by budgeting on an accrual rather than a cash
basis. The budget would then include an annual charge of $1.3 million for
depreciation — $1 million on the ten-year equipment; $0.3 million on the three-year
equipment. Annual required revenues would be $7.8 million:
Wages, salaries and other operating costs $6.0
Interest on bonds 0.5
Depreciation on equipment 1.3
Total revenue requirements $7.8
This practice might, however, be objectionable to some taxpayers because it
requires that they contribute cash to the authority in years prior to those in which it
will actually be expended. Thus, for example, at the end of Year 1 the authority will
have a cash “reserve” of $0.4 million — the difference between the $7.8 million in
1-7
, Granof, Khumawala, Calabrese & Smith 8e, Government and Not-for-Profit Accounting
taxes collected and the $7.4 million in cash outlays. The authority could also
achieve interperiod equity by issuing serial bonds (those in which a portion of the
principal matures each year over the life of the issue) or by establishing and
contributing to a debt service “sinking fund.” By taking either of these approaches,
the authority would, in effect, be repaying the bonds over the period in which the
equipment is used and thereby matching equipment costs with equipment benefits.
P. 1-2
1. The information provided should, by itself, pose no obstacle to approving the loan.
For sure, revenues just cover expenditures, allowing for no excess to cover the debt
service on the loan and the additional operating expenditures that will be incurred
when the classroom building is put into use. The key issue facing a loan officer,
however, is whether the church members are both willing and fiscally able to pay
for the new facility and to cover the additional operating costs. The fiscal capacity
of the church cannot be assessed independently of that of its members.
The financial statements reveal that the church’s assets will have a market value of
$7.2 million (new and old facilities plus cash and investments) when the classroom
building is complete. If some or all of these assets are used to secure the loan, then
the bank may have a reasonable cushion against default. However, market values of
churches or other special-purpose facilities are notoriously unreliable. Moreover, for
obvious reasons, banks are reluctant to foreclose on local churches.
2. The loan officer may wish to review the financial statements for “smoking guns”
such as contingent liabilities, litigation, or unusual transactions. However, assuming
that none are found, there is likely to be little in the financial statements to provide
the basis for a loan decision.
3. If the loan officer were to approve the loan, he would likely do so in large measure
because he has had a business relationship with members of the church and has
confidence in their ability to manage the church and assure that the loan is repaid.
Accordingly, he would probably want to review whatever information is available
as to the character and credit worthiness of key church members and officers.
4. As implied in part a, as a matter of policy the church, like many not-for-profit
organizations, generates only enough revenues to meet its expenditures. If the
members opt to enhance the level of services provided by the church by building a
new facility — and thereby increase expenditures — then presumably they will also
increase their dues and contributions.
Financial statements of many not-for-profits are inadequate for making loan
decisions because they report only on the entities themselves. However, the entities’
true fiscal condition cannot be determined apart from that of their constituents.
1-8
