Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
Organizations
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INSTRUCTOR’S MANUAL
TO ACCOMPANY
ESSENTIAL OF ACCOUNTING FOR GOVERNMENTAL
AND NOT–FOR-PROFIT ORGANIZATIONS:
TWELFTH EDITION
PREPARED BY:
MARY LORETTA MANKTELOW
MARILLA S. MELCHER
JAMES MADISON UNIVERSITY
Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
Organizations
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CHAPTER 1 Introduction to Accounting and Financial Reporting for Governmental and
Not-for-Profit Organizations
1-1. THE SOLUTION TO THIS AND THE FIRST EXERCISE OF CHAPTERS 2 THROUGH 9 WILL
1-2.
1) ORGANIZATIONAL PURPOSES: WHILE THE PURPOSE OF A COMMERCIAL BUSINESS
2) SOURCES OF REVENUES: GOVERNMENTS DERIVE MANY OF THEIR RESOURCES
FROM TAXES. INDIVIDUALS AND BUSINESSES PAY TAXES TO AVOID PENALTY, NOT
3) POTENTIAL FOR LONGEVITY: BECAUSE THE U.S. AND STATE CONSTITUTIONS
GRANT STATE AND LOCAL GOVERNMENTS THE ABILITY TO TAX, GOVERNMENTS
4) RELATIONSHIP WITH STAKEHOLDERS: TAXES ARE CREATED THROUGH THE
5) ROLE OF THE BUDGET: GOVERNMENT BUDGETS ARE EXPRESSIONS OF PUBLIC
POLICY AND OFTEN CARRY THE AUTHORITY OF LAW, PREVENTING PUBLIC OFFICIALS
1-3. THE THREE STANDARDS SETTING BODIES IN QUESTION ARE THE GOVERNMENTAL
ACCOUNTING STANDARDS BOARD (GASB), THE FEDERAL ACCOUNTING STANDARDS
ACCOUNTING ADVISORY BOARD (FASAB), AND THE FINANCIAL ACCOUNTING
STANDARDS BOARD (FASB). THE GASB SETS ACCOUNTING AND FINANCIAL
Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
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1-4. THE DEFINITION OF A GOVERNMENT, AS AGREED TO BY THE FASB AND THE GASB IS
AS FOLLOWS:
1. POPULAR ELECTION OF OFFICERS OR APPOINTMENT (OR APPROVAL) OF A
2. THE POTENTIAL FOR UNILATERAL DISSOLUTION BY A GOVERNMENT WITH THE
3. THE POWER TO ENACT AND ENFORCE A TAX LEVY.
FURTHERMORE, ORGANIZATIONS ARE PRESUMED TO BE GOVERNMENTAL IF THEY HAVE
1-5. THE “HIERARCHY OF GAAP” REFERS TO THE PREFERENTIAL ORDERING OF SOURCES
THAT DEFINE ACCOUNTING AND REPORTING PRINCIPLES FOR GOVERNMENTAL AND
NONGOVERNMENTAL UNITS. THE HEIRARCH SERVES AS A GUIDE FOR AUDITORS AND
Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
Organizations
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FOR THE FEDERAL GOVERNMENT AND ITS AGENCIES:
A. FASAB STATEMENTS AND INTERPRETATIONS, AND AICPA AND FASB
PRONOUNCEMENTS SPECIFICALLY MADE APPLICABLE TO FEDERAL GOVERNMENTAL
Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
Organizations
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1-6.
A. CONCEPTUALLY, THE MEASUREMENT FOCUS DETERMINES WHAT IS MEASURED; THE
BASIS OF ACCOUNTING DETERMINES WHEN SOMETHING IS MEASURED. THE ECONOMIC
RESOURCES MEASUREMENT FOCUS MEASURES ALL ECONOMIC RESOURCES, INCLUDING
FIXED ASSETS AND LONG–TERM DEBT. THE CURRENT FINANCIAL RESOURCES
MEASUREMENT FOCUS MEASURES PRIMARILY FINANCIAL RESOURCES AND DOES NOT
RECOGNIZED ACCORDING TO THE PROVISIONS OF GASB STATEMENT 33. UNDER
MODIFIED ACCRUAL ACCOUNTING, REVENUE RECOGNITION IS MODIFIED TO REQUIRE
THAT THE AMOUNT BE MEASURABLE (DETERMINABLE) AND AVAILABLE TO FINANCE
EXPENDITURES OF THE CURRENT PERIOD.
C. UNDER ACCRUAL ACCOUNTING, EXPENSES ARE RECOGNIZED WHEN INCURRED.
MEASUREMENT FOCUS AND MODIFIED ACCRUAL ACCOUNTING, FIXED ASSETS ARE NOT
CAPITALIZED OR DEPRECIATED; RATHER FIXED ASSETS ARE CHARGED TO EXPENDITURES
WHEN RECEIVED.
E. UNDER THE ECONOMIC RESOURCES MEASUREMENT FOCUS AND ACCRUAL ACCOUNTING,
LONG–TERM DEBT IS RECORDED AS A LIABILITY; REPAYMENTS ARE RECORDED AS A
Chapter 01 – Introduction to Accounting and Financial Reporting for Governmental and Not-for-Profit
Organizations
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1-7. PUBLIC SECTOR ORGANIZATIONS ARE GOVERNMENTS OR ORGANIZATIONS OWNED OR
1-8. GASB HAS A THREE–PART BUDGETARY PRINCIPLE:
1. AN ANNUAL BUDGET (S) SHOULD BE ADOPTED BY EVERY GOVERNMENTAL UNIT.
2. THE ACCOUNTING SYSTEM SHOULD PROVIDE THE BASIS FOR APPROPRIATE
3. BUDGETARY COMPARISONS SHOULD BE INCLUDED IN THE APPROPRIATE
1-9. ACCORDING TO THE WEB SITE, “THE MISSION OF THE GOVERNMENTAL ACCOUNTING
STANDARDS BOARD IS TO ESTABLISH AND IMPROVE STANDARDS OF STATE AND LOCAL
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Organizations
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1-10. THE APPROPRIATE FUNDS ARE:
a) CAPITAL PROJECTS FUND: THESE FINANCIAL RESOURCES ARE TO BE USED TO
FINANCE CONSTRUCTION OF A CAPITAL ASSET. SINCE THE JAIL IS UNLIKELY TO
CHARGE FOR ITS SERVICES, IT WOULD NOT BE PART OF A PROPRIETARY FUND.
b) SPECIAL REVENUE FUND: SINCE THE TAX REVENUE IS RESTRICTED BY STATE
PRECLUDES THE RESOURCES BEING REPORTED IN A PERMANENT FUND. SINCE
THE RESOURCES ARE RESTRICTED BY THE DONOR, THEY WOULD BE REPORTED IN
A SPECIAL REVENUE FUND.
f) GENERAL FUND: THE RESOURCES ARE NEITHER FIDUCIARY NOR PROPRIETARY.
SINCE THE RESOURCES ARE NOT RESTRICTED OR COMMITTED TO A PARTICULAR