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Government and Not-for-Profit Accounting: Concepts and Practices, 8th Edition

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Government and Not-for-Profit Accounting: Concepts and Practices, 8th Edition

Michael H. Granof, Saleha B. Khumawala, Thad D. Calabrese, Daniel L. Smith

ISBN: 978-1-119-49581-9 December 2018 816 Pages

Description

Government and Not-for-Profit Accounting highlights the dynamic nature and constant evolution of the field and the intellectual challenges it presents.  Designed to assist both preparers and potential users of financial reports, this book emphasizes concepts over rules and regulations to help students think critically and consider the effectiveness of alternate methodologies. Real-world examples demonstrate the similarities and differences between the public and private sectors—and how each might approach the same issue—and complete coverage of relevant reporting standards and practices aligns with the latest GASB, FASB, and AICPA changes. 

A central goal of this text is to make students aware of the reasons behind the guidelines and standards, and consider their strengths, limitations, applications, and alternatives. Much more than simply an invaluable preparation resource for the CPA and CGFM exams, this book lays the intellectual foundation that allows the students of today to become the leaders of tomorrow: the members of the standard‐setting boards, partners of CPA firms, government and not‐for‐profit executives, legislative and governing board members, and more.

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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 The 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 Atheletic 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? 47

What Are the Main Types of a Government’s Funds? 54

What’s Notable about Each Type of Governmental Fund? 57

What’s Notable about Each Type of Proprietary Fund? 60

What’s Notable about Each Type of Fiduciary Fund? 66

What is Included in a Government’s Comprehensive Annual Financial Report (CAFR)? 67

Example: Government‐Wide Statement of Activities 70

How Do the Funds and Annual Reports of Not‐For‐Profits Differ from Those of Governments? 71

Summary 74

Key Terms in This Chapter 76

Exercise for Review and Self-Study 76

Questions for Review and Discussion 77

Exercises 78

Continuing Problem 82

Problems 83

Questions for Research, Analysis, and Discussion 91

Solution to Exercise for Review and Self-Study 91

3 Issues of Budgeting and Control 95

What Are the Key Purposes of Budgets? 96

Why Is More Than One Type of Budget Necessary? 96

How Are Expenditures and Revenues Classified? 98

Why Are Performance Budgets Necessary? 99

What Are the Key Phases for the Budget Cycle? 101

In Practice: Budgeting and Legislative Constraints 105

On What Basis of Accounting Are Budgets Prepared? 106

In Practice: States Balance Their Budgets the Painless Way 107

In Practice: The Cost of GAAP 108

In Practice: Balancing the Budget by Selling Assets to Yourself 109

What Cautions Must Be Taken in Budget‐to‐Actual Comparisons? 109

How Does Budgeting in Not‐For‐Profit Organizations Compare with That in Governments? 112

How do Budgets Enhance Control? 113

What are the Distinctive Ways Governments Record their Budgets? 114

Example: Budgetary Entries 115

An Alternative Method: Crediting or Debiting the Difference between Revenues and Expenditures to“Budgetary Control” 117

How Does Encumbrance Accounting Prevent Overspending? 118

Example: The Encumbrance Cycle—Year 1 118

Example: The Encumbrance Cycle—Year 2 120

Example: Impact of Encumbrances on Fund Balance 121

Are Budgetary and Encumbrance Entries Really Needed? 123

Summary 124

Key Terms in This Chapter 124

Exercise for Review and Self‐Study 124

Questions for Review and Discussion 125

Exercises 126

Continuing Problem 132

Problems 132

Questions for Research, Analysis, and Discussion 142

Solution to Exercise for Review and Self‐Study 143

4 Recognizing Revenues in Governmental Funds 145

Why and How Do Governments Use the Modified Accrual Basis? 146

What Are the Main Types of Nonexchange Revenues and the Limitations on How and When They Can Be Used? 149

How Should Property Taxes and Other Imposed Nonexchange Revenues Be Accounted For? 150

In Practice: Natural Disasters Raise New Problems for Accountants and Auditors 150

Example: Property Taxes 151

Example: Fines 155

How Should Sales Taxes and Other Derived Tax Revenues Be Accounted For? 156

Example: Sales Taxes 157

Example: Sales Taxes Collected by State 158

Example: Income Taxes 159

What are Tax Abatements and Why and How Must They Be Disclosed? 161

How Should Grants and Similar Government-Mandated and Voluntary Nonexchange Revenues Be Accounted For? 162

Example: Unrestricted Grant with Time Requirement 163

Example: Grant with Purpose Restriction 163

Example: Reimbursement (Eligibility Requirement) Grant 163

Example: Unrestricted Grant with Contingency Eligibility Requirement 164

Example: Endowment Gift 164

Example: Pledges 164

Example: Payments in Lieu of Taxes 165

Example: Donations of Land for Differing Purposes 165

Example: On-Behalf Payments 168

How Should Sales of Capital Assets Be Accounted For? 168

Example: Sales of Capital Assets 169

How Should Licenses, Permits, and Other Exchange Transactions Be Accounted For? 170

Example: License Fees 170

How Should Governments Report Revenues in Their Government-Wide Statements? 171

Summary 171

Key Terms in This Chapter 173

Exercise for Review and Self-Study 173

Questions for Review and Discussion 173

Exercises 174

Continuing Problem 180

Problems 180

Questions for Research, Analysis, and Discussion 188

Solution to Exercise for Review and Self‐Study 189

5 Recognizing Expenditures in Governmental Funds 191

How Is The Accrual Concept Modified for Expenditures? 192

In Practice: Tax Expenditures That Are Actually Reductions in Revenue 193

Example: Wages and Salaries 194

How Should Compensated Absences Be Accounted For? 195

In Practice: Changing the Pay Date by One Day 195

Example: Vacation Leave 195

Example: Sick Leave 197

Example: Sabbatical Leave 198

How Should Pensions and Other Postemployment Benefits Be Accounted for? 199

Example: Pension Expenditure 199

How Should Claims and Judgments Be Accounted For? 200

Example: Claims and Judgments 200

How Should the Acquisition and Use of Materials and Supplies Be Accounted For? 202

Example: Supplies 202

How Should Prepayments Be Accounted For? 205

Example: Prepayments 205

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? 208

Example: Long‐term Debt 209

In Practice: California School children May Pay for Their Own Education 210

How Should Nonexchange Expenditures be Accounted for? 211

Example: Unrestricted Grant with Time Requirement 212

Example: Grant with Purpose Restriction 212

Example: Reimbursement (Eligibility Requirement) Grant 212

How Should Interfund Transactions Be Accounted For? 213

Example: Interfund Transfer 214

Example: Interfund Purchase/Sale 214

What Constitutes other Financing Sources and Uses? 215

How Should Revenues, Expenditures, and Other Financing Sources and Uses be Reported? 216

What Is the Significance of the Current Financial Governmental Fund Statements? An Overview 217

Summary 217

Key Terms in This Chapter 218

Exercise for Review and Self-Study 219

Questions for Review and Discussion 219

Exercises 220

Continuing Problem 226

Problems 227

Questions for Research, Analysis, and Discussion 235

Solution to Exercise for Review and Self-Study 235

6 Accounting for Capital Projects and Debt Service 239

How do Governments Account for Capital Projects Funds? 240

Example: Bond Issue Costs 242

Example: Bond Premiums and Discounts 242

Comprehensive Example: Main Types of Transactions Accounted for in Capital Projects Funds 243

How do Governments Account for Resources Dedicated to Debt Service? 246

Comprehensive Example: Main Types of Transactions Accounted for in Debt Service Funds 248

How do Governments Handle Special Assessments? 251

In Practice: Use and Abuse of Special Assessments 252

Accounting for Special Assessments in Proprietary Funds 254

In Practice: What We Might Learn From “Net Investment in Capital Assets” 256

How Can Governments Benefit from Debt Refundings? 257

Example: Debt Refundings 257

In Practice: Current and Advance Refundings 258

Example: In‐Substance Defeasance 259

Summary 261

Key Terms in This Chapter 262

Exercise for Review and Self‐Study 262

Questions for Review and Discussion 263

Exercises 264

Continuing Problem 269

Problems 270

Questions for Research, Analysis, and Discussion 280

Solution to Exercise for Review and Self‐Study 280

7 Capital Assets and Investments in Marketable Securities 284

What Accounting Practices Do Governments Follow for General Capital Assets? 285

Example: Trade-Ins 288

Why and How Should Governments Report Infrastructure? 289

In Practice: Nation’s Infrastructure Earns a Cumulative Grade of D+ 290

In Practice: Fair Values May (Or May Not) Facilitate Sales Decisions 295

How Should Governments Account for Assets That Are Impaired? 296

Example: Restoration Approach 296

Example: Service Units approach 297

Example: Deflated Depreciated Replacement Cost Approach 298

What Issues Are the Critical Issues With Respect to Marketable Securities and Other Investments? 298

Example: Investment Income 301

In Practice: Some Governments May Make Suboptimal Investment Decisions in Order to Avoid Financial Statement Volatility 303

Example: Interest Income 303

In Practice: One Common-Type Derivative 305

In Practice: Investment Debacles 305

In Practice: Common sense Investment Practices 307

Summary 307

Key Terms in this Chapter 308

Exercise for Review and Self-Study 308

Questions for Review and Discussion 309

Exercises 309

Continuing Problem 313

Problems 314

Questions for Research, Analysis, and Discussion 323

Solution to Exercise for Review and Self-Study 323

8 Long-Term Obligations 325

Why is Information on Long-Term Debt Important to Statement Users? 326

Can Governments and Not-For-Profits Go Bankrupt? 326

In Practice: It is Not So Easy to Declare Municipal Bankruptcy 327

How Do Governments Account for Long-Term Obligations? 328

Example: Accounting for Bonds in Government-Wide Statements 330

In Practice: Valuing a Lottery Prize 331

What Constitutes a Government’s Long-Term Debt? 331

Example: Demand Bonds 333

Example: Bond Anticipation Notes 334

Example: Tax Anticipation Notes 334

Example: Lessee Accounting 336

Example: Lessor Accounting 337

Example: Overlapping Debt 342

In Practice: 49Ers Score Big in the Financial Arena 344

In Practice: Tobacco Bonds are Both Risky and Inconsistent with Government Policies 345

What Other Information Do Users Want to Know About Outstanding Debt? 346

Example: Debt Margin 347

What are Bond Ratings, and why are They Important? 349

Summary 350

Key Terms in this Chapter 350

Exercise for Review and Self-Study 351

Questions for Review and Discussion 351

Exercises 352

Continuing Problem 358

Problems 358

Questions for Research, Analysis, and Discussion 366

Solution to Exercise for Review and Self-Study 366

9 Business-Type Activities 368

What Types of Funds Involve Business-Type Activities? 369

Why Do Governments and Not-For-Profits Engage in Business-Type Activities? 369

Should Business-Type Activities be accounted for differently than Governmental Activities? 370

What are the Three Basic Statements of Proprietary Fund Accounting? 372

What Accounting Issues are Unique to Enterprise Funds of Governments? 376

Example: Revenue Bond Proceeds as Restricted Assets 380

Example: Landfill Costs in an Enterprise Fund 382

Example: Pollution Remediation Costs in an Enterprise Fund 385

What are Internal Service Funds, and how are they accounted for? 386

Example: Internal Service Fund Accounting 390

In Practice: Full-Cost Pricing May Encourage Dysfunctional Decisions 391

Example: Insurance Premiums 394

Example: Self-Insurance in a General Fund 395

How are Proprietary Funds Reported? 396

Example: Eliminating Interfund Balances and Transactions 397

In Practice: Want to Own a Bridge? 399

Summary 401

Key Terms in this Chapter 402

Exercise for Review and Self-Study 403

Questions for Review and Discussion 403

Exercises 406

Continuing Problem 411

Problems 411

Questions for Research, Analysis, and Discussion 421

Solution to Exercise for Review and Self-Study 421

10 Pensions and Other Fiduciary Activities 423

Why is Pension accounting so important? 423

In Practice: Funded Status of State Defined Benefit Plans—Ten Best and Ten Worst 425

How do Defined Contribution Plans Differ from Defined Benefit Plans? 425

In Practice: Defined Benefit Plans are More Efficient than Defined Contribution Plans 426

In Practice: Can Defined Benefit Plans be saved? 427

What are the Distinctions among Single, Agent Multiple-Employer, and Cost-Sharing Plans? 428

What is the Relationship between an Employer and its Pension Plan? 428

What is the Underlying Rationale for the Gasb Approach? 429

How Should the Employer Measure its Pension Obligation? 429

How Should the Pension Expense in Full Accrual Statements be Determined? 431

Example: The Pension Expense 433

How Should the Pension Expenditure in Governmental Funds be Determined? 436

What Special Problems do Multiple-Employer Cost-Sharing Plans Pose? 436

How Should the Pension Plan be accounted for? 437

What Types of Disclosures are required? 439

How Should Postemployment

Benefits other than Pensions (Opeb) be accounted for? 440

What are Fiduciary Funds? 441

In Practice: Difficulty of Determining Whether an Activity is Fiduciary or Governmental 445

Should Investment Income of a Permanent Fund be reported in the Permanent Fund Itself or the Beneficiary Fund 448

Example: Expendable Investment Income 449

Summary 449

Key Terms in this Chapter 450

Exercise for Review and Self-Study 450

Questions for Review and Discussion 452

Exercises 452

Continuing Problem 456

Problems 456

Questions for Research, Analysis, and Discussion 463

Solution to Exercise for Review and Self-Study 463

11 Issues of Reporting, Disclosure, and Financial Analysis 465

How Can a Government Prepare Government‐Wide Statements from Fund Statements? 465

Why is the Reporting Entity an Issue for Governments? 467

Example: The Reporting Entity 467

What Criteria Have Been Established for Government Reporting Entities? 468

Example: Financially Accountable Component Units 469

Example: Fiscal Dependency 470

Example: Blended Component Units 471

Example: A Closely Affiliated Organization 474

Example: Application of Current Standards 475

What Other Elements Make Up the Comprehensive Annual Financial Report? 477

What Are the Reporting Requirements for Special‐Purpose Governments? 481

How Can A Government’s Fiscal Condition be Assessed? 483

In Practice: Balanced Budget Requirements Don’t Always Result in Balanced Budgets 492

Drawing Conclusions 501

Summary 501

Key Terms in This Chapter 502

Exercise for Review and Self‐Study 502

Questions for Review and Discussion 503

Exercises 504

Continuing Problem 509

Problems 510

Questions for Research, Analysis, and Discussion 516

Solution to Exercise for Review and Self-Study 516

12 Not-for-Profit Organizations 519

Who’s In Charge? 519

What Should be the Form and Content of Financial Statements? 520

What is an Endowment? 523

Example: Reporting Revenues and Expenses 527

What Are the Main Types of Contributions, and How Should Pledges be accounted for? 532

In Practice: Even the Very Wealthy Sometimes Renege on their Contributions 536

Example: Pledges 536

When Should Use-Restricted (Purpose-Restricted) Contributions Be Recognized? 538

Example: Use-Restricted Contributions 539

In Practice: A Gift with Strings Attached 540

Should Contributions of Services be recognized? 540

Example: Service Contributions 540

Should Receipts of Collection Items Be Recognized As Revenues? 541

In Practice: Examples of Contributed Services 541

When Should Conditional Promises be recognized? 542

In Practice: When a Contribution is Not a Contribution 542

Example: Conditional Promises 543

How Should “Pass-Through” Contributions be Accounted for? 543

Example: A Federated Fund-Raising Organization 543

Example: A Foundation That Transfers Assets to a Specified Organization 544

Example: A Foundation That Supports a Related Organization 544

When Should Gains and Losses on Investments be recognized? 545

Example: Investment Gains 546

Should Endowment Gains be Considered Net Additions to Principal or Expendable Income? 546

Example: Investment Gains 547

What are Split Interest Agressements, and How Should They be Accounted for? 548

How Should Depreciation be Reported? 549

Example: Depreciation 549

What Issues Does a Not-For-Profit Face in Establishing its Reporting Entity? 550

Comprehensive Example: Museum of American Culture 551

How Should the Costs of Fund-Raising Activities be Determined? 558

Criteria for Allocating a Portion of Costs to Program or Management Functions 558

Example: Allocating Charitable Costs 559

How Can a Not-For-Profit’s Fiscal Condition be Assessed? 561

In Practice: Not-For Profits, Like Corporations, Tainted by Scandals 563

Summary 564

Key Terms in this Chapter 565

Exercise for Review and Self-Study 565

Questions for Review and Discussion 568

Exercises 569

Problems 575

Solution to Exercise for Review and Self-Study 580

13 Colleges and Universities 581

What Unique Issues do Colleges and Universities Face? 581

Accounting for Revenues and Expenses 591

In Practice: Which Set of Standards Do We Follow? 592

In Practice: From Public to Private 593

In Practice: How Should a University Classify a Gift that May Not Be a Gift? 593

Example: Tuition and Fee Revenues 594

Other Issues 595

Example: Grants 596

Example: Student Loans 597

In Practice: How Auxiliary Enterprises Can Be Misused 598

Comprehensive Example: Mars University 599

Evaluating the Fiscal Wherewithal of Colleges and Universities 603

Summary 605

Key Terms in this Chapter 605

Exercise for Review and Self-Study 605

Questions for Review and Discussion 608

Exercises 608

Problems 612

Solution to Exercise for Review and Self-Study 618

14 Health Care Providers 620

In Practice: Hospitals Face Economic Challenges While Also Implementing Policy Changes 621

What Unique Issues do Health Care Providers Face? 622

What are the Key Differences Between Private Not-For-Profit and Government Health-Care Providers? 623

What Are The Basic Financial Statements? 623

How Are Key Revenues and Expenses Recognized? 628

Example: Patient Care Revenues 628

Example: Capitation Fee Revenues 630

Example: Charity Care 631

Example: Malpractice Claims 632

Example: Retrospective Premiums 632

Comprehensive Example: Medical Center Hospital 633

How can the Fiscal Wherewithal of Health-Care Organizations be Evaluated? 638

In Practice: Financial Problems Not Caused By Single Issue 640

Summary 641

Key Terms in this Chapter 642

Exercise for Review and Self-Study 642

Questions for Review and Discussion 642

Exercises 643

Problems 649

Solution to Exercise for Review and Self-Study 655

15 Auditing Governments and Not‐for‐Profit Organizations 656

How do Audits of Governments and Not‐For‐Profits Differ from Those of Businesses? 657

How has the Yellow Book Influenced Governmental and Not‐For‐Profit Auditing? 657

What Types Of Audits Do Governments Conduct? 658

What Levels of Standards are Applicable to all Engagements? 659

In Practice: To Whom Should a City Auditor Report? 660

In Practice: Targeting Seemingly Trivial Activities 666

Example: Evidence Gathering 669

In Practice: Findings Must Relate to Program Objectives 670

How Have the Single‐Audit Act and other Pronouncements Influenced Auditing? 670

What Approach do Auditors Take in Performing Single Audits? 672

What Reports Result from Single Audits? 675

Example: Ethical Dilemma 679

Summary 680

Key Terms in this Chapter 681

Exercise for Review and Self‐Study 681

Questions for Review and Discussion 682

Exercises 683

Problems 685

Cases in Ethics 690

Solution to Exercise for Review and Self-Study 692

16 Federal Government Accounting 694

Which Agencies Are Responsible For Federal Accounting And Reporting? 697

What Constitutes The Federal Budget? 699

What Constitutes the Federal Government Reporting Entity? 701

What are the Form and Content of Government‐Wide Federal Statements? 702

What Types of Accounts are Maintained by Federal Entities? 712

What Statements are Required of Federal Agencies? 712

Example: Subsidized loan 730

Example: loan Guarantees 731

What Else Constitutes the Federal Government’s Reporting System 732

What are the key International Trends in Governmental Accounting? 733

Summary 735

Key Terms in this Chapter 736

Exercise For Review And Self‐Study 736

Questions for Review and Discussion 737

Exercises 738

Problems 742

Solution to Exercise for Review and Self-Study 749

Glossary 750

Value Tables 770

Index 779

 

  • Complete, accurate, and up-to-date coverage of all authoritative pronouncements issued by the Governmental Accounting Standards Board (GASB)
  • Revised to reflect the latest applicable Financial Accounting Standards Board (FASB) updates
  • Fully aligned with current AICPA Audit and Accounting Guide, as well as Office of Management and Budget (OMB) and Government Accountability Office (GAO) publications
  • Expanded discussion highlights potentially significant changes to guidelines and standards not yet officially issued
  • Updated problems, exercises and question throughout
  • Provides insight on real-world methods through challenging practice sets that require students to justify their approach and consider alternatives
  • Features an overarching Continuing Problem that requires students to review comprehensive financial reports and answer questions as they pertain to state and local accounting principles
  • Builds critical thinking skills by asking students to analyze and interpret financial statements of actual not-for-profit and government entities
  • Provides comprehensive coverage and relevant exercises, practice questions, and reviews to help students prepare for the CPA exam and the Certified Government Financial Manager (CGFM) exam