ANSWER KEY



ANSWER KEY

Chapter 1

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.

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.

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.

EX 1-2

1. b

2. b

3. d

4. b

5. a

6. c

7. a

8. b

9. a

10. b

Chapter 2

11. CAFR is a government’s Comprehensive Annual Financial Report. Its main components are an introductory section (that includes a letter of transmittal and a GFOA (Government Finance Officers Association) certificate of achievement if received), a financial section (that includes management’s discussion and analysis, the financial statements, notes to the financial statements and required supplementary information) and a statistical section (that includes economic, demographic and financial data).

Chapter 3

1. Capital budgets are closely tied to operating budgets in that governments and other not-for-profits must include current year capital expenditures in their operating budgets. In addition, if they issue debt to finance capital projects, they generally must service it out of operating funds. Further, once they complete the projects, they must maintain and repair them out of operating funds.

2. A flexible budget may be more important to business-type than to government-type activities because business-type activities are driven by the market and can be expected to vary more widely with changes in customer demand. The level of government-type activities, by contrast, is often established by the budget.

3. The main virtue of an object classification budget is that it facilitates control, specifying in detail how every dollar will be spent. However, by focusing on and controlling individual expenditures, it may ignore the relationship between costs and organizational objectives. It may thereby discourage effective planning and evaluation.

Performance budgets require the specification of costs and outcomes and therefore encourage managers to consider the benefits or sacrifices that will result from a change in spending. In short, in performance budgeting the emphasis is on what the entity accomplishes rather than on how it accomplishes it.

6. Allotments are periodic allocations of funds to departments or agencies, usually made by the chief executive, to assure that an entire year’s appropriation is not dissipated early in the period. They provide an added measure of control over expenditures.

8. The variances in budget to actual comparisons may be of no value in revealing the reliability of budget estimates made at the start of the year because they compare the amended budget with actual results. Amendments may be made through the last day of the year and even after year-end. The rationale for this practice is that the comparison is intended to demonstrate legal compliance, not effective management. Governments need only adhere to their budgets as amended, not their initially adopted budgets. However, GASB Statement No. 34 requires that the original budget be presented along with the final budget for reporting purposes.

9. Budgetary entries have no impact on year-end financial statements. They are closed-out at year-end and not reported on either the balance sheet or operating statement. Encumbrances are also closed-out and have no impact on the operating statement. However, the related reserve for encumbrances is a reservation of fund balance and, accordingly, is reported on the balance sheet as part of fund equity.

EX 3-2

1. a

2. a

3. c

4. d

5. d

6. c

7. b

8. c

9. d

10. d

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