Government accounting

Chapter 10

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 10 Analysis of Government Financial Performance 1) An effective system for evaluating financial performance helps management to assess whether financial performance can meet creditor and service obligations. Answer: TRUE Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 2) A tax watchdog group is an example of an intermediary that represents citizen interests. Answer: TRUE Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 3) The key cause of municipal financial crises is the failure of management to raise taxes quickly enough in response to adverse environmental factors. Answer: FALSE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 4) Internal managers and credit analysts evaluate financial condition of a government in the same way. Answer: FALSE Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 5) The financial condition of a government is easily determined by calculating a set of financial ratios. Answer: FALSE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 6) The term financial position is closely related to the term liquidity. Answer: TRUE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 7) Failure to achieve interperiod equity may negatively impact a government's financial condition. Answer: TRUE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 8) Management practices and legislative policies are very relevant in the evaluation of a government's financial performance. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 9) Environmental factors facing a government have little impact on a city's fiscal policy. Answer: FALSE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 10) Budget solvency is the government's ability to provide services at the level and quality that are required for the health, safety, and welfare of its citizens. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 11) Cash solvency is the government's long-run ability to pay all the costs of doing business. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 12) Political culture, one of the environmental factors affecting financial condition, includes such factors as form of government and the entity's economic, political, and social history. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 13) Fiscal capacity is the government's ongoing ability and willingness to supply the capital and human resources needed to meet its commitments to provide services. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 14) Service-level solvency is the government's ability to meet its current budget by expending no more resources than were appropriated. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 15) Population demographics have an impact on financial factors such as revenue per capita. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 16) A large intergovernmental revenues ratio can be viewed as a positive sign concerning a government's financial condition. Answer: FALSE Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 17) One measure of interperiod equity is whether net revenues are exceeding a government's total expenses. Answer: TRUE Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 18) To provide a meaningful interpretation of a financial ratio a benchmark is needed. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 19) Use of trend data is an acceptable method of benchmarking for governments. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 20) A revenues to expenditures ratio of over 0.90 is considered acceptable. Answer: FALSE Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 21) Electronic Municipal Market Access (EMMA) is a source of all state and local government comprehensive annual financial reports (CAFRs). Answer: FALSE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 22) Electronic Municipal Market Access (EMMA) is an electronic database of government financial reports provided by the Securities and Exchange Commission. Answer: FALSE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 23) FitchRatings, Thomson Municipal Market, Standard & Poor's, and Kroll Bond Rating Agency are the four major agencies that provide credit ratings for state and local government debt. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 24) Factors common to the bond rating agencies' risk assessment are the economy and a government's debts. Answer: TRUE Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 25) Which of the following is not a typical reason for evaluating a government's financial condition? A) Help identify and prevent financial crises from developing. B) Hold management accountable for complying with laws and regulations. C) Determine if the government can continue to offer the needed level of services. D) Determine whether residents will receive dividends. Answer: D Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 26) Which of the following terms is defined as determining whether current-year revenues are sufficient to pay for current-year services and whether future taxpayers will be required to assume the burdens of services previously provided? A) Financial position. B) Interperiod equity. C) Financial condition. D) Economic condition. Answer: B Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 27) The term that is closely related to the concept of liquidity is: A) Financial condition. B) Interperiod equity. C) Financial position. D) Economic condition. Answer: C Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 28) According to the GASB, which of the following financial concepts can be defined as the probability that a government will meet its financial obligations, both currently and in the future? A) Financial condition. B) Financial position. C) Financial leverage. D) Liquidity. Answer: A Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 29) Which of the following trends is most likely to be a signal of impending fiscal stress? A) An increasing ratio of own source revenues to total revenues. B) A decreasing ratio of total revenues to total expenditures. C) A decreasing ratio of debt service expenditures to operating revenues. D) A decreasing ratio of operating expenditures to total revenues. Answer: B Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 30) Which of the following ratios would be most helpful in assessing the operating position of a government entity? A) Net tax-supported long-term debt/population. B) Own source revenues/total revenues. C) Debt service expenditures/total expenditures. D) General Fund balance/General Fund operating revenues. Answer: D Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 31) All of the following are appropriate benchmarks for a state or local government to use as a basis for comparing performance except: A) A government's own operating results and financial position from prior years. B) International City/County Management Association's Financial Trend Monitoring System results for governments of similar types and size. C) Federal agencies' financial information for a comparable time period. D) Socioeconomic and demographic trends of governments of similar types and size available from U.S. Census Bureau. Answer: C Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 32) After financial ratios are calculated, the results should be compared to any of the following except: A) The same indicator from prior years. B) Budgeted information for the government for the upcoming year. C) Comparable government ratios calculated from the Government Finance Officers Association's Financial Indicators Database. D) Credit analyst measures or other red flag indicators. Answer: B Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 33) Which of the following ratios would be considered favorable if it was low? A) Total revenues to population. B) Debt service to total revenues. C) Capital outlay from operating funds to operating expenditures. D) Cash and short-term investments to current liabilities. Answer: B Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 34) A recognizable signal of fiscal stress is: A) Total revenues from own sources increasing as a percent of total revenues for all sources. B) Increasing population. C) Declining property values. D) A decreasing ratio of total operating expenditures to population. Answer: C Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 35) Which of the following is a measure of the extent to which the government's business-type activities are self-supporting? A) Unrestricted net position/total revenues. B) Business-type activities revenues/business-type activities expenses. C) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by total beginning net position. D) Total revenues/total expenses. Answer: B Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 36) A measure of whether the government lived within its means in the measurement year, or was required to use prior year resources to fund a portion of current year costs, or shifted the funding of some current year costs to future periods, is: A) Business-type activities revenues/business-type activities expenses. B) Unrestricted net position/total revenues. C) Net revenues/total expenses. D) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by beginning net position. Answer: C Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 37) A measure of the adequacy of the amount of the government's total unrestricted net position or deficit at the measurement date is: A) Unrestricted net position/total revenues. B) Business-type activities revenues/business-type activities expenses. C) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by beginning net position. D) Net revenues/total expenses. Answer: A Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 38) Which of the following is one of the most important reasons for evaluating a government's financial performance? A) Determine if property taxes and other revenue sources should be increased. B) Assign responsibility for success or failure of the government to certain parties. C) Determine whether the government is accomplishing its mission. D) Have an early warning of impending financial difficulty for a diverse set of decision makers. Answer: D Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 39) Which of the following terms best describes a government's ongoing ability and willingness to meet its financial obligations and service commitments as they become due? A) Financial condition. B) Fiscal capacity. C) Economic condition. D) Financial position. Answer: C Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 40) Political culture, such as attitudes towards taxes, is an example in the ICMA's Financial Trend Monitoring Systems of: A) Environmental factors. B) Organizational factors. C) Financial factors. D) Management practices and legislative policies. Answer: A Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 41) Which of the following statements about credit analysts' models is true? A) Credit analysts focus primarily on demographic statistics and management's long-term investment strategies. B) Credit analysts have access to the same set of information that internal managers use. C) Credit analysts are concerned with assessing a government's ability to pay interest and principal on debt when due. D) Credit analysts rarely use comprehensive annual financial reports. Answer: C Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 42) For which of the following is a low or decreasing value of the item associated with a stronger financial condition of a government entity? A) Unfunded pension liability. B) Property values. C) Home ownership. D) Employment rate. Answer: A Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 43) Which ratio or concept describes the extent to which the government has lived within its means for the year? A) Debt to assets. B) Interperiod equity. C) Current ratio. D) Revenue dispersion. Answer: B Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 44) Which of the following financial capability indicators is a measure of a government's capacity to issue bonded debt? A) Revenue dispersion. B) Property taxes per capita. C) Bonded debt per capita. D) Available legal debt limit. Answer: D Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 45) Which of the following governments would have publicly accessible information available through the Electronic Municipal Market Access (EMMA)? A) A city that had issued revenue bonds. B) A county that has entered into a capital lease. C) All state and local governments over 25,000 in population. D) Those state and local governments who have issued debt subject to Securities and Exchange Commission (SEC) oversight. Answer: A Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 46) An investor could find all but one of the following pieces of information through the Electronic Municipal Market Access (EMMA). Which of the following is not available on EMMA? A) Credit rating for the debt issuance. B) Comprehensive Annual Financial Report. C) Interest rate and size of the debt issuance. D) Credit report on the government issuing the debt. Answer: D Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 47) Three major rating agencies (Fitch, Moody's, and Standard and Poor's) for governments have each developed quantitative tools for assessing credit risk. Which of the following general factors is used by all three rating agencies in assessing credit risk? A) Economy. B) Budgetary flexibility. C) Revenue dispersion. D) Geographic location. Answer: A Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 48) Identify the following factors that affect financial condition as environmental factors (E) or financial factors (F). Factor E or F 1. Community needs and resources ________ 2. Disaster risk ________ 3. Revenues ________ 4. Intergovernmental constraints ________ 5. External economic conditions ________ 6. Expenditures ________ 7. Debt structure ________ 8. Political culture ________ 9. Unfunded liabilities ________ 10. Condition of capital plant ________ 11. Operating position ________ Answer: 1. E, 2. E, 3. F, 4. E, 5. E, 6. F, 7. F, 8. E, 9. F, 10. F, 11. F Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 49) For each of the following financial ratios that are based on comprehensive annual financial report (CAFR) information by selecting the appropriate letter of the explanation for that ratio. Answers can only be used once. A. An indicator of interperiod equity. B. An indicator of the government's commitment to replacement of capital assets. C. An indicator of the government's reliance on revenues it does not directly control. D. A measure of the degree to which government assets have been funded with debt. E. An indicator of the government's ability to pay its 60- to 90-day obligations. F. A measure of the government's capacity to issue debt. G. A measure of capital asset useful service life. H. A measure of the government's liquidity. I. An indicator of taxpayer debt burden. J. An indicator of the government's ability to withstand financial emergencies. ________ 1. General fund balances/General Fund operating revenues ________ 2. (Cash + short-term investments)/Current liabilities ________ 3. General obligation long-term debt/Assessed valuation ________ 4. Capital outlay from operating funds/Operating expenditures ________ 5. General bonded debt/Legal debt limit ________ 6. Accumulated depreciation/Average cost of depreciable assets ________ 7. Net revenues/Total expenses ________ 8. Charges for services/Total revenues ________ 9. Total liabilities/Total assets ________ 10. Current assets/Current liabilities Answer: 1. J, 2. E, 3. I, 4. B, 5. F, 6. G, 7. A, 8. C, 9. D, 10. H Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 50) Select the key term that relate to analysis of government financial performance from the list that best matches with the following definition. A. Benchmarking B. Budgetary solvency C. Cash solvency D. Economic condition E. Financial condition F. Financial position G. Fiscal capacity H. Long-run solvency I. Service capacity J. Service-level solvency ________ 1. The probability that a government will meet its financial obligations as they become due and its service obligations to constituencies ________ 2. A composite of a government's financial health and its ability and willingness to meet its financial obligations and its commitments to provide services ________ 3. The method of identifying a number that represents a target to which actual results are compared, or a basis for comparison ________ 4. The government's ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they become due ________ 5. The adequacy of cash and short-term claims to cash to meet current obligations and those expected in the near future ________ 6. A government's ability to provide services at the level and quality that citizens desire ________ 7. A government's ability to generate enough cash over a 30- or 60-day period to pay its bills Answer: 1. E, 2. D, 3. A, 4. G, 5. F, 6. J, 7. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 51) Explain the importance of evaluating government financial performance. Answer: It is important for taxpayers, creditors, managers, legislative and oversight bodies, and others to evaluate government financial performance to detect early warning signs of impending financial difficulty. Disastrous financial crises may be able to be avoided, or at least minimized, if concerned stakeholders alert management and governing bodies to potential problems. Another reason to monitor the performance of government managers is to ensure that future generations will not have to bear the financial burden for economic decisions made by this generation. Further, monitoring government financial performance provides useful information when evaluating operating performance; that is, whether scarce resources are used efficiently and effectively to accomplish the shared goals of the government and its citizens. Difficulty: 2 Medium Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry 52) Distinguish and describe key financial performance concepts, such as financial position, financial condition, and economic condition. Answer: Financial position represents a focus on assets and liabilities that require cash or are normally converted to cash in the near future and can generally be determined from the financial statements alone. When compared with financial condition (which is more closely connected to solvency), financial position tends to be a shorter-run concept aligned with liquidity. Financial condition is the probability that a government will meet both its financial obligations and its service obligations to various stakeholders (e.g., creditors, consumers, employees, taxpayers, suppliers, constituents) as they become due and its current and future service obligations to constituents. More specifically, financial condition refers to the government's ability to maintain existing service levels, withstand economic disruptions, and meet the demands of growth, decline, and change. Economic condition is a composite of a government's financial health and its ability and willingness to meet its financial obligations and its commitments to provide services. The GASB identifies three components of economic condition: financial position, fiscal capacity, and service capacity. Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 53) Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Answer: Environmental factors (e.g., community needs, economic conditions, intergovernmental constraints, natural disasters, and political cultures) largely determine revenue capacity and demand for services. Organizational factors include management practices and legislative policies, including fiscal policies. Financial factors (e.g., revenues, expenditures, debt, and condition of the plant) impact how fiscal policy (i.e., organizational factors) within the government responds to environmental demand and changes in the environment. Illustration 10-1 in the text displays the relationship among these three factor groupings. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 54) Describe how financial performance is related to the operating performance of a government entity. Answer: Good financial performance, measured by financial condition and financial position, appears to be a necessary condition to efficient and effective operations of the government. However, these components of economic condition do not ensure that a government is operating efficiently and effectively. Achieving efficient and effective use of productive resources requires innovative budgeting and management techniques. Measuring operating performance is better done through assessment of efforts and accomplishments and outcomes, rather than the ratio analyses described in Chapter 10. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 55) Discuss how despite significant improvements in the quality of government financial reporting over the years there are still serious, high profile public sector financial crises. How does the quality of financial reporting affect the ability to evaluate financial condition? Answer: Government financial reporting has improved considerably so that today, compliance with generally accepted accounting principles is the norm, not the exception. However, governments face complex political and social demands for public services and constraints on funding those services. High quality financial reporting certainly helps to evaluate the financial condition of a government; however, it is very difficult to predict the effects of unemployment trends, investment performance, natural disasters, and other nation-wide problems that affect state and local governments. Government financial managers, particularly through the efforts of the Government Finance Officers Association, have contributed greatly to improving the quality of financial reporting over the years along with the Governmental Accounting Standards Board. More reliable and relevant information (i.e., higher quality) is available in assessing government financial health; however, this analysis is not easy to do in an increasingly complex, national and global economic environment. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 56) How do the objectives of evaluating financial condition differ between internal managers and credit analysts? How are their objectives similar? Answer: Internal managers are primarily concerned with ensuring that the government has the capacity to sustain services to the community, whereas bond investors and creditors are mainly interested in assessing the ability of the government to make its principal and interest payments on debt when due. Managers and investors and creditors have similar interests in the sense that investors and creditors also are interested in the government's ability to sustain service. History has shown that in times of severe fiscal stress vital services usually take priority over debt service payments. Difficulty: 2 Medium Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry 57) "Financial statements are virtually useless in evaluating a city's financial condition." Do you agree with this statement? Why or why not? Answer: Disagree. While it is true that much useful information is provided in a comprehensive annual financial report outside the financial statements, such as the introductory section and the statistical section, the financial statements and the notes to the financial statements, which are an integral part of the statements, are essential to calculating the ratios (see, for example, Illustrations 10-3, 10-4 and 10-6) that indicate the financial health of a government. Government-wide accrual basis financial statements can provide useful information about the entity as a whole and the cost of government services and the burden placed on taxpayers to finance those services. Difficulty: 3 Hard Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Evaluate AACSB: Communication AICPA: BB Industry 58) How do credit analysts assist decision makers in evaluating the credit worthiness of a state or local government? Answer: Credit analysts, such as those with Moody's, Standard and Poor's, FitchRatings, and Kroll Bond Rating Agency, analyze external financial statements of a government along with other available economic and demographic information, make initial assessments, compare municipalities, and then assign a bond rating to each bond a government issues. Investors considering the purchase or sale of municipal bonds use this rating to compare the risk associated with each bond relative to other municipal bonds. Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Communication AICPA: BB Industry 59) "Benchmarking is a simple method for comparing one government to another." Do you agree or disagree with this statement? Explain. Answer: Disagree. Benchmarking is not simple, but worth the effort as it provides valuable information in assessing the strength of one government compared to other governments. Benchmarking is a method of identifying a number that represents a target to which actual results are compared, or a basis for comparison; for example, industry averages. Difficulty: 3 Hard Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Evaluate AACSB: Communication AICPA: BB Industry 60) Describe some ratios that can be calculated using the basic financial statements that will help a decision maker assess the financial position of the government. Answer: Five ratios are described in Illustration 10-4 to assess financial position: (1) unrestricted net position, (2) capital asset condition, (3) debt to assets, (4) current ratio, and (5) quick ratio. These ratios focus on the ability of the government, in the short-term, to meet its current obligations. Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry

Chapter 11

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 11 Auditing of Government and Not-for-Profit Organizations 1) When financial statements are accompanied by the report of an independent auditor, users have the assurance that the statements have been prepared in conformity with accounting and financial reporting standards established by authoritative bodies, and that all material facts have been disclosed. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Some of the auditing issues faced by auditors of government and not-for-profit entities are unique to the public sector. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) The U.S. Office of Management and Budget issues generally accepted auditing standards which provide general guidelines for government audits and address the minimum responsibilities of the auditor. Answer: FALSE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4) Auditing standards issued by the U.S. General Accountability Office include specific reference to ethical requirements relating to an audit of financial statements, however, auditing standards issued by the Auditing Standards Board do not address ethics. Answer: FALSE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Governments may engage one auditor to audit the primary government and other auditors to audit certain component units. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) Generally accepted government auditing standards (GAGAS) apply to financial audits of state and local governments only if they expend $750,000 or more in federal financial assistance. Answer: FALSE Difficulty: 1 Easy Topic: Governmental auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) To help identify threats to independence, generally accepted government auditing standards establish a conceptual framework that requires auditors to identify, evaluate, and apply safeguards to appropriately address threats to independence. Answer: TRUE Difficulty: 1 Easy Topic: Governmental auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Performance audits are independent assessments of performance against objective criteria. Answer: TRUE Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Only state and local governments and their component units must have single audits; colleges and universities and other not-for-profit organizations that expend federal financial awards are not required to have single audits. Answer: FALSE Difficulty: 1 Easy Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) In evaluating an entity's system of internal controls, a material weakness is a deficiency in the design or operation of internal controls such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. Answer: TRUE Difficulty: 1 Easy Topic: Reporting audit findings Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) In auditing compliance with laws and regulations as part of a single audit, the auditor must render an opinion on the specific requirements applicable to each program for which the entity receives federal financial assistance. Answer: FALSE Difficulty: 1 Easy Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) The introductory paragraph of the auditor's report should identify the financial statements being audited and, in particular, refer to the audit of the financial statements of each opinion unit. Answer: TRUE Difficulty: 1 Easy Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) Required supplementary information (RSI), such as the MD&A and budgetary comparison schedules, are within the scope of a financial statement audit. Answer: FALSE Difficulty: 1 Easy Topic: Required supplementary and other information Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Under generally accepted government auditing standards, safeguards are controls designed to reduce or eliminate threats to independence. Answer: TRUE Difficulty: 1 Easy Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) The section headed "Auditor's Responsibility" in the audit report will specify whether the audit is conducted under generally accepted auditing standards or generally accepted government auditing standards. Answer: TRUE Difficulty: 1 Easy Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) If the auditor determines that the financial statements contain a departure from GAAP, the effect of which is material, the auditor should express an unqualified opinion. Answer: FALSE Difficulty: 1 Easy Topic: Types of opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) The AICPA's Audit and Accounting Guide, State and Local Governments, requires auditors to make separate materiality determinations for each opinion unit. Answer: TRUE Difficulty: 1 Easy Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Generally accepted government auditing standards (GAGAS) require that auditors conducting a GAGAS audit complete at least 80 hours of continuing professional education (CPE) that directly contributes to the auditor's professional proficiency to perform such audit work. Answer: TRUE Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Guidelines for grant accounting and reporting are contained within the State and Local Government Audit and Accounting Guide, issued by the AICPA. Answer: FALSE Difficulty: 1 Easy Topic: Special topics Learning Objective: 11-04 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Generally accepted government auditing standards require the auditor to report on internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements. Answer: TRUE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) Audits of state and local governments may be performed by all of the following except: A) Independent CPAs. B) State audit agencies. C) Federal grantor agencies. D) The Office of Management and Budget (OMB). Answer: D Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) Governments and not-for-profit entities may be subject to each of the following levels of audit except: A) Requirements under AICPA generally accepted auditing standards. B) Requirements under GAO generally accepted government auditing standards. C) Requirements under OMB compliance standards. D) Requirements under the Single Audit Act. Answer: C Difficulty: 2 Medium Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) Which of the following is a true statement about the relationship between generally accepted government auditing standards (GAGAS) and generally accepted auditing standards (GAAS)? A) GAGAS and GAAS provide standards for financial audits, attestation engagements, and performance audits. B) GAGAS encompass GAAS and supplement certain GAAS. C) GAAS encompass GAGAS and supplement certain GAGAS. D) GAGAS are promulgated by the Government Accountability Office and GAAS are promulgated by the Governmental Accounting Standards Board. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) The goal(s) of a performance audit include(s) assessment of: A) Program effectiveness. B) Economy. C) Internal control compliance. D) All of these choices are correct. Answer: D Difficulty: 2 Medium Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) Auditing procedures deemed particularly applicable to audits of state and local governments by independent CPAs are published in: A) The GASB codification. B) AICPA audit and accounting guides. C) GASB implementation guides. D) All of these choices are correct. Answer: B Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) In audits of state and local government units which of the following sections may not be required in the auditor's report for every audit? A) Auditor's Opinion section. B) Other Matters section. C) Other Information section. D) Auditor's Responsibility section. Answer: C Difficulty: 2 Medium Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) Generally accepted government auditing standards (GAGAS) apply to all of the following audits except: A) Financial statement audits of federal organizations. B) Financial audits of not-for-profit organizations not receiving or expending federal financial awards. C) Financial audits of governments receiving and expending federal grants. D) Performance audits of federal programs. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) The single audit requirement applies to: A) All audits of state and local government reporting entities. B) Financial audits of all not-for-profit entities. C) Most audits of state and local governments expending federal grant funds. D) Only those governments and not-for-profit entities that are audited by a federal audit agency. Answer: C Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) One of the primary purposes of the Single Audit Act of 1984 (amended in 1996) is to: A) Detect fraud, waste and abuse in government entities. B) Promote the efficient and effective use of audit resources. C) Make audit activity legal at the federal level. D) Allow federal auditors greater access to government entities receiving federal funds. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 30) Which of the following statements concerning the Single Audit Act of 1984 (with 1996 amendments) is correct? A) Only those entities receiving over $750,000 a year in federal financial assistance are required to have a single audit. B) Those entities expending under $750,000 a year in federal awards may be exempt from single audit requirements. C) The Single Audit Act only applies if an entity has high risk programs. D) The single audit is optional for all entities receiving federal awards. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 31) Threats to independence include all of the following except: A) Bias threat. B) Familiarity threat. C) Undue influence threat. D) Management representation threat. Answer: D Difficulty: 2 Medium Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Typical objectives of a performance audit include: A) Determining whether financial statements fairly present the entity's operational results. B) Judging the appropriateness of an entity's program goals. C) Determining whether financial statements fairly present in conformity with GAAP. D) Assessing effectiveness and results, economy and efficiency, and internal controls. Answer: D Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) The purpose of an attestation engagement may include all of the following, except: A) Expressing an opinion on whether the subject matter examined is in conformity with recognized criteria. B) Expressing a conclusion about whether any information came to the attention of the auditor indicating that the subject matter reviewed conflicts with recognized criteria. C) Providing an agreed-upon procedure report on an assertion about a subject matter. D) Providing a due diligence report on compliance with laws and regulations. Answer: D Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) In which section of the standard audit report does the auditor inform financial statement users that certain information, such as combining statements or budgetary comparison schedules may not have been subject to the comprehensive audit procedures? A) Auditor's Opinion section. B) Other Matters section. C) Other Information section D) Auditor's Responsibility section. Answer: C Difficulty: 2 Medium Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 35) Generally accepted government auditing standards (GAGAS): A) Establish the same scope as GAAS, but use wording appropriate to government entities instead of business organizations. B) Are set forth in the Federal Government Compliance Supplement. C) Establish more standards that are broader in scope than those found in GAAS. D) Establish standard wording of auditor's reports on government financial statements. Answer: C Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) An unmodified audit opinion rendered on a government unit's basic financial statements means those statements: A) Have been certified as free from error. B) Did not require modifications by the auditor. C) Present the entity's financial position fairly in conformity with GAAP. D) All of these choices are correct. Answer: C Difficulty: 1 Easy Topic: Types of opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 37) Under the existing GAAP hierarchy for state and local government financial reporting, the GASB Implementation guides are: A) More authoritative than GASB Statements. B) Equally authoritative to GASB Technical Bulletins. C) More authoritative than the AICPA state and local government audit guide. D) Less authoritative than AICPA Practice Bulletins. Answer: B Difficulty: 2 Medium Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) An auditor would not render an opinion on a(an): A) Financial audit of financial statements. B) Performance audit. C) Audit to determine whether the entity has adhered to specific compliance requirements applicable to a major program. D) Audit to determine whether a government department's financial information complies with specific state regulatory requirements. Answer: B Difficulty: 2 Medium Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 39) A single audit conducted pursuant to the Single Audit Act Amendments of 1996 requires which of the following types of audits? A) Financial Audit: Yes; Performance Audit: No B) Financial Audit: No; Performance Audit: No C) Financial Audit: No; Performance Audit: Yes D) Financial Audit: Yes; Performance Audit: Yes Answer: A Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 40) All of the following reports are included in the reporting package resulting from the single audit except: A) Financial statements and schedule of expenditures of federal awards. B) Summary schedule of prior audit findings. C) Report on efficiency and effectiveness. D) Corrective action plan. Answer: C Difficulty: 2 Medium Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following is not a required component of the audit report for a single audit? A) A report on internal control over financial reporting and compliance with federal statutes, regulations, and the terms and conditions of the federal award. B) An opinion on the completeness of the schedule of expenditures. C) A report on compliance for each major program and on internal control over compliance. D) A schedule of findings and questioned costs. Answer: B Difficulty: 1 Easy Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 42) Which of the following best describes the relationship between generally accepted auditing standards (GAAS) and generally accepted government auditing standards (GAGAS)? A) GAAS apply to independent CPA auditors; GAGAS apply to government auditors. B) Audits conducted in conformity with GAGAS also require the auditor to conform to GAAS. C) Audits done in accordance with GAAS must also be done in accordance with GAGAS. D) Audits of state and local governments always require that the audit be conducted in accordance with both GAAS and GAGAS. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 43) A common reason why a government might receive a "modified opinion" from the external auditors is: A) A violation of generally accepted accounting principles was noted that does not cause material misstatement of the financial statements. B) A fund balance deficit in the General Fund. C) Poor internal controls such that the accounting records could not be audited. D) Expenditures exceeded appropriations in the General Fund. Answer: C Difficulty: 2 Medium Topic: Types of audit opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) Which of the following would not be considered Category (b) GAAP for state and local government auditees? A) AICPA Practice Bulletins if specifically made applicable to state and local governments by the AICPA and cleared by the GASB. B) GASB Technical Bulletins. C) GASB Statements. D) GASB Implementation Guides. Answer: C Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) Which of the following is the highest in the hierarchy of generally accepted accounting principles for federal government entities? A) AICPA Audit and Accounting Guide B) FASB emerging issues task force reports. C) GASB statements. D) FASAB statements. Answer: D Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 46) Which of the following is not considered an opinion unit requiring a materiality determination associated with a financial statement audit of a state or local government? A) Aggregate discretely presented component units. B) Investment trust fund financial statements. C) Each major governmental fund. D) Business-type activities. Answer: B Difficulty: 2 Medium Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 47) When compared to generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS) include additional General Standard requirements for financial audits related to all of the following except: A) Independence. B) Quality control and assurance. C) Audit opinions. D) Competence. Answer: C Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 48) The fundamental ethical principles identified under generally accepted government auditing standards (GAGAS) include all of the following except: A) Public interest. B) Proper use of government information, resources, and position. C) Oath of office. D) Professional behavior. Answer: C Difficulty: 2 Medium Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) An auditor performing nonaudit work for a client may be in danger of violating the independence rules in Government Auditing Standards when he or she provides: A) Valuation services. B) Advice on establishing or improving internal controls. C) Benchmarking information to the client. D) The client with answers to technical questions. Answer: A Difficulty: 1 Easy Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 50) Under a single audit: A) An annual audit must be performed encompassing the nonfederal entity's financial statements and schedule of expenditures of federal awards. B) The audit must be conducted by an independent auditor in accordance with generally accepted government auditing standards (GAGAS) and cover the operations of the entire nonfederal entity. C) For each major program, the auditor must obtain an understanding of the internal controls pertaining to the compliance requirements for the program, assess control risk, and perform tests of controls, unless the controls are deemed to be ineffective. D) All of the given statements regarding a single audit are true. Answer: D Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 51) Under a single audit, low-risk Type A programs are identified as those: A) Audited in at least one of the three most recent audit periods as a major program. B) With no significant changes in personnel or systems that would have significantly increased risk. C) Considered low-risk by a cognizant agency. D) All of these choices are correct. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) When conducting a single audit: A) All federal grant programs must be audited. B) All major programs must be audited. C) At a minimum, all Type A major programs not identified as low-risk and certain high-risk Type B programs must be considered for audit. D) All programs not identified as low-risk must be audited. Answer: C Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 53) Which of the following statements regarding audit findings is true? A) A significant deficiency is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. B) A material weakness is a deficiency in internal control important enough to merit attention by those charged with governance. C) A deficiency exists when the design or operation of a control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis. D) All of the given statements are true. Answer: C Difficulty: 2 Medium Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 54) Cognizant agencies: A) Are responsible for conducting government single audits. B) Are assigned to each nonfederal agency expending more than $50 million of federal funds per year. C) Are also referred to as oversight agencies. D) Are responsible for issuing Government Auditing Standards. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 55) Select the key term that relate to auditing of government and not-for-profit organizations from the list that best matches with the following definition. A. Attestation engagement B. Generally accepted auditing standards (GAAS) C. Opinion units D. Materiality E. Financial audit F. Generally accepted government auditing standards (GAGAS) G. Performance audits ________ 1. A process that culminates in an opinion that financial statements present fairly an entity's financial position and results of operations in conformity with GAAP ________ 2. An auditor's judgment as to the level at which the quantitative or qualitative effects of misstatements will have a significant impact on user's evaluations ________ 3. Standards prescribed by the AICPA to provide guidance for planning, conducting, and reporting on audits by CPAs ________ 4. Professional services related to internal control, compliance, MD&A presentation, allowability and reasonableness of proposed contract amounts, final contract costs, and reliability of performance measures ________ 5. Units of the government on which the auditor expresses an opinion (e.g., governmental activities, each major governmental fund, etc.) Answer: 1. E, 2. D, 3. B, 4. A 5. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Government auditing topics Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process.; 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits.; 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 56) Select the key term that relate to single audits from the list that best matches with the following definition. A. Risk-based approach B. Single audit C. Questioned cost D. Material weakness E. Oversight agency F. Major programs G. Cognizant agency H. Significant deficiency ________ 1. The federal agency that makes the predominant amount of direct funding to the nonfederal entity receiving less than $50 million in federal awards ________ 2. A deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis ________ 3. An audit prescribed by federal law for state and local governments and not-for-profit organizations that expend more than $750,000 in a fiscal year ________ 4. Used by auditors to determine which programs will be audited as part of the single audit ________ 5. A monetary item identified by an auditor in an audit finding that generally relates to noncompliance with a law, regulation, or agreement, where the costs are either not supported by adequate documentation or appear unreasonable Answer: 1. E, 2. D, 3. B, 4. A, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 57) Each of the following activities could be performed by an independent auditor. Select whether generally accepted government auditing standards deem each activity Acceptable (A), Prohibited (P), or Require conceptual framework assessment (R) in regarding to independence. ________ 1. Reporting to those charged with governance on behalf of management. ________ 2. Providing valuation services. ________ 3. Researching and responding to the audited entity's technical questions on relevant tax laws as an ancillary part of providing tax services. ________ 4. Preparing accounting records and financial statements. ________ 5. Providing internal control monitoring and assessments. ________ 6. Having custody of an audited entity's assets. ________ 7. Setting policies and strategic direction for the audited entity. ________ 8. Educating the audited entity on matters within the technical expertise of the auditors. Answer: 1. P, 2. R, 3. A, 4. R, 5. R, 6. P, 7. P, 8. A Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 58) Audit objectives set forth by the United States Comptroller General in Government Auditing Standards (GAS or GAGAS) differ from the AICPA view (GAAS) as discussed in Chapter 11. What are some of the differences? Answer: With the release of AICPA's clarified standards and a recent revision to GAGAS, a number of the redundancies and differences between the sets of auditing standards have been eliminated. There are still differences in general standards, performance standards, and reporting standards whereby GAGAS exceeds GAAS. The differences are outlined in Illustration 11-5 and include additional guidance or requirements on independence, professional judgment, competence, quality control and assurance, audit communications, audit documentation, audit planning, report submission, and references to GAGAS in the audit report. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) What are the major types of audits and audit engagements described in the Government Accountability Office's Government Auditing Standards or generally accepted government auditing standards (GAGAS), and how do they differ? Answer: Government Auditing Standards, also referred to as generally accepted government auditing standards (GAGAS), define three major types of services performed by auditors: financial statement audits, attestation engagements, and performance audits. Financial audits provide an auditor's opinion that financial statements present fairly an entity's financial position, changes in financial position, and, where applicable, cash flows in conformity with generally accepted accounting principles, and informs users that they can rely on that information. Attestation engagements are examinations or reviews on subject matter that provide various levels of assurance on financial or nonfinancial matters depending upon the user's needs. Performance audits provide an auditor's independent assessment (but not an opinion) of the extent to which government officials are efficiently, economically, and effectively carrying out their responsibilities. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 60) "An unmodified opinion on the financial statements of a local government means the entirety of the comprehensive annual financial report (CAFR) has been audited and conforms with GAAP." Do you agree or disagree? Why? Answer: Disagree. The standard auditor's report expresses an opinion on the basic financial statements, but not on all statements, schedules, tables, and narrative in the comprehensive annual financial report. In some instances, by prearrangement the audit work is extended and the auditor expresses an opinion on combining and other supplementary information, as well as the basic financial statements. Difficulty: 2 Medium Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) When conducting a government financial statement audit, how does the auditor determine the appropriate auditing standards for the engagement? Answer: Government audits are conducted under AICPA generally accepted auditing standards (GAAS) or GAO's generally accepted government auditing standards (GAGAS). The appropriate set of standards should be established during the contracting period and specified in the audit engagement letter. While a single audit or audits of federal funds must be conducted using GAGAS, a financial statement audit may follow GAAS unless a GAGAS audit is required under law or requested by the entity under audit. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) What are the benefits to a state or local government of establishing an audit committee? Answer: An audit committee, when properly organized and utilized, can provide substantial benefit to all concerned parties. It can strengthen the stewardship reporting function of the governing board; it can improve communication between the independent auditor and management, thereby enhancing the auditor's independence by serving as an objective buffer between the auditor and management. For taxpayers and creditors, an audit committee can help ensure maximum value and benefit from the audit itself. Difficulty: 2 Medium Topic: Special topics Learning Objective: 11-04 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 63) Explain how federal award programs are selected for audit under the risk-based approach. Answer: The risk-based approach is applied as follows: First, the "larger" (per the sliding scale presented in Chapter 11) federal programs are identified as "Type A." All other programs are identified as "Type B" programs. Second, any low-risk Type A programs are identified. This involves auditor judgment after fully considering the factors discussed in Chapter 11. Third, high risk Type B programs are identified. However, the auditor is not expected to perform risk assessments on relatively small federal programs, as defined in Chapter 11. At a minimum, the auditor should audit as major programs all Type A programs not identified as low-risk. If a Type A program was not audited in the two most recent audit periods, it must be audited in the current period. In terms of Type B programs, the auditor is not required to identify more high-risk Type B programs than one fourth the number of low-risk Type A programs. As many major programs as necessary must be audited to ensure that at least 40% of total federal awards expended are audited. The exception is when an auditee is designated as low-risk. In that case, a low-risk auditee needs to have audited a sufficient number of major programs to encompass only 20 percent of total federal awards expended. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 64) Answer the following questions relating to the provisions of the Single Audit Act of 1984 and 1996 amendments. (a) What is a single audit? (b) How do you determine if your government must have a single audit? (c) Where would you find authoritative guidance on conducting a single audit? Answer: (a) A single audit is an audit conducted pursuant to the requirements of the Single Audit Act Amendments of 1996 (and SAA of 1984). Such an audit is conducted on an organization-wide basis as opposed to a program specific audit. The Single Audit Act requires a financial and compliance audit but not a performance audit. (b) The Single Audit Act provides that each nonfederal entity that expends a total amount of federal awards in excess of $750,000 for the fiscal year in which the expenditure threshold is met is required to have a single audit. Federal awards is defined very broadly to include federal grants, contracts, loans, loan guarantees, property, cooperative agreements, interest subsidies, and insurance, and also includes "pass-through" assistance received from another level of government as well as that received directly. (c) OMB Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards provides guidance for the auditor conducting a single audit. These documents can be obtained from the Internet homepage of the OMB. In addition, auditors are required to use the Compliance Supplement, which details compliance auditing requirements for many federal programs. The AICPA's Audit and Accounting Guide State and Local Governments is also valuable. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 65) Describe the importance of materiality for auditors and explain how materiality is determined in audits of state and local governments that follow GASB standards. Answer: Materiality, in the auditor's judgment, is the level at which the quantitative or qualitative effects of misstatements will have a significant impact on users' evaluations. The AICPA Audit and Accounting Guide State and Local Governments requires auditors to make separate materiality determinations for each opinion unit. Under GASB standards these opinion units are governmental activities, business-type activities, aggregate discretely presented component units, each major governmental and enterprise fund, and the aggregate remaining fund information. Difficulty: 2 Medium Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Chapter 14

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 14 Accounting for Not-for-Profit Organizations 1) Under current accounting and reporting standards, nongovernmental not-for-profit organizations must utilize the fund accounting structure set forth in the AICPA Audit and Accounting Guide Not-for-Profit Entities. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 2) Examples of organizations that can be either governmental or nongovernmental include colleges and universities, hospitals, and museums. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 3) The FASB generally requires that not-for-profit organizations record unconditional pledges as support (contributions) only when received in cash. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4) Cash received by a nongovernmental not-for-profit organization in year 1 that the donor stipulates is to cover operating expenses of the following year should be recognized as an increase in net assets with donor restrictions in year 1 and as net assets released from restrictions in year 2. Answer: TRUE Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 5) The FASB states that donated services should be recorded as contributions by a not-for-profit organization if they meet the recognition criteria and are material. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The FASB requires that support from special events, if related to the central ongoing and major activities of the organization, and related direct costs, be reported at their gross amounts in the statement of activities. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) GAAP for nongovernmental not-for-profit organizations is set by the FASB and the AICPA. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 8) Supporting services expenses include fund-raising and management and general expenses that are not directly attributable to specific programs. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Contributions received in a prior period and restricted by the donor for construction of a building were reported as increases to net assets with donor restrictions in the period received. When the building is constructed in a subsequent period a not-for-profit would report contributions for the amount released from restrictions. Answer: FALSE Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 10) Under FASB standards the statement of activities for a not-for-profit organization is required to be separated into operating and nonoperating activity. Answer: FALSE Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) Not-for-profits are required to report expense amounts by natural classification and functional classification. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) The FASB requires not-for-profits to prepare a statement of cash flows. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) Similarity in the characteristics of nongovernmental not-for-profit (NFP) organizations and governmental NFP organizations can make it difficult to determine whether the NFP is nongovernmental or governmental in nature. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 14) The FASB requires not-for-profit organizations to report expenses by nature and function in the notes to the financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) Board-designated net assets are net assets with donor restrictions the board sets aide for a specific purpose. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 16) According to the FASB Codification, donated materials are generally not recognized as contributions by a not-for-profit organization. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Donor-imposed restrictions must be clearly reflected in financial statements of not-for-profit organizations reporting under the FASB. Answer: TRUE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The FASB requires that the purchase of equity securities be initially recorded at the acquisition price and the purchase of debt securities be initially recorded at fair value. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Museums and religious organizations reporting in accordance with FASB must capitalize and report assets such as works of art, historical treasures, and similar collectible items if they are held for public inspection. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Under FASB standards, expenses of a not-for-profit organization can only be shown as reductions of net assets without donor restrictions. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) The FASB requires the statement of financial position prepared by a not-for-profit organization to report net assets in three categories: net assets without donor restrictions, net investment in capital assets, and net assets with donor restrictions. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) Organizations that have the power to enact and enforce a tax levy are nongovernmental not-for-profits. Answer: FALSE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 23) The GASB provides guidance on generally accepted accounting principles for governmental not-for-profit organizations. Answer: TRUE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 24) An organization that can directly issue debt paying interest exempt from federal taxation may be a governmental not-for-profit or a nongovernmental not-for-profit. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 25) Under the FASB Codification a $5 million endowment that cannot be spent for 50 years should be classified as net assets with donor restrictions. Answer: TRUE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) Fixed-term endowments and board-designated endowments are classified as net assets with donor restrictions according to the FASB. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) Similar to the GASB, the FASB requires not-for-profit entities to prepare the statement of cash flows using the direct method. Answer: FALSE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) Long-term unconditional pledges (those that will not be collected within a year) are generally reported at fair value. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 29) The FASB requires that if a financial intermediary has variance power it recognize a donation as a contribution payable on its financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) Under the FASB Codification the costs incurred for a joint activity may be allocated between fund-raising expenses and program expenses if the criteria of purpose, audience, and content are met. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) The FASB states that if a not-for-profit has a controlling financial interest in a for-profit it should consolidate the for-profit over which it has a controlling financial interest into its financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Consolidations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Goodwill created because a not-for-profit organization obtains control of another organization is always recorded as an asset. Answer: FALSE Difficulty: 1 Easy Topic: Consolidations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) Which of the following characteristics of not-for-profit organizations (NFPs) can be used to distinguish a nongovernmental from a governmental NFP? A) Contributions by resource providers who do not expect a return on investment. B) Ability to impose taxes on citizens. C) Absence of ownership interests. D) All of the given characteristics are generally different for nongovernmental versus governmental NFPs. Answer: B Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 34) Responsibility for establishing generally accepted accounting principles (GAAP) for nongovernmental, not-for-profit organizations rests with the FASB and was most clearly established: A) By the FASB Codification. B) When the FASB was created in 1974. C) When the GASB was created in 1984. D) In the AICPA's Statement of Auditing Standards No. 69 (hierarchy of GAAP). Answer: A Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 35) Under FASB standards how would a not-for-profit organization recognize a conditional pledge? A) Debit Pledges Receivable and credit Contributions—With Donor Restrictions. B) Debit Pledges Receivable and credit Deferred Contributions. C) Debit Conditional Pledges Receivable and Credit Deferred Contributions. D) It would not recognize the conditional pledge until pledge conditions are substantially met. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) The FASB Codification requires the following financial statements for all not-for-profit organizations: A) Statement of financial position, statement of activities, and statement of cash flows. B) Statement of financial position, statement of operations, and statement of cash flows. C) Statement of financial position, statement of activities, and statement of net assets. D) Statement of financial position, statement of revenues and expenses, and statement of cash flows. Answer: A Difficulty: 1 Easy Topic: Financial Reporting Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 37) Which of the following statements is true regarding fund accounting for not-for-profit organizations (NFPs)? A) Fund accounting can be used by NFPs for external purposes, but not internal purposes. B) Fund accounting can provide a good mechanism for facilitating reporting to donors. C) Fund accounting is not allowed. D) Fund accounting for internal and external reporting purposes has been replaced by FASB with the two classes of net assets (without donor restrictions, and net investment in restricted assets). Answer: B Difficulty: 2 Medium Topic: Financial Reporting Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) According to the FASB Codification, which of the following is a condition that must be met for contributed services to a not-for-profit organization (NFP) to be recorded as both a contribution and as an expense? A) The service creates or enhances nonfinancial assets, such as a carpenter renovating a building. B) The service requires a specialized skill and is provided by someone who possesses the specialized skill, such as a lawyer preparing contracts. C) The service supplements the management function, such as an auditor preparing a program audit, which is not normally done. D) All of the given conditions must be met for contributed services to be recognized as a contribution and an expense. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 39) The FASB requires investments in equity securities that have a readily determinable market value of a not-for-profit organization be reported at: A) Lower of cost or market. B) Amortized cost. C) Fair value. D) Cost. Answer: C Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) An example of an increase in net assets for a not-for-profit organization that would be labeled revenue rather than support is: A) An unconditional promise to give. B) Investment income. C) A restricted gift. D) An allocation of funds from the local United Way organization. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 41) A donor provides a large cash contribution that is to be used for acquisition of a new building. Under FASB standards, how would this contribution be reported by a not-for-profit organization on its statement of cash flows? A) Operating activity. B) Investing activity. C) Financing activity. D) Capital and related financing activity. Answer: C Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) The FASB states that depreciation expense in a not-for-profit organization should be: A) Assigned to or allocated to the functions to which it relates. B) Reported under the management and general function. C) Disclosed in the notes to the financial statements. D) Allocated to program but not support functions. Answer: A Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 43) A not-for-profit (NFP) organization acting as a financial intermediary receives a contribution. Under the FASB Codification the NFP would be most likely to recognize the contribution as a liability under which of the following situations? A) The NFP has variance power. B) The NFP is acting as an agent, receiving the contribution on behalf of another organization. C) The NFP is financially interrelated with the organization on whose behalf it received the contribution. D) The NFP has a 51 percent interest in the organization on whose behalf it received the contribution. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) According to the FASB, net assets with donor restrictions are released from restrictions: A) At the end of each fiscal year. B) As assets are spent for the purposes intended by the donor. C) When funds are returned to the donor. D) When all donor conditions have been met. Answer: B Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) A local philanthropist made an unconditional pledge to donate $100,000 to a not-for-profit organization to be paid in five equal installments of $20,000 beginning in two years. Under FASB standards the pledge would be recognized as: A) A contribution of $20,000 in each of the five years a contribution is made. B) A contribution of $100,000 in the year the pledge is made, adjusted for the estimated uncollectible amount. C) Deferred support of $100,000 in the year the pledge was made. D) A contribution of $100,000 in the year the pledge was made, discounted for the difference between the pledge and its present value. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 46) Which of the following statements is correct regarding reporting of special events and related direct costs under current FASB standards? A) Special events and related direct costs must be reported separately at their gross amounts if they relate to the ongoing major operations of a not-for-profit. B) Special events revenues are to be reported at gross amounts, even if direct costs are of a peripheral or incidental nature. C) With few exceptions special events revenues are reported net of related direct costs. D) Expenses of promoting and conducting special events should be netted directly against special events revenue. Answer: A Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) A not-for-profit organization incurred $10,000 in management and general expenses in the current fiscal year. When reporting the expenses by function, the $10,000 would be reported as: A) A deduction from program revenue. B) Fund-raising expense. C) Program services expenses. D) Supporting services expenses. Answer: D Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 48) Which of the following would be considered "contribution revenue or support" of a not-for-profit organization under FASB standards? A) Gain on disposal of capital assets. B) Money received from a fund-raising campaign. C) Money received from rental of surplus office space. D) Investment earnings. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) In accordance with FASB standards, securities donated to a not-for-profit organization should be recorded at the: A) Donor's recorded amount. B) Fair value at the date of the gift, or the donor's recorded amount, whichever is lower. C) Fair value at the date of the gift, or the donor's recorded amount, whichever is higher. D) Fair value at the date of the gift. Answer: D Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following would be reported as an Asset with Restrictions on Use? A) A cash contribution for a program activity, such as diabetes research. B) A cash contribution for a new building. C) Cash restricted by debt covenants with lenders. D) Cash restricted by the board for purchase of new computer equipment. Answer: B Difficulty: 2 Medium Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 51) Under FASB standards, which of the following contributions would not have to be reported as an asset on the statement of financial position of a not-for-profit organization? A) Land was donated to the Friends of the Forest Society for conversion into a nature trail. B) The original courthouse was donated to the Historical Preservation Society for conversion into a museum. C) An art collector donated a famous oil painting to a local art museum for display in its exhibit hall. D) A valuable coin collection was donated to the Youth for Conservation organization, which the organization plans to sell at current market prices. Answer: C Difficulty: 2 Medium Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) According to the FASB, a not-for-profit arts organization would report the account Provision for Uncollectible Pledges as which of the following? A) Expense. B) Contra revenue. C) Contra asset. D) FASB allows management to determine its policy for reporting the Provision for Uncollectible Pledges. Answer: A Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 53) A not-for-profit organization that follows FASB standards must display the changes in all classes of net assets on which of the following statements? A) Statement of activities. B) Statement of financial position. C) Statement of cash flows. D) Statement of functional expenses. Answer: A Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 54) When a nongovernmental not-for-profit organization spends money for the purpose for which an external donor intended, the expense is reported as a: A) Decrease in net assets with donor restrictions. B) Decrease in net assets without donor restrictions. C) Decrease in current-restricted fund balance. D) Decrease in committed fund balance. Answer: B Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 55) Not-for-profits can report expenses by nature and function: A) In the notes to the financial statements. B) As a separate financial statement. C) In the statement of activities. D) All of the options are correct. Answer: D Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 56) According to the FASB, how should unrealized gains on the investment portfolio of a not-for-profit organization be recognized? A) Not recognized. B) Reported in the net asset section of the balance sheet. C) Reported according to whether the gains relate to trading, or held-to-maturity assets. D) Reported on the statement of activities. Answer: D Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 57) Which of the following is not one of the criteria specified in the FASB Codification for determining whether joint costs with a fund-raising appeal can be reported with program expenses rather than as fund-raising expenses? A) Purpose. B) Audience. C) Time period. D) Content. Answer: C Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 58) Which of the following terms is used to indicate that a donor provided a gift with explicit instructions that the gift is to be used for a specific purpose by the not-for-profit but the entire amount may be spent right away? A) Board-designated net assets. B) Net assets without donor restrictions. C) Endowment assets. D) Net assets with donor restrictions. Answer: D Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) In the current year, the not-for-profit organization Save the Butterflies Foundation received cash of $500 to be used as the Foundation wishes and $1,000 to be used for butterfly research. Save the Butterflies also received pledges of $700 that it can use as it wishes and $600 for its building fund. All pledges are expected to be received next year. How much would Save the Butterflies report as contributions with donor restrictions in the current year? A) $1,000. B) $1,600. C) $1,300. D) $2,300. Answer: D Difficulty: 3 Hard Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 60) In the current year, the not-for-profit organization (NFP) How to Read Government Financial Reports received both cash of $1,000 and pledges of $2,000 to be used for teaching citizens how to read government financial reports. During the year the organization spent $1,500 teaching citizens to read financial statements. Assuming the NFP has a policy of spending its restricted resources first, in the current year what amount of contributions can be reclassified as without donor restrictions? A) $1,000. B) $1,500. C) $2,000. D) $3,000. Answer: A Difficulty: 3 Hard Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 61) The mission of the not-for-profit organization, Save Our Butterflies Foundation, is to provide research and education concerning the conservation of butterflies. Which of the following expenses would be reported as a support expense by the Foundation? A) The costs of exhibiting at the local Nature Conservancy annual fair held for the general public. B) The costs of depreciation on it butterfly facility. C) The cost of printed materials distributed to the local elementary schools on how to start butterfly gardens. D) The cost of printing and distributing its annual report. Answer: D Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) For financial reasons, two not-for-profit hospice organizations (hospices A and B) decided to combine. As a result of the combination, the assets and liabilities of the combined hospice were reported at the amounts that had been previously reported by A and B on their financial statements. Under the FASB, the combining of hospices A and B would be classified as which of the following? A) Merger. B) Consolidation. C) Acquisition. D) Component unit. Answer: A Difficulty: 2 Medium Topic: Combinations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 63) During the year a donor pledged $1,000,000 in funds to a not-for-profit private charter school. The school will receive the pledge if it is able to raise $500,000 in funds over the next year. According to the FASB, how would this pledge be recorded? A) Contribution—With Donor Restrictions. B) Contribution—Without Donor Restrictions. C) Deferred Revenue. D) It would not be recorded. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 64) A local CPA volunteered his time to prepare the Form 990 for an after-school development organization that serves disadvantaged children. If the services had not been donated the organization would have had to hire a CPA to prepare the return. In accordance with the FASB Codification, the value of the CPA's time devoted to helping the organization should be recorded as: A) Contribution—With Donor Restrictions. B) Support Expense. C) Machinery & Equipment. D) It would not be recorded. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 65) The board of directors for a nongovernmental not-for-profit organization decided to designate $20,000 each year for the next three years to fund a special research project it was planning to conduct at the end of the three-year period. How would these board-designated resources be reported on the statement of financial position? A) Net assets with donor restrictions. B) Net assets without donor restrictions. C) Internal payable. D) The resources would not be reported on the statement of financial position. Answer: B Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 66) How does the FASB require not-for-profit organizations to report expenses? A) Natural classification, such as salaries, rent, and supplies. B) Functional classification, such as program and support. C) Management has the option of reporting using natural classification or functional classification. D) Both natural classification and functional classification must be reported. Answer: D Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 67) In accordance with the FASB Codification, which of the following would not be classified as a support expense by the not-for-profit organization Save Our Lakes? A) The cost of printing and distributing the annual report. B) The cost of a mailing to past contributors requesting donations for lakeshore cleanup. C) The cost of the annual lakeshore cleanup activities. D) The cost to have an attorney review the organization's by-laws. Answer: C Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 68) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate terms. A. Nonexchange transactions B. Net assets with donor restrictions C. Collections D. Variance power E. Exchange transactions F. Board-designated net assets G. Endowment H. Promise to give ________ 1. Unrestricted net assets that the governing body decides to set aside for specific purposes ________ 2. The unilateral power of an organization to redirect donated assets to a different beneficiary than initially indicated by the donor ________ 3. Net assets for which the donor has indicated use in a future period or for a particular purpose ________ 4. Transactions in which the donor derives no direct tangible benefits ________ 5. Works or art, historical treasures, or similar assets held and protected for public exhibition, and, if sold, proceeds would be used to acquire similar assets Answer: 1. F, 2. D, 3. B, 4. A, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Financial Reporting; Accounting for NFP organizations Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets.; 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 69) Record the journal entry that would be made by a nongovernmental, not-for-profit organization involved in medical research. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. The entity received $1,500 in cash contributions. Of that amount, $1,000 is to be used for medical research. 2. The entity received pledges of $700,000 for its endowment fund. All pledges will be collected next year. 3. The entity received donated services of $1,200 from medical researchers who helped with the entity's on-going drug development research. It also received $300 in donated services from students, who helped clean the research facilities. 4. The entity paid medical research operating expenses of $5,000 that were related to restricted net assets it had received in prior years. Answer: 1. Cash $ 1,500 Contributions-Without Donor Restrictions $ 500 Contributions-With Donor Restrictions $ 1,000 2. Pledges Receivable $700,000 Contributions-With Donor Restrictions $700,000 3. Medical Research Program Expenses $1,200 Contributions-Without Donor Restrictions $1,200 Note the $300 of student donated services is not recorded since the services do not require a specialized skill. 4. Medical Research Program Expenses $ 5,000 Cash $ 5,000 Net Assets Released-Satisfaction of Program Restrictions-With Donor Restrictions $ 5,000 Net Assets Released-Satisfaction of Program Restrictions-Without Donor Restrictions $ 5,000 Difficulty: 3 Hard Topic: Accounting for NFP organizations Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 70) Explain the purpose of FASB ASC 958-720-45 on joint-cost accounting as it relates to reporting fund-raising and program expenses of a not-for-profit organization. How is this standard applied? Answer: The purpose of the standard is to provide guidance on when costs of joint activities that involve fund-raising and a program purpose can be allocated between fund-raising and programs. The FASB requires three criteria to be met before a cost can be reported as a program expense, 1) the purpose must be to advance the mission of the organization, 2) the cost must be directed to an audience who is capable of advancing that mission, and 3) the content of the material that is produced must include a call to action on the part of the audience to advance the mission of the organization. If all three of these criteria are met, the costs identifiable with a specific program function can be reported as a program expense rather than a fund-raising expense. If one of the criteria is not met the costs must be reported as fund-raising, they cannot be allocated. Difficulty: 3 Hard Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Communication AICPA: FN Reporting 71) Distinguish not-for-profit organizations from entities in the government and commercial sectors of the U.S. economy. Answer: Not-for-profit organizations that are nongovernmental differ from government entities because they were created by individuals, not governments; they do not have the power to tax citizens; and FASB is the authoritative standards setting body for financial reporting, not the GASB. Nongovernmental, not-for-profit organizations differ from businesses in the commercial sector because they are often the recipient of contributions by donors in nonexchange transactions, rather than exchange transactions for which resource providers expect a proportionate return; they operate for purposes other than to earn a profit and there is an absence of ownership interests. Difficulty: 2 Medium Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Understand AACSB: Communication AICPA: BB Industry 72) Distinguish between "support" and "revenues from exchange transactions." Answer: Support means revenue from contributions made without expectation of commensurate benefits for the donor, such as gifts, grants, and bequests. Revenues from exchange transactions, on the other hand, arise from bilateral exchange transactions in which the other party to the transaction receives benefit or other consideration for the resources provided. Examples of such revenues are membership dues, program service fees, sales of supplies or services, investment income, and realized gains on investment transactions. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry 73) If the program services expenses category includes both directly related costs and indirect costs allocated to it, why is it necessary to have a separate category of "supporting services expenses"? Answer: It is desirable to know the full cost of service programs, which is why program services expenses include both the direct costs and allocated indirect costs of programs. However, some expenses are incurred for general purposes, such as to maintain or increase public awareness of the organization rather than for any specific program(s). In addition, costs of general management and administration, such as accounting, budgeting, legal services, etc. are necessary to maintain the organization, and thus are properly chargeable to "supporting services expenses" rather than "program services expenses." Similarly general fund-raising activities usually benefit multiple programs and are not readily allocable to individual programs. Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry 74) Would a not-for-profit library that receives the majority of its resources from a specific tax levy on local citizens remitted to the city follow the same financial reporting principles as would a library that operates without a dedicated tax and instead relies on contributions from individuals and grants from foundations and governments? Explain. Answer: No. The Governmental Accounting Standards Board establishes generally accepted accounting principles (GAAP) for a library that receives tax revenue as that is a governmental, not-for-profit organization. The Financial Accounting Standards Board establishes GAAP for nongovernmental not-for-profit organizations such as the second library described, which depends on contributions and grants and not tax revenue. Difficulty: 2 Medium Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Understand AACSB: Communication AICPA: BB Industry 75) Explain when donated materials should be recognized as a contribution and as an expense by a nongovernmental not-for-profit organization. Answer: FASB criteria for recognizing revenue for donated materials are somewhat restrictive and limit recognition of donated materials by not-for-profit organizations. In general, donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be established. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry 76) Explain the accounting for contributions received by a financial intermediary under the FASB Codification. Answer: If a not-for-profit organization (NFP) merely accepts charitable contributions from donors for the purpose of directing them to another organization, then it is considered an "agent" and the contribution is reported as an increase to cash and a liability to the other organization. In these cases, the NFP does not recognize revenue or expense on the contribution received and then made. On the other hand, if a NFP receives a contribution and the donor gives that NFP "variance power" to redirect the asset to someone else, or if the NFP is financially interrelated with the organization that is intended to receive the gift, then the NFP reports the contribution as an asset and as revenue, and reports an expense when the resources are directed to the intended organization. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 77) The not-for-profit organization Accountants Rule has a mission to promote the accounting profession in the local community. It is heavily supported by local accounting firms and businesses seeking to increase the number of individuals entering the profession. Following is the pre-closing trial balance for the organization. Debit Credit Cash and cash equivalents $ 985 Investments $ 2,605 Pledges receivable $ 830 Allowance for uncollectible pledges $ 35 Accounts payable and accrued liabilities $ 1,090 Net assets without donor restrictions $ 1,267 Net assets with donor restrictions $ 2,148 Contributions—without donor restrictions $ 3,460 Contributions—with donor restrictions $ 1,720 Interest income—without donor restrictions $ 55 Net assets released—satisfaction of program restriction—without donor restrictions $ 1,850 Net assets released—satisfaction of program restriction—with donor restrictions $ 1,850 Outreach expenses $ 2,800 College recruitment expenses $ 1,955 Management and general expenses $ 425 Fund-raising expenses $ 175 Total $ 11,625 $ 11,625 Prepare a statement of activities for the organization for the year ended December 31, 2020. (Negative amounts should be indicated by a minus sign.) Answer: Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Illustrative transactions Not-for-profit organizations Learning Objective: 14-05 Prepare journal entries and financial statements in accordance with the generally accepted accounting principles governing NFP organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

Chapter 9

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 9 Financial Reporting of State and Local Governments 1) In accordance with GASB standards, both a general purpose government and a special purpose government can be considered primary governments if certain criteria are met. Answer: TRUE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) State and local governments should prepare only those financial reports required by law—generally year-end financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) A financial reporting entity is defined as a primary government, as well as all other organizations that have an operational relationship with the primary government. Answer: FALSE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4) Both a general purpose and a special purpose government could be considered examples of primary governments under GAAP. Answer: TRUE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) The three sections of the comprehensive annual financial reports of state and local governments are (1) an introductory section, (2) a financial section, and (3) a supplemental section. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) A government is financially accountable for another entity if it appoints the voting majority of the entity's governing board. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 7) Statistical tables included in comprehensive annual financial reports should provide social and economic data, in addition to financial data, to assist financial statement users in better understanding the activities and condition of the government. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) The accounting system used by a state or local government must make it possible to prepare financial statements as required by the Financial Accounting Standards Board. Answer: FALSE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Under GASB standards, the financial statements that report on business-type activities at the government-wide level include the statement of net position, statement of activities, and statement of cash flows. Answer: FALSE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Fiduciary activities are not reported in the government-wide financial statements under GASB standards. Answer: TRUE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) Special purpose accounting frameworks are considered generally accepted accounting principles (GAAP) for state and local governments. Answer: FALSE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) In reconciling between the governmental fund and government-wide statements, capital assets acquired by a governmental fund are deducted from fund balance—governmental funds to arrive at net position of governmental activities. Answer: FALSE Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 13) A discretely presented component unit is presented as a major fund on the governmental fund financial statements. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 14) Popular reports provide condensed financial information that can be used by governments to communicate financial results to citizens. Answer: TRUE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) One of the required reconciliations in converting governmental fund financial statements to governmental activities statements at the government-wide level is an adjustment for internal service funds' assets, liabilities, operating income (loss), and transfers. Answer: TRUE Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 16) Under GASB standards, only proprietary funds prepare a statement of cash flows. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Similar in purpose to the International Accounting Standard Board (IASB) is the International Public Sector Accounting Standards Board. Answer: TRUE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The General Fund data for a blended component unit should be reported as a special revenue fund of the primary government. Answer: TRUE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Similar to for-profit entities, the GASB requires governments to prepare quarterly interim financial reports. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) The GASB defines a component unit as any organization for which the primary government is financially accountable. Answer: FALSE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) The two methods for presenting component units in the financial statements are aggregated and disaggregated. Answer: FALSE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) To be reported as a major component unit, a component unit must meet the same 10 percent and 5 percent size requirements as major funds. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 23) A not-for-profit organization could be reported as a component unit of a primary government. Answer: TRUE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) The GASB requires that interim financial reports be prepared on a semiannual basis at a minimum. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) An example of information found in the statistical section of the comprehensive annual financial report (CAFR) is demographic information such as unemployment rates, and personal income of citizens. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) According to the Bureau of Census, which of the following would be considered a special district? A) Colyer Township. B) Milborne Independent School District. C) Hieher City. D) Johnston Building Authority. Answer: D Difficulty: 2 Medium Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) Which of the following factors would not indicate that a potential component unit (PCU) imposes a financial burden or provides a financial benefit to the primary government? A) The primary government is entitled to its share of any dividends distributed by the PCU. B) The primary government is obligated to provide financial support to the PCU. C) The primary government is obligated for the PCU's debt. D) The primary government is entitled to the PCU's resources. Answer: A Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) Which of the following circumstances would indicate that a potential component unit (PCU) should be included as part of the government financial reporting entity? A) The primary government is entitled to the resources of the PCU. B) Officials of the primary government appoint a majority of the members of the governing board of the PCU. C) The primary government significantly influences the programs and activities of the PCU. D) Officials of the primary government appoint a majority of the members of the PCU's governing board and the primary government is able to impose its will on the PCU. Answer: D Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) Which of the following is not a category found in the statistical section of the comprehensive annual financial report (CAFR)? A) Expenditure trend information. B) Revenue capacity information. C) Demographic and economic information. D) Debt capacity information. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) Combining financial statements for nonmajor funds of a government should be included: A) In the basic financial statements. B) In the notes to the financial statements. C) As a part of the financial section of the comprehensive annual financial report (CAFR). D) As part of the statistical section of the comprehensive annual financial report (CAFR). Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following would not be included within the financial section of the comprehensive annual financial report (CAFR)? A) Letter of transmittal. B) Management's discussion and analysis (MD&A). C) Independent auditor's report. D) Required supplementary information (RSI). Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following would not be provided by management's discussion and analysis (MD&A)? A) A narrative explanation of the contents of the CAFR. B) A description of the government's financial condition. C) A forecast of revenues and expenditures for the next three fiscal years. D) A discussion of economic factors and the budget and tax rates approved for the next year. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) Which of the following is a required program revenue category in the government-wide statement of activities? A) Special assessments. B) Operating grants and contributions. C) Sales taxes. D) Transfers. Answer: B Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) Which of the following would increase the governmental activities balance in Net Position—Net Investment in Capital Assets? A) Use of tax revenues to acquire a police department building. B) Issuance of long-term debt to be used to acquire equipment for the police department. C) A gift of land to the city restricted by the donor to be used by the city airport, which is accounted for as an enterprise fund. D) Recording annual depreciation on capital assets. Answer: A Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 35) Which of the following is evidence of fiscal independence for the purpose of considering whether one legally separate organization is a component unit of another? A) The potential component unit is precluded from issuing long-term debt. B) The potential component unit raises its own taxes without the approval of the primary government. C) The potential component unit names its board of directors without the approval of the primary government. D) The potential component unit sets user charges with the approval of the primary government. Answer: B Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) What constitutes the basic financial statements of a government? A) Financial section of the comprehensive annual financial report (CAFR). B) Government-wide financial statements plus notes. C) Government-wide financial statements plus fund financial statements plus notes. D) Government-wide financial statements plus fund financial statements plus notes plus required supplementary information (RSI). Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 37) Which of the following actions is not required to convert data from the governmental fund financial statements to enable preparation of the government-wide financial statements? A) Adding annual depreciation expense proportionately to functional expense categories. B) Eliminating interfund payables and receivables between governmental funds. C) Aggregating fund information. D) Eliminating receivables and payables between governmental and enterprise funds. Answer: D Difficulty: 2 Medium Topic: Converting Accounting Information from the Modified Accrual to the Accrual Basis of Accounting Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) Under GASB standards, if a government only has six governmental funds and two enterprise funds how many basic financial statements would it prepare? A) Five. B) Six. C) Seven. D) Nine. Answer: C Difficulty: 3 Hard Topic: Government Financial Reports Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 39) Which of the following is one of the three sections of a comprehensive annual financial report? A) Statistical section. B) Single audit section. C) Supplementary section. D) Investment section. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) Which of the following statements or schedules is most likely to be prepared by a government as an interim financial report? A) A government-wide statement of activities. B) A governmental funds balance sheet. C) A schedule of budgeted and actual expenditures. D) A schedule of cash flows for governmental funds. Answer: C Difficulty: 2 Medium Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following are government-wide financial statements required by GASB standards? A) Statement of net position and statement of cash flows. B) Statement of net position, statement of activities, and statement of cash flows. C) Statement of net position and statement of activities. D) Statement of activities and statement of cash flows. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 42) Where should infrastructure assets and long-term liabilities issued to finance infrastructure be reported? A) Letter of transmittal. B) Fund financial statements. C) Management's discussion and analysis. D) Government-wide financial statements. Answer: D Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 43) Under GASB standards, where are nonmajor funds reported? A) In the management's discussion and analysis preceding the financial statements. B) In aggregate amounts in a single column in the fund financial statements. C) In a note disclosure following the financial statements. D) In the government-wide financial statements. Answer: B Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) GASB standards require that governmental fund financial statements include which of the following? A) Balance sheet. B) Statement of activities. C) Statement of cash flows. D) Both Balance sheet and Statement of activities. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) Balsam City's library board is appointed by the city council, which has agreed to subsidize the operating costs of the library at a material amount to be determined each year. In addition, the city is paying debt service on general obligation bonds issued to construct the library. Based on generally accepted accounting principles (GAAP) criteria for defining the reporting entity: A) The library is a component unit. B) The library is a special purpose government. C) The library is a joint venture. D) The library is a jointly governed organization. Answer: A Difficulty: 3 Hard Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 46) The comprehensive annual financial report (CAFR) of a government should contain a statement of revenues, expenses, and changes in net position for: A) Both proprietary and governmental funds. B) Governmental but not proprietary funds. C) Proprietary but not governmental funds. D) Both proprietary and fiduciary funds. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following items are typically reported differently between the governmental fund statements and the Governmental Activities column of the government-wide statements? A) Capital outlays. B) Cash collected on property taxes receivable. C) Accounts payable and other accrued expenses. D) Inventories. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 48) Which of the following asset amounts would be classified as restricted fund balance on the governmental funds balance sheet? A) Cash related to a federal grant for the Public Works department. B) Supplies inventory in the General Fund. C) Cash in the debt service fund that the city has set aside to pay a long-term note. D) A cash contribution that must be maintained in perpetuity. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 49) Some governments provide to their citizens highly condensed financial information, budget summaries, and narrative descriptions. This report is called a(an) A) Comprehensive annual financial report. B) Basic financial statements. C) Required supplementary information. D) Popular report. Answer: D Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 50) In reconciling the net change in fund balances to the change in net position of governmental activities which of the following would be added to the change in net position of governmental activities? A) Issuance of long-term debt. B) Construction of capital assets. C) Accrual of interest expense. D) Depreciation expense. Answer: B Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 51) Which of the following statements concerning the reporting of internal balances by a government at the end of its fiscal year is true? A) The internal balances amounts reported in the balance sheet columns represent activity among governmental funds. B) The internal balances amounts reported in the statement of net position columns represent activity between governmental activities and business-type activities. C) The internal balances amounts are reported in both the asset and liability sections on the statement of net position. D) The internal balances amounts reported represent the difference between interfund transfers in and interfund transfers out. Answer: B Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) Which of the following would decrease the governmental activities balance in Net Position—Net Investment in Capital Assets? A) An increase in accumulated depreciation. B) Acquisition of a capital lease. C) Sale of a fully depreciated capital asset. D) Receipt of a capital grant that has not been expended at fiscal year-end. Answer: A Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 53) In reconciling the total fund balances of the governmental funds to the net position of governmental activities, which of the following would be added to the net position of governmental activities? A) Accumulated depreciation. B) Premium on bonds payable. C) Construction work in progress. D) Bond interest payable. Answer: C Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 54) On the statement of revenues, expenditures, and changes in fund balance for governmental funds, how are capital outlays reported? A) As a separate line item in the expenditures section of the statement. B) Capital outlays are allocated to the functional areas, much like depreciation. C) As a separate line item in the other financing sources (uses) section of the statement. D) Below net change in fund balances, but before beginning fund balance. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) Which of the following statements concerning the reporting of expenses on the statement of activities is true? A) Expenses are reported after program revenues. B) Expenses are reported after general revenues. C) Expenses are reported after program and general revenues. D) Expenses are reported before program and general revenues. Answer: D Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 56) Which of the following statements concerning interfund transfers is true? A) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund balance when transfers occur among governmental funds. B) Interfund transfers are reported in the statement of activities when transfers occur among governmental funds. C) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund balance and the statement of activities when transfers occur among governmental funds. D) Interfund transfers are reported as internal balances on the statement of net position when activity occurs among governmental activities and business-type activities. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 57) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate terms. A. Component unit B. Financial reporting entity C. Financial accountability D. Joint venture E. Other stand-alone government F. Primary government ________ 1. A separate government or agency that is combined for purposes of reporting on the whole entity ________ 2. The responsibility that exists when a primary government appoints a voting majority of an organization's governing board and it is able to (a) impose its will on the organization or (b) there is a potential for the organization to provide financial benefits or impose a financial burden on the primary government ________ 3. A state government, general purpose local government, or special purpose government that is independent of other state or local governments ________ 4. A legally separate governmental organization that does not have a separately elected government body ________ 5. Primary government and all related component units Answer: 1. A, 2. C, 3. F, 4. E, 5. B Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 58) For the following items that require reconciliation between governmental funds financial statements and governmental activities financial statements at the government-wide level according to GASB standards, indicate which is the best appropriate terms. (A) Always be subtracted from fund balances—governmental funds. (B) Always be added to fund balances—governmental funds. (C) May be added to or subtracted from fund balances—governmental funds in arriving at net position of governmental activities. ________ 1. Capital assets used in governmental activities ________ 2. Long-term liabilities that are not payable in the current period ________ 3. Net position of internal service funds that are primarily governmental in nature ________ 4. Accrued interest payable not due in the current period Answer: 1. B, 2. A, 3. C, 4. A Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 59) The following transactions relate to the City of Middleton, which has a fiscal year end of December 31. The city adopts budgets for the General Fund and the debt service fund. NOTE: for simplicity, and contrary to GASB standards, assume straight-line amortization for this problem. 1. The City of Middleton sells a $2,000,000, 3%, 16-year general obligation bond issue on January 2 at par. The bond pays interest semiannually on July 1 and January 2, with the first principal payment scheduled for next year on January 2. A city hall annex must be constructed with the bond proceeds. The bond premium must be used to pay interest on the debt. 2. Budgets are adjusted to account for the sale of the bond. The debt service fund budget should be adjusted to accommodate the new debt issue. If the debt service fund does not have sufficient resources to pay expenditures, the needed funds will be provided by the General Fund. 3. On February 1, $1,000,000 of the cash from the sale of the bonds is invested for one year at a rate of 1.26%. Earnings on the investment are available for construction of the city hall annex. 4. July 1 the first interest payment is due. 5. December 31 adjusting entries are prepared. Required: For the five related transactions provided, prepare all necessary journal entries for the affected funds and at the governmental activities level. Clearly indicate the fund journal or the government-wide journal in which the entry is being recorded. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer: 1. Capital projects fund journal Cash $2,000,000 Other Financing Source-Proceeds of Bonds $2,000,000 Governmental activities journal Cash $2,000,000 Bonds Payable $2,000,000 2. Debt service fund journal Estimated Other Financing Sources-Interfund Transfers In $30,000 Appropriations $30,000 General Fund journal Budgetary Fund Balance $30,000 Estimated Other Financing Uses-Interfund Transfers Out $30,000 3. Capital projects fund journal Investments $1,000,000 Cash $1,000,000 Governmental activities journal Investments $1,000,000 Cash $1,000,000 4. General Fund journal Other Financing Uses-Interfund Transfer Out $30,000 Cash $30,000 Debt service fund journal Cash $30,000 Other Financing Sources-Interfund Transfer In $30,000 Expenditures-Interest $30,000 Cash $30,000 Governmental activities journal Expenses-Interest on Long-term Debt $30,000 Cash $30,000 5. Capital projects fund journal Interest Receivable $11,555 Revenues-(optional to put source, Interest) $11,555 Governmental activities journal Interest Receivable $11,555 General Revenues-Investment Earnings-(optional to indicate restriction, Restricted for Capital Projects) $11,555 Expenses-Interest on Long-term Debt $30,000 Interest Payable $30,000 Debt service fund Note that there is no accrual of interest expenditure since the expenditure is not legally due until after the first of the year. Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 60) "Interim financial reports are needed for state and local governments even though external users of financial reports have no need to assess monthly or quarterly performance of the government." Do you agree? Why or why not? Answer: Agree. It is true that interim financial reports for governments are not widely provided to external users. However, GASB standards recommend that interim financial reports be provided periodically, mainly for use of administrators of the government, as well as to assist members of the legislative branch in monitoring current financial status and progress toward achieving the annual budget. Other users having a particular interest in the financial management of the government (e.g., news media and citizens) may find interim reports of use. Difficulty: 2 Medium Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 61) What is meant by the term "reporting entity" in accounting for state and local governments? Answer: A reporting entity is defined as a primary government, organizations for which the primary government is financially accountable, and other organizations that the primary government, through the exercise of professional judgment, determines should be included to prevent the reporting entity's financial statements from being misleading. Difficulty: 2 Medium Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 62) In your own words, describe the relationships between a component unit and a primary government. Provide some examples and describe the financial reporting for a component unit. Answer: A component unit is an organization for which the primary government is financially accountable or for which the primary government, through the exercise of professional judgment, determines should be included to prevent the reporting entity's financial statements from being misleading. Component units can be museums, libraries, economic development corporations, housing commissions, transit authorities that are dependent upon the primary government for funding, authorization to issue debt, and other financial decisions. The primary government exercises judgment in determining whether the results of a component unit's operations are discretely presented as a column in the reporting entity's financial statements. If not discretely presented, the component unit's operations may be reported by blending the elements into the reporting unit's financial statements. Difficulty: 3 Hard Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Apply AACSB: Communication AICPA: FN Reporting 63) Describe what the government-wide statements are intended to convey to readers and contrast with the intent of the fund financial statements. Answer: Government-wide statements are designed to demonstrate operational accountability; that is, information useful in assessing operating results and short- and long-term financial position and the cost of providing government services from an economic perspective reported in entity-wide financial statements. Governmental fund financial statements are designed to demonstrate fiscal accountability; that is, current-period financial position and budgetary compliance. Proprietary fund financial statements focus on total economic resources and, like government-wide financial statements, are designed to convey operational accountability. Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 64) Describe the alternative processes for capturing the financial accounting information required for government-wide financial statements. Answer: There are two basic approaches to obtaining the information necessary to prepare the government-wide statements: (1) the dual-track approach which requires the accounting information system to be capable of capturing two bases of accounting (i.e., modified accrual and accrual) for each transaction as it is recorded in the underlying journals and ledgers, which is the approach presented in chapters 3-6 of the textbook and (2) conversion of fund accounting information at the end of a period (e.g., month or year) to accrual accounting, when appropriate, which is presented in Appendix A of the textbook. Difficulty: 2 Medium Topic: Converting Accounting Information from the Modified Accrual to the Accrual Basis of Accounting Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 65) Explain why special purpose frameworks (also known as other comprehensive bases of accounting) may be used by a state or local government instead of GASB standards, which are generally accepted accounting principles (GAAP). Answer: Some small state and local governments may conclude that the costs of complying with GAAP outweigh the benefits. Those governments may not be participants in the bond market, and therefore would not have the same set of users for their external financial statements as would governments with tax-exempt debt. Special purpose framework accounting records may be easier to prepare and easier to understand for users. Difficulty: 2 Medium Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 66) Describe some items requiring adjustments when modified accrual basis accounting information must be converted to accrual basis accounting in preparation of government-wide statements. Answer: Items requiring adjustment when going from modified accrual basis of accounting to accrual basis of accounting include: (1) capital expenditures are reclassified as capital assets, (2) annual depreciation on capital assets is recognized, (3) other financing sources from bonds are reclassified as long-term liabilities, (4) interest on long-term debt is recorded, (5) internal service activity is moved from proprietary funds to be reported with governmental activities, (6) transfers and balances between funds are netted and balances between governmental and business-type activities are reported as internal balances, (7) differences that may arise from recognition of deferred inflows and deferred outflows of resources, and (8) interfund transfers between governmental funds and internal service funds are eliminated. Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting