ch__01_____SM[1]

Government and Not-for-Profit Accounting: Concepts and Practices

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Solutions of Exercises: Chapter 1 The Government and Not-For-Profit Environment Questions for Review and Discussion 1. The critical distinction between for-profit businesses and not-for-profit entities, including governments, is that businesses have profit as their main motive whereas the others have service. A primary purpose of financial reporting is to report on an entity’s accomplishments — how well it achieved its objectives. Accordingly, the financial statements of businesses measure profitability — their key objective. Financial reports of governments and other not-for-profit entities should not focus on profitability, since it is not a relevant objective. Ideally, therefore, they should focus on other performance objectives, such as how well the organizations met their service goals. In reality, however, the goal of reporting on how well they have achieved such goals has proven difficult to attain and the financial reports have focused mainly on finance-related data. 2. Governments and not-for-profits are “governed” by the budget, whereas businesses are governed by the marketplace. The budget is the key political and fiscal document of governments and not-for-profits. It determines how an entity obtains its resources and how it allocates them. It encapsulates most key decisions of consequence made by the organization. In a government the budget is not merely a managerial document; it is the law. 3. Owing to the significance of the budget, constituents want assurance that the entity achieves its revenue estimates and complies with its spending mandates. They expect the financial statements to report on how the budget was administered. 4. Interperiod equity is the concept that taxpayers of today should pay for the services that they receive and should not shift the payment burden to taxpayers of the future. Financial reporting must indicate the extent to which interperiod equity has been achieved. Therefore, it must determine and report upon the economic costs of the services performed (not merely the cash costs) and of the taxpayers’ contribution toward covering those costs. 5. The matching concept may be less relevant for governments and not-for-profits than for businesses because there may be no connection between revenues generated and the quantity, quality, or cost of services performed. An increase in the demand for, or cost of, services provided by a homeless shelter would not necessarily result in an increase in the amount of donations that it receives. Of course, governments and not-for-profits are concerned with measuring interperiod equity and for that purpose the matching concept may be very relevant. 6.
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ch__01_____SM[1] - Government and not-for-profit accounting...

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