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Rule 203 of the AICPA's Code of Professional Conduct pertains to a. CPAs' independence b. authorities designated to establish accounting standards c....

This question was answered on Jan 12, 2011. View the Answer
Rule 203 of the AICPA’s Code of Professional
Conduct pertains to
a. CPAs’ independence
b. authorities designated to establish accounting
c. standards of competency
d. solicitation of new clients by a CPA
2. Which of the following rule-making authorities
would establish accounting standards for
Stanford University (a private university)?
a. the AICPA
b. the FASB
c. the FASAB
d. the GASB
3. Which of the following rule-making authorities
would establish accounting standards for
the University of Texas (a public university)?
a. the AICPA
b. the FASB
c. the FASAB
d. the GASB
4. If the GASB has not issued a pronouncement
on a specific issue, which of the following is
true with respect to FASB pronouncements?
a. they would automatically govern
b. they could be taken into account but would
have no higher standing than other accounting
c. they are irrelevant
d. they could be taken into account by the
reporting entity, but only if disclosure is
made in notes to the financial statements
5. The FASB is to the GASB as
a. a brother is to a sister
b. a father is to a son
c. a son is to a father
d. a daughter is to a friend
6. Standards promulgated by the FASB are most
likely to be adhered to by which of the following
governmental units?
a. a police department
b. a public school
c. an electric utility
d. a department of highways
7. Which of the following practices is most likely
to undermine interperiod equity?
a. paying for a new school building out of
current operating funds
b. paying the administrative staff of a school
out of current operating funds
c. issuing 20-year bonds to finance construction
of a new highway
d. recognizing gains and losses on marketable
securities as prices increase and decrease
8. The term ‘‘independent sector’’ refers to
a. states that have opted not to receive federal
b. not-for-profit organizations
c. churches that are unaffiliated with a particular
d. universities that are not affiliated with a
particular athletic conference
9. Which of the following is not an objective of
external financial reporting by either the
GASB or the FASB?
a. to enable the statement user to detect fraud
b. to disclose legal or contractual restrictions
on the use of resources
c. to provide information about how the organizations
meet their cash requirements
d. to provide information that would enable a
user to assess the service potential of longlived
10. Which of the following is the least appropriate
use of the external financial statements of a
a. to assess the entity’s financial position
b. to assess whether the compensation of management
is reasonable in relation to that in
comparable entities
c. to compare actual results with the budget
d. to evaluate the efficiency and effectiveness
of the entity in achieving its objectives

Problem 1-3

Budgeting practices that satisfy cash requirements may
not promote interperiod equity.

The Burnet County Road Authority was
established as a separate government to maintain
county highways. The road authority was granted
statutory power to impose property taxes on county
residents to cover its costs, but it is required to
balance its budget, which must be prepared on a
cash basis. In its first year of operations it engaged
in the following transactions, all of which were
consistent with its legally adopted, cash-based

_ Purchased $10 million of equipment, all of which
had an anticipated useful life of 10 years. To
finance the acquisition, the authority issued $10
million in 10-year term bonds (i.e., bonds that
mature in 10 years)

_ Incurred wages, salaries, and other operating
costs, all paid in cash, of $6 million

_ Paid interest of $0.5 million on the bonds

_ Purchased $0.9 million of additional equipment,
paying for it in cash. This equipment had a useful
life of only three years

1. The authority’s governing board levies property
taxes at rates that are just sufficient to
balance the authority’s budget. What is the
amount of tax revenue that it is required to

2. Assume that in the authority’s second year of
operations, it incurs the same costs, except that
it purchases no new equipment. What amount
of tax revenue is it required to collect?

3. Make the same assumption as to the tenth year,
when it has to repay the bonds. What amount
of tax revenue is it required to collect?
4. Comment on the extent to which the authority’s
budgeting and taxing policies promote
interperiod equity. What changes would you

Problem 1-4

The dual objectives of assessing interperiod equity and
ensuring budgetary compliance may necessitate different
accounting practices.

A city engages in the transactions that follow.
For each transaction, indicate the amount of revenue
or expenditure that it should report in 2012.
Assume first that the main objective of the financial
statements is to enable users to assess budgetary
compliance. Then assume alternatively that the main
objective is to assess interperiod equity.

The city prepares its budget on a ‘‘modified’’
cash basis (that is, it expands the definition of cash
to include short-term marketable securities), and
its fiscal year ends on December 31.

1. Employees earned $128,000 in salaries and
wages for the last five days in December
2012. They were paid on January 8, 2013.

2. A consulting actuary calculated that, per an
accepted actuarial cost method, the city should
contribute $225,000 to its firefighters’ pension
fund for 2012. However, the city contributed
only $170,000, which is the amount budgeted
at the start of the year.

3. The city acquired three police cars for $35,000
cash each. The vehicles are expected to last for
three years.

4. OnDecember 1, 2012, the city invested $99,000
in short-term commercial paper (promissory
notes). The notes matured January 1, 2013.
The city received $100,000. The $1,000 difference
between the two amounts represents the
city’s return (interest) on the investment.
5. On January 2, 2012, the city acquired a new
$10 million office building, financing it with
25-year serial bonds. The bonds are to be
repaid evenly over the period during which
they are outstanding—that is, $400,000 per
year. The useful life of the building is 25 years.

6. On January 1, 2012, the city acquired another
$10 million office building, financing this facility
with 25-year term bonds. These bonds
will be repaid entirely when they mature January
1, 2037. The useful life of this building is
also 25 years.

7. City restaurants are required to pay a $1,200
annual license fee, the proceeds of which the
city uses to fund its restaurant inspection program.
The license covers the period July 1
through June 30. In 2012 the city collected $120,000 in fees for the license period beginning
July 1, 2012.

8. The city borrowed $300,000 in November
2012 to cover a temporary shortage of cash.
It expects to repay the loan in February 2013.

Problem 1-5

Year-end financial accounting and reporting can reveal
the economic substance of government actions that have
been taken mainly to balance the budget.

Public officials, it is often charged, promote
measures intended to make the government ‘‘look
good’’ in the short-term, but that may be deleterious
in the long term. Assume that a city’s budget is
on a cash or near-cash basis. Further assume that
the following actions, designed to increase a
reported surplus, were approved by the city council
and did indeed reduce budgetary expenditures or
increase budgetary revenues:

a. The city reduced its contributions to the
employee defined benefit pension plan from
the $10 million recommended by the city’s
actuary to $5 million. Under a defined benefit
plan, the employer promises employees specified
benefits upon their retirement, and the level
of benefits is independent of when and how
much the employer contributes to the plan
over the employees’ years of service.

b. It reduced by $1 million the city’s cash transfer
to a rainy-day reserve that is maintained to cover
possible future reductions in tax collections
attributable to a downturn in the region’s

c. It sold securities that had been held as an
investment. The securities had been purchased
five years earlier at a cost of $2 million. Market
value at the time of sale was $5 million.

d. It delayed until the following year $10 million of
maintenance on city highways.

1. Suppose that you were asked to propose
accounting principles for external reporting
that would capture the true economic nature
of these measures—actions that, in substance,
did not improve the city’s financial performance
or position. For each measure, indicate
how you would require that it be accounted for
and reported.

2. Can you see any disadvantages to the principles
that you propose?

Problem 1-6

Choice of accounting principles may have significant
economic consequences.

In preparing its budget proposals, a city’s
budget committee initially estimated that total revenues would be $120 million and total expenditures
would be $123 million. In light of the
balanced budget requirements that the city has to
meet, the committee proposed several measures
to either increase revenues or decrease expenditures.
They included the following:

a. Delay the payment of $0.4 million of city bills
from the last week of the fiscal year covered by
the budget to the first week of the next fiscal

b. Change the way property taxes are accounted
for in the budget. Currently, property taxes are
counted as revenues only if they are expected
to be collected during the budget year. New
budgetary principles would permit the city to
include as revenues all taxes expected to be
collected within 60 days of the following fiscal
year, in addition to those collected during the
year. The committee estimates that the change
would have a net impact of $1.2 million.

c. Change the way that supplies are accounted
for in the budget. Currently, supplies are
recognized as expenditures at the time they
are ordered. The proposal would delay recognition
of the expenditure until the supplies
are actually received. The committee estimates
a net effect of $0.8 million.

d. Defer indefinitely $1.5 million of maintenance
on city roads.
Except as just noted with respect to supplies,
the city currently prepares its budget on a cash
basis, even though other bases are also legally
permissible. It prepares its year-end financial statements,
however, on an accrual basis.

1. Indicate the impact of each of the proposals on
the city’s (1) budget, (2) annual year-end financial
statements, (3) ‘‘substantive’’ economic
well-being. Be sure to distinguish
between direct and indirect consequences.

2. It is sometimes said that choice of accounting
principles doesn’t matter in that the principles
affect only the way in which the entity’s fiscal
‘‘story’’ is told; they have no impact on the
entity’s actual financial history or current status.
Do you agree? Explain.
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This question was asked on Jan 11, 2011 and answered on Jan 12, 2011.

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