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Chapter 1
1-1
The solution to this and the first exercise of Chapters 2 through 9 will differ from
student to student assuming each has a different CAFR.
1-2.
1.
2.
3.
4.
5.
B.
A.
C
D.
D.
6.
7.
8.
9.
10.
C.
A.
D.
D.
D.
1-3.
1.
2.
3.
4.
5.
B.
D.
C.
A.
C.
6.
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9.
10.
B.
D.
D.
D.
C.
1-4.
A.
B.
The three standards setting bodies in question are the Governmental Accounting
Standards Board (GASB), the Federal Accounting Standards Accounting
Advisory Board (FASAB), and the Financial Accounting Standards Board
(FASB). The GASB sets accounting and financial reporting standards for state
and local governmental organizations, including those not-for-profit organizations
that are determined to be state and local governments. The FASAB establishes
accounting standards for the federal government and its agencies unless objected
to by one of the "principals" (the director of the office of management and budget,
the comptroller general of the united states, and the secretary of the treasury).
When the "principals" approve, the FASAB standards become GAAP. The FASB
sets accounting and financial reporting standards for all nongovernmental entities,
including business entities and nongovernmental, not-for-profit entities.
The definition of a government, as agreed to by the FASB and the GASB is as
follows:
“Public corporations and bodies corporate and politic are governmental
organizations. Other organizations are governmental organizations if they have
one or more of the following characteristics:
1.
Popular election of officers or appointment (or approval) of a controlling
majority of the members of the organization’s governing body by officials
of one or more state or local governments;
2.
The potential for unilateral dissolution by a government with the net assets
reverting to a government, or
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1-4 (B) (Continued).
3.
The power to enact and enforce a tax levy.
Furthermore, organizations are presumed to be governmental if they have the
ability to issue directly (rather than through a state or municipal authority) debt
that pays interest exempt from federal taxation. However, organizations
possessing only that ability (to issue tax-exempt debt) and none of the other
governmental characteristics may rebut the presumption that they are
governmental if their determination is supported by compelling, relevant
evidence.
C.
The “hierarchy of GAAP” refers to the preferential ordering of sources that define
accounting and reporting principles for governmental and nongovernmental units.
A separate hierarchy exists for each in the Statement of Auditing Standards.
For state and local governmental units:
1.
GASB Statements and Interpretations, plus AICPA and FASB
pronouncements if made applicable to state and local governments by a
GASB Statement or Interpretation.
2.
GASB Technical Bulletins, and the following pronouncements if
specifically made applicable to state and local governments by the
AICPA; AICPA Industry Audit and Accounting Guides and AICPA
Statements of Position.
3.
Consensus positions of the GASB Emerging Issues Task Force (not yet in
existence) and AICPA Practice Bulletins if specifically made applicable to
state and local governments by the AICPA.
4.
"Q's and A's" published by the GASB staff, as well as industry practices
widely recognized and prevalent.
5.
Other accounting literature, including GASB Concepts Statements;
pronouncements in categories (a) through (d) of the hierarchy for
nongovernmental entities when not specifically made applicable to state
and local governments; FASB Concepts Statements; FASAB Statements,
Interpretations, and Technical Bulletins, AICPA Issues Papers;
International Accounting Standards Committee Statements,
pronouncements of other professional associations or regulatory agencies;
AICPA Technical Practice Aids; and accounting textbooks, handbooks, or
articles.
1-2
1-4 (C) (Continued).
For the federal government and its agencies:
1.
FASAB Statements and Interpretations, plus AICPA, FASB, and GASB
pronouncements if made applicable to federal governmental entities by a
FASAB Statement or Interpretation.
2.
FASAB Technical Bulletins and the following pronouncements if
specifically made applicable to federal governmental entities by the
AICPA and cleared by the FASAB; AICPA Industry Audit and
Accounting Guides and AICPA Statements of Position.
3.
AICPA AcSEC Practice Bulletins if specifically made applicable to
federal governmental entities and cleared by the FASAB and Technical
Releases of the Accounting and Auditing Policy Committee of the
FASAB.
4.
Implementation Guides published by the FASAB staff and practices that
are widely recognized and prevalent in the federal government.
5.
Other accounting literature, including FASAB Concepts Statements;
pronouncements in categories (a) through (d) of the hierarchy in paragraph
10 when not specifically made applicable to federal governmental entities;
FASB and GASB Statements, Interpretations, Technical Bulletins, and
Concepts Statements; AICPA Issues Papers; International Accounting
Standards of the International Accounting Standards Committee;
pronouncements of other professional associations or regulatory agencies;
AICPA Technical Practice Aids; and accounting textbooks, handbooks, or
articles.
For nongovernmental units:
1.
FASB Statements and Interpretations, APB Opinions, and AICPA
Accounting Research Bulletins.
2.
FASB Technical Bulletins, AICPA Industry Audit and Accounting
Guides, and AICPA Statements of Position.
3.
Consensus positions of the FASB Emerging Issues Task Force and AICPA
Practice Bulletins.
1-3
1-4 (C) (Continued).
1-5.
A.
4.
AICPA Accounting Interpretations; "Q's and A's" published by the
FASB staff, as well as industry practices widely recognized and
prevalent.
5.
Other accounting literature, including FASB Concepts Statements; AICPA
Issues Papers; International Accounting Standards Committee Statements,
GASB Statements, Interpretations, and Technical Bulletins;
pronouncements of other professional associations or regulatory agencies;
AICPA Technical Practice Aids; and accounting textbooks, handbooks,
and articles.
Conceptually, the measurement focus determines what is measured; the basis of
accounting determines when something is measured. The economic resources
measurement focus measures all economic resources, including fixed assets and
long-term debt. The current financial resources measurement focus measures
primarily financial resources and does not measure long-term assets and
liabilities. The accrual basis of accounting recognizes revenues when earned and
expenses when incurred. The modified accrual basis of accounting is somewhere
between the cash and accrual bases of accounting and recognizes revenues when
measurable and available to finance expenditures of the current period. The
modified accrual basis of accounting recognizes expenditures generally when
goods and services are received, except for payments of interest on long-term debt
which are recognized when due.
B.
Under accrual accounting revenues based on exchange transactions are
recognized when earned. Revenues based on nonexchange transactions are
recognized according to the provisions of GASB Statement 33. Under modified
accrual accounting, revenue recognition is modified to require that the amount be
measurable (determinable) and available to finance expenditures of the current
period.
C.
Under accrual accounting, expenses are recognized when incurred. Expenses are
often matched with the revenues those expenses generate, in the case of exchange
transactions. Accruals are required for interest and other expenses, regardless of
when cash is to be transferred. Under modified accrual accounting, expenditures
(not expenses) are recorded generally when goods or services are received. (To
the instructor: This answer is based on the information given in Chapter 1; more
sophistication is introduced in later chapters.)
D.
Under the economic resources measurement focus and accrual accounting, fixed
assets are capitalized and depreciated (except for infrastructure assets using the
modified approach). Under the current financial resources measurement focus
and modified accrual accounting, fixed assets are not capitalized or depreciated;
rather fixed assets are charged to expenditures when received.
1-4
1-5 Continued
E.
Under the economic resources measurement focus and accrual accounting, longterm debt is recorded as a liability; repayments are recorded as a reduction of that
liability. Under the current financial resources measurement focus and modified
accrual accounting, long-term debt is not recorded as a liability. (Later chapters
will indicate that the issuance of debt results in an “other financing source” in the
governmental fund statements and that the repayment of debt will result in an
expenditure in the governmental fund statements.)
An exchange transaction, according to GASB Statement 34, is one “in which each
party receives and gives up essentially equal values.” Nonexchange transactions
are transactions “in which a government gives (or receives) value without directly
receiving (or giving) equal value in exchange.” The four types of nonexchange
transactions are: (1) derived tax revenues, (2) imposed nonexchange revenues, (3)
government-mandated nonexchange transactions, and (4) voluntary nonexchange
transactions.
1-6.
Public sector organizations are governments or organizations owned or controlled by
governments. Private sector organizations are organizations that are not owned or
controlled by governments and include businesses as well as private not-for-profit
organizations.
1-7.
GASB has a three-part budgetary principle:
1.
An annual budget (s) should be adopted by every governmental unit.
2.
The accounting system should provide the basis for appropriate budgetary control.
3.
Budgetary comparisons should be included in the appropriate financial statements
and schedules for governmental funds for which an annual budget has been
adopted.
.
1-8.
A.
According to the web site, “The mission of the Governmental Accounting
Standards Board is to establish and improve standards of state and local
governmental accounting and financial reporting that will:
* Result in useful information for users of financial reports and
* Guide and educate the public, including issuers, auditors, and users of those
financial reports.”
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B.
C.
According to the web site, “The primary users of state and local governmental
financial reports are those:
a.
To whom governmental is primarily accountable-its citizens,
b.
Who directly represent the citizens-legislative and oversight bodies, and
c.
Who finance government or who participate in the financing processtaxpayers, other governments, investors, creditors, underwriters, and
analysts.
The guiding principles of GASB (first sentence of each) are:
* To be objective and neutral in its decision making and to ensure, as much as
possible, that the information resulting from its standards is a faithful
representation of the effects of state and local government activities.
* To weigh carefully the views of its constituents in developing concepts and
standards so that they will (a) meet the accountability and decision-making needs
of the users of government financial reports, and (b) gain general acceptance
among state and local government preparers and auditors of financial reports.

To establish standards only when the expected benefits exceed the perceived
costs.
* To consider the applicability of its standards to the separately issued general
purpose financial statements of governmentally owned special entities.
* To bring about needed changes in ways that minimize disruption of the
accounting and financial reporting processes.
* To review the effects of past decisions and interpret, amend, or replace
standards when appropriate.
1-C. SEE THE SOLUTION TO CONTINUOUS PROBLEM 4-C.
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