Chapter One Review Questions

Question 1: What characteristics differentiate G&NP

organizations from profit-seeking entities?

Answer:
The following characteristics differentiate government and
nonprofit (or not-for profit) organizations from profit-seeking (or
for-profit) organizations:

a. Government and nonprofit (G&NP) organizations are service-

oriented and there
is no profit motive inherent in their inception or operation;

b. They usually are owned collectively, and ownership interests

cannot be sold or traded; contributors of financial resources to
G&NP organizations do not necessarily receive any direct or
proportionate shares of their goods or services;

c. They often provide goods or services that are not feasibly

provided through the
private sector

d. Their major policy decisions, and perhaps some operating

decisions, typically are made by consensus vote of an elected or
appointed governing body.

Question 2: List four factors that cause society to subject

G&NP organizations to more stringent legal, regulatory, and
other controls than it imposes on private businesses.

Answer:

a. The lack of the profit test as a regulator and control device.

b. Governments have the power of taxation.

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c. There is no open market for most G&NP organization goods and
services.

d. Resources made available to G&NP organizations often are

restricted for
specified services.

Question 3: Legal and administrative constraints are

societys tools for directing G&NP institutions in achieving
their objectives. This results in an emphasis on control
and accountability for expendable financial resources in
G&NP organization rather than on net income
determination.
Why cant the profitability measure provide this direction?
Identify various legal and administrative control
provisions unique to G&NP organizations and explain their
impact on accounting and reporting for such
organizations?

Answer:

G&NP organizations are, by definition, not profit-seeking

organizations. Thus, their goal is not to maximize profits, but to
provide as much goods and services as possible within the
constraints of the resources made available to them. Further,
many of the goods and services they provide are provided by
G&NP organizations because it is not profitable for business
organizations to provide them.
In the absence of the profit measure and its regulatory benefits,
society substitutes
alternative controls over G&NP organizations. The two major
control devices are funds and the budgetary/appropriations
process. Other control devices include restrictions as to their
organizational structure, personnel policies and procedures,
sources of financial resources, uses of financial resources,
accounting, reporting, and auditing. The impact of societys
control devices is seen in the use of fund accounting, budgetary

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control, and financial reporting emphasizing accountability for
financial resources received, used, and held in terms of the
constraints within which the G&NP organization functions.

Question 4: Discuss the funds flow concept as it

applies to the operations of G&NP organizations.

Answer:
The focal point of G&NP organization accounting and financial
reporting is expendable financial resources, accounted for in
expendable funds, and allocated by the budgetary process. In this
context, funds-flow refers to the beginning balances, inflows,
outflows, and ending balances of the net expendable financial
resources of expendable funds.

Question 5: Contrast the cost measurement focus used

by proprietary (nonexpendable) funds and governmental
(expendable) funds.
Answer:
The cost measurement focus of proprietary (nonexpendable)
funds is expenses.
Expenses are the cost of assets and services that are consumed
during a period. This is the cost measurement focus used by
businesses.
The cost measurement focus of governmental (expendable) funds
is expenditures. Expenditures are the amount of financial
resources expended for a period for:
a. Current operations
b. Capital outlay
c. Long-term debt principal retirement and interest.

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Question 6: Contrast the following concepts as they are
used in commercial and G&NP accounting:
a. Accounting entity
b. Periodicity
c. Matching
d. Going concern

Answer:

a. Accounting entity: In G&NP accounting, the accounting

entity concept relates to the separate fund and fund type entities,
not to the organization as a whole. The organization in its entirety
typically is referred to as the reporting entity.
b. Periodicity: In G&NP accounting, the periodicity concept
usually relates to the budgetary period and budgetary
comparisons, rather than to income determination.

c. Matching: The matching concept as understood in commercial

accounting is used similarly for commercial-type activities
undertaken by G&NP organizations and in government-wide
financial reporting. In all other cases, is reference to matching
revenues and expenditures.
Governmental (expendable) fund accounting emphasizes the
inflows, outflows,
and balances of expendable financial resources rather than the
determination of
revenues, expenses, and net income.
d. Going concern: The going concern concept is relevant only
when commercial-type or self supporting activities are involved in
G&NP organizations and at the government wide level.
Expendable financial resource funds exist on a year-by year or
project-by-project basis and may be intentionally exhausted and
go out of business.