G&NP Accounting Notes
G&NP Accounting Notes SPEA V346
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This 11 page Reader was uploaded by Sara Reeves on Saturday January 31, 2015. The Reader belongs to SPEA V346 at Indiana University taught by McCaster in Fall. Since its upload, it has received 138 views. For similar materials see Intro to Governmental and Financial Reporting in Public Relations at Indiana University.
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Date Created: 01/31/15
Government and NonPro t Accounting Chapter 1 Governments and types of nonpro t organizations are unique in that They do not attempt to earn a pro tmost are exempt from income taxes They are owned collectively by their constituents because ownership not evidenced by equity shares those unhappy with government must await change in governing body or move Contributors of nancial resources to organization do not necessarily receive a direct or proportionate share of their services ex Homeowners pay taxes to nance public schools but might not have kids in school Major policy decisions are made by majority vote or elected or appointed governing body city council hospital board of directors etc whose members serve parttime Decisions must mostly be made in meetings open to public and have quotopen recordsquot laws that make their accounting and other records open to the public A exists because a community or society decides to to its group as a whole goods usually provided whether costs incurred will be recovered through charges for the goods or services or whether those paying for goods or services are those bene ting from them Major organizations federal state county municipal township village etc kindergartens elementary amp secondary schools vocational and technical schools colleges and universities NI 39 3 hospitals nursing homes CPAs American Red Cross United Service Organizations USO 4 YMCA YWCA Salvation Army etc 5 United Way Community Chest fundraising agencies etc 6 private trusts and corporations organized for educational religious or charitable purposes sector now accounts for more than of all expenditures in the US economy GampNP organizations are to pro tseeking enterprises in many ways 1 2 They are integral parts of same economic system and use nancial capital and human resources to accomplish their purposes Both must acquire and convert scarce resources into their respective goods or services 3 Must have viable information systems including excellent accounting systems to assure that people receive relevant and timely information for planning directing controlling and evaluating the sources uses and balances of scarce resources 4 Cost analysis and other control and evaluation techniques are essential to ensure that resources are utilized economically effectively and ef ciently 5 Both can produce similar resources ex Both govt and private may own and operate transportation systems and electric utilities Major s between the two include 1 Organizational objectives 2 Sources of nancial resources 3 Methods of evaluating performance and operating results Objective of my GampNP is to as their nancial and other resources permit GNP usuay operate on a May seek to increase amount of resources available each year but purpose is to enable org to provide more or better services not to increase wealth GNP seek to expend their available nancial resources for the bene t of their constituencies in GNP environment thus typicay focuses on on sources and uses of expendable nancial resources budget status and cash ow rather than on i Pro t text regulator device is not present in usua GNP situation Because govts have power to tax and lack market competition for most provided services Also consumers have to case bc govt services are provided without charge or at a set or constant charge Evaluation of GNP is hard because 0 No open market supply and demand test to evaluate services provided 0 Relationship between resource contributors and recipients is remote and indirect GNP orgs are not pro t oriented in usual sense and are not expected to operate pro tably pro t test is neither valid performance indicator nor regulating device Govts can force nancial resource contributions through taxation Governments and NP organizations are subject to more stringent legal regulatory and other controls than are private businesses These orgs must employ measures and controls of operating results other than net income to ensure resources are used appropriately All facets of a GampNP organization39s operationsespecially SLG state and local govtsmay be affected by legal or quasilegal requirements 1 lmposed externally such as by fed or state statute grant regulations or judicial decrees or 2 lmposed internally or by mutual agreement ex Charter bylaw ordinance trust agreement etc Aspects of GampNP org39s or otherwise include 1 form composition of governing board and duties of its personnel lines of authority and responsibility policies concerning which officials are to be elected appointed or hired 2 who will appoint or hire personnel tenure of personnel policies and procedures upon termination compensation levels etc 3 types and maximum amounts of taxes licenses nes or fees a govt may levy procedure for setting user charges tuition rates debt limits purposes for which debt may be incurred etc 4 purposes for which resources may be used including the legal restriction of certain resources only for speci c purposes purchasing procedures to be followed budgeting methods forms or procedures 5 any or all phases of the accounting system for example chart of accounts bases of accounting forms and procedures 6 type and frequency of nancial reports report format and content report recipients 7 frequency of audit who is to perform the audit scope and type of audit time and place for ling the audit report who is to receive or have access to the audit report Managers of GNP may have limited discretion compared with managers of business Objectives of GNP Accounting and Financial Reporting Financial Accounting Standards Board FASB Statement ofFinancia Accounting Concepts No 4 states objectives of general purpose external nancial reporting by nonbusiness nonpro t orgs No 4 says 0 Objectives stem from needs of external users 0 Also managers and governing bodies need a great deal of internal accounting info to carry out their responsibilities in planning and controlling activities Objectives in SFAC no 4 state that nancial reporting by nonbusiness orgs should provide info that is useful to present and potential resource providers and other users in 0 Making rational decisions about allocation of resources to those orgs Assessing the services that nonbusiness org provides and ability to continue providing 0 Assessing how managers of nonbusiness org have discharged their stewardship responsibilities and other aspects of their performance Also should include explanations to help users understand nancial info provided The and several similar predecessor committees led the development of accounting principles concepts and standards for state and local govts until led development of acting principles for hospitals and health care institutions colleges and universities set forth accounting principles and standards for nonpro t organizations in AICPA audit and acting guides until began issuing guidance for nongov nonpro t orgs in 1993 led fed govt accounting standards effort until Federal Accounting Standards Advisory Board was established in 1990 Both FASB and GASB are overseen by Financial Accounting Foundation FAF FASB 7 full time members and over 60 staff members GASB 7 members chairman full time other six members are parttime Board is assisted by fulltime professional staff of about 12 people FAF created GASB in 1984 and that stated 0 is responsible for establishing accounting and nancial reporting standards for activities and transactions is responsible for establishing accounting and nancial reporting standards for Include 1 Public corporations and bodies corporate and politic and 2 Other organizations if they have one or more of the following characteristics 0 The popular election of of cers or appointment of a controlling majority of the members of org39s governing body by of cials of one or more S or L govts The potential for unilateral dissolution by a govt with the net assets reverting to a govt The power to enact and enforce a tax levy The ability to issue directly rather than through state or municipal authority debt that pays interest exempt from fed taxation GASB Jurisdiction hierarchy aka 0 Guidance applies only to state and local govt organizations non SLGs follow FASB Jurisdiction GAAP hierarchy authoritative pronouncements for SLGs guidance that has been cleared by GASB staff in GASB pronouncements or is not authoritative Unique aspect of SLG environment is that govt may be involved in both govtl and businesstype activity 0 include re and police protection courts street and traf c control health and welfare executive and legislative of ces and other quotgeneral govtlquot activities 0 include public utilities ex Electricity water and other activities for which user fees are charged and that are operated similarly to private businesses GovernmentalType activities Purpose provide goods or services often without regard to individual recipient39s ability to pay for them Sources of nancial revenue examples taxes and governmental grants and subsidies Taxation Even when SLGs charge fees for general govt services they often must be subsidized with tax revenue ex many public health clinics Power to taX causes to be Taxation is or event that eliminates any direct association between 1 The amount and quality of the services a constituent receives from the govt and 2 The amount the constituent pays to the govt The ability of the govt to exact resources from individuals businesses and others by taxation and similar levies means types levels and quality of services a govt provides are not automatically dictated or regulated by what constituents want or are willing to pay for services Intergovernmental Revenues grants and subsidies from higher level govts are another signi cant source of SLG revenues Financial Resource Allocation Mechanisms Derived from processes clearly different from business enterprises for the most part the nature of the US governing system including restrictions on nancial resource use and budget process determines how allocations are made Restrictions on Resource Use One way to allocate general govt resources is for restrictions to be placed on resource use by resource provider or their representative Some restrictions arise from intergovernmental grantors requiring resources provided be used for certain purpose taxes being levied for speci c purpose roads education debt service debt proceeds restricted to speci c purpose These e the primary reason for use to account for nancial resources split up according to purpose The Budget Taxes and other revenues are allocated to various uses by placing even more detailed budgetary restrictions on their use Budget is adopted into law and becomes a contract between executive branch legislative branch and citizenry Budget Process 1 Executive branch typically prepares proposed budget and submits appropriation requests to the legislative branch 2 Legislative branch has power to approve those requests 3 Executive branch is accountable to legislative branch for operating within those appropriations and laws An has the force of law It both to be expended for various purposes and that may be expended for each of these purposes Government must demonstrate its budgetary accountability which entails reporting whether revenues were obtained and expended as anticipated and whether allowed expenditures were exceeded Establishing the budget is one of the most important functions elected reps perform numerous environmental feature discussed result in distinct SLG accountabilities To whom accountable the need for accountability exists between 2 and 3The 1 Constituencies elected officials are empowered by citizens to act on their behalf and are evaluated by voters in part on their scal and budgetary performance SLG officials must demonstrate that money going to certain areas actually are used in those areas 2 To other governments Senior levels of govt often have some oversight authority over lower level of govt also arises when grants or intergovernmental subsidies are granted to SLG 3 SLG39s legislative and executive bodies fund restrictions and budget contract have been complied with and resources have been used ef ciently and effectively Financial reports for governmentaltype activities focus on two types of accountability o government39s responsibility to demonstrate its compliance with public decisions about the raising and spending of public monies in the short term includes use of resources in accordance with restrictions and compliance with fund and budget restrictions 0 government39s responsibility to demonstrate extent to which it has met operating objectives and whether it can continue to meet them in the foreseeable future This type of accountability results in govt providing 0 A measure of economic costs of providing services operating costs 0 Assessment of whether a govt is raising enough revenues each period to cover cost of providing services operating results 0 Assessment of whether services are provided economically and efficiently Reporting Issues and Problems Characteristics of SLG also create issues and problems that must be dealt with in nancial reporting or auditing including but not limited to 0 Need to demonstrate compliance with restrictions on use of nancial resources 0 Need for appropriate budgetary reporting Financial Report Users GASB has identi ed primary groups of users of external nancial reports of SLGs Citizenry those whom govt is primarily accountable Legislative and oversight bodies those who directly represent the citizens Investor and creditors those who lend or participate in lending process There is a fourth group of government administrators if they are without adequate access BusinessTvne Activities A govt39s businesstype activities include 0 Provide same types of services as private sector businesses lnvolve exchange relationship there is direct relationship between services provided and fee charged to the consumer Are often separate legally constituted selfsuf cient organizations Exchange relationship causes users of nancial reports to focus on measuring the costs of providing the service the revenues obtained from the service and the difference between the two Most capital assets of businesstype activities are revenue producing Businesstype activities of a government often perform only a single function there is normally a greater potential for comparability among businesstype activities that are performing similar functions than among governmentaltype activities which vary from government to government Some government businesstype activities are designed to be insulated from the political revenue they are not a part of general government budgetary process they have direct relationship between fees and services rendered and they are separate legally constituted agencies Businesstype organizations often perform a single function so multiple fund accounting is not as common as it is in governmentaltype activities Similarities and differences between users and uses of nancial reports on SLG39s businesstype activities compared to reports covering its governmentaltype activities 0 Users and uses of govtal nancial reports typically are the same regardless of whether activity is businesstype or governmentaltype however users and uses of nancial reports for businesstype activities may differ depending on whether activity reports separately or as part of broader general govt Uses of businesstype activity nancial reports differ only in emphasis from the uses of nancial reports of govttype activities Investors and creditors are concerned primarily with whether businesstype activity is generating and will continue to generate suf cient cash to meet debt service requirements 0 Citizen groups and consumers may use info on results of operations to assess the reasonableness of user charges 0 Legislative and oversight of cials review businesstype activity reports to see cash ow and user charge and also to assess need to subsidize an activity with general govt revenues or vice versa 0 Both citizen groups and legislative and oversight of cials need info about effectiveness economy etc because this info has effect of user charges 0 All user groups may be concerned with relationship between nancial position and operating results of the businesstype activity and that of the government as a whole Characteristics of SLG Accounting and Financial Reporting Operations established primarily to generate pro tssuch as lotteries are the exception in the govt SLG accounting and reporting have a strong emphasis on control of and accountability for nancial resources Two most important types of provisions affecting accounting in this environment are 1 The and 2 The External restrictions create signi cant accountability Constraints that are internal plans and may be changed by the governing body or management can create some internal accountability SLG orgs establish funds to control restricted and designated resources and to both ensure and demonstrate compliance with legal and administrative requirements separate scal and accounting entities and include cash and noncash resourcessegregated according to purposes or activities for which they are to be used as well as related liabilities Two basic categories of fund accounting entities are used by SLGs 1 to account for nancial assets related liabilities changes in net assets and balances that may be expended in its nonbusinesstype activities ex Fire and police protection to account for revenues expenses assets liabilities and net position of its businesstype activities ex Utilities cafeterias etc Use of in GampNP situations than in private enterprise 0 Fund of a commercial enterprise is simply apportion of its assets that has been restricted to speci c uses not a separate and distinct accounting entity 0 Fund in GNP accounting sense is a selfcontained accounting entity with its own asset liability revenue expenditure or expense and fund balance or net position accounts SLG expenditures may only be made within the authority of appropriations authorizations to make expenditures for speci ed purposes or similar authorizations by governing body is commonly prepared for each governmental fund organization39s chief executive asks governing body for permission to incur speci ed amount of expendituresfor salaries equipment supplies and so on during budget period to carry out department s mission When approved by governing body budgetary expenditure estimates become binding which both expenditures for speci ed purposes and the amounts that can be expended for each speci ed purpose of most SLG accounting and reporting is accounted for in govtal fund entities and allocated by the budget and appropriation process Cost measurement focus of proprietary fund accounting and of entitywide nancial reports of GNP orgs like that the cost of assets and services consumed during the period In contrast the cost measurement focus of amount of net nancial resources expended during the period for 0 Current operations ex Salaries utilities 0 Capital outlay acquiring capital assets 0 Longterm debt principal retirement and interest Term quot has been de ned as quot whether paid or unpaid including current operating costs provision for retirement of debt not reported as a liability of the fund from which retire and capital outlaysquot Don39t confuse expenditures with expenses are not appropriable nancial resources thus they are listed and accounted for separately from the govtl fund accounting entities in a accounting entity Cost of acquiring a capital asset is considered an in the period in which it occurs because both reduce the net nancial assets of a governmental fund Primary consideration in SLG environment is on