Week 1 Government and Not-for-Profit Environment (Ch.

1)
Learning Objectives:
 Understand the characteristics that distinguish governments from not-for-profit and from
for profit organizations
 Understand the overall purpose of financial reporting in the government and not-for-
profit sectors
 Understand the information requirements of the users of financial reports of government
and not-for-profit entities
 Understand the specific objectives of financial reporting as established by the
Government Accounting Standards Board (GASB) and the Financial Accounting
Standards Board (FASB)

Over recent years, there has been significant growth in the government and not-for-profit sector
which now consists of more than 87,000 local government agencies and more than one million
not-for-profit entities. Consequently any comprehensive accounting program should include a
study of government and not-for-profit accounting. This is a survey course which examines the
big picture of government and not-for-profit accounting.
Governments and not-for-profits differ significantly from businesses in ways which have
profound implications for financial reporting. To begin with, the primary goal of governments
and not-for-profits is to provide some service to constituents and not to earn a profit.
Governments and not-for-profits are governed mainly by their budgets and not by the
marketplace. At the outset of our discussion then we should consider some of the more
important characteristics of government, not-for-profit, and profit organizations.

Government Agencies
 Ultimate objective is to meet some political and/or social need
 Goal is something other than to earn net income and/or make a profit
 Commonly render services with no expectation of receiving revenue
 Primarily supported by taxes
 Taxpayers do not necessarily receive an equivalent share of the government's goods or
services
 Often form a monopoly for specified services, i.e, fire department
 GASB primary source of accounting guidelines for government agencies
 The annual budget is the key fiscal document
 Not subject to local, state, or federal taxes

Not-for-Profit Organizations
 Ultimate objective is to meet some social need
 Goal is something other than to earn net income and/or make a profit
 Primarily supported by donations and grants
 Donors contributing resources do not necessarily receive an equivalent share of the
organization's goods or services
 The organization is owned collectively, no shares of ownership are distributed
 Major decisions are made by consensus vote of an executive board
 The annual budget is the key fiscal document most important to stakeholders
 FASB primary source of accounting guidelines
  Typically file an annual Form 990 Information Return with IRS

For Profit Organizations

 Primary focus is on earning net income, return on investment, and earnings per share
 Accounting emphasis is on properly recording net income and properly accounting for
equity
 Annual reports, especially the income statement, are the key financial documents
 FASB is the primary source of accounting guidelines
 Corporations file an annual Corporate Form 1120 with IRS

As indicated above, the Government Accounting Standards Board (GASB) is the primary source
for GAAP for state and local governments. The Financial Accounting Standards Boards(FASB)
is the primary source for GAAP for both for-profit and not-for-profit organizations. In recent
years the FASB has issued Statements 116, 117, and 124 which are specifically related to not-
for-profit organizations. We will discuss the some of the specifics of these standards as part of
this course.

Governments and not-for-profits by their very nature do not generate profits. They may receive
taxes, contributions, grants, and other resources from stakeholders who expect no specific
individual return. Since the basic goals of governments and not-for-profits are completely
different from for-profit organizations, the accounting practices and procedures are also
different. The basic rules of debits and credits are followed, however, many other accounting
procedures must be modified to account for the unique circumstances of governments and not-
for-profits. The emphasis on financial reporting is on accountability and stewardship, on
properly accounting for financial resources, and on adherence to agreed upon budgets. Budgets
are far more important for governments and not-for-profits than they are for businesses.
The purpose of both government and not-for-profit financial reporting include:
 To compare results with budgets
 To assess condition and results
 To check compliance with laws and regulations
 To evaluate efficiency and effectiveness

Relating to government reporting, GASB has established three key objectives of accountability
as follows:
Inter-period equity
Budgetary and fiscal compliance
Service efforts, costs, and accomplishments

Inter-period equity means that financial reporting should provide information as to whether
current year revenues are sufficient to pay for current year services. In other words,
organizations should not transfer present costs to future years. This concept of inter-period
equity applies only to borrowing for operating, not capital, expenditures. Information relating to
inter-period equity is provided by financial statements prepared on a full accrual basis--revenue
is reported when earned and expense is reported when incurred.
Budgetary and fiscal compliance refers to whether or not resources were obtained and used in
accordance with the entity's legally adopted budget. Since governments and not-for-profits'
budgets are typically prepared on a cash basis, financial reporting to determine budgetary
compliance must also be on a cash basis.
These two objectives, inter-period equity and budgetary compliance often are in conflict with
one another. Please study the example on Pages 18-19 in which revenue and expenditures are
first compared using the cash basis and secondly using the accrual basis.
Often the revenues and assets of governments and not-for-profits are restricted. That is, they
must be used for a particular activity or purpose or during a certain time period. It is important
that that the accounting system ensure that restricted assets are used properly. To this end
governments and most not-for-profits use a system of accounting called fund accounting. This
will be the subject matter of Chapter Two.

Week 2 Fund Accounting (Ch. 2)

Because the financial resources of not-for-profits and governments may be restricted or limited
as to activity, purpose, or time expenditure, many not-for-profits and all government agencies
use an accounting system known as fund accounting. Though SFAS 117 eliminated the
requirement that not-for-profits use fund accounting to prepare external financial reports,
nevertheless, many of these organizations continue to use funds in their accounting systems
because they enhance internal control.

A fund can be defined simply as any part of an organization for which separate accounting
records are kept. More technically, GASB Statement #34 defines a fund as:
“A fiscal and accounting entity with a self-balancing set of accounts recording cash and
other financial resources, together with all related liabilities, and residual equities or
balances and changes therein, which are segregated for the purpose of carrying on
specific activities or attaining certain objectives in accordance with special regulations,
restrictions, or limitations.”

Each fund is represented by its own self-balancing accounts. Rather than the business model of
the accounting equation (Assets = Liabilities + Stockholders’ Equity), fund accounting uses the
equation (Assets = Liabilities + Fund Balance). Similar to owners’ or stockholders’ equity, the
fund balance is the residual balance remaining when liabilities are subtracted from assets (net
assets). Some organizations have one fund and some have many funds, each fund with its own
self-balancing accounts from which a separate financial statement can be prepared.

In fund accounting, every transaction in every fund must be recorded by at least one debit and
one credit. Any transaction which affects two or more funds must be accounted for as if it
affected two separate entities and must be recorded individually in each fund. Thus it requires
two journal entries. See the example on Page 36.

The basis of accounting relates to when transactions are recognized. There are two ends of the
continuum with respect to the basis of accounting. At one end is the full accrual basis where a
transaction is recognized when it has its substantive economic impact (report revenue as earned,
report expense as incurred) and at the other end is the cash basis (report revenue as cash
received, report expense as cash is paid). In between these two poles there are many variations of
hybrid accounting--partly cash and partly accrual. Measurement focus has to do with what is
being reported upon--which assets and liabilities will be given accounting recognition and
reported on the financial statements.

GASB has decreed that governments use the following basis of accounting and measurement
focus:
 Government-wide financial statements of net assets and statement of activities should be
prepared using full accrual accounting and using the economic resources measurement
focus. Thus revenues and expenses are recognized when the exchange takes place
(revenue recorded when earned, expenses recorded when incurred)
 Governmental funds should be prepared using a modified accrual basis and using the
current financial measurement focus. Thus revenue should be recognized when available
and measureable and expenditures when the fund liability is incurred (revenue recorded
when cash received or available and measureable, expenditures recorded when cash paid
or current liability incurred). Because the measurement focus is on current financial
resources, capital assets and long term liabilities are excluded from the balance sheet.

With regard to budgets, GASB in Principle #10 states that every government unit should prepare
and adopt an annual budget and that "the accounting system should provide the basis for
appropriate budgetary control". Thus some governments budget their governmental funds on a
modified accrual basis and others budget revenues and expenditures on a strictly cash basis.
Either method is allowed so long as budgetary control is achieved.

Because governments and some not-for-profit entities are primarily concerned with the assets
needed to satisfy current year obligations, they utilize a fund accounting system which
recognizes revenues and expenditures on a cash or near-basis basis. The measurement focus is
mainly on short-term financial assets and liabilities and thus the system is commonly referred to
as a modified accrual basis. Long-lived assets and long-term liabilities are excluded from the
balance sheet when using the modified accrual basis.

Of course, the organization must maintain accounting control over all assets and liabilities. Thus
an government which uses the modified accrual basis in its fund accounting system must prepare
a second set of financial statements which report all assets and liabilities. In effect then the
government entity must prepare one set of financial statements for funds using a cash or near
cash basis and another set of financial statements showing all assets and liabilities using full
accrual accounting.

For example, when a government entity purchases a computer for $5,000 the entry would be
accounted for as an expenditure in the funds statements with this journal entry:
Expenditure for Computer $5,000
Cash $5,000

Even though the computer has a multi-period life, the $5,000 would in effect be expensed
immediately in the funds statements.

In the government's full financial statements which use accrual accounting the purchase of the
computer would be accounted for as follows:
 Computer $5,000
Cash $5,000

Using accrual accounting the computer would be set up as a capital asset and depreciated over its
useful life.

To provide some additional explanation of the modified accrual approach, the authors describe a
series of transactions of a school district. Carefully study the example on Pages 38-40. The
school district's fund balance sheet for the four separate funds appears as Table 2-1 and the
school district's statement of fund revenues, expenditures, and other changes in fund balances for
the four separate funds appears as Table 2-2.

GASB Statement Number 34 issued in 1999 requires that governments prepare two separate sets
of financial statements. The first set, the government-wide statements reports on the government
as a whole, consolidates government operations, and reports on a full accrual basis. The second
set, the fund financial statements, reports fund activities separately, does not consolidate funds,
and since the focus is on current financial resources, reports on a modified accrual (cash or near
cash) basis.
Examples of government-wide statements for Charlotte, North Carolina including a statement of
net assets (balance sheet) and a statement of activities (income statement) are shown in Tables 2-
3 and
2-4.

Examples of fund financial statements for the City of Charlotte including the balance sheet and a
statement of revenues, expenditures, and changes in fund balances are shown in Tables 2-5 and
2-6. Table 2-7 shows a reconciliation of the net change in fund balances of total government
funds (Table 2-6) to the change in net assets reported in the government-wide statement of
activities (Table 2-4). Use Table 2-7 to trace the Net Change in Fund Balances-Total
Governmental Funds of $4,914 as shown on Table 2-6 to the reconciled amount of Change in
Net Assets of Governmental Activities of $302,729 shown on Table 2-4.

There are three categories of governmental funds as follows:

1. Governmental activities – financed by taxes and intergovernmental grants
2. Business-type (Proprietary) funds – financed primarily through use fees
3. Fiduciary funds funds which the government acts as a trustee for other parties

There are five types of governmental funds as follows:

1. General fund – to account for all unrestricted resources
2. Special revenue funds – to account for revenues restricted for a specific purpose
3. Debt service funds – to account for resources set aside for the payment of interest and
principal on long-term debt
4. Capital project funds – to account for revenues held for the acquisition or construction of
major capital facilities
5. Permanent funds – to account for resources legally restricted to the extent that only
earnings on investments, not principal, may be used to support specific government
programs
There are two types of proprietary funds as follows:
1. Enterprise funds – to account for any activity for which a fee is charged to external users
2. Internal service funds – to account for goods and services provided by one department to
other departments of the same governmental unit

There are two kinds of fiduciary funds as follows:

1. Trust funds – to account for resources required to pay pension, healthcare, investment,
and private purpose obligations
2. Agency funds – to account for resources held in a custodial capacity on a short-term basis

Carefully read Pages 46-56 so that you can gain some general understanding of the various kinds
of government funds. Note that the basis of accounting differs depending on the fund as follows:
Governmental funds Modified accrual basis
Proprietary funds Full accrual basis
Fiduciary funds Full accrual basis

In this course we’ll study governmental and proprietary funds but will leave the discussion of
fiduciary funds to more advanced courses.

The annual report for a government entity is known as the comprehensive annual financial report
(CAFR). The CAFR for a city is often several hundreds of pages in length as it reports data to a
number of different types of users. The complete CAFR is divided into three main sections:
 Introductory section
 Financial section including management's discussion and analysis
 Statistical section

The financial section of the CAFR contains two government wide financial statements:
 Statement of net assets (balance sheet)
 Statement of activities (income statement)

Since there are three main categories of funds, the CAFR contains basic statements for each of
the three categories of funds as follows:
 Government funds
 Proprietary funds
 Fiduciary funds

As indicated above, many not-for profits though not required to, do in fact use fund accounting.
It allows the not-for-profits to utilize an accounting system whereby resources with specific
limitations can be tracked and results reported. If not-for-profits use fund accounting, they are
required to classify their assets into three categories based on the restrictions of donors as
follows:
 Unrestricted – no restriction on resources
 Temporarily restricted – must be used for a specific purpose
 Permanently restricted – typically endowments, from which only the income may
be spent
Budgeting for Not-For-Profits (Ch. 3)
A budget can be defined as a detailed plan for using financial and other resources for the
forthcoming period. It’s important for any successful enterprise, whether for-profit or not-for-
profit, to prepare a budget. Some of the advantages of budgeting include:
 It forces the organization to plan for the future
 It is a means of communicating and coordinating plans and objectives for the
immediate future
 It may undercover financial and other resource problems before they occur
 It provides a benchmark performance can be evaluated
 If properly prepared and administered, a budget can motivate employees

For not-for-profits, the budget is a key financial document. It is their plan of action for the
forthcoming period. Its preparation can take various forms but should include the following
action items:
1. List specific goals for the forthcoming year in light of the organization’s strategic plan of
operations
2. Compute the estimated cost of each of the goals
3. Calculate expected income for the forthcoming year
4. In light of the expected income, prioritize the goals set forth in (2) above
5. Submit the proposed budget to the ratifying body (board of directors)

The budget is both a planning document and a control document. The control aspect is
accomplished by comparing actual revenue and expenses with budgeted amounts in a
performance report. This should be done on a regular basis and at least monthly. Variances are
the difference between actual amounts and budgeted amounts. Since every revenue or expense
account measured will probably give rise to some variance, it is important to prioritize variances.
This can be done on a percentage basis, dollar amount, etc. For governments and not-for-profits
there are several important budgets including:

Appropriation a government budget which focuses on current operating revenues and

budget expenditures. For NFP this type of budget is called an operating budget
Capital budget focuses on the acquisition of long-term assets
relates to business type activities and compares inputs and outputs over
Flexible budget
varying volumes of activity

Appropriation budgets which relate to legislatively granted expenditure authority cover the
general fund which by law usually must be balanced at year end. Great scrutiny is paid to this
budget because it determines the amount of taxes and other revenues must be levied to cover
expenditures. Capital budgets have a time line of from one to five or more years out and are the
formal plan for the acquisition (or construction) of long lived assets. Flexible budgets relate to
business-type activities and will be the subject of Chapter 13.

In general terms, there are two kinds of budgets:

 1. A traditional budget begins with last year’s budget and revises the figures to take into
consideration this period’s needs and objectives
2. A zero based budget is a budget in which every items must be justified anew. The
baseline for this type of budget is zero, as its name implies.

Budgets employ various revenue and expenditure classification schemes. The most commonly
prepared traditional budget is an object classification budget. Table 3-1, Page 82, is an excerpt
from an object classification budget covering the expenditure for public safety. Note that actual
figures are provided for FY 2003 and estimated figures are provided for FY 2004 and FY 2005.

Government budgets are typically prepared by an organization's executive branch, e.g., the state
governor, and then submitted to the legislature for approval. After agreeing to the budget, the
legislature officially adopts it by enacting an appropriation authorizing the agreed upon
expenditure. The organization's executive branch then carries out the budget usually through a
process of allotments to specific departments and agencies.

Through the year interim financial reports may be issued to ensure that sufficient funds remain to
operate through year end. At the end of the year governments and not-for-profits should include
budget to actual comparisons for each of the funds for which they have adopted budgets.
Variances (differences between budgeted and actual amounts) should be based on the final rather
than the original budget. Table 3-3 presents the budget and actual figure for the general fund for
the City of Charlotte. The resulting variances can be investigated further in terms of dollar or
percentage amount. Of course, the variance might have arisen from the fact that the budgeted
amount was not realistic in light of actual economic events. Every effort should be made to
determine the cause of the variance rather than to place blame on a department or an employee.
The GASB recommends that governments prepare their annual budgets for governmental funds
on a modified accrual basis, however, many governments prepare budgets on a cash basis. Their
rationale in doing this is that cash accounting assures that the government receives in taxes and
over revenues only what is it required to disburse.

To achieve greater control over budgets, governments may employ an encumbrance accounting
system where journal entries are employed to record the budget and subsequent expenditures.
Note that the ledger accounts for such a system have an additional column which tracks the
revenue balance or the expenditure unemcumbered balance. See Pages 96-7. Typical
transactions in such a system are shown on Pages 98-105.

Week 4 – Recognizing Revenues in Governmental Funds (Ch. 4)

In previous chapters we learned that GASB requires government agencies to prepare two sets of
financial statements as follows:
1. Government-wide financial statements - These are consolidated statements prepared using
full accrual accounting which tell the reader whether current revenues are sufficient to
pay current expenditures (inter-period equity)
2. Fund financial statements - These statements are prepared on a modified accrual (cash and
near cash) basis and show whether the agency has obtained and used resources according
to its budget (budgetary compliance)
There is a close relationship between accounting measurement focus and the basis of accounting.
Measurement focus refers to which assets and liabilities are being measured and the basis of
accounting refers to when transactions and other events are recognized. Please study figure 4-1
on Page 121.

In this chapter we will concentrate on recognizing revenues on the fund financial statements
(some limited discussion will be included on recognizing revenue on the government-wide
financial statements). Since most governments in their budgets focus on cash and near cash
resources, the fund financials are prepared using the modified accrual basis with the
measurement focus on current financial resources. In fact, long-term assets and debt are omitted
from the fund statements.

Government agencies derive most of their revenues from non-exchange transactions—taxes and
inter-governmental grants. GASB #33 requires that revenue from non-exchange transactions be
recognized when is it measurable and available to finance expenditures of the current fiscal
period. GASB #33 defines “Available “ as collected within the current period or expected to be
collected soon enough thereafter to be used to pay current liabilities. With respect to property
taxes only, GASB states that revenues should be recognized only if cash is collected or is
expected to be collected within sixty days of year-end. Most government agencies use this sixty
day rule to recognize other revenues beyond property taxes.

As set forth on Page 123 non-exchange revenues are divided into four categories:
1. Imposed non-exchange revenues – property taxes and fines
2. Derived tax revenues – sales taxes, income taxes, and taxes imposed on assets
3. Government-mandated non-exchange transactions –inter-governmental grants which
require the recipient to use the resources for a specific purpose
4. Voluntary non-exchange transactions – inter-governmental grants voluntarily entered
into by two or more governmental parties

There are two types of limitations dictating when and how a government uses resources from
non-exchange transactions as follows:
1. Time requirements – when must the resource be used
2. Purpose restrictions – for what purpose much the resource be used

GASB #33 requires that governments not recognize revenue, expenditures, or expenses for non-
exchange transactions until the time requirements are met.
Beginning on Page 125 to the end of Chapter 4 the textbook author illustrates how various
common non-exchange and exchange revenues are to be accounted for in the fund financial
statements. There is some limited discussion of how these same transactions are accounted for in
the government wide financial statements. See boxes entitled "Differences in Government Wide
Statements".

Important categories of non-exchange and exchange revenue categories are as follows:

 Property taxes – revenue should be recognized in the period for which the taxes are
levied. However on the fund statements the tax revenue must also be available—either
 collected in the current period or current period taxes expected to be collected within 60
days of year end
 Sales, income and taxes based on other assets – revenue should be recognized on sales
taxes and other derived tax revenues at the time the underlying exchange transaction
takes place. For sales taxes, it is the date of sale. Income tax revenue should be
recognized in the period collected and current period income tax expected to be collected
within 60 days of year end.
 Inter-governmental grants –grant revenue should be recognized on both mandatory and
voluntary grants when eligibility requirements including time requirements have been
met.
 Pass-through grants are grants that a government must transfer to, or spend on behalf of,
a secondary recipient. GASB #33 states that as a general rule cash pass-through grants
should be recognized as revenue (and expenditures or expenses) versus omitting them
from the fund statements.
 Capital asset disposition – revenues from the sale of capital assets and from other
exchange transactions should be recognized in the period of the exchange. Since the fund
statements include no capital assets, the sale of a fixed asset is accounted for on the cash
basis and takes the following form:
Cash
Other Financing Sources - Sale of Asset
 Investment income – changes in fair value should be reported as revenue (or loss) and at
fair market value on the balance sheet.
 Revenue from licenses, permits, and other exchange transactions – report on cash basis

A summary of the revenue recognition guidelines for governmental agencies appears in Table 4-
1, Page 150.
Week 5 Recognizing Expenditures in Governmental Funds (Ch. 5)
As we have discussed previously, government agencies prepare two sets of financial statements
as follows:
Fund financial statements – prepared on a modified accrual basis
Government-wide financial statements – prepared on a full accrual basis

In Chapter 5 the authors discuss the proper accounting for expenditures and expenses on the fund
financial statements and on the government-wide financial statements. Much of the emphasis in
this chapter, however, is on accounting and reporting expenditures on the fund statements.

Expenditures rather than expenses are recorded on the governmental fund statements because
fund accounting is heavily influenced by budgeting concerns. Expenditures are decreases in net
financial resources, whereas expenses are reductions in overall net assets. Expenditures are
generally recognized when resources are acquired; expenses when resources are consumed. For
example, supplies expenditures are recorded in the funds statements when purchased rather than
when used (as accounted for in a full accrual system). Another example is the accounting for
equipment. On the funds statements costs for equipment are recorded as Capital Outlays –
Expenditures at time of acquisition versus being capitalized in an accrual system. Expenditures
of a fiscal period may either require cash outlays during the period or create liabilities that have
to be satisfied shortly after the end of the period.

Most government expenditures are exchange rather than non-exchange transactions. Exchange
transactions occur when goods and services are acquired for cash or other assets given up. These
expenditures like revenues are accounted for on a modified accrual basis on governmental fund
statements but on a full accrual basis for the government-wide financial statements. As
discussed previously, fund accounting is greatly influenced by governmental budgeting and thus
the modified accrual basis (recording cash and near cash flows) is used on the fund statements.

The author discusses the accounting for several common expenditure categories as follows:
o Wages and salaries-Wages and salaries are recognized on an accrual basis (when
earned) on both the governmental funds statements and the government-wide
statements
o Employer Compensated Absences-Governments compensate employees for time not
worked for a variety of reasons such as vacations, sick pay, jury duty, etc. In concept
these costs are similar to wage and salary expense with one important difference—the
compensated absence may be earned to one period but not paid until several periods
later. In this sense the liability cannot be considered current and only current liabilities
are reported on the fund statements. The author offers two examples of employer
compensated absences including the following:
 Vacation Pay-On the governmental funds statements vacation pay should be
recognized in the periods in which the payments are due and paid (cash basis). On
the government-wide financials vacation pay is recognized on a full accrual basis.
 Sick Leave- On the government funds statements only sick pay actually paid in the
current period is recorded. On the government wide financials sick leave should
be recognized as a liability when earned only when the sick leave is expected to be
paid to employees upon their discharge, resignation, or retirement.
o Pensions-On the governmental funds statements pension expenditures should be
recognized in the period the payments to the pension fund are made (cash basis). On
the government-wide financials pension expense is recognized on a full accrual basis
therefore pension expense should equal the employer’s required pension contribution.
o Claims and Judgments- GASB and FASB use the same standards for recognition of
claims and judgments, that is, it should be recorded when:
It is probable that an asset has been impaired or a liability has been incurred and
the amount of the loss can be reasonably estimated However on the funds
statements any liability is recognized only when paid though GASB requires that
in the year the liability is first recognized, its existence must be set forth in the
financial statement notes. On the government wide financials GASB requires that
the liability should be recognized in the first year the claim or judgment meets the
two step test above.
o Supplies-On the governmental funds statements expenditures are recognized either
when purchased or when consumed. If the purchase method is used, however, an
adjusting entry is required to record the supplies inventory at year end (see Page 173-
4). On the government-wide financials material and supplies is recognized only when
consumed.
o Prepayments-On the governmental funds statements expenditures for prepayments can
be accounted for recognized either by the purchases method (when the payment is
made) or the consumption method (when the underlying asset is consumed). On the
government-wide financials prepayments such as prepaid insurance are only
recognized when consumed.
o Capital assets- In accordance with GASB standards, fixed assets are neither capitalized
nor depreciated on the fund statements. When an asset is acquired it is recorded in the
funds statements as:
Capital Asset – Expenditure
Cash
o On the government-wide financials, capital assets are reported in accordance with
FASB standards.
Many capital assets are acquired with debt. On Page 178 the author cites an example of
where road equipment is acquired by signing a note payable. Because long term
obligations (notes payable to be paid in future years) are not reported in government
funds, GASB requires the acquisition of debt to be recorded as follows:
Cash (or Capital Asset – Expenditure)
Other Financing Sources – Note Payable
o Long term debt – interest and principal expenditures - Interest and principal on long
term debt are not accrued on the governmental funds statements. It is recorded only in
the period that the interest or principal payment is due and paid. On the government-
wide financials long-term debt is reported at face value plus or less any unamortized
premium or discount.

Most but not all government expenditures are associated with exchange transactions. On
Page 183 there is a brief discussion of how to account for non-exchange expenditures.
Non-exchange expenditures should be accounted for exactly like non-exchange revenues
(Ch 4).
 o Inter-fund activities are next discussed. Since each government fund is an independent
fiscal and accounting entity how should transfers from one fund to another be
accounted for. GASB defines two types of inter-fund activities:
o Reciprocal inter-fund activities are the internal equivalent of exchange transactions (in
effect arms length transactions). GASB requires that reciprocal inter-fund transfers be
reported as if they were exchange transactions.
o Non-reciprocal inter-fund activities are the internal equivalent of non-exchange
transactions. They represent transfers of cash for which equivalent goods or services
are not received. GASB required that non-reciprocal inter-fund transfers be accounted
by a Nonreciprocal transfer out on the giving fund and a nonreciprocal transfer in on
the receiving fund (Page 185).

A model of how revenues, expenditures and changes in fund balances should be reported
appears on Page 187. Note that the statement takes the following form:
Revenues
Less Expenditures
Equals Excess of Revenues over Expenditures
Plus or minus Other Financing Sources and Uses including transfers
Plus or minus Special and Extraordinary Items
Equals Net Change in Fund Balance
Plus Fund Balance, Beginning
Equals Fund Balance, Ending

Table 5-1 is a summary of expenditure/expense recognition principles.

Week Six - Business Type Activities (Ch. 9)

Governments and not-for-profits engage in many activities which are very similar to private
industry. Museums operate gift store, colleges and universities operate cafeterias, etc. The
accounting for these enterprises is quite similar to that of for-profit businesses with financial
statements prepared on the full accrual basis.

Governments divide their business-type activities into proprietary funds of which there are two
types:
Enterprise funds – operations which provide goods and/or services to the general public
and Internal service funds – operations in which goods and/or services are provided by
one government department to another

Although governments account for their business-type activities in discrete proprietary funds,
not-for-profits account for their business-type activities within their current operating funds.

Some of the reasons for using full accrual accounting for proprietary fund activities are:
Full accrual accounting provides a more complete picture of an enterprise’s economic
condition Full accrual accounting is more consistent with the objectives of GASB Full
accrual accounting sets forth depreciation expense Better comparisons can be made with
similar for-profit enterprises
Governments are required to prepare three basis proprietary fund statements as follows:
Statement of net assets (balance sheet) statement of revenues, expenses, and changes in
fund net assets (income statement) Statement of cash flows

In contrast to individual fund statements of governmental funds, the proprietary funds are
accounted on a full accrual basis the proprietary fund statements are therefore the same as the
government-wide statements.
Table 2-8 and 2-9 on Pages 52-3 show the City of Charlotte’s proprietary funds statement of net
assets and statements of revenues, expenses, and changes in fund net assets for the year ending
June 30, 2002.

An example of a model of a statement of revenues, expenses, and changes in fund net asset is
presented on Page 313. Note that in addition to operating revenues and expenses, capital grants
both received and distributed are shown.

Table 9-2 is the City of Charlotte’s statement of cash flows for proprietary funds for the period
ending June 30, 2002. Note that in contrast to how businesses report cash flows, governments
must categorize cash flows into four categories as follows:
Cash flows from operating activities
Cash flows from non-capital financing activities
Cash flows from capital and related financing activities
Cash flows from investing activities

GASB #34 states that governments may account for an activity in a proprietary fund as long as it
charges fees to external users. However, it must treat an activity as a proprietary fund is one of
the following three requirements are met:
The activity is financed solely with revenue debt Laws or regulations require that the
activity’s costs be recovered by fees and charges The pricing policies of the activity
establish fees designed to recover All costs including capital costs
As notes in the text, these criteria should be applied to the activity’s principal source of revenue.

The second type of proprietary fund is an internal service fund where one governmental unit
provides goods or services to another governmental unit. Internal service funds, like enterprise
funds, are accounted for on a full accrual basis. Table 9-3 and 9-4 present the City of Charlotte’s
internal service funds statement of net assets and is internal service fund statement of revenues,
expenses, and changes in fund net assets. Typical internal service fund journal entries are
described on Pages 327-329.

As indicated in the text, internal service funds affect the other funds with which they interact.
The effect of this is that revenues and costs are counted twice within the same set of fund
financial statements. This is not true of the government-wide statements as they consolidate
individual funds and eliminate inter-fund activities.

Issues of Reporting, Disclosure, and Financial Analysis

Week Seven – Chapter 11
The composition of the reporting entity is an important issue for governments and some not-for-
profits because what is reported on defines the scope of the financial statements. As you recall
from financial accounting, business entities use the equity or consolidated methods depending on
their percentage of ownership of subsidiaries. The issue is much less clear for governments and
the issue on what should be reported arises at times with other not-for-profits.

GASB Statement #14 states that a financial reporting entity should consist of a primary
government and its component units; and that a primary government is any state government,
county, or municipality as well as special purpose governments such as school districts or utility
districts. To qualify as a primary government, a special purposes government must have a
separately elected governing body, be legally separate from other primary governments and be
fiscally independent of other governments. An extended discussion of this topic appears on
Pages 402-406 of the text.

As you may recall from our earlier discussions, the Comprehensive Annual Financial Report
consists of three principal sections as follows:
Introductory Section
Financial Section
Statistical Section

The introductory section consists of:

A table of contents
A letter of transmittal
Any other information deemed appropriate by management

The financial section consists of:

The auditors’ report
Management’s discussion and analysis
The basic financial statements
Required supplementary information including budget to actual comparisons
Combining statements, individual statements, and schedules which supplement
the basic statements

The basic financial statements include the two government-wide statements, namely, the
statement of net assets and the statement of activities. Funds statements must be prepared for
each of the three categories of funds including governmental funds, proprietary funds, and
fiduciary funds.

The statistical section includes important financial and non-financial information about the
government entity. This often includes data relating to the most recent ten year period.
Examples of statistical information to be included in this section appears in Table 11-3, Page
415.

In this course we’ll not cover the material relating to the reporting requirements for government
colleges, universities, and other special purpose entities on Pages 415-421.
In assessing the fiscal condition of a government, the financial statements are an important
source of information but non financial data is extremely important too. Table 11-5, Pages 422-5
show a comprehensive methodology of determining the fiscal well being of a city. Note the
extent of non financial information such as population demographics, crime rates, political
climate, etc. As the author notes the general approach described in the comprehensive analysis is
to first assess the current economic, political, and social environment in which the government
operates and then to identify the changes that are likely to occur. An analysis of the operating
environment includes such factors as:
Demographic indicators
Economic conditions
Political and leadership characteristics
Social conditions
Population trends
Expected changes in government enterprises
Technological changes
Ratio analysis can be used to evaluate the well being of a government. Some common ratios
employed to evaluate government performance include the following:
 Fiscal effort Per capita revenue from own sources
Median family income
 Adequacy of revenues Total revenues
Total expenditures
 Adequacy of fund balance Unreserved fund balance
Total operating revenues
 Current ratio Cash, short-term investments, and receivables
Current liabilities

Week Eight – Other Not-for-Profit Organizations (Ch. 12 Pg. 450-479)

The accounting practices of not-for-profit organizations more resemble those of business rather
than of government. The FASB establishes the accounting guidelines for non-government
NFP’s whereas GASB sets the accounting standards for government agencies. FASB
emphasizes the superiority of accrual accounting over cash basis or modified cash basis
accounting. External reporting is done entirely on a full accrual basis and thus not-for-profits do
not have expenditures, only expenses.

SFAS #117 requires that not-for-profits prepare three financial statements as follows:
1. Statement of financial position (balance sheet)
2. Statement of activities (similar to an income statement)
3. Statement of cash flows

Statement of financial position

This is an important statement as it is the entity’s balance sheet and reports assets, liabilities, and
net assets (A-L). SFAS #117 requires the reporting of separate categories of net assets as
follows:
 Unrestricted net assets
  Temporarily restricted net assets – generally resources that must be used either for
specific purposes or in specific periods
 Permanently restricted assets – endowments where the principal must remain intact and
only the related income is available for expenditure

Although the FASB does not dictate a particular format, it does require that the balance sheet
present six totals as follows:
1. Total assets
2. Total Liabilities
3. Total Net Assets
4. Total unrestricted assets
5. Total temporarily restricted assets
6. Total permanently restricted assets

The statement of financial position should provide stakeholders with the means to assess the
organization’s ability to continue to provide services. It should provide information about
liquidity, the ability to meet short and long term obligations, and whether the organization has a
need to incur further debt. As the author notes, most organizations categorize their assets and
liabilities as either current or non-current. Table 12-1 (Pg. 454-455) is an example of a statement
of financial position.

Statement of Activities
FASB Statement #117 requires that revenues and expenses be reported in a statement of
activities. This statement reports all financial transactions from the beginning to the end of the
fiscal year which result in increases or decreases in an organization’s net assets. It should report
changes in each of the three categories of net assets. Table 12-2 (Pg. 456-8) is an example of a
statement of activities.

SFAS #117 requires that the statement of activities provide stakeholders with information that
will:
 Evaluate the NFP organization’s performance during the period being reported
 Assess the NFP’s service efforts and its ability to continue to provide services
 Assess how the NFP’s managers have discharged their stewardship responsibilities and
other aspects of their performance

Revenues, expenses, gains, losses and reclassifications from one asset to another are all reported
on the statement of activities. Revenues include actual cash inflows as well as expected cash
receipts. Revenues are to be reported as increases in one of the categories of net assets.

Expenses include cash outflows, using up of non-cash assets, or incurrence of liabilities. In

contrast to the reporting of revenues, expenses are reported as decreases in unrestricted net
assets. This requirement requires that the NFP prepare two journal entries when spending
restricted resources. One entry in the restricted fund records the decrease in cash (or other asset)
and the decrease in restricted asset. The second entry in an unrestricted fund records the expense
and increase in unrestricted net assets. See the example of this dual entry requirement on Page
453.
Expenses must be reported by function—by program services or supporting activities. This may
be done either in the statement of activities or in the accompanying notes. Note the
categorization of expenses in the statement of activities on Page 458.

Statement of Cash Flows

The statement of cash flows provides stakeholders including donors and creditors with an
assessment of the organization’s:
 Ability to generate future positive cash flows
 Abilitiy to meet current and future obligations
 Reasons for the differences between income and cash receipts and payments
 Changes in investing and financial activities

The statement of cash flows shows an organization’s cash receipts and payments during a period.
Just as for profit organizations, FASB requires that not-for-profits divide their cash flows into the
following three categories:
1. Operating activities
2. Investing activities
3. Financing activities

FASB encourages NFP’s to use the direct method in preparing the statement of cash flows.
Table 12-4 (Pg. 460) shows typical cash inflows in operating, investing, and financing activities.
As with most for-profit businesses, many NFP’s report their cash flows using the indirect
method. Table 12-5 (Pg. 12-5) is an example of a cash flow prepared the indirect method.

FASB #117 contains several modifications which not-for-profits use to report cash flows. Note
that cash flows from financing activities should include both contributions restricted for long-
term purposes and interest and dividends from investments restricted for long term purposes (Pg.
459).

From Page 453-479 the author discussed how to account for specific categories of revenues and
expenses.

Contributions- Contributions, nonreciprocal receipts of assets or services, are accounted for by

debiting an asset account and crediting Revenues from Contributions. Assets must be classified
either unrestricted, temporarily restricted, or permanently restricted (based on donor stipulation).
Contributions are in effect non-exchange transactions in that the donor does not expect to receive
equal value in return. Any exchange transaction which the organization engages in is to be
accounted for as an ordinary business transactions and is always an unrestricted source of
revenue.

Pledges- FASB #116 requires that not-for-profits report unrestricted pledges as income upon
receipt of a pledge. However, cash to be received in future periods is considered to be time
restricted and should be reported as temporarily restricted. However, use-restricted pledges are
recognized as revenue in the period received or promised. Please study the comprehensive
example of pledges on Page 464-466.
Contributions of Services- Per SFAS #116 contributions of services should be recognized only if
the following conditions are met:
 The services are professional in nature
 The organizations would ordinarily have had to pay for the services
 The services create or enhance non-financial assets
 The services required specified skills

If these conditions are met then expense should be debited and revenue credited. Contributions
of services which do not meet the above standards are not entered into the accounting records.

Contributions of Collection Items - Regarding contributions of collection items (books, art,

etc.) the FASB encourages not-for-profits to recognize the contribution as revenue and to
capitalize the entire collection. However, note the exceptions on Page 470.

Conditional Promises - FASB Statement #116 requires that conditional promises to give shall be
recognized as revenue when the conditions on which they depend are substantially met.

Pass-Through Contributions -FASB Statement #136 states that pass-through contributions

should not be included in revenue (or subsequent expense). Instead an asset account should be
debited and a liability account, payable to ultimate beneficiary, credited. See Page 472-4. There
are two main exceptions to this rule as follows:
1. The donor has explicitly granted the recipient variance power—the right to
unilaterally redirect the assets to another beneficiary
2. The donor and donee organizations are financially interrelated.
Gains and Losses On Investments
SFAS #124 requires that investments must be accounted at fair value (similar to commercial
organizations) and that changes in fair value should be recorded as they occur. Investments need
not be categorized into the three categories of trading, available-for-sale, and held-to-maturity,
however. Gains and losses in the fair value of securities should be reported on the statement of
activities as increases or decreases in unrestricted net assets. See Pages 474-5.

Depreciation
On Pages 477-8 there is a brief discussion of how depreciation should be reported. SFAS #93
requires that depreciation expense and accumulated depreciation be recognized. Since SFAS
#117 requires that all expenses be reported as decreases in unrestricted net assets, depreciation
expense should be reported in the unrestricted column or section of the statement of activities.

Week Nine – Not-for-Profits Part II

Beginning on Page 479 the author presents a comprehensive example of accounting for the
Museum of American Culture. Detailed journal entries, beginning and ending statement of
financial position, statement of activities, and statements of cash flows are provided. You should
study this example carefully and trace the individual transactions to the financial statements.
Chapter 12 contains a brief discussion of special accounting issues relating to (1) not-for-profit
health care provides and (2) to universities.
SFAS #116 and #117 are the primary sources of GAAP for not-for-profit health care providers.
The basic financial statements for health care providers are similar to that presented in the
comprehensive example, Museum of American Culture. The statement of financial position
separates net assets into unrestricted, temporarily restricted, and permanently restricted and the
statement of activities classified revenues as unrestricted, temporarily restricted, or permanently
restricted. Expenses are reported as decreases in unrestricted resources only.

The statement of activities divides revenue into at least two classifications: patient care and
other revenues. Patient care may include capitation (per person) fees. These fees arise when an
HMO contracts with an individual or third party insurance company to provide services during a
specified period of time. Other revenues may include contributions, educational services, rental
revenue, etc. The statement of activities must indicate resources released from restriction and
any transfers between funds. Some typical health care journal entries are presented on Pages
490-1. Note that per the AICPA audit guide gross revenue should exclude charity care.

Typical journal entries for a not-for-profit college or university are presented on pages 498-500.
A basic accounting problem facing academic institutions is how and when to report tuition and
fees especially at fiscal year end. The 1973 AICPA audit guide states that revenues and
expenditures should be reported totally within the fiscal year in which the program is
predominantly conducted. Grant revenue is a major source of revenue for academic instructions.
Non-exchange grants are a form of contributions and should be accounted for as such.
Reimbursement grants, however, are conditioned upon the grantee’s incurring qualifying costs.
They should be accounted for as conditional grants and revenue should be recognized as the
grantee incurs qualifying costs.