Government and Not-for-Profit Accounting, Binder Ready Version: Concepts and Practices, 7th Edition Solution Manual

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1-1Chapter 1The Government and Not-For-Profit EnvironmentQuestions for Review and Discussion1.The critical distinction between for-profit businesses and not-for-profits includinggovernments is that businesses have profit as their main motive whereas the othershave service. A primary purpose of financial reporting is to report on an entity’saccomplishments—how well it achieved its objectives. Accordingly, the financialstatements of businesses measure profitability, their key objective. Financial reportsof governments and other not-for-profits should not focus on profitability, since it isnot a relevant objective. Ideally, therefore, they should focus on other performanceobjectives, such as how well the organizations met their service goals. In reality,however, the goal of reporting on how well they have achieved such goals hasprovendifficulttoattainandthefinancialreportshavefocusedmainlyonfinancially-related data.2.Governments and not-for-profits are “governed” by the budget, whereas businessesare governed by the marketplace. Thebudget is the key political and fiscaldocument of governments and not-for-profits. It determines how an entity obtains itsresourcesandhowitallocatesthem.Itencapsulatesmostkeydecisionsofconsequence made by the organization. In a government the budget is not merely amanagerial document; it is the law.3.Owing to the significance of the budget, constituents want assurance that the entityachieves its revenue estimates and complies with its spending mandates. Theyexpect the financial statements to report on how the budget was administered.4.Interperiod equityis the concept that taxpayers of today pay for the services thatthey receive and not shift the payment burden to taxpayers of the future. Financialreporting must indicate the extent to which interperiod equity has been achieved.Therefore, it must determine and report upon the economic costs of the servicesperformed (not merely the cash costs) and of the taxpayers’ contribution towardcovering those costs.5.Thematching conceptmay be less relevant for governments and not-for-profits thanfor businesses because there may be no connection between revenues generated andthe quantity, quality or cost of services performed. An increase in the demand for, orcost of, services provided by a homeless shelter would not necessarily result in anincrease in the amount of donations that it receives. Of course, governments andnot-for-profits are concerned with measuring interperiod equity and for that purposethe matching concept may be very relevant.

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