Question 1

An entity is likely to be a governmental entity if a controlling majority of its governing body is appointed by governmental officials.

Accepted Answer

Entities created by governments by statute or under nonprofit laws are governmental if their officers are popularly elected, or a controlling majority of their governing body is appointed or approved by governmental officials.

Question 2

Characteristics that distinguish nonprofits from business enterprises include nonprofits receiving significant contributions from resource providers without an expectation of receive an equivalent return and the lack of a profit motive.

Accepted Answer

Businesses seldom receive charitable contributions and exist to make profits to enhance the wealth of their owners. Nonprofits receive significant charitable contribution and are not in business to make a profit.

Question 3

A purpose of a government is to provide services to its constituents.

Accepted Answer

Business enterprises exist to enhance the wealth of its owners, but a government exist to provide services to its constituents.

Question 4

A purpose of a nonprofit is to provide services to its constituents.

Accepted Answer

Business enterprises exist to enhance the wealth of its owners, but a nonprofit exists to provide services to its constituents.

Question 5

Unlike businesses enterprises, Governments and nonprofits acquire resources through taxes or donations. Transactions related to taxes and donations require special accounting standards.

Accepted Answer

A reason for unique accounting standards for governments and nonprofits is that they obtain most of their revenues from nonexchange transactions, such as taxes and donations.

Question 6

Governmental and nonprofit accounting standards-setters tend to take a longer-term perspective in developing accounting measurements for certain of their transactions because they rarely go out of business.

Accepted Answer

Governmental accounting standards-setters tend to take a longer-term perspective in developing accounting measurements for governments because governments rarely go out of business because of their power to tax and the types of services that governments provide. Nonprofits, however, are at risk of going out of business for many reasons, such as competition, inefficiencies, and changes in constituent needs.

Question 7

Major external users of governmental and nonprofit entity financial reports are oversight bodies, service recipients, and owners.

Accepted Answer

Although it is true that oversight bodies and service recipients are major external users of governmental and nonprofit entity financial reports, neither governments or nonprofits have owners. Instead, they are accountable to resource providers, such as taxpayers, donors, investors, and grant-providing organizations.

Question 8

State and local governments and nonprofit entities are required to prepare fund-based reports for external financial reporting purposes.

Accepted Answer

State and local governments prepare fund-based reports for external financial reporting purposes, but FASB does not require nonprofit entities to prepare fund-based reports although FASB does not preclude such reporting if the nonprofit entity complies with FASB's financial reporting requirements.

Question 9

The federal government, state and local governments, and nonprofit entities are required to prepare financial statements on the accrual basis for external financial reporting purposes.

Accepted Answer

The financial statements of the federal government and nonprofit entities are prepared on the accrual basis of accounting. State and local governments use the accrual basis to prepare financial statements for their business-type activities and their government-wide financial statements.

Question 10

All governments prepare fund financial statements for external financial reporting purposes.

Accepted Answer

State and local governments prepare fund financial statements, but funds are not used in the federal financial statements.

Question 11

The federal government and state and local governments use the modified accrual basis of accounting.

Accepted Answer

State and local governments use the modified accrual basis of accounting to account for their basic government functions and the accrual basis of accounting to account for business-type activities and for their government-wide financial statements. The federal government, however, only uses the accrual basis of accounting for financial reporting purposes.

Question 12

The FASAB establishes financial reporting standards for all governments.

Accepted Answer

The Federal Accounting Standards Advisory Board (FASAB) sets financial reporting standards for the federal government, but the Governmental Accounting Standards Board (GASB) sets financial reporting standards for state and local governments.

Question 13

In their objectives of financial reporting, both the FASAB and GASB state that financial reporting should assist in the government's duty to be publicly accountable.

Accepted Answer

Public accountability is an important objective in both the FASAB and GASB's Concepts Statements.

Question 14

The FASB establishes financial reporting standards for all nongovernmental entities, including nonprofit colleges and universities and health care providers.

Accepted Answer

The FASB establishes financial reporting standards for all nongovernmental entities, including nonprofits, such as nonprofit colleges and universities and nonprofit health care providers.

Question 15

The financial reporting standards established by the FASAB, GASB, and FASB are considered to be generally accepted accounting principles by virtue of the authority accorded them by the General Accountability Office.

Accepted Answer

The American Institute of Certified Public Accountants' Code of Professional Conduct-not the General Accountability Office-provides the authoritative GAAP status for financial reporting standards promulgated by the FASAB, GASB, and FASB.

Question 16

GASB standards recognize only two categories of GAAP for state and local governments. The most authoritative source of GAAP is GASB Statements.

Accepted Answer

GASB standards recognize only two categories of GAAP for state and local governments. Category A is the most authoritative source of GAAP and is comprised of GASB Statements and Interpretations. Category B is also authoritative and is comprised of GASB Technical Bulletins, GASB Implementation Guides, and AICPA literature cleared by the GASB.

Question 17

The FASB Codification is the single source of authoritative GAAP for nonprofit organizations.

Accepted Answer

The FASB Codification is the single source of authoritative GAAP for nonprofit organizations. Any accounting literature-outside the FASB Codification-is nonauthoritative.

Question 18

Which of the following is a distinguishing characteristic of a nonprofit organization?

Accepted Answer

Nonprofit organizations, unlike business enterprises, lack ownership interests. Therefore, they do not engage in ownership-type transactions, such as issuing stock and paying dividends.

Question 19

Which of the following is a reason that governmental accounting is different from business accounting?

Accepted Answer

The long-life of governments, as compared to business enterprises, is a reason that governmental accounting is different. To illustrate, the GASB allows the difference between projected and actual earnings for pension investments to be reported as either as deferred inflows of resources or deferred outflows of resources and recognized as an expense over a five-year period rather than being reported immediately as an expense. This will be discussed in more detail in Chapter 8.

Question 20

Most of the revenues obtained by most governments come from:

Accepted Answer

Governments obtain most of their revenues from various types of taxes. Of course, borrowing does not result in revenue. Although a few governments obtain a large portion of their revenues from the sale of goods or services-such as a government-owned utilities or hospitals-the largest source of revenues for states, cities, counties, and most other governments is taxes.

Quiz 1: Governmental and Nonprofit Accounting Environment and Characteristics