Accounting for Governmental & Nonprofit Entities 17th edition by reck-Test Bank

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Accounting for Governmental & Nonprofit Entities 17th edition by reck-Test Bank

Chapter 02

Principles of Accounting and Financial Reporting for State and Local Governments

 

True / False Questions

1. Governmental activities are to be classified as governmental or business-type.

True    False

 

2. Governmental funds are identical to governmental activities, proprietary funds are identical to business-type activities, and fiduciary funds are identical to fiduciary activities of a government.

True    False

 

3. Only those governmental and proprietary funds that meet the GASB size criteria for major funds are reported in separate columns of the governmental and proprietary fund financial statements.

True    False

 

4. Economic resources are cash or items expected to be converted into cash during the current period, or soon enough thereafter to pay current period liabilities.

True    False

 

5. Governmental funds account for assets but not the liabilities.

True    False

 

6. The types of funds that may be used in governmental accounting are classified into the three categories of governmental, proprietary, and fiduciary.

True    False

 

7. The governmental funds category includes the General Fund, special revenue funds, debt service funds, capital projects funds, and internal service funds.

True    False

 

8. Governments can, in part, demonstrate operational accountability by reporting proprietary and fiduciary fund financial information, as well as all government-wide financial information, using an economic resources measurement focus and the accrual basis of accounting.

True    False

 

9. All capital assets acquired by or used by a fund should be reported in the fund balance sheet or statement of net position.

True    False

 

10. Because budgetary accounts are used by governments, government financial statements can never be said to be in accord with generally accepted accounting principles.

True    False

 

11. The maximum sets of fund financial statements a government would present are three.

True    False

 

12. When revenues are legally restricted by external resource providers or committed by enabling legislation for particular operating purposes, a private purpose trust fund is created.

True    False

 

13. A debt service fund is used to account for financial resources segregated for the purpose of making principal and interest payments on general long-term debt.

True    False

 

14. A deferred inflow of resources is defined as “an acquisition of net assets by the government that is applicable to a future reporting period.”

True    False

 

15. Expenditures are never recorded in governmental funds.

True    False

 

16. Deferred outflow of resources is a type of asset that is unique to government.

True    False

 

17. Revenues is an example of what the GASB terms an inflow of resources.

True    False

 

18. An expenditure is an example of what the GASB terms an outflow of resources.

True    False

 

19. Deferred inflow of resources and deferred outflow of resources would be shown in separate sections of a government’s statement of net position.

True    False

 

20. In accordance with GASB standards, a deferred inflow of resources is reported on the financial statements the same as an unearned revenue.

True    False

 

21. The GASB concept statements indicate that an asset that is going to be converted to cash should be reported at a remeasured amount at the financial statement date.

True    False

 

22. Proprietary funds primarily provide services to the general public for a fee.

True    False

 

23. A permanent endowment is an example of a nonspendable fund balance.

True    False

 

24. Assigned fund balances can be either positive or negative.

True    False

 

25. The General Fund is the only fund that can have a positive unassigned fund balance.

True    False

 

26. The positive fund balance in a special revenue fund must at a minimum be reported as assigned.

True    False

 

27. Nonmajor funds are not reported on the fund financial statements.

True    False

 

 

Multiple Choice Questions

28. Which of the following is true regarding financial reporting for internal service funds?

A. Internal service funds are reported in the governmental fund financial statements.

 

B. Internal service funds are aggregated and reported as a major fund in the proprietary fund financial statements.

 

C. Internal service funds are generally reported in the Business-type Activities column of the government-wide financial statements.

 

D. Internal service funds are generally reported in the Governmental Activities column of the government-wide financial statements.

 

29. Which of the following is not a characteristic of a fund as defined by GASB standards?

A. An accounting entity.

 

B. A fiscal entity.

 

C. A reporting entity.

 

D. A self-balancing set of accounts.

 

30. In accounting for state and local governments the modified accrual basis is required for

A. Proprietary and fiduciary funds.

 

B. Governmental funds.

 

C. Governmental and fiduciary funds.

 

D. Governmental and internal service funds.

 

31. Under the modified accrual basis of accounting, revenues should be recognized when

A. Earned.

 

B. Collected in cash.

 

C. Authorized by the budget ordinance.

 

D. Measurable and available.

 

32. The accrual basis of accounting applicable to proprietary fund types requires that exchange revenues be recognized when

A. Earned.

 

B. Collected in cash.

 

C. Authorized by the budget ordinance.

 

D. Measurable and available.

 

33. Which of the following funds is a governmental fund-type?

A. Private-purpose trust fund.

 

B. Internal service fund.

 

C. Permanent fund.

 

D. Enterprise fund.

 

34. Financial resources set aside to pay principal and interest on general long-term debt may be accounted for in which of the following fund types?

A. Private-purpose trust fund.

 

B. Debt service fund.

 

C. Principal and interest trust fund.

 

D. Internal service fund.

 

35. According to GASB standards transfers should be recognized

A. When earned.

 

B. When collected in cash.

 

C. When authorized by the budget ordinance.

 

D. In the period the interfund receivable and payable arise.

 

36. Generally accepted accounting principles applicable to state and local governments require that

A. Only governmental funds and proprietary funds should be established.

 

B. Only those funds required by law, GASB standards, and sound financial administration should be established.

 

C. Only those funds required by law and sound financial administration should be established.

 

D. All categories of funds must be established.

 

37. Which of the following is a proprietary fund?

A. Special revenue fund.

 

B. Investment trust fund.

 

C. Debt service fund.

 

D. Internal service fund.

 

38. Which of the following is a fiduciary fund?

A. Investment trust fund.

 

B. Special revenue fund.

 

C. Debt service fund.

 

D. Enterprise fund.

 

39. Which of the following funds would be most appropriate when accounting for an activity that provides goods or services to the public for a fee that is intended to make the activity self-supporting?

A. Investment trust fund.

 

B. Enterprise fund.

 

C. Internal service fund.

 

D. Special revenue fund.

 

40. Which of the following funds should be used if resources provided by a federal grant must be segregated and used for counseling of youthful offenders?

A. Private-purpose trust fund.

 

B. Enterprise fund.

 

C. Internal service fund.

 

D. Special revenue fund.

 

41. Which of the following funds would be used to account for an activity that provides centralized purchasing and sales of goods or services to other departments or agencies of the government on a cost-reimbursement basis?

A. Enterprise fund.

 

B. Fiduciary fund.

 

C. Internal service fund.

 

D. Permanent fund.

 

42. Which of the following funds would record depreciation of capital assets?

A. Special revenue fund.

 

B. Permanent fund.

 

C. Internal service fund.

 

D. Agency fund.

 

43. Capital assets used by departments accounted for by the General Fund of a governmental unit should be accounted for in

A. The General Fund.

 

B. The governmental activities journal.

 

C. The business-type activities journal.

 

D. The general capital assets fund.

 

44. Capital assets used by an enterprise fund should be accounted for in the

A. Enterprise fund and depreciation on the capital assets should be recorded.

 

B. Business-type activities journal but no depreciation on the capital assets should be recorded.

 

C. Governmental activities journal and depreciation on the capital assets should be recorded.

 

D. Enterprise fund but no depreciation on the capital assets should be recorded.

 

45. Which of the following funds are proprietary funds?

A. Enterprise funds, investment trust funds, pension trust funds, and the General Fund.

 

B. Enterprise funds and internal service funds.

 

C. Internal service funds, special revenue funds, and enterprise funds.

 

D. Proprietary funds are not used in governmental accounting.

 

46. Which of the following funds are governmental funds?

A. General Fund, special revenue funds, capital projects funds, debt service funds, and private-purpose trust funds.

 

B. General Fund, special revenue funds, private-purpose trust funds.

 

C. General Fund, special revenue funds, debt service funds, capital projects funds, and permanent funds.

 

D. General Fund, special revenue funds, capital projects funds, debt service funds, and internal service funds.

 

47. The activities of a water utility department, which offers its services to the general public on a user charge basis, should be accounted for in

A. An enterprise fund.

 

B. A special revenue fund.

 

C. The General Fund.

 

D. An internal service fund.

 

48. The measurement focus and basis of accounting that are most unlike those used by business entities are those used by

A. Governmental funds.

 

B. Fiduciary funds.

 

C. Proprietary funds.

 

D. Contribution funds.

 

49. Which of the following governmental funds must be reported as a major fund?

A. The General Fund.

 

B. Any fund with total assets, liabilities, revenues, or expenditures that are 10% or more of the General Fund and 5% or more of total General Fund and Business-type Activities.

 

C. The government may opt to include or exclude any fund it choses as a major fund.

 

D. Only the General Fund and special revenue funds that meet the 10% and 5% size criteria.

 

50. The basis of accounting that should be used in preparing fund financial statements is:

  Governmental funds Proprietary funds Fiduciary funds
A) Modified accrual Accrual Modified accrual
B) Modified accrual Modified accrual Modified accrual
C) Modified accrual Accrual Accrual
D) Accrual Accrual Accrual

 

A. Choice A

 

B. Choice B

 

C. Choice C

 

D. Choice D

 

51. A major governmental fund is one that has one or more elements (e.g., assets, liabilities, revenues, or expenditures) that is at least:

A. Five percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

B. Ten percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

C. Five percent of the corresponding element(s) of total governmental funds and five percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

D. Ten percent of the corresponding element(s) of total governmental funds and 5 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

52. A city received resources that the state indicates can only be used for public works projects, such as road construction. Assuming the resources have not been expended by year end, how would the resources the city received be shown in the city’s fund balances?

A. Spendable-Designated Fund Balance.

 

B. Spendable-Committed Fund Balance.

 

C. Spendable-Restricted Fund Balance.

 

D. Spendable-Assigned Fund Balance.

 

53. Which of the following would be reported as a nonspendable fund balance?

A. Inventory.

 

B. Restricted assets.

 

C. Assets whose use is limited.

 

D. Capital assets.

 

54. Under GASB standards which of the following funds can report a positive amount for unassigned fund balance?

A. Capital projects fund.

 

B. Special revenue fund.

 

C. General Fund.

 

D. All of the above.

 

55. Use the following information to determine whether the Development Special Revenue and the Debt Service Funds should be reported as major funds based on asset amounts provided. Development Special Revenue Fund Assets $740,000 Debt Service Fund Assets $150,000 Total Governmental Fund Assets $7,500,000 Total Governmental Fund and Enterprise Fund Assets $8,750,000

A. The Development Special Revenue Fund should be reported as major.

 

B. The Debt Service Fund should be reported as major.

 

C. Both the Development Special Revenue Fund and the Debt Service Fund should be reported as major.

 

D. Neither the Development Special Revenue Fund nor the Debt Service Fund should be reported as major.

 

56. Which of the following is not one of the seven elements defined by the GASB concept statements?

A. Deferred inflow of resources.

 

B. Expenses.

 

C. Assets.

 

D. Net position.

 

57. The GASB concept statements indicate that in certain instances a remeasured value for an asset or liability should be reported on the financial statements. Which of the following is not one of the methods recommended by the GASB for remeasured amounts?

A. Historical cost.

 

B. Lower of cost or market.

 

C. Fair value.

 

D. Replacement cost.

 

 

Short Answer Questions

58. The following are categories of funds described in Chapter 2:

A. Governmental funds
B. Proprietary funds
C. Fiduciary funds

For each of the following descriptive phrases, indicate the type of fund from the list above that best matches by placing the appropriate letter in the blank space next to the phrase.

_______1. Includes permanent funds held in trust to be used for public purpose
_______2. Sometimes referred to as income determination, business-like, or commercial-type funds
_______3. Any fund held by a government in an agent or trustee relationship for an external party
_______4. Used when the government collect taxes or amounts bequeathed from private citizens
_______5. Enterprise and internal service funds

 

 

 

 

 

 

59. The following are fund balance classifications described in Chapter 2:

A. Nonspendable
B. Spendable—Restricted
C. Spendable—Committed
D. Spendable—Assigned
E. Spendable—Unassigned

For each of the following scenarios, indicate how they would be classified for fund balance reporting purposes using the classification list above. Place the appropriate letter in the blank space next to each scenario.

_______1. Bond proceeds of $15,000,000 that must be used for construction of a fire substation remain unspent at the end of the fiscal year.
_______2. Prepaid rent of $6,000 remains at the end of the fiscal year.
_______3. The city council adopted a plan to set aside 2% of revenues over the next three years to help build cash reserves. At the end of the fiscal year 2% of the revenues were set aside.
_______4. The state transportation department provided $1,000,000 in state funds to be used for street widening. At the end of the fiscal year $750,000 remained unspent.
_______5. The county received a $3,000,000 endowment during the year.

 

 

 

 

 

 

60. Following are some of the county’s governmental funds. The county has asked you to determine is any of the funds listed should be classified as major funds based on the GASB size criteria. Clearly indicate which fund(s) you believe should be classified as major and provide support for your choice(s).

  General Fund Special Revenue Fund Debt Service Fund Total of all
Governmental Funds
Total of all
Governmental &Enterprise Funds
Assets 12,000,000 1,000,000 500,000 15,000,000 21,000,000
Liabilities  3,000,000 250,000 30,000 4,580,000 5,890,000
Revenues 10,000,000 600,000 1,450,000 13,770,000 17,123,000
Expenditures/Expenses  9,859,000 725,000 1,300,000 13,460,000 16,665,000

 

 

 

 

 

 

 

Essay Questions

61. List the basic financial statements required by GASB standards and briefly explain their purposes.

 

 

 

 

62. “The primary purpose of an accounting system for a state or a local government is to make it possible for financial statements to demonstrate compliance with finance-related legal and contractual provisions.” Explain why you believe this statement to be correct or incorrect.

 

 

 

 

63. Explain the difference between measurement focus and basis of accounting. Also, explain the difference between the economic resources measurement focus and the current financial resources measurement focus as well as the difference between the accrual and modified accrual bases of accounting. Which funds and government-wide activities use each focus and each basis?

 

 

 

 

64. List the seven fund financial statements that are required as part of the basic financial statements by GASB standards. What measurement focus and basis of accounting should be used in preparing each of these statements?

 

 

 

 

65. Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Provide examples of each.

 

 

 

 

66. Describe the comprehensive annual financial report (CAFR). What are the sections of the report and which components of the organization should it include? Is a CAFR required?

 

 

 

 

Chapter 02 Principles of Accounting and Financial Reporting for State and Local Governments Answer Key

True / False Questions

1. Governmental activities are to be classified as governmental or business-type.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities.
Topic: Financial reporting model
 

 

2. Governmental funds are identical to governmental activities, proprietary funds are identical to business-type activities, and fiduciary funds are identical to fiduciary activities of a government.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

3. Only those governmental and proprietary funds that meet the GASB size criteria for major funds are reported in separate columns of the governmental and proprietary fund financial statements.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

4. Economic resources are cash or items expected to be converted into cash during the current period, or soon enough thereafter to pay current period liabilities.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

5. Governmental funds account for assets but not the liabilities.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

6. The types of funds that may be used in governmental accounting are classified into the three categories of governmental, proprietary, and fiduciary.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

7. The governmental funds category includes the General Fund, special revenue funds, debt service funds, capital projects funds, and internal service funds.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

8. Governments can, in part, demonstrate operational accountability by reporting proprietary and fiduciary fund financial information, as well as all government-wide financial information, using an economic resources measurement focus and the accrual basis of accounting.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

9. All capital assets acquired by or used by a fund should be reported in the fund balance sheet or statement of net position.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

10. Because budgetary accounts are used by governments, government financial statements can never be said to be in accord with generally accepted accounting principles.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

11. The maximum sets of fund financial statements a government would present are three.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

12. When revenues are legally restricted by external resource providers or committed by enabling legislation for particular operating purposes, a private purpose trust fund is created.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

13. A debt service fund is used to account for financial resources segregated for the purpose of making principal and interest payments on general long-term debt.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

14. A deferred inflow of resources is defined as “an acquisition of net assets by the government that is applicable to a future reporting period.”

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

15. Expenditures are never recorded in governmental funds.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

16. Deferred outflow of resources is a type of asset that is unique to government.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

17. Revenues is an example of what the GASB terms an inflow of resources.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

18. An expenditure is an example of what the GASB terms an outflow of resources.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

19. Deferred inflow of resources and deferred outflow of resources would be shown in separate sections of a government’s statement of net position.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

20. In accordance with GASB standards, a deferred inflow of resources is reported on the financial statements the same as an unearned revenue.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

21. The GASB concept statements indicate that an asset that is going to be converted to cash should be reported at a remeasured amount at the financial statement date.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

22. Proprietary funds primarily provide services to the general public for a fee.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

23. A permanent endowment is an example of a nonspendable fund balance.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

24. Assigned fund balances can be either positive or negative.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

25. The General Fund is the only fund that can have a positive unassigned fund balance.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

26. The positive fund balance in a special revenue fund must at a minimum be reported as assigned.

TRUE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

27. Nonmajor funds are not reported on the fund financial statements.

FALSE

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

Multiple Choice Questions

28. Which of the following is true regarding financial reporting for internal service funds?

A. Internal service funds are reported in the governmental fund financial statements.

 

B. Internal service funds are aggregated and reported as a major fund in the proprietary fund financial statements.

 

C. Internal service funds are generally reported in the Business-type Activities column of the government-wide financial statements.

 

D. Internal service funds are generally reported in the Governmental Activities column of the government-wide financial statements.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Internal service fund
 

 

29. Which of the following is not a characteristic of a fund as defined by GASB standards?

A. An accounting entity.

 

B. A fiscal entity.

 

C. A reporting entity.

 

D. A self-balancing set of accounts.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Definition of a fund
 

 

30. In accounting for state and local governments the modified accrual basis is required for

A. Proprietary and fiduciary funds.

 

B. Governmental funds.

 

C. Governmental and fiduciary funds.

 

D. Governmental and internal service funds.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Modified accrual basis of accounting
 

 

31. Under the modified accrual basis of accounting, revenues should be recognized when

A. Earned.

 

B. Collected in cash.

 

C. Authorized by the budget ordinance.

 

D. Measurable and available.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Modified accrual basis of accounting
 

 

32. The accrual basis of accounting applicable to proprietary fund types requires that exchange revenues be recognized when

A. Earned.

 

B. Collected in cash.

 

C. Authorized by the budget ordinance.

 

D. Measurable and available.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Focus and basis of accounting for fund financial statements
 

 

33. Which of the following funds is a governmental fund-type?

A. Private-purpose trust fund.

 

B. Internal service fund.

 

C. Permanent fund.

 

D. Enterprise fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

34. Financial resources set aside to pay principal and interest on general long-term debt may be accounted for in which of the following fund types?

A. Private-purpose trust fund.

 

B. Debt service fund.

 

C. Principal and interest trust fund.

 

D. Internal service fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

35. According to GASB standards transfers should be recognized

A. When earned.

 

B. When collected in cash.

 

C. When authorized by the budget ordinance.

 

D. In the period the interfund receivable and payable arise.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

36. Generally accepted accounting principles applicable to state and local governments require that

A. Only governmental funds and proprietary funds should be established.

 

B. Only those funds required by law, GASB standards, and sound financial administration should be established.

 

C. Only those funds required by law and sound financial administration should be established.

 

D. All categories of funds must be established.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

37. Which of the following is a proprietary fund?

A. Special revenue fund.

 

B. Investment trust fund.

 

C. Debt service fund.

 

D. Internal service fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

38. Which of the following is a fiduciary fund?

A. Investment trust fund.

 

B. Special revenue fund.

 

C. Debt service fund.

 

D. Enterprise fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Reporting in an agency or trustee capacity
 

 

39. Which of the following funds would be most appropriate when accounting for an activity that provides goods or services to the public for a fee that is intended to make the activity self-supporting?

A. Investment trust fund.

 

B. Enterprise fund.

 

C. Internal service fund.

 

D. Special revenue fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

40. Which of the following funds should be used if resources provided by a federal grant must be segregated and used for counseling of youthful offenders?

A. Private-purpose trust fund.

 

B. Enterprise fund.

 

C. Internal service fund.

 

D. Special revenue fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

41. Which of the following funds would be used to account for an activity that provides centralized purchasing and sales of goods or services to other departments or agencies of the government on a cost-reimbursement basis?

A. Enterprise fund.

 

B. Fiduciary fund.

 

C. Internal service fund.

 

D. Permanent fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Internal service fund
 

 

42. Which of the following funds would record depreciation of capital assets?

A. Special revenue fund.

 

B. Permanent fund.

 

C. Internal service fund.

 

D. Agency fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Internal service fund
 

 

43. Capital assets used by departments accounted for by the General Fund of a governmental unit should be accounted for in

A. The General Fund.

 

B. The governmental activities journal.

 

C. The business-type activities journal.

 

D. The general capital assets fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

44. Capital assets used by an enterprise fund should be accounted for in the

A. Enterprise fund and depreciation on the capital assets should be recorded.

 

B. Business-type activities journal but no depreciation on the capital assets should be recorded.

 

C. Governmental activities journal and depreciation on the capital assets should be recorded.

 

D. Enterprise fund but no depreciation on the capital assets should be recorded.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

45. Which of the following funds are proprietary funds?

A. Enterprise funds, investment trust funds, pension trust funds, and the General Fund.

 

B. Enterprise funds and internal service funds.

 

C. Internal service funds, special revenue funds, and enterprise funds.

 

D. Proprietary funds are not used in governmental accounting.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

46. Which of the following funds are governmental funds?

A. General Fund, special revenue funds, capital projects funds, debt service funds, and private-purpose trust funds.

 

B. General Fund, special revenue funds, private-purpose trust funds.

 

C. General Fund, special revenue funds, debt service funds, capital projects funds, and permanent funds.

 

D. General Fund, special revenue funds, capital projects funds, debt service funds, and internal service funds.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

47. The activities of a water utility department, which offers its services to the general public on a user charge basis, should be accounted for in

A. An enterprise fund.

 

B. A special revenue fund.

 

C. The General Fund.

 

D. An internal service fund.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

48. The measurement focus and basis of accounting that are most unlike those used by business entities are those used by

A. Governmental funds.

 

B. Fiduciary funds.

 

C. Proprietary funds.

 

D. Contribution funds.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Common elements between governmental and for-profit financials
 

 

49. Which of the following governmental funds must be reported as a major fund?

A. The General Fund.

 

B. Any fund with total assets, liabilities, revenues, or expenditures that are 10% or more of the General Fund and 5% or more of total General Fund and Business-type Activities.

 

C. The government may opt to include or exclude any fund it choses as a major fund.

 

D. Only the General Fund and special revenue funds that meet the 10% and 5% size criteria.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

50. The basis of accounting that should be used in preparing fund financial statements is:

  Governmental funds Proprietary funds Fiduciary funds
A) Modified accrual Accrual Modified accrual
B) Modified accrual Modified accrual Modified accrual
C) Modified accrual Accrual Accrual
D) Accrual Accrual Accrual

 

A. Choice A

 

B. Choice B

 

C. Choice C

 

D. Choice D

 

AACSB: Knowledge application
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

51. A major governmental fund is one that has one or more elements (e.g., assets, liabilities, revenues, or expenditures) that is at least:

A. Five percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

B. Ten percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

C. Five percent of the corresponding element(s) of total governmental funds and five percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

D. Ten percent of the corresponding element(s) of total governmental funds and 5 percent of the corresponding element(s) of total governmental and enterprise funds combined.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

52. A city received resources that the state indicates can only be used for public works projects, such as road construction. Assuming the resources have not been expended by year end, how would the resources the city received be shown in the city’s fund balances?

A. Spendable-Designated Fund Balance.

 

B. Spendable-Committed Fund Balance.

 

C. Spendable-Restricted Fund Balance.

 

D. Spendable-Assigned Fund Balance.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Restricted fund balances
 

 

53. Which of the following would be reported as a nonspendable fund balance?

A. Inventory.

 

B. Restricted assets.

 

C. Assets whose use is limited.

 

D. Capital assets.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

54. Under GASB standards which of the following funds can report a positive amount for unassigned fund balance?

A. Capital projects fund.

 

B. Special revenue fund.

 

C. General Fund.

 

D. All of the above.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

55. Use the following information to determine whether the Development Special Revenue and the Debt Service Funds should be reported as major funds based on asset amounts provided. Development Special Revenue Fund Assets $740,000 Debt Service Fund Assets $150,000 Total Governmental Fund Assets $7,500,000 Total Governmental Fund and Enterprise Fund Assets $8,750,000

A. The Development Special Revenue Fund should be reported as major.

 

B. The Debt Service Fund should be reported as major.

 

C. Both the Development Special Revenue Fund and the Debt Service Fund should be reported as major.

 

D. Neither the Development Special Revenue Fund nor the Debt Service Fund should be reported as major.

 

AACSB: Knowledge application
AICPA: FN Measurement
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

56. Which of the following is not one of the seven elements defined by the GASB concept statements?

A. Deferred inflow of resources.

 

B. Expenses.

 

C. Assets.

 

D. Net position.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

57. The GASB concept statements indicate that in certain instances a remeasured value for an asset or liability should be reported on the financial statements. Which of the following is not one of the methods recommended by the GASB for remeasured amounts?

A. Historical cost.

 

B. Lower of cost or market.

 

C. Fair value.

 

D. Replacement cost.

 

AACSB: Knowledge application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

Short Answer Questions

58. The following are categories of funds described in Chapter 2:

A. Governmental funds
B. Proprietary funds
C. Fiduciary funds

For each of the following descriptive phrases, indicate the type of fund from the list above that best matches by placing the appropriate letter in the blank space next to the phrase.

_______1. Includes permanent funds held in trust to be used for public purpose
_______2. Sometimes referred to as income determination, business-like, or commercial-type funds
_______3. Any fund held by a government in an agent or trustee relationship for an external party
_______4. Used when the government collect taxes or amounts bequeathed from private citizens
_______5. Enterprise and internal service funds

 

1. A, 2. B, 3. C, 4. C, 5. B

 

AACSB: Knowledge application
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

59. The following are fund balance classifications described in Chapter 2:

A. Nonspendable
B. Spendable—Restricted
C. Spendable—Committed
D. Spendable—Assigned
E. Spendable—Unassigned

For each of the following scenarios, indicate how they would be classified for fund balance reporting purposes using the classification list above. Place the appropriate letter in the blank space next to each scenario.

_______1. Bond proceeds of $15,000,000 that must be used for construction of a fire substation remain unspent at the end of the fiscal year.
_______2. Prepaid rent of $6,000 remains at the end of the fiscal year.
_______3. The city council adopted a plan to set aside 2% of revenues over the next three years to help build cash reserves. At the end of the fiscal year 2% of the revenues were set aside.
_______4. The state transportation department provided $1,000,000 in state funds to be used for street widening. At the end of the fiscal year $750,000 remained unspent.
_______5. The county received a $3,000,000 endowment during the year.

 

1. B, 2. A, 3. D, 4. B, 5. A.

 

AACSB: Knowledge application
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

60. Following are some of the county’s governmental funds. The county has asked you to determine is any of the funds listed should be classified as major funds based on the GASB size criteria. Clearly indicate which fund(s) you believe should be classified as major and provide support for your choice(s).

  General Fund Special Revenue Fund Debt Service Fund Total of all
Governmental Funds
Total of all
Governmental &Enterprise Funds
Assets 12,000,000 1,000,000 500,000 15,000,000 21,000,000
Liabilities  3,000,000 250,000 30,000 4,580,000 5,890,000
Revenues 10,000,000 600,000 1,450,000 13,770,000 17,123,000
Expenditures/Expenses  9,859,000 725,000 1,300,000 13,460,000 16,665,000

 

Debt Service Fund – The size criteria states that a fund must be at least 10% of the total of all governmental funds for at least one of the elements (assets, liabilities, revenues, expenditures/expenses), and it must be at least 5% of the total of all governmental funds and enterprise funds for the same element. The debt service fund meets the size criteria for revenues since 10% of the total of all governmental funds is $1,377,000 and 5% of the total of all governmental and enterprise funds is $856,150, both of which the debt service fund exceeds. (The thresholds for the other three elements are: assets—10% is $1,500,000, 5% is $1,050,000; liabilities—10% is $458,000, 5% is $294,500; expenditures/expenses—10% is $1,346,000, 5% is $833,250.)

General Fund – the General Fund is always classified as a major fund and it meets the size criteria for all of the elements.

 

AACSB: Knowledge application
AICPA: FN Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-03 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund.
Topic: Reporting major funds
 

 

Essay Questions

61. List the basic financial statements required by GASB standards and briefly explain their purposes.

The basic financial statements include two government-wide financial statements, seven fund financial statements, and notes thereto. The government-wide statements are a statement of net position and statement of activities designed to report on the operational accountability of the government as a whole. The fund financial statements that follow are designed to report on the government’s fiscal accountability for spending according to legal budgets, laws, and agreements with resource providers. A balance sheet and statement of revenues, expenditures, and changes in fund balance are required for governmental-type funds, as well as a reconciliation of the change in fund balances to change in net position at the government-wide level. A statement of net position; a statement of revenues, expenses, and changes in fund net position; and statement of cash flows are required for proprietary-type funds. A statement of net position and statement of changes in net position are required for fiduciary funds.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

62. “The primary purpose of an accounting system for a state or a local government is to make it possible for financial statements to demonstrate compliance with finance-related legal and contractual provisions.” Explain why you believe this statement to be correct or incorrect.

The statement is not correct. The GASB specifies that a governmental accounting system must make it possible both to prepare statements in conformity with GAAP and to prepare legal compliance reports. The former are the basic financial statements on which auditors express an opinion; the latter are special purpose reports that may or may not be accompanied by auditors’ reports.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

63. Explain the difference between measurement focus and basis of accounting. Also, explain the difference between the economic resources measurement focus and the current financial resources measurement focus as well as the difference between the accrual and modified accrual bases of accounting. Which funds and government-wide activities use each focus and each basis?

Measurement focus describes what is measured; that is, the nature of the resources, claims against resources, and flows of resources that are measured and reported by a fund or activity. The basis of accounting describes when things are measured. The economic resources measurement focus reports on the balances and flows of both current and noncurrent assets and liabilities, whereas the current financial resources focus reports only on the balances and flows of current assets and liabilities. The accrual basis of accounting recognizes revenues when earned and expenses when incurred, where the modified accrual basis recognizes revenues when measurable and available for current spending and expenditures when a current liability has been incurred. Governmental funds use the current financial resources measurement focus, and proprietary and fiduciary funds use the economic resources measurement focus. Governmental funds use the modified accrual basis of accounting. Proprietary and fiduciary funds use the accrual basis of accounting. Governmental and business-type activities at the government-wide level report on net position and activities using the economic resources measurement focus and the accrual basis of accounting.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

64. List the seven fund financial statements that are required as part of the basic financial statements by GASB standards. What measurement focus and basis of accounting should be used in preparing each of these statements?

These seven fund statements are required in the basic financial statements (assuming that an entity has funds in each of the three fund types):

• Balance sheet-governmental funds
• Statement of revenue, expenditures, and changes in fund balances-governmental funds
• Statement of net position-proprietary funds
• Statement of revenues, expenses, and changes in fund net position-proprietary funds
• Statement of cash flows-proprietary funds
• Statement of fiduciary net position
• Statement of changes in fiduciary net position

In addition, a reconciliation of (1) the total fund balance of governmental funds from the balance sheet-governmental funds to the governmental activities net position from the government-wide statement of net position, and (2) the change in total fund balances of governmental funds from the statement of revenue, expenditures, and changes in fund balances-governmental funds to the change in governmental activities net position from the government-wide statement of activities, are required on the face of the financial statements or as separate schedules.

The governmental funds are accounted for using the current financial resources measurement focus and modified accrual basis of accounting. The proprietary and fiduciary funds are accounted for using the economic resources measurement focus and accrual basis of accounting (except for certain liabilities of defined benefit pension plans and related postemployment healthcare plans).

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

65. Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Provide examples of each.

Governmental activities are those core governmental services, together with general administrative support. Examples include public safety, public works (e.g., road and bridge maintenance), parks and recreation, cultural, and social services. Business-type activities are those that are self-supporting through user charges for services they provide, although operating subsidies from general tax revenues are not uncommon. Typical examples include public utilities, such as water and sewer, transportation systems, golf courses, and swimming pools. Fiduciary activities are those in which the government acts in a fiduciary capacity, either as an agent or trustee, for parties outside the government. Examples include trust funds that benefit individuals and organizations outside of the government.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-01 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities.
Topic: Financial reporting model
 

 

66. Describe the comprehensive annual financial report (CAFR). What are the sections of the report and which components of the organization should it include? Is a CAFR required?

The CAFR is recommended, but not required. The CAFR is comprised of three sections: (1) introductory section, (2) financial section, and (3) statistical section. All activities of the primary government and its component units should be included in the reporting entity covered by the CAFR. The minimum financial reporting requirements include (1) MDamp;A, (2) basic financial statements, and (3) required supplementary information other than the MDamp;A.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02 Explain the Governmental Accounting Standards Board’s (GASB) integrated accounting and financial reporting model, including: Elements and measurement approaches for the elements of the financial statements; Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type.
Topic: Financial reporting model
 

 

Chapter 08

Accounting for Fiduciary Activities-Agency and Trust Funds

 

True / False Questions

1. In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance.

True    False

 

2. Trust funds often exist over a longer period of time than agency funds, represent and develop vested interests of a beneficiary to a greater extent, and involve more complex administration and financial accounting and reporting.

True    False

 

3. Fiduciary funds are sometimes identified in the annual reports of state and local governments as “Ancillary Funds.”

True    False

 

4. Resources that are held in trust for the benefit of the government’s own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund.

True    False

 

5. Agency funds are used only if a government holds resources in a purely custodial capacity for others.

True    False

 

6. Assets that are held in an agency fund belong to the party or parties for which the government acts as agent; however, the government retains legal right of ownership in the event of party’s bankruptcy.

True    False

 

7. The collection of taxes or other revenues by one government for several of the funds it operates and for other governments often results in the creation of a trust fund.

True    False

 

8. It is common for an agency fund to have relatively small net position balances.

True    False

 

9. An agency fund should be used to account for special assessment billing and collection, and related debt service of special assessment debt, if the government has no responsibility for the debt.

True    False

 

10. It is common for a government that collects taxes on behalf of other governments to be authorized to withhold a certain percentage from the collections for each government.

True    False

 

11. In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement.

True    False

 

12. When an investment pool is created, the assets of each fund entering the pool should be transferred to the pool at their fair value at the date of the transfer.

True    False

 

13. Investment trust funds and pension trust funds should be accounted for in the same manner as permanent funds.

True    False

 

14. Agency funds should utilize the modified accrual basis of accounting.

True    False

 

15. Trust funds should utilize the accrual basis of accounting.

True    False

 

16. Pension trust funds should utilize budgetary accounts in the same manner that General Funds and special revenue funds do.

True    False

 

17. Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements.

True    False

 

18. Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool.

True    False

 

19. Most investment trust funds distribute investment earnings and changes in investment values on a daily basis.

True    False

 

20. A common example of a private-purpose trust fund is a state-sponsored 529 savings plan, structured such that parents make after-tax contributions to an investment fund managed by the state government.

True    False

 

21. A defined benefit plan specifies the amount or rate of contribution that the employer and employees must contribute to benefit the members’ accounts in the pension plan.

True    False

 

22. Other postemployment benefits (OPEB) include benefits other than pensions, such as health care, life insurance, and long-term care.

True    False

 

23. GASB standards provide comprehensive guidance on pension accounting and financial reporting for defined benefit pension plan employers, but the FASB provides guidance for plan sponsors.

True    False

 

24. When one participant in an investment pool withdraws part of its equity from the pool, that participant’s proportionate interest is decreased and all other participants’ proportionate interest is increased.

True    False

 

25. Defined benefit pension plans are classified as either single-employer pension plans or multiple-employer pension plans.

True    False

 

 

Multiple Choice Questions

26. Each of the following are reported as fiduciary funds except:

A. A permanent fund.

 

B. An investment trust fund.

 

C. An agency fund.

 

D. A private-purpose trust fund.

 

27. Which of the following statements regarding the financial reporting of agency funds is not true?

A. Agency activities are reported only in the fiduciary fund financial statements.

 

B. Agency fund financial information is reported in a separate column of the government-wide statement of activities.

 

C. Trust funds are included in the statement of changes in fiduciary net position.

 

D. GASB standards allow disclosure of the assets and liabilities of agency funds in a separate column of the statement of fiduciary net position.

 

28. Which of the following is the most reliable means of distinguishing a trust relationship from an agency relationship for purposes of deciding which type of fiduciary fund should be used?

A. Examine the applicable documents and contact the GASB for a determination letter.

 

B. Examine the aggregate of factors, such as the enactment that brought the relationship into existence and regulations under which it operates.

 

C. Examine the length of time assets will be held; agency relationships are generally in existence longer than trust relationships.

 

D. Examine the wording of any agreements to determine if the word “trust” or “agency” is used.

 

29. Which of the following activities would most appropriately be recorded by a trust fund?

A. Donations collected for improvements to the public library.

 

B. Deposits held for customers of a municipal-owned electric utility.

 

C. Assets held for investment, the earnings from which are used for maintenance of the City Cemetery.

 

D. Assets held for college scholarships to be awarded to the children of police officers.

 

30. Billing and collection of special assessments and payment of debt principal and interest on special assessment debt for which the city is not obligated in any manner should be recorded in a(an):

A. Debt service fund.

 

B. Special assessment fund.

 

C. Capital projects fund.

 

D. Agency fund.

 

31. If special assessment receivables are recorded in the accounts of an agency fund, the appropriate account(s) to credit upon receipt of assessments from property owners will include:

A. Contributions to Net Position.

 

B. Revenues and Deferred Revenues.

 

C. Due to Special Assessment Bondholders.

 

D. Interfund Transfers In.

 

32. A city will serve as a conduit for federal grant money which is sent to the city by the state government and must be remitted to various not-for-profit organizations who will use the money. The ultimate allocation of the money is decided by the state government. Which of the following terms describes the nature of this grant?

A. Agency grant.

 

B. Fiduciary grant.

 

C. Pass-through grant.

 

D. Partial grant.

 

33. Which of the following activities would most appropriately be recorded by an agency fund?

A. Donations collected for improvements to the public library.

 

B. Deposits held for customers of a municipal-owned electric utility.

 

C. Taxes collected by a county government on behalf of cities within the county.

 

D. Assets held for college scholarships to be awarded to the children of police officers.

 

34. Which of the following accounts is least likely to be used by a tax agency fund?

A. Cash.

 

B. Revenues.

 

C. Taxes receivable for other funds.

 

D. Due to other governments.

 

35. When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $3,100,000. To record this transaction, the journal entry made by the debt service fund will include:

A. A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

 

B. A credit to Revenues—Change in Fair Value of Investments in the amount of $100,000.

 

C. A debit to Investments in the amount of $3,000,000.

 

D. A credit to Investments in the amount of $3,100,000.

 

36. When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $2,900,000. To record this transaction, the journal entry made by the debt service fund will include:

A. A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

 

B. A debit to Revenues—Change in Fair Value of Investments in the amount of $100,000.

 

C. A debit to Investments in the amount of $2,900,000.

 

D. A credit to Investments in the amount of $100,000.

 

37. The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts?

A. Interfund Loans.

 

B. Revenues.

 

C. Undistributed Earnings on Pooled Investments.

 

D. Interfund Receivables.

 

38. Which of these fiduciary fund types always has zero net position?

A. Agency funds.

 

B. Pension trust funds.

 

C. Investment trust funds.

 

D. Private-purpose trust funds.

 

39. Which of the statements concerning agency funds is true?

A. Agency funds use the same basis of accounting as permanent funds.

 

B. Agency funds are reported only on the statement of fiduciary net position.

 

C. Agency funds use the temporary accounts Additions and Deductions.

 

D. Agency funds never receive cash.

 

40. Which of the following financial statements is prepared by fiduciary funds?

A. Statement of net position.

 

B. Statement of activities.

 

C. Statement of cash flows.

 

D. All of the above.

 

41. At the government-wide level, where are fiduciary funds reported?

A. In the Governmental Activities column.

 

B. In the Business-type Activities column.

 

C. As an internal balance in the total column.

 

D. Fiduciary funds are not reported at the government-wide level.

 

42. An investment trust fund is used to report the net position available to the:

A. Sponsoring government only.

 

B. External participants only.

 

C. Financial institution that acts as custodian for the fund’s investments.

 

D. All of the above.

 

43. A local civic group gave the county government $25,000 cash to be used to pay the utility bills of persons with income below the poverty level. The city should account for the $25,000 contribution in:

A. An investment trust fund.

 

B. The General Fund.

 

C. A permanent fund.

 

D. Private-purpose trust fund.

 

44. An Olympic medalist swimmer who grew up in the city contributed $75,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the swimming complex. The $75,000 would most appropriately be recorded in a(an):

A. Agency fund.

 

B. A permanent fund.

 

C. Private-purpose trust fund.

 

D. Investment trust fund.

 

45. A statement of cash flows should be prepared for which of the following fiduciary fund types?

A. Fiduciary funds do not provide a statement of cash flows.

 

B. Agency.

 

C. Pension trust.

 

D. Private-purpose trust

 

46. Which of the following is the appropriate basis of accounting for an agency fund?

A. Cash basis.

 

B. Modified cash basis.

 

C. Accrual basis.

 

D. Modified accrual basis.

 

47. A donor contributed $500,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the a band shell in the city’s park. The $500,000 would most appropriately be recorded in a(an):

A. Agency fund.

 

B. Private-purpose trust fund.

 

C. Endowment fund.

 

D. Permanent fund.

 

48. Fiduciary funds use a basis of accounting similar to which of the following funds?

A. Permanent funds.

 

B. Special revenue funds.

 

C. Enterprise funds.

 

D. Debt service funds.

 

49. Which of the following is the appropriate measurement focus for agency funds?

A. Economic resources.

 

B. Current financial resources.

 

C. Cash and cash equivalents.

 

D. Accrual basis.

 

50. Which of the following activities would be accounted for by a trust fund?

A. Deposits held for customers of a city-owned electric utility.

 

B. Assets passed-through the state government to the local government.

 

C. Assets held for special assessment bondholders for which the city has no liability.

 

D. Assets which are used to assist in the preservation of a private residence.

 

51. A governmental employer who makes contributions to pension plans for all employees:

A. Reports pension expenditures in a governmental fund in the amount actually contributed.

 

B. Reports pension expenses in a proprietary fund reflecting changes to the net pension liability.

 

C. Recognizes pension costs in the government-wide statements on the accrual basis of accounting.

 

D. All of the above.

 

52. In financial reporting for proprietary funds and at the government-wide level, the employer’s pension expense for the period is equal to:

A. The employer’s contribution.

 

B. Annual required contribution.

 

C. Current year benefits, interest on prior pension liabilities, plan changes, amortization of deferred amounts, and other changes to the net pension liability.

 

D. All of the above.

 

53. Which of the following statements is true regarding termination benefits?

A. Voluntary termination benefits occur when employers provide an incentive to hasten an employee’s voluntary termination of employment, such as a one-time payout.

 

B. Voluntary terminations relate to layoffs or reductions in workforce.

 

C. Employers incur expenses related to voluntary terminations but not to involuntary terminations.

 

D. Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations.

 

54. Other postemployment benefits may include:

A. Health care.

 

B. Life insurance.

 

C. Long-term care.

 

D. All of the above.

 

55. In pension accounting, the employer’s net pension liability:

A. Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments.

 

B. Represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.

 

C. Is the same as the net pension obligation.

 

D. Is based on actuarial valuations generally required to be performed at least every five years.

 

 

Short Answer Questions

56. The following are key terms in Chapter 8 that relate to accounting for pension plans.

A. Agent multiple-employer pension plan
B. Cost-sharing multiple-employer pension plan
C. Covered payroll
D. Defined benefit plan
E. Defined contribution plan
F. Net pension liability
G. Service cost
H. Total pension liability

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

_____ 1. A pension plan which specifies the amount or rate of contribution that the employer and employees must contribute to the members’ accounts in the pension plan.
_____ 2. The portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.
_____ 3. The portion of the actuarial present value of projected benefit payments that is attributed to the current year, interest on the total pension liability, benefit payments, and other changes to the total pension liability.
_____ 4. The pension obligations of many employers are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan.
_____ 5. Plan assets of numerous employers are pooled for investment purposes but accounts are maintained for the individual employer participants.

 

 

 

 

 

 

Essay Questions

57. If a city has a responsibility for endowed resources, how would city management decide whether to account for the resources in a permanent fund or a trust fund? How does financial reporting of the funds differ?

 

 

 

 

58. Why do agency funds have no fund equity? What classes of accounts are reported in agency fund financial statements?

 

 

 

 

59. Explain the purpose of the account “undistributed change in fair value of investments” used in a cash and investment pool.

 

 

 

 

60. Describe the types of pension plans most often found in governmental entities and the differences between them.

 

 

 

 

61. Briefly describe how GASB Statements 67 and 68 compare to prior pension accounting standards.

 

 

 

 

62. Kirby County established a tax agency fund to collect property taxes for the City of Kix, the City of Denton, and Kirby County School District. Total tax levies of the three governmental units were $200,000 for the year, of which $60,000 was for the City of Kix, $40,000 for Denton, and $100,000 for the School District.

The tax agency fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for agency fund operations. During the year the tax agency fund collected and remitted $150,000 of the $200,000 levies to the various governmental units. Collection fees associated with the $150,000 were remitted to Kirby County’s General Fund prior to year end.

For the Kirby County Tax Agency Fund prepare the journal entries to record the taxes collected during the year and the remittances made to participating governments.

 

 

 

 

63. On January 1, Forrester County is holding investments for Tinsel Town valued at $500,000 in an investment pool, accounted for in an investment trust fund. On January 1, Valley School District invests $1,500,000 in the pool. Earnings on pooled investments for the six months ended June 30 totaling $300,000 were received in cash.

1) What percentage interest in the pool is held by the town and the school district?
2) (a) Show the entry in the Investment Trust Fund to record the School District’s investment in the pool.
(b) Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period.
(c) Show the entry in the Investment Trust Fund to record the distribution of the interest earned on pooled investments, assuming that the interest will be reinvested by the town and school district.

 

 

 

 

Chapter 08 Accounting for Fiduciary Activities-Agency and Trust Funds Answer Key

True / False Questions

1. In accounting practice, the legalistic distinctions between trust funds and agency funds are not of major significance.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

2. Trust funds often exist over a longer period of time than agency funds, represent and develop vested interests of a beneficiary to a greater extent, and involve more complex administration and financial accounting and reporting.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

3. Fiduciary funds are sometimes identified in the annual reports of state and local governments as “Ancillary Funds.”

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Fiduciary Funds
 

 

4. Resources that are held in trust for the benefit of the government’s own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Fiduciary Funds
 

 

5. Agency funds are used only if a government holds resources in a purely custodial capacity for others.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

6. Assets that are held in an agency fund belong to the party or parties for which the government acts as agent; however, the government retains legal right of ownership in the event of party’s bankruptcy.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

7. The collection of taxes or other revenues by one government for several of the funds it operates and for other governments often results in the creation of a trust fund.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

8. It is common for an agency fund to have relatively small net position balances.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Topic: Accounting for Agency Funds
 

 

9. An agency fund should be used to account for special assessment billing and collection, and related debt service of special assessment debt, if the government has no responsibility for the debt.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Topic: Accounting for Agency Funds
 

 

10. It is common for a government that collects taxes on behalf of other governments to be authorized to withhold a certain percentage from the collections for each government.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Topic: Accounting for Agency Funds
 

 

11. In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Topic: Accounting for Agency Funds
 

 

12. When an investment pool is created, the assets of each fund entering the pool should be transferred to the pool at their fair value at the date of the transfer.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

13. Investment trust funds and pension trust funds should be accounted for in the same manner as permanent funds.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

14. Agency funds should utilize the modified accrual basis of accounting.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Topic: Accounting for Agency Funds
 

 

15. Trust funds should utilize the accrual basis of accounting.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

16. Pension trust funds should utilize budgetary accounts in the same manner that General Funds and special revenue funds do.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

17. Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-04 Explain the activities of and accounting and financial reporting for commonly used agency funds.
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Fiduciary Fund Reporting
 

 

18. Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

19. Most investment trust funds distribute investment earnings and changes in investment values on a daily basis.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

20. A common example of a private-purpose trust fund is a state-sponsored 529 savings plan, structured such that parents make after-tax contributions to an investment fund managed by the state government.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Trust Funds
 

 

21. A defined benefit plan specifies the amount or rate of contribution that the employer and employees must contribute to benefit the members’ accounts in the pension plan.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Trust Funds
 

 

22. Other postemployment benefits (OPEB) include benefits other than pensions, such as health care, life insurance, and long-term care.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-06 Describe accounting for other postemployment benefits plans.
Topic: Other postemployment benefits
 

 

23. GASB standards provide comprehensive guidance on pension accounting and financial reporting for defined benefit pension plan employers, but the FASB provides guidance for plan sponsors.

FALSE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Trust Funds
 

 

24. When one participant in an investment pool withdraws part of its equity from the pool, that participant’s proportionate interest is decreased and all other participants’ proportionate interest is increased.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

25. Defined benefit pension plans are classified as either single-employer pension plans or multiple-employer pension plans.

TRUE

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

Multiple Choice Questions

26. Each of the following are reported as fiduciary funds except:

A. A permanent fund.

 

B. An investment trust fund.

 

C. An agency fund.

 

D. A private-purpose trust fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Fiduciary Funds
 

 

27. Which of the following statements regarding the financial reporting of agency funds is not true?

A. Agency activities are reported only in the fiduciary fund financial statements.

 

B. Agency fund financial information is reported in a separate column of the government-wide statement of activities.

 

C. Trust funds are included in the statement of changes in fiduciary net position.

 

D. GASB standards allow disclosure of the assets and liabilities of agency funds in a separate column of the statement of fiduciary net position.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Fiduciary Fund Reporting
 

 

28. Which of the following is the most reliable means of distinguishing a trust relationship from an agency relationship for purposes of deciding which type of fiduciary fund should be used?

A. Examine the applicable documents and contact the GASB for a determination letter.

 

B. Examine the aggregate of factors, such as the enactment that brought the relationship into existence and regulations under which it operates.

 

C. Examine the length of time assets will be held; agency relationships are generally in existence longer than trust relationships.

 

D. Examine the wording of any agreements to determine if the word “trust” or “agency” is used.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Fiduciary Fund Reporting
 

 

29. Which of the following activities would most appropriately be recorded by a trust fund?

A. Donations collected for improvements to the public library.

 

B. Deposits held for customers of a municipal-owned electric utility.

 

C. Assets held for investment, the earnings from which are used for maintenance of the City Cemetery.

 

D. Assets held for college scholarships to be awarded to the children of police officers.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

30. Billing and collection of special assessments and payment of debt principal and interest on special assessment debt for which the city is not obligated in any manner should be recorded in a(an):

A. Debt service fund.

 

B. Special assessment fund.

 

C. Capital projects fund.

 

D. Agency fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

31. If special assessment receivables are recorded in the accounts of an agency fund, the appropriate account(s) to credit upon receipt of assessments from property owners will include:

A. Contributions to Net Position.

 

B. Revenues and Deferred Revenues.

 

C. Due to Special Assessment Bondholders.

 

D. Interfund Transfers In.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

32. A city will serve as a conduit for federal grant money which is sent to the city by the state government and must be remitted to various not-for-profit organizations who will use the money. The ultimate allocation of the money is decided by the state government. Which of the following terms describes the nature of this grant?

A. Agency grant.

 

B. Fiduciary grant.

 

C. Pass-through grant.

 

D. Partial grant.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

33. Which of the following activities would most appropriately be recorded by an agency fund?

A. Donations collected for improvements to the public library.

 

B. Deposits held for customers of a municipal-owned electric utility.

 

C. Taxes collected by a county government on behalf of cities within the county.

 

D. Assets held for college scholarships to be awarded to the children of police officers.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-03 Describe the uses for and characteristics of agency funds.
Topic: Agency Funds
 

 

34. Which of the following accounts is least likely to be used by a tax agency fund?

A. Cash.

 

B. Revenues.

 

C. Taxes receivable for other funds.

 

D. Due to other governments.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

35. When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $3,100,000. To record this transaction, the journal entry made by the debt service fund will include:

A. A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

 

B. A credit to Revenues—Change in Fair Value of Investments in the amount of $100,000.

 

C. A debit to Investments in the amount of $3,000,000.

 

D. A credit to Investments in the amount of $3,100,000.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

36. When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $2,900,000. To record this transaction, the journal entry made by the debt service fund will include:

A. A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000.

 

B. A debit to Revenues—Change in Fair Value of Investments in the amount of $100,000.

 

C. A debit to Investments in the amount of $2,900,000.

 

D. A credit to Investments in the amount of $100,000.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

37. The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts?

A. Interfund Loans.

 

B. Revenues.

 

C. Undistributed Earnings on Pooled Investments.

 

D. Interfund Receivables.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

38. Which of these fiduciary fund types always has zero net position?

A. Agency funds.

 

B. Pension trust funds.

 

C. Investment trust funds.

 

D. Private-purpose trust funds.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

39. Which of the statements concerning agency funds is true?

A. Agency funds use the same basis of accounting as permanent funds.

 

B. Agency funds are reported only on the statement of fiduciary net position.

 

C. Agency funds use the temporary accounts Additions and Deductions.

 

D. Agency funds never receive cash.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

40. Which of the following financial statements is prepared by fiduciary funds?

A. Statement of net position.

 

B. Statement of activities.

 

C. Statement of cash flows.

 

D. All of the above.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

41. At the government-wide level, where are fiduciary funds reported?

A. In the Governmental Activities column.

 

B. In the Business-type Activities column.

 

C. As an internal balance in the total column.

 

D. Fiduciary funds are not reported at the government-wide level.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

42. An investment trust fund is used to report the net position available to the:

A. Sponsoring government only.

 

B. External participants only.

 

C. Financial institution that acts as custodian for the fund’s investments.

 

D. All of the above.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

43. A local civic group gave the county government $25,000 cash to be used to pay the utility bills of persons with income below the poverty level. The city should account for the $25,000 contribution in:

A. An investment trust fund.

 

B. The General Fund.

 

C. A permanent fund.

 

D. Private-purpose trust fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

44. An Olympic medalist swimmer who grew up in the city contributed $75,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the swimming complex. The $75,000 would most appropriately be recorded in a(an):

A. Agency fund.

 

B. A permanent fund.

 

C. Private-purpose trust fund.

 

D. Investment trust fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

45. A statement of cash flows should be prepared for which of the following fiduciary fund types?

A. Fiduciary funds do not provide a statement of cash flows.

 

B. Agency.

 

C. Pension trust.

 

D. Private-purpose trust

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Fiduciary Fund Reporting
 

 

46. Which of the following is the appropriate basis of accounting for an agency fund?

A. Cash basis.

 

B. Modified cash basis.

 

C. Accrual basis.

 

D. Modified accrual basis.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

47. A donor contributed $500,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the a band shell in the city’s park. The $500,000 would most appropriately be recorded in a(an):

A. Agency fund.

 

B. Private-purpose trust fund.

 

C. Endowment fund.

 

D. Permanent fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

48. Fiduciary funds use a basis of accounting similar to which of the following funds?

A. Permanent funds.

 

B. Special revenue funds.

 

C. Enterprise funds.

 

D. Debt service funds.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-02 Distinguish among agency funds and trust funds (private-purpose, investment, and pension).
Topic: Fiduciary Funds
 

 

49. Which of the following is the appropriate measurement focus for agency funds?

A. Economic resources.

 

B. Current financial resources.

 

C. Cash and cash equivalents.

 

D. Accrual basis.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

50. Which of the following activities would be accounted for by a trust fund?

A. Deposits held for customers of a city-owned electric utility.

 

B. Assets passed-through the state government to the local government.

 

C. Assets held for special assessment bondholders for which the city has no liability.

 

D. Assets which are used to assist in the preservation of a private residence.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

51. A governmental employer who makes contributions to pension plans for all employees:

A. Reports pension expenditures in a governmental fund in the amount actually contributed.

 

B. Reports pension expenses in a proprietary fund reflecting changes to the net pension liability.

 

C. Recognizes pension costs in the government-wide statements on the accrual basis of accounting.

 

D. All of the above.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

52. In financial reporting for proprietary funds and at the government-wide level, the employer’s pension expense for the period is equal to:

A. The employer’s contribution.

 

B. Annual required contribution.

 

C. Current year benefits, interest on prior pension liabilities, plan changes, amortization of deferred amounts, and other changes to the net pension liability.

 

D. All of the above.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

53. Which of the following statements is true regarding termination benefits?

A. Voluntary termination benefits occur when employers provide an incentive to hasten an employee’s voluntary termination of employment, such as a one-time payout.

 

B. Voluntary terminations relate to layoffs or reductions in workforce.

 

C. Employers incur expenses related to voluntary terminations but not to involuntary terminations.

 

D. Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Trust Funds
 

 

54. Other postemployment benefits may include:

A. Health care.

 

B. Life insurance.

 

C. Long-term care.

 

D. All of the above.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 08-06 Describe accounting for other postemployment benefits plans.
Topic: Other postemployment benefits
 

 

55. In pension accounting, the employer’s net pension liability:

A. Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments.

 

B. Represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.

 

C. Is the same as the net pension obligation.

 

D. Is based on actuarial valuations generally required to be performed at least every five years.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

Short Answer Questions

56. The following are key terms in Chapter 8 that relate to accounting for pension plans.

A. Agent multiple-employer pension plan
B. Cost-sharing multiple-employer pension plan
C. Covered payroll
D. Defined benefit plan
E. Defined contribution plan
F. Net pension liability
G. Service cost
H. Total pension liability

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

_____ 1. A pension plan which specifies the amount or rate of contribution that the employer and employees must contribute to the members’ accounts in the pension plan.
_____ 2. The portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service.
_____ 3. The portion of the actuarial present value of projected benefit payments that is attributed to the current year, interest on the total pension liability, benefit payments, and other changes to the total pension liability.
_____ 4. The pension obligations of many employers are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan.
_____ 5. Plan assets of numerous employers are pooled for investment purposes but accounts are maintained for the individual employer participants.

1. E, 2. H, 3. G, 4. B, 5. A

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

Essay Questions

57. If a city has a responsibility for endowed resources, how would city management decide whether to account for the resources in a permanent fund or a trust fund? How does financial reporting of the funds differ?

If resources entrusted to a government are specified for public purposes that benefit the general citizenry (for example, to maintain parks and cemeteries or to acquire art for public buildings), they are considered governmental rather than fiduciary activities under GASB standards. Thus, public-purpose endowments are accounted for as permanent funds. Endowments set aside for private purposes are accounted for as private-purpose trust funds. The principal financial reporting difference is that financial information for a private-purpose trust is reported in the statement of fiduciary net position and statement of changes in fiduciary net position, whereas that for a permanent fund is reported in the balance sheet-governmental funds and statement of revenues, expenditures, and changes in fund balances-governmental funds.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Fiduciary Fund Reporting
 

 

58. Why do agency funds have no fund equity? What classes of accounts are reported in agency fund financial statements?

When an agency fund is used to account for assets, the assets belong to the party or parties for whom the government acts as an agent, and not to the government itself. Thus, agency fund assets are offset by liabilities equal in amount and no fund equity accounts exist.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

59. Explain the purpose of the account “undistributed change in fair value of investments” used in a cash and investment pool.

The account “undistributed change in fair value of investments” is used in a cash and investments pool trust fund to accumulate the unrealized and realized gains and losses on investments that arise when investments in the pool are revalued to fair value or sold. This is a liability account that is distributed to pool participants when a distribution to a pool participant is made.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Distinguish between the purposes of internal service funds and enterprise funds.
Learning Objective: 08-01 Explain how trust and agency funds are used to report on the fiduciary activities of a government.
Topic: Internal Service Funds
 

 

60. Describe the types of pension plans most often found in governmental entities and the differences between them.

Pension plans are of two general types, defined contribution plans and defined benefit plans. A defined contribution plan specifies the amount or rate of contribution, often a percentage of covered salary, that the employer and employees must contribute to the members’ accounts in the pension plan. The level of benefits payable upon retirement is determined by the total amount of contributions to a member’s account and earnings on investments. Defined benefit pension plans provide a specified amount of benefits to a retiree based on a formula that may include factors such as age, salary, and years of employment. They are classified as either single-employer pension plans (pensions are provided only to employees of the employer) or multiple-employer pension plans (pension benefits are provided to the employees of more than one employer). Multiple employer plans can be further designated as agent or cost-sharing.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

61. Briefly describe how GASB Statements 67 and 68 compare to prior pension accounting standards.

Prior to GASB Statements 67 and 68, standards focused on pension plan funding status relative to annual actuarial required contributions (i.e., employer contribution to pension compared to requirements) and overall funding progress. The new pension standards require immediate recognition of the net long-term liability of future pension benefits in excess of accumulated plan assets. The new standards will better align the recognition of pension expense with the period in which the related benefits are earned. Considered in total, the changes set forth by the GASB will have the overall effect of expense recognition being accelerated.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Pension Accounting
 

 

62. Kirby County established a tax agency fund to collect property taxes for the City of Kix, the City of Denton, and Kirby County School District. Total tax levies of the three governmental units were $200,000 for the year, of which $60,000 was for the City of Kix, $40,000 for Denton, and $100,000 for the School District.

The tax agency fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for agency fund operations. During the year the tax agency fund collected and remitted $150,000 of the $200,000 levies to the various governmental units. Collection fees associated with the $150,000 were remitted to Kirby County’s General Fund prior to year end.

For the Kirby County Tax Agency Fund prepare the journal entries to record the taxes collected during the year and the remittances made to participating governments.

 

KIRBY COUNTY
TAX AGENCY FUND
GENERAL JOURNAL
    Debits Credits
1. TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS—CURRENT 400,000  
    DUE TO OTHER FUNDS AND GOVERNMENTS          400,000
       
2. CASH 150,000  
  TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS—CURRENT   150,000
       
3. DUE TO OTHER FUNDS AND GOVERNMENTS 150,000  
  DUE TO KIX   44,100
  DUE TO DENTON   29,400
  DUE TO SCHOOL DISTRICT   73,500
  DUE TO GENERAL FUND   3,000

 

      Collection    
  Tax %age of total allocated 2% fee  
Kix $60,000 30% 45,000 900 44,100
Denton 40,000 20% 30,000 600 29,400
School district 100,000 50% 75,000 1,500 73,500
  200,000     3,000 147,000

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 3 Hard
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

63. On January 1, Forrester County is holding investments for Tinsel Town valued at $500,000 in an investment pool, accounted for in an investment trust fund. On January 1, Valley School District invests $1,500,000 in the pool. Earnings on pooled investments for the six months ended June 30 totaling $300,000 were received in cash.

1) What percentage interest in the pool is held by the town and the school district?
2) (a) Show the entry in the Investment Trust Fund to record the School District’s investment in the pool.
(b) Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period.
(c) Show the entry in the Investment Trust Fund to record the distribution of the interest earned on pooled investments, assuming that the interest will be reinvested by the town and school district.

 

FORRESTER COUNTY
INVESTMENT TRUST FUND
GENERAL JOURNAL
    Debits Credits
2(a). CASH 1,500,000  
    ADDITIONS—DEPOSITS IN POOLED INVESTMENTS—VALLEY SCHOOL BOARD DISTRICT          1,500,000
       
(b). CASH 300,000  
  UNDISTRIBUTED EARNINGS ON POOLED INVESTMENTS   300,000
       
(C). UNDISTRIBUTED EARNINGS ON POOLED    
  INVESTMENTS 300,000  
  ADDITIONS—DEPOSITS IN POOLED INVESTMENTS—VALLEY SCHOOL DISTRICT   225,000
  ADDITIONS—DEPOSITS IN POOLED INVESTMENTS—TINSEL TOWN   75,000

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for a cash and investment pool (including an investment trust fund); a private-purpose trust fund; and a pension trust fund.
Topic: Accounting for Agency Funds
 

 

Chapter 12

Budgeting and Performance Measurement

 

True / False Questions

1.
Budgeting is an important part of a manager’s planning and control responsibilities in both public and private organizations.

True    False

 

2.
In governments, the budget has always played a role in external financial reports through the required budget-to-actual comparison schedules or statements for those funds that have a legally approved budget.

True    False

 

3.
The type of budgeting that relates input of resources to output of services is zero-based budgeting.

True    False

 

4.
Popular budgeting approaches employed by governments include incremental budgeting, performance budgeting, program budgeting, planning-programming-budgeting systems, and zero-based budgeting.

True    False

 

5.
Governmental budgets must be voted upon by citizens for approval in an annual general election.

True    False

 

6.
Public hearings must be held to provide adequate opportunity for citizens’ input to governmental budgets, prior to legislative adoption of the budget.

True    False

 

7.
Cash planning and budgeting are important in government because the timing of cash inflows often do not necessarily coincide with the timing of cash outflows.

True    False

 

8.
Under GASB standards, every government, regardless of its size, is instructed to prepare a cash budget for each month of the fiscal year.

True    False

 

9.
Budget appropriations for governmental funds ordinarily cover only one year, while capital budgets are often multi-year.

True    False

 

10.
When planning, budgeting, and performance measurement are related, good performance is rewarded, and consequences exist for substandard performance, then public employees’ behaviors will change.

True    False

 

11.
Total quality management (TQM) seeks to continuously improve an organization’s ability to meet or exceed customers’ demands, and, as such, is useful in a government setting as well as a business setting.

True    False

 

12.
Service efforts and accomplishments measures suffer from the same problem as line-item or object-of-expenditures budgeting; that is, focusing only on resource inputs while ignoring outputs and outcomes of governmental activities.

True    False

 

13.
To determine which costs are allowable for charging to a federal assistance program, accountants and auditors refer to the GASB cost circular.

True    False

 

14.
Service efforts and accomplishments (SEA) reporting helps citizens, elected officials, appointed officials, investors and creditors, and other interested parties evaluate the government’s performance in the absence of a “bottom line” measure such as exists for for-profit entities.

True    False

 

15.
Under service efforts and accomplishments (SEA) reporting input measures are quantity measures that reflect the quantity of a service provided, such as the number of lane-miles of road repaired.

True    False

 

16.
Under service efforts and accomplishments (SEA) reporting, outcome measures gauge accomplishments, or the results of services provided, such as the percentage of lane-miles of road in excellent, good, or fair condition.

True    False

 

17.
Despite its initial popularity, service efforts and accomplishments reporting has lost favor in recent years.

True    False

 

18.
A major disadvantage of activity-based costing (ABC) in a governmental setting is the very limited number of activities for which it can be used.

True    False

 

19.
A major advantage of activity-based costing (ABC) is that it reduces unit cost distortions arising from overhead allocations that often occur using traditional cost accounting systems.

True    False

 

20.
The sole purpose of preparing a governmental budget is to show compliance with laws and regulations.

True    False

 

21.
GASB Concepts Statement No. 2 requires state and local governments to include service efforts and accomplishments measures within the comprehensive annual financial report.

True    False

 

22.
A generally unallowable cost may be allowable under certain circumstances.

True    False

 

23.
Governments receiving federal grants and contract funds are expected to have an accounting information system with adequate internal controls that can deliver reliable information to compare the actual amount spent with budgeted amounts.

True    False

 

24.
The United States Office of Management and Budget (OMB) publishes a “super circular” which provides streamlined guidelines for grant accounting and reporting.

True    False

 

25.
Service efforts and accomplishments reporting is also referred to as citizen-centric reporting.

True    False

 

 

Multiple Choice Questions

26.
Which of the following statements is not consistent with the GASB’s “Budgeting, Budgetary Control, and Budgetary Reporting Principle”?

 

A.
An annual budget must be adopted using generally accepted accounting principles.

 

B.
The accounting system should provide the basis for appropriate budgetary control.

 

C.
Budgetary comparisons should be presented for the General Fund and each major special revenue fund for which an annual budget has been adopted.

 

D.
The budgetary comparisons should present both the original and the final appropriated budgets for the reporting period.

 

27.
The GASB “Budgeting Principle” states that an annual budget should be adopted by (for) every:

 

A.
Fiduciary fund type.

 

B.
Fund of a government.

 

C.
Governmental unit.

 

D.
Governmental fund type except special revenue funds

 

28.
A common approach to budgeting line-items whereby the current year’s budget is constructed by adding or subtracting amounts expected to be required by line items is:

 

A.
Performance budgeting.

 

B.
Zero-based budgeting.

 

C.
Program budgeting.

 

D.
Incremental budgeting.

 

29.
Which of the following is not a typical step in the budgeting process for a state or local government?

 

A.
Request by management for input on the budget.

 

B.
Review and revisions of the budget by the administrative staff of each unit.

 

C.
Public hearings for citizen input.

 

D.
Approval by a majority vote of the citizenry.

 

30.
An budgeting method that derives the subsequent year’s budget from the current year’s budget is called:

 

A.
Planning-programming-budgeting.

 

B.
Incremental budgeting.

 

C.
Zero-based budgeting.

 

D.
Performance budgeting.

 

31.
In budgeting revenues, state and local government administrators should:

 

A.
Be cautious not to utilize unauthorized sources or exceed authorized ceilings on revenues from specific sources.

 

B.
Ensure that at least the amount of revenues needed to meet spending needs are raised, even if authorized ceilings on some revenue sources must be exceeded.

 

C.
Utilize all authorized revenues sources at the maximum amount allowed by law.

 

D.
Ignore “other financing sources” since these resource inflows are not available for appropriation.

 

32.
Cash receipts and cash disbursement budgets for a government:

 

A.
Should be prepared for all funds for the entire fiscal year.

 

B.
Should be prepared monthly or as needed to enhance cash management, investment management, and short-term debt management.

 

C.
Should be prepared for only those funds for which appropriations budgets are required by law to be prepared on the accrual basis or the modified accrual basis.

 

D.
Should be prepared for only those funds for which appropriations budgets are not required by law.

 

33.
Cash disbursement budgets:

 

A.
Are prepared to facilitate the preparation of government-wide financial statements.

 

B.
Are usually prepared for each month of the year, or for shorter intervals, in order to facilitate planning short-term borrowings and investments.

 

C.
Are prepared only for funds not required to operate under legal appropriation budgets.

 

D.
Are prepared only for each fiscal year because disbursements for each month are approximately equal.

 

34.
The schedule of legally required events in the budgeting process is generally referred to as the:

 

A.
Budget docket.

 

B.
Legal timetable.

 

C.
Hearing schedule.

 

D.
Budget calendar.

 

35.
Effective capital budgeting for general capital assets of a government requires:

 

A.
Intermediate and long-range capital improvement plans for general capital assets.

 

B.
Nonfinancial information on physical measures and service condition of capital assets of component units.

 

C.
Consideration of how proprietary fund capital projects will be financed.

 

D.
Information about the capital asset needs of a motor pool accounted for as an internal service fund.

 

36.
Which of the following statements regarding government budgets is not true?

 

A.
A budget should be enacted before the fiscal year begins and be integrated with the financial accounting system so that actual results can be compared to budgets at regular intervals.

 

B.
The budget’s role is limited to inclusion in internal financial reports and budgetary compliance monitoring for those funds that have a legally approved budget.

 

C.
Integrating the budget into the accounting system allows management to oversee individual unit performance and react quickly to variances between actual results and budgeted plans.

 

D.
A budget is a plan of financial operation embodying an estimate of proposed expenditures for a given period of time and the proposed means of financing them.

 

37.
Which of the following might appropriately be termed an outcome indicator for a police department that reports service efforts and accomplishments (SEA) indicators?

 

A.
Number of crimes investigated.

 

B.
Value of property lost due to crime.

 

C.
Hours of patrol.

 

D.
Number of personnel hours expended.

 

38.
Which of the following statements regarding service efforts and accomplishments (SEA) is not true?

 

A.
SEA information includes indicators of a government’s actual performance in providing services to its citizens.

 

B.
As governments integrate strategic planning, budgeting, and performance measurement, information on SEA is available and often provided to the public.

 

C.
SEA reporting may take the form of a published report, an electronic report posted on a government’s Web site, or a pamphlet designed to summarize an entity’s SEA measurement results.

 

D.
SEA reporting is required by governments with populations greater than 500,000.

 

39.
Which of the following statements is not true?

 

A.
A balanced scorecard is an integrated set of performance targets, both financial and nonfinancial, that are derived from an organization’s strategies about how to achieve its goals.

 

B.
Total quality management (TQM) seeks to continuously improve the government’s ability to meet or exceed demands from customers who might be external, such as taxpayers and service recipients, or internal, such as the customers of an internal service fund.

 

C.
Service efforts and accomplishments (SEA) reporting links customer (taxpayer and other resource provider) satisfaction to improvements in the operating systems and processes used to provide goods and services.

 

D.
Customer relationship management (CRM) systems create an integrated view of a customer to coordinate services from all channels of the organization with the intent to improve the long-term relationship the organization has with its customer.

 

40.
The number of lane-miles of road repaired to a specified minimum condition is an example of an:

 

A.
Output measure.

 

B.
Input measure.

 

C.
Outcome measure.

 

D.
Efficiency measure.

 

41.
Service efforts and accomplishments (SEA) information:

 

A.
Includes indicators of a government’s actual performance in providing services to its citizens.

 

B.
Aids users in assessing the economy, efficiency, and effectiveness of government.

 

C.
Is required for all governments that issue a CAFR.

 

D.
Both A and B are true.

 

42.
Balanced scorecards integrate all of the following into a document that can be shared with employees and stakeholders except:

 

A.
GASB financial reporting standards.

 

B.
Internal business processes measures.

 

C.
Nonfinancial measures, such as customer satisfaction.

 

D.
Financial performance measures.

 

43.
Which of the following has contributed most to governments’ increased interest in activity-based accounting?

 

A.
GASB standards.

 

B.
Implementation of innovative management approaches (such as TQM and SEA measures) in response to public demand for greater accountability and productivity.

 

C.
Increased demand for high profile management tools to bolster the image of government.

 

D.
The enactment of Sarbanes-Oxley legislation.

 

44.
All of the following are objectives of activity-based cost (ABC) accounting in government except:

 

A.
To preserve, at a minimum, the present quality and availability of services.

 

B.
To help find lower cost alternatives to providing services.

 

C.
To link customer (taxpayer) satisfaction to improvements in the operating systems used to provide goods and services.

 

D.
To make increases in the volume of services dependent on reducing costs.

 

45.
Efficiency measures, as the term is used in the service efforts and accomplishments (SEA) literature, can be described as:

 

A.
Measures that relate the quantity or cost of resources used to units of output.

 

B.
Measures that relate to the amount of financial and nonfinancial resources used in a program or process.

 

C.
Measures that relate costs to outcomes.

 

D.
Measures that reflect either the quantity or quality of a service provided.

 

46.
The GASB identifies which of the following three broad categories of service efforts and accomplishments (SEA) measures:

 

A.
Measures of service efforts, measures of service accomplishments, and measures of efficiency.

 

B.
Measures of service efforts and accomplishments, measures of service efficiency, and measures of service effectiveness.

 

C.
Measures of service efforts, measures of service accomplishments, and measures of the costs of service efforts and accomplishments.

 

D.
Measures of service efforts, measures of service accomplishments, and measures that relate efforts to accomplishments.

 

47.
Which of the following statements regarding service efforts and accomplishments (SEA) is not true?

 

A.
Measures of service efforts, or input measures, relate to the amount of financial and nonfinancial resources (such as money and materials) used in a program or process.

 

B.
Effort measures relate service efforts to outputs of service and to outcomes or results of services.

 

C.
Output measures are quantity measures that reflect either the quantity of a service provided or the quantity of service provided that meets a specified quality requirement.

 

D.
Outcome measures gauge accomplishments, or the results of services provided.

 

48.
State and local governments and not-for-profit organizations that receive grants or contracts from the federal government should charge costs of these grants or contracts in conformity with:

 

A.
Cost Accounting Standards Board standards.

 

B.
Office of Management and Budget circulars.

 

C.
Financial Accounting Standards Board standards.

 

D.
Governmental Accounting Standards Board standards.

 

49.
Which of the following statements regarding costs under federal awards is not true?

 

A.
Only items of cost specifically mentioned in a grant, contract, or other agreement document are allowable.

 

B.
Several costs are allowable under highly restrictive conditions and generally require the explicit approval of the grantor agency.

 

C.
For major not-for-profit organizations and institutions of higher learning, indirect costs must be classified within two broad categories termed “facilities” and “administration.”

 

D.
Direct costs are those that can be identified specifically with a particular cost objective.

 

50.
Which of the following is not one of the criteria for an allowable cost under a federal grant?

 

A.
A cost that is necessary and reasonable for the performance of the federal award and allocable thereto under the OMB cost principles.

 

B.
A cost that conforms to any limitations or exclusions set forth in the OMB cost principles or in the federal award as to types or amount of cost items.

 

C.
A cost that has been approved by the FASB or GASB as an allowable cost.

 

D.
A cost that is adequately documented.

 

 

Short Answer Questions

51. The following are key terms in Chapter 12 that relate to budgeting of government services:

A. Efficiency measures
B. Effectiveness measures
C. Planning-programming-budgeting system
D. Zero-based budgeting
E. Program budgeting
F. Flexible budgeting
G. Incremental budgeting
H. Budget calendar

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

_____ 1. A budget in which each activity and the amounts of resources requested for each activity must be justified each year
_____ 2. A budget that is derived from the current year budget by multiplying a factor across all line-items
_____ 3. A budgeting approach popular in the 1960s that integrates various elements of planning for programs
_____ 4. Measures that relate costs to outcomes
_____ 5. A budget in which resource inputs and service outputs are identified by programs

 

 

 

 

 

52. The following are key terms in Chapter 12 that relate to costing of government services:

A. Allowable costs
B. Job order costing
C. Cost principle
D. Cost objective
E. Indirect costs
F. Direct costs
G. Process costing
H. Activity-based costing

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition

_____ 1. A system that identifies specific costs that drive the cost of service or production activities
_____ 2. Costs incurred that cannot be identified specifically with a cost objective
_____ 3. Costs that meet specific criteria determined by the resource provider
_____ 4. A program, function, activity, award, organizational subdivision, contract, or work unit established for the accumulation of costs
_____ 5. System appropriate for recording costs of continuous activities or processes

 

 

 

 

 

 

Essay Questions

53.
Are governments required to report their budgets externally? Explain.

 

 

 

 

 

54.
Explain how strategic planning, budgeting, and performance measurement can be integrated in a government and why this integration is desirable.

 

 

 

 

 

55.
What budgeting approach requires justification for the inclusion of every activity each year? Briefly describe this method and how it can be effective.

 

 

 

 

 

56.
Explain what is required to develop an effective total quality management (TQM) program for a government.

 

 

 

 

 

57.
Under federal guidelines, when is a cost considered reasonable?

 

 

 

 

 

58.
Describe what is meant by the direct costs of a program (for example, a fire prevention program) and why it is important to distinguish direct costs from indirect costs.

 

 

 

 

 

59.
Identify and define the three broad categories of service efforts and accomplishments (SEA) measures.

 

 

 

 

 

60.
The finance officer of a small city has heard that certain items of cost may be allowable under federal grants, even though they were not incurred specifically for the grant. To what source could the finance officer go to determine what costs are allowable under federal grants? Why do you think the federal government specifies the allowability of costs?

 

 

 

 

 

Chapter 12 Budgeting and Performance Measurement Answer Key

True / False Questions

1.
Budgeting is an important part of a manager’s planning and control responsibilities in both public and private organizations.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

2.
In governments, the budget has always played a role in external financial reports through the required budget-to-actual comparison schedules or statements for those funds that have a legally approved budget.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

3.
The type of budgeting that relates input of resources to output of services is zero-based budgeting.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

4.
Popular budgeting approaches employed by governments include incremental budgeting, performance budgeting, program budgeting, planning-programming-budgeting systems, and zero-based budgeting.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

5.
Governmental budgets must be voted upon by citizens for approval in an annual general election.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

6.
Public hearings must be held to provide adequate opportunity for citizens’ input to governmental budgets, prior to legislative adoption of the budget.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

7.
Cash planning and budgeting are important in government because the timing of cash inflows often do not necessarily coincide with the timing of cash outflows.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

8.
Under GASB standards, every government, regardless of its size, is instructed to prepare a cash budget for each month of the fiscal year.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

9.
Budget appropriations for governmental funds ordinarily cover only one year, while capital budgets are often multi-year.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Types of Budgets
 

 

10.
When planning, budgeting, and performance measurement are related, good performance is rewarded, and consequences exist for substandard performance, then public employees’ behaviors will change.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Budgetary Integration
 

 

11.
Total quality management (TQM) seeks to continuously improve an organization’s ability to meet or exceed customers’ demands, and, as such, is useful in a government setting as well as a business setting.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Performance Measurement
 

 

12.
Service efforts and accomplishments measures suffer from the same problem as line-item or object-of-expenditures budgeting; that is, focusing only on resource inputs while ignoring outputs and outcomes of governmental activities.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

13.
To determine which costs are allowable for charging to a federal assistance program, accountants and auditors refer to the GASB cost circular.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

14.
Service efforts and accomplishments (SEA) reporting helps citizens, elected officials, appointed officials, investors and creditors, and other interested parties evaluate the government’s performance in the absence of a “bottom line” measure such as exists for for-profit entities.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

15.
Under service efforts and accomplishments (SEA) reporting input measures are quantity measures that reflect the quantity of a service provided, such as the number of lane-miles of road repaired.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

16.
Under service efforts and accomplishments (SEA) reporting, outcome measures gauge accomplishments, or the results of services provided, such as the percentage of lane-miles of road in excellent, good, or fair condition.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

17.
Despite its initial popularity, service efforts and accomplishments reporting has lost favor in recent years.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

18.
A major disadvantage of activity-based costing (ABC) in a governmental setting is the very limited number of activities for which it can be used.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Activity Based Costing
 

 

19.
A major advantage of activity-based costing (ABC) is that it reduces unit cost distortions arising from overhead allocations that often occur using traditional cost accounting systems.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Activity Based Costing
 

 

20.
The sole purpose of preparing a governmental budget is to show compliance with laws and regulations.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budget Objectives
 

 

21.
GASB Concepts Statement No. 2 requires state and local governments to include service efforts and accomplishments measures within the comprehensive annual financial report.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

22.
A generally unallowable cost may be allowable under certain circumstances.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

23.
Governments receiving federal grants and contract funds are expected to have an accounting information system with adequate internal controls that can deliver reliable information to compare the actual amount spent with budgeted amounts.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

24.
The United States Office of Management and Budget (OMB) publishes a “super circular” which provides streamlined guidelines for grant accounting and reporting.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

25.
Service efforts and accomplishments reporting is also referred to as citizen-centric reporting.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

Multiple Choice Questions

26.
Which of the following statements is not consistent with the GASB’s “Budgeting, Budgetary Control, and Budgetary Reporting Principle”?

 

A.
An annual budget must be adopted using generally accepted accounting principles.

 

B.
The accounting system should provide the basis for appropriate budgetary control.

 

C.
Budgetary comparisons should be presented for the General Fund and each major special revenue fund for which an annual budget has been adopted.

 

D.
The budgetary comparisons should present both the original and the final appropriated budgets for the reporting period.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

27.
The GASB “Budgeting Principle” states that an annual budget should be adopted by (for) every:

 

A.
Fiduciary fund type.

 

B.
Fund of a government.

 

C.
Governmental unit.

 

D.
Governmental fund type except special revenue funds

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

28.
A common approach to budgeting line-items whereby the current year’s budget is constructed by adding or subtracting amounts expected to be required by line items is:

 

A.
Performance budgeting.

 

B.
Zero-based budgeting.

 

C.
Program budgeting.

 

D.
Incremental budgeting.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

29.
Which of the following is not a typical step in the budgeting process for a state or local government?

 

A.
Request by management for input on the budget.

 

B.
Review and revisions of the budget by the administrative staff of each unit.

 

C.
Public hearings for citizen input.

 

D.
Approval by a majority vote of the citizenry.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

30.
An budgeting method that derives the subsequent year’s budget from the current year’s budget is called:

 

A.
Planning-programming-budgeting.

 

B.
Incremental budgeting.

 

C.
Zero-based budgeting.

 

D.
Performance budgeting.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

31.
In budgeting revenues, state and local government administrators should:

 

A.
Be cautious not to utilize unauthorized sources or exceed authorized ceilings on revenues from specific sources.

 

B.
Ensure that at least the amount of revenues needed to meet spending needs are raised, even if authorized ceilings on some revenue sources must be exceeded.

 

C.
Utilize all authorized revenues sources at the maximum amount allowed by law.

 

D.
Ignore “other financing sources” since these resource inflows are not available for appropriation.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

32.
Cash receipts and cash disbursement budgets for a government:

 

A.
Should be prepared for all funds for the entire fiscal year.

 

B.
Should be prepared monthly or as needed to enhance cash management, investment management, and short-term debt management.

 

C.
Should be prepared for only those funds for which appropriations budgets are required by law to be prepared on the accrual basis or the modified accrual basis.

 

D.
Should be prepared for only those funds for which appropriations budgets are not required by law.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

33.
Cash disbursement budgets:

 

A.
Are prepared to facilitate the preparation of government-wide financial statements.

 

B.
Are usually prepared for each month of the year, or for shorter intervals, in order to facilitate planning short-term borrowings and investments.

 

C.
Are prepared only for funds not required to operate under legal appropriation budgets.

 

D.
Are prepared only for each fiscal year because disbursements for each month are approximately equal.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

34.
The schedule of legally required events in the budgeting process is generally referred to as the:

 

A.
Budget docket.

 

B.
Legal timetable.

 

C.
Hearing schedule.

 

D.
Budget calendar.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

35.
Effective capital budgeting for general capital assets of a government requires:

 

A.
Intermediate and long-range capital improvement plans for general capital assets.

 

B.
Nonfinancial information on physical measures and service condition of capital assets of component units.

 

C.
Consideration of how proprietary fund capital projects will be financed.

 

D.
Information about the capital asset needs of a motor pool accounted for as an internal service fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-03 Describe the budgeting process for a state or local government, including the procedures involved in preparing specific types of budgets.
Topic: Budgeting Process
 

 

36.
Which of the following statements regarding government budgets is not true?

 

A.
A budget should be enacted before the fiscal year begins and be integrated with the financial accounting system so that actual results can be compared to budgets at regular intervals.

 

B.
The budget’s role is limited to inclusion in internal financial reports and budgetary compliance monitoring for those funds that have a legally approved budget.

 

C.
Integrating the budget into the accounting system allows management to oversee individual unit performance and react quickly to variances between actual results and budgeted plans.

 

D.
A budget is a plan of financial operation embodying an estimate of proposed expenditures for a given period of time and the proposed means of financing them.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

37.
Which of the following might appropriately be termed an outcome indicator for a police department that reports service efforts and accomplishments (SEA) indicators?

 

A.
Number of crimes investigated.

 

B.
Value of property lost due to crime.

 

C.
Hours of patrol.

 

D.
Number of personnel hours expended.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

38.
Which of the following statements regarding service efforts and accomplishments (SEA) is not true?

 

A.
SEA information includes indicators of a government’s actual performance in providing services to its citizens.

 

B.
As governments integrate strategic planning, budgeting, and performance measurement, information on SEA is available and often provided to the public.

 

C.
SEA reporting may take the form of a published report, an electronic report posted on a government’s Web site, or a pamphlet designed to summarize an entity’s SEA measurement results.

 

D.
SEA reporting is required by governments with populations greater than 500,000.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

39.
Which of the following statements is not true?

 

A.
A balanced scorecard is an integrated set of performance targets, both financial and nonfinancial, that are derived from an organization’s strategies about how to achieve its goals.

 

B.
Total quality management (TQM) seeks to continuously improve the government’s ability to meet or exceed demands from customers who might be external, such as taxpayers and service recipients, or internal, such as the customers of an internal service fund.

 

C.
Service efforts and accomplishments (SEA) reporting links customer (taxpayer and other resource provider) satisfaction to improvements in the operating systems and processes used to provide goods and services.

 

D.
Customer relationship management (CRM) systems create an integrated view of a customer to coordinate services from all channels of the organization with the intent to improve the long-term relationship the organization has with its customer.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Performance Measurement Tools
 

 

40.
The number of lane-miles of road repaired to a specified minimum condition is an example of an:

 

A.
Output measure.

 

B.
Input measure.

 

C.
Outcome measure.

 

D.
Efficiency measure.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

41.
Service efforts and accomplishments (SEA) information:

 

A.
Includes indicators of a government’s actual performance in providing services to its citizens.

 

B.
Aids users in assessing the economy, efficiency, and effectiveness of government.

 

C.
Is required for all governments that issue a CAFR.

 

D.
Both A and B are true.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

42.
Balanced scorecards integrate all of the following into a document that can be shared with employees and stakeholders except:

 

A.
GASB financial reporting standards.

 

B.
Internal business processes measures.

 

C.
Nonfinancial measures, such as customer satisfaction.

 

D.
Financial performance measures.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Balanced Scorecard
 

 

43.
Which of the following has contributed most to governments’ increased interest in activity-based accounting?

 

A.
GASB standards.

 

B.
Implementation of innovative management approaches (such as TQM and SEA measures) in response to public demand for greater accountability and productivity.

 

C.
Increased demand for high profile management tools to bolster the image of government.

 

D.
The enactment of Sarbanes-Oxley legislation.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Activity Based Costing
 

 

44.
All of the following are objectives of activity-based cost (ABC) accounting in government except:

 

A.
To preserve, at a minimum, the present quality and availability of services.

 

B.
To help find lower cost alternatives to providing services.

 

C.
To link customer (taxpayer) satisfaction to improvements in the operating systems used to provide goods and services.

 

D.
To make increases in the volume of services dependent on reducing costs.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Activity Based Costing
 

 

45.
Efficiency measures, as the term is used in the service efforts and accomplishments (SEA) literature, can be described as:

 

A.
Measures that relate the quantity or cost of resources used to units of output.

 

B.
Measures that relate to the amount of financial and nonfinancial resources used in a program or process.

 

C.
Measures that relate costs to outcomes.

 

D.
Measures that reflect either the quantity or quality of a service provided.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

46.
The GASB identifies which of the following three broad categories of service efforts and accomplishments (SEA) measures:

 

A.
Measures of service efforts, measures of service accomplishments, and measures of efficiency.

 

B.
Measures of service efforts and accomplishments, measures of service efficiency, and measures of service effectiveness.

 

C.
Measures of service efforts, measures of service accomplishments, and measures of the costs of service efforts and accomplishments.

 

D.
Measures of service efforts, measures of service accomplishments, and measures that relate efforts to accomplishments.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

47.
Which of the following statements regarding service efforts and accomplishments (SEA) is not true?

 

A.
Measures of service efforts, or input measures, relate to the amount of financial and nonfinancial resources (such as money and materials) used in a program or process.

 

B.
Effort measures relate service efforts to outputs of service and to outcomes or results of services.

 

C.
Output measures are quantity measures that reflect either the quantity of a service provided or the quantity of service provided that meets a specified quality requirement.

 

D.
Outcome measures gauge accomplishments, or the results of services provided.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

48.
State and local governments and not-for-profit organizations that receive grants or contracts from the federal government should charge costs of these grants or contracts in conformity with:

 

A.
Cost Accounting Standards Board standards.

 

B.
Office of Management and Budget circulars.

 

C.
Financial Accounting Standards Board standards.

 

D.
Governmental Accounting Standards Board standards.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

49.
Which of the following statements regarding costs under federal awards is not true?

 

A.
Only items of cost specifically mentioned in a grant, contract, or other agreement document are allowable.

 

B.
Several costs are allowable under highly restrictive conditions and generally require the explicit approval of the grantor agency.

 

C.
For major not-for-profit organizations and institutions of higher learning, indirect costs must be classified within two broad categories termed “facilities” and “administration.”

 

D.
Direct costs are those that can be identified specifically with a particular cost objective.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

50.
Which of the following is not one of the criteria for an allowable cost under a federal grant?

 

A.
A cost that is necessary and reasonable for the performance of the federal award and allocable thereto under the OMB cost principles.

 

B.
A cost that conforms to any limitations or exclusions set forth in the OMB cost principles or in the federal award as to types or amount of cost items.

 

C.
A cost that has been approved by the FASB or GASB as an allowable cost.

 

D.
A cost that is adequately documented.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

Short Answer Questions

51. The following are key terms in Chapter 12 that relate to budgeting of government services:

A. Efficiency measures
B. Effectiveness measures
C. Planning-programming-budgeting system
D. Zero-based budgeting
E. Program budgeting
F. Flexible budgeting
G. Incremental budgeting
H. Budget calendar

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

_____ 1. A budget in which each activity and the amounts of resources requested for each activity must be justified each year
_____ 2. A budget that is derived from the current year budget by multiplying a factor across all line-items
_____ 3. A budgeting approach popular in the 1960s that integrates various elements of planning for programs
_____ 4. Measures that relate costs to outcomes
_____ 5. A budget in which resource inputs and service outputs are identified by programs

1. D, 2. G, 3. C, 4. A, 5. E

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

52. The following are key terms in Chapter 12 that relate to costing of government services:

A. Allowable costs
B. Job order costing
C. Cost principle
D. Cost objective
E. Indirect costs
F. Direct costs
G. Process costing
H. Activity-based costing

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition

_____ 1. A system that identifies specific costs that drive the cost of service or production activities
_____ 2. Costs incurred that cannot be identified specifically with a cost objective
_____ 3. Costs that meet specific criteria determined by the resource provider
_____ 4. A program, function, activity, award, organizational subdivision, contract, or work unit established for the accumulation of costs
_____ 5. System appropriate for recording costs of continuous activities or processes

1. H, 2. E, 3. A, 4. D, 5. G

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Cost principles
Topic: Grant Accounting
 

 

Essay Questions

53.
Are governments required to report their budgets externally? Explain.

 

 

Most governments publish a stand-alone budget document for each budget cycle. They will also publish preliminary and final budget information in local newspapers. In terms of external reporting, budget-to-actual statements (for the General Fund and major special revenue funds with a legally adopted budget) are required as supplementary information or as a more traditional statement that compares budgeted to actual operating performance within the basic financial statements.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-01 Explain the objectives of budgeting in the public sector.
Topic: Budgeting Objectives
 

 

54.
Explain how strategic planning, budgeting, and performance measurement can be integrated in a government and why this integration is desirable.

 

 

To integrate strategic planning, budgeting, and measuring performance measurement a government sets a direction for the organization through a strategic plan, develops programs and activities, designs performance measures, budgets in such a way that shows resources used are expected to result in accomplishments, monitors operations, and then evaluates and reports on actual results compared to the plan. These steps are repeated in a cycle that provides feedback to stakeholders to whom the managers are accountable. Feedback is then incorporated into the next strategic plan. An integrated system of planning-budgeting-performance measurement is desirable because it requires managers to clearly identify targeted outputs and outcomes, to be transparent to all internal and external stakeholders about those desired outputs and outcomes, and to provide leadership and written policies about how to attain goals. An integrated system is more likely to lead the government to achieve its goals and objectives than a disaggregated set of planning, budgeting, and measurement systems.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Budgetary Integration
 

 

55.
What budgeting approach requires justification for the inclusion of every activity each year? Briefly describe this method and how it can be effective.

 

 

The budgeting approach described is zero-based budgeting (ZBB). Under this approach the basic concept is that each program must periodically be justified from scratch. This approach can overcome one of the fundamental weaknesses of incremental budgeting; namely that programs tend to be continued long after they have outlived their usefulness. Practically, however, since many government services are nondiscretionary in nature (e.g., police and fire protection, operation of the courts, etc.), it may be more effective to concentrate on a few major programs each year, being sure to review every program at least once in every few years.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-02 Explain the differences among various budgeting approaches.
Topic: Budgeting Approaches
 

 

56.
Explain what is required to develop an effective total quality management (TQM) program for a government.

 

 

Although individual governments have tailored their TQM efforts to meet their specific needs, Chapter 12 lists several elements that appear to be common in nearly all TQM structures. In general these elements relate to the need for top-level support and commitment, a strong customer orientation, and multiple-faceted approach to enhancing productivity and quality. Productivity and quality are enhanced by reducing organizational barriers, empowering employees to change methods and procedures as needed, training employees in the new method and procedures, and developing appropriate standards and performance measures.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-05 Describe managerial tools used to improve performance.
Topic: Total Quality Management
 

 

57.
Under federal guidelines, when is a cost considered reasonable?

 

 

A cost is defined as reasonable if, in its nature and amount, it “does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost”. Since the reasonableness of certain items of costs may be difficult to determine, nonfederal entities may seek the prior written approval of the federal awarding agency in advance of the incurrence of special or unusual costs.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

58.
Describe what is meant by the direct costs of a program (for example, a fire prevention program) and why it is important to distinguish direct costs from indirect costs.

 

 

The direct costs of a program are those that can be identified as having been incurred specifically for the purposes of the program. It is important to carefully distinguish direct costs since a government can usually recover the full amount of direct costs of a program that receives federal funding, but only if the costs are identified in the manner set forth in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Indirect costs may only be partially recoverable. Also, knowing what the cost of providing fire protection is can be highly useful in determining whether to contract with a private firm for fire protection, as have some innovative municipalities.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

59.
Identify and define the three broad categories of service efforts and accomplishments (SEA) measures.

 

 

Service efforts and accomplishments (SEA) measures include:(1) input measures—measures of service efforts,(2) output and outcome measures—measures of service accomplishments, and(3) efficiency and effectiveness measures—measures that relate efforts to accomplishments.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting.
Topic: Service Efforts and Accomplishments
 

 

60.
The finance officer of a small city has heard that certain items of cost may be allowable under federal grants, even though they were not incurred specifically for the grant. To what source could the finance officer go to determine what costs are allowable under federal grants? Why do you think the federal government specifies the allowability of costs?

 

 

The OMB’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, provides guidance to state and local governments on cost principles for federal grants. Also referred to as the “super circular,” this document is readily available on the OMB Web site and lists allowable and unallowable costs for federal grants and contracts. For example, governments will find that depreciation on equipment used on the grant is an allowable cost, alcoholic beverages are an unallowable cost, and advertising may be an allowable cost under certain restricted conditions. Federal agencies that have a number of grant programs, or large amounts of money to grant, also may publish guidelines for grantee use. Since federal grants are awarded for specific purposes and funded with public resources, it is important that the use of the resources be controlled. As discussed in Chapter 11, federal grants are monitored via single audits.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 12-06 Describe the budget and cost issues in grant accounting.
Topic: Grant Accounting
 

 

Chapter 16

Accounting for Health Care Organizations

 

True / False Questions

1.
Financial reporting standards for all hospitals are established by the FASB.

True    False

 

2.
Patient service revenues and related receivables exclude charges for charity care services.

True    False

 

3.
In accounting for health care entities, the account Provision for Bad Debts should be reported as a contra-revenue, rather than as an expense.

True    False

 

4.
Under the FASB GAAP hierarchy the AICPA Audit and Accounting Guide Health Care Entities would be category (b) authoritative guidance.

True    False

 

5.
In accordance with the FASB Codification, an expense for diabetes research that was financed by temporarily restricted contributions would be recorded as a decrease of unrestricted net assets by a not-for-profit health care organization.

True    False

 

6.
FASB standards require that not-for-profit health care entities prepare a statement of changes in net assets.

True    False

 

7.
Under GAAP, both governmental and nongovernmental not-for-profit health care entities are required to identify operating and nonoperating activity on their operating statements.

True    False

 

8.
Health care is provided by organizations that may be for-profit, not-for-profit, or governmental; although over half of all nonfederal health care is provided by not-for-profit entities.

True    False

 

9.
Similar to other not-for-profit entities, health care entities are required under FASB standards to report program and support functional expenses.

True    False

 

10.
Assets set aside by the governing board for the eventual construction of a hospital addition should be recorded as “assets limited as to use.”

True    False

 

11.
A nongovernmental not-for-profit health care entity would report the net asset categories unrestricted, restricted, and permanently restricted.

True    False

 

12.
Continuing care retirement communities (CCRC) provide residential care in a facility, along with some level of long-term medical care that is less intensive that hospital care.

True    False

 

13.
All health care organizations report investments at fair value and report unrealized gains or losses on the statement of operations.

True    False

 

14.
The “equity” section (assets minus liabilities) of a health care entity’s balance sheet or statement of net position will indicate whether the health care organization is for-profit, not-for-profit, or governmental.

True    False

 

15.
A contractual adjustment is recorded as a contra-revenue account.

True    False

 

16.
The goal of financial and operational analysis of a health care entity is to determine if the entity is profitable.

True    False

 

17.
Similar to for-profit entities, under FASB standards, not-for-profit health care entities are required to classify investments into trading, available-for-sale, and held to maturity for reporting purposes.

True    False

 

18.
The purpose of a performance indicator is to provide an operating measure for not-for-profit health care organizations that is equivalent to income from continuing operations of for-profit health care organizations.

True    False

 

19.
The GASB and the FASB provide the same criteria for recognizing and reporting services donated to a health care entity.

True    False

 

20.
Unlike other not-for-profit entities, the FASB requires health care entities to prepare a statement of changes in net assets.

True    False

 

21.
The format for a not-for-profit health care entity’s statement of operations is the same as that for other types of not-for-profits; the FASB requires a different title on the statement since most revenues are derived from user charges.

True    False

 

22.
In accordance with the FASB Codification estimated uncollectible account amounts are reported in the same manner for patient accounts receivable and donor pledges receivable.

True    False

 

23.
Assets limited as to use are unrestricted assets whose use is limited by parties other than donors or grantors.

True    False

 

24.
In accordance with the FASB Codification, net assets released from restriction should be included as part of the performance indicator on a health care entity’s statement of operations.

True    False

 

25.
Both the FASB and the GASB would require that a contribution received for the construction of a future medical facility be reported as an investing activity on the statement of cash flows.

True    False

 

 

Multiple Choice Questions

26.
According to FASB standards, which of the following entities would not be considered a health care organization?

 

A.
The Heart Research Institute.

 

B.
The St. George Hospital.

 

C.
The Family Practice Medical Clinic.

 

D.
The Northeast Health Maintenance Organization.

 

27.
Which of the following is (are) considered an authoritative source of GAAP for nongovernmental not-for-profit health care entities?

 

A.
The AICPA Audit and Accounting Guide Health Care Entities.

 

B.
The Healthcare Financial Management Associations’ Financial Accounting and Reporting Manual.

 

C.
The FASB Accounting Standards Codification (ASC).

 

D.
All of the above are considered GAAP according to the GAAP hierarchy.

 

28.
Which of the following is not a financial statement prepared by nongovernmental not-for-profit health care entities?

 

A.
Statement of changes in net assets.

 

B.
Statement of revenues, expenses, and changes in net assets.

 

C.
Balance sheet.

 

D.
Statement of cash flows.

 

29.
Contractual adjustments that arise from differences between the gross charge for patient services and the amount paid by a third party payor are reported as:

 

A.
Deductions from gross patient revenue in arriving at net patient revenue.

 

B.
Disclosures in the notes to the financial statements.

 

C.
Either deductions from gross patient revenue or disclosure in the notes, depending on the dollar amount of the adjustments relative to billings.

 

D.
Bad debt expense.

 

30.
Which of the following would be considered an asset limited as to use?

 

A.
Cash donated for an endowment.

 

B.
Cash from a federal research grant, which is to be used for water quality research.

 

C.
Cash the board of directors has designated for equipment acquisitions.

 

D.
Cash contributions that are to be used for the building fund.

 

31.
Which of the following statements is true about diagnosis-related groups (DRGs)?

 

A.
DRGs are the basis for a cost accounting method that groups costs together by departments performing the services.

 

B.
A DRG is a case-mix classification scheme that is used to determine the payment provided to the hospital for inpatient services, regardless of how much the hospital spends to treat a patient.

 

C.
The federal Medicare system of retroactive payment for services depends on DRGs.

 

D.
The DRGs method is the prevailing practice of billing third-party payors for a health care organization’s average cost for providing care for locally defined similar medical conditions.

 

32.
The primary source of revenue for most hospitals is:

 

A.
Nonexchange transactions, such as contributions.

 

B.
Exchange transactions, such as fees for services.

 

C.
Investment income.

 

D.
Capitation fees from health maintenance organizations.

 

33.
A hospital originally recorded all patient services it provided as a $500,000 debit to accounts receivable. Upon review the hospital determined that a contractual adjustment of $200,000 needs to be made, and estimated bad debts of $5,000 need to be recorded. In addition, at the time the receivable was recorded the hospital did not realize $100,000 should be considered charity services. Based on the information provided, what is the net amount of accounts receivable that the hospital would report on its financial statements?

 

A.
$495,000.

 

B.
$300,000.

 

C.
$200,000.

 

D.
$195,000.

 

34.
Charity service and bad debts in a government hospital that follows business-type accounting are:

 

A.
Both reported as deductions from gross patient revenue in arriving at net patient revenue.

 

B.
Both reported as expenses.

 

C.
Reported differently, with charity service disclosed in the notes to the financial statements and bad debts reported as a deduction from revenue.

 

D.
Reported differently, with charity service reported as a deduction from gross patient revenue and bad debts reported as an expense.

 

35.
Which of the following volunteer services is most likely to be reported by a nongovernmental not-for-profit hospital as contribution revenue and an expense?

 

A.
Community members who plant flowers on the grounds once a year in the spring.

 

B.
Volunteers in the gift shop who work a few hours a day serving customers.

 

C.
Nurses from a religious organization who volunteer to assist in the care of critically ill children.

 

D.
An accountant who is a member of the board of directors.

 

36.
Which of the following could be included in the performance indicator measure provided by a nongovernmental not-for-profit hospital?

 

A.
Contribution to an endowment.

 

B.
Gain on sale of equipment.

 

C.
Grant restricted for diabetes research.

 

D.
Interest income that is temporarily restricted.

 

37.
Which of the following would usually be considered as temporarily restricted net assets in a nongovernmental not-for-profit hospital?

 

A.
Funds designated by the board of directors for future equipment purchases.

 

B.
Donated services by senior citizens.

 

C.
A permanent endowment received from the city’s leading citizen.

 

D.
A research grant from the federal government to study high blood pressure.

 

38.
Where does a nongovernmental not-for-profit health care entity report increases that have occurred in its temporarily restricted net assets?

 

A.
Statement of changes in net assets.

 

B.
Statement of operations.

 

C.
Balance sheet.

 

D.
Similar to governmental health care entities, it would not report the change on the face of a financial statement.

 

39.
Contractual Adjustments is properly characterized as:

 

A.
An expense.

 

B.
An other financing use.

 

C.
A liability.

 

D.
A contra revenue.

 

40.
In accordance with the FASB Codification, donated medicines that normally would be purchased by a hospital should be recorded at fair value and credited to which of the following?

 

A.
Net Patient Service Revenue.

 

B.
Other Revenue.

 

C.
Nonoperating Gains.

 

D.
Deferred Revenues.

 

41.
An annual contributor to a nongovernmental not-for-profit hospital made an unrestricted pledge in October 2016 that will be paid in March 2017. Assuming the hospital’s fiscal year-end is December 31, 2016, the pledge should be credited to:

 

A.
Contributions—Temporarily Restricted in 2016.

 

B.
Contributions—Unrestricted in 2016.

 

C.
Contributions—Temporarily Restricted in 2017.

 

D.
Contributions—Unrestricted in equal amounts in 2016 and 2017.

 

42.
How would the cash acquisition of equipment be reported on a health care entity’s statement of cash flows?

 

A.
Investing activity applying GASB standards.

 

B.
Investing activity applying FASB standards.

 

C.
Financing activity applying FASB standards.

 

D.
Operating activity applying GASB standards.

 

43.
Where would a capitation fee be reported on a health care entity’s financial statements?

 

A.
Service revenue.

 

B.
Other professional expense.

 

C.
Other revenue.

 

D.
Short-term liability.

 

44.
In accordance with the FASB Codification, which of the following would be an appropriate performance indicator for a not-for-profit health care organization?

 

A.
Revenues.

 

B.
Excess of revenues and gains over expenses and losses.

 

C.
Expenses and losses.

 

D.
Contributions to long-lived assets.

 

45.
The GASB requires business-type health care organizations to prepare which of the following financial statements?

 

A.
Statement of revenues, expenses, and changes in net position; statement of net position; and statement of cash flows.

 

B.
Statement of operations; statement of net assets; and a statement of cash flows.

 

C.
Statement of revenues, expenses, and changes in net position; and statement of net position.

 

D.
Statement of activities; statement of net position; statement of changes in net position; and statement of cash flows.

 

46.
Which of the following statements concerning the Patient Protection and Affordability Act (also known as the Affordable Care Act) is true?

 

A.
Since the Act primarily focuses on the insurance industry there is little impact on health care accounting.

 

B.
Since the Act is a federal law it only affects governmental health care facilities.

 

C.
Since all portions of the Act have only recently been enacted the full impact on health care accounting is unknown.

 

D.
The Act will have no impact on a nongovernmental hospital’s Internal Revenue Service filing of the Form 990, since the Act is not under the oversight of the Internal Revenue Service.

 

47.
Which of the following is shown on a statement of changes in net assets?

 

A.
An increase in temporarily restricted net assets.

 

B.
A gain on the sale of equipment.

 

C.
A loss from a discontinued operation.

 

D.
An unrestricted contribution.

 

48.
Which of the following would be considered service revenue of a health care entity?

 

A.
Revenue from the hospital cafeteria.

 

B.
Capitation fees received from a health maintenance organization.

 

C.
Fee revenue received for providing medical transcripts.

 

D.
Revenue received for the rental of an assisted living facility’s conference room to a local not-for-profit.

 

 

Short Answer Questions

49. The following are key terms in Chapter 16 that relate to accounting for health care organizations:

A. Contractual adjustments
B. Capitation fees
C. Charity care
D. Diagnosis-related groups
E. Prospective payment system
F. Health maintenance organizations
G. Performance indicator
H. Third-party payor

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

___1. A prepaid health care plan that functions as a broker of health care between the consumer/patient requiring services and health care provider
___2. Medicare’s system in which payments are based on allowed services cost with in the same diagnosis-related group rather than a actual cost of services rendered
___3. Fixed dollar amount of fees per person paid periodically by a third-party payor to a health care provider
___4. the difference between the gross patient service and the negotiated payment by third-party payors in arriving at net patient service revenue
___5. health service provided to person with a demonstrated inability to pay

 

 

 

 

 

 

50. Record in general journal form the following selected transactions for Avalon General Hospital, a nongovernmental not-for-profit institution.

1. Gross charges for patient services rendered during the period amounted to $7,870,000, of which $350,000 represented charity care for indigent patients.
2. During the year the provision for bad debts was set at $190,000 and contractual adjustments amounted to $435,000.
3. A wealthy donor donated $2,000,000 to construct a new cardiology wing on the hospital.
4. During the year, the new cardiology wing (see item 3) was one-half completed at a cost of $1,000,000.

 

 

 

 

 

51. Show entries in general journal form for the following transactions of Bothwell Regional Hospital, a nongovernmental not-for-profit hospital.

1. For the month just ended the hospital received in cash $8,000 from the hospital’s gift shop sales, and received donated medicines with a fair value of $47,000. These medicines are of the type the hospital normally would purchase.
2. The hospital’s finance officer, in compliance with the directive of the governing board, invested $600,000 of operating cash in certificates of deposit to be held for future purchases of equipment.
3. New equipment costing $750,000 was purchased from money given the hospital in a prior year to be held until needed for equipment purchases.
4. A federal grant was received in cash in the amount of $400,000 to be used for heart research. During the current year only $50,000 was spent for this research program.

 

 

 

 

 

52. Georgetown Hospital, a governmental hospital, recorded during its fiscal year ended September 30, gross patient services valued at $15,000,000, excluding charity care services of $1,600,000. However, contractual adjustments by third-party payors amounted to $1,200,000. In May of that year it received donated medical supplies worth $2,000; supplies it had planned to purchase had it not been for the gift. At year-end, the governing board set aside investments in the amount of $500,000 for future plant expansion and $250,000 to be invested with the related earnings used for a special prenatal care program.

1. In its operating statement for the year ended September 30, how much Georgetown should report as net patient services revenue? Justify your answer.
2. For the year ended September 30, how should the donation of medical supplies be reported?
3. What amount of unrestricted net position should Georgetown report in its balance sheet as board designated, assuming it had no board designated net position at the beginning of the year?

 

 

 

 

 

 

Essay Questions

53.
There are three main reasons why a nongovernmental not-for-profit hospital does not receive the full amount that it normally charges for a room: 1) contractual adjustments arising from transactions with third-party payors, 2) charity service provided to indigent patients, and 3) bad debts. Compare the accounting treatment for the three reasons listed.

 

 

 

 

 

54.
Congress mandated diagnosis-related groups (DRG) as a method for recording costs in health care organizations, in part to facilitate Medicare’s prospective payment system. Explain what the DRG system is and describe the impact this change may have had on the cost accounting systems of health care organizations.

 

 

 

 

 

55.
Contrast the statement of cash flows that nongovernmental not-for-profit hospitals prepare to those that governmental hospitals prepare.

 

 

 

 

 

56.
Describe what prepaid health care plans are and some of the related accounting issues.

 

 

 

 

 

57.
What auditing issues are of particular significance to the health care industry?

 

 

 

 

 

58.
“The goal of financial and operational analysis for the manager is to determine the creditworthiness of the health care organization.” Do you agree with the statement? Why or why not?

 

 

 

 

 

59.
Explain how one can evaluate both the financial performance of a hospital and the quality of health care the hospital provides.

 

 

 

 

 

Chapter 16 Accounting for Health Care Organizations Answer Key

True / False Questions

1.
Financial reporting standards for all hospitals are established by the FASB.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations.
Topic: Reporting and accounting issues
 

 

2.
Patient service revenues and related receivables exclude charges for charity care services.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Revenue reporting
 

 

3.
In accounting for health care entities, the account Provision for Bad Debts should be reported as a contra-revenue, rather than as an expense.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Revenue reporting
 

 

4.
Under the FASB GAAP hierarchy the AICPA Audit and Accounting Guide Health Care Entities would be category (b) authoritative guidance.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations.
Topic: AICPA Audit and Accounting Guide Health Care Entities
 

 

5.
In accordance with the FASB Codification, an expense for diabetes research that was financed by temporarily restricted contributions would be recorded as a decrease of unrestricted net assets by a not-for-profit health care organization.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

6.
FASB standards require that not-for-profit health care entities prepare a statement of changes in net assets.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Not-for-profit hospital-required financial statements
 

 

7.
Under GAAP, both governmental and nongovernmental not-for-profit health care entities are required to identify operating and nonoperating activity on their operating statements.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

8.
Health care is provided by organizations that may be for-profit, not-for-profit, or governmental; although over half of all nonfederal health care is provided by not-for-profit entities.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: BB Industry
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations.
Topic: Reporting and accounting issues
 

 

9.
Similar to other not-for-profit entities, health care entities are required under FASB standards to report program and support functional expenses.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

10.
Assets set aside by the governing board for the eventual construction of a hospital addition should be recorded as “assets limited as to use.”

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Assets limited as to use
 

 

11.
A nongovernmental not-for-profit health care entity would report the net asset categories unrestricted, restricted, and permanently restricted.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

12.
Continuing care retirement communities (CCRC) provide residential care in a facility, along with some level of long-term medical care that is less intensive that hospital care.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: BB Industry
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities.
Topic: Reporting and accounting issues
 

 

13.
All health care organizations report investments at fair value and report unrealized gains or losses on the statement of operations.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

14.
The “equity” section (assets minus liabilities) of a health care entity’s balance sheet or statement of net position will indicate whether the health care organization is for-profit, not-for-profit, or governmental.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

15.
A contractual adjustment is recorded as a contra-revenue account.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Revenue reporting
 

 

16.
The goal of financial and operational analysis of a health care entity is to determine if the entity is profitable.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: BB Industry
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Why health care organizations track costs
 

 

17.
Similar to for-profit entities, under FASB standards, not-for-profit health care entities are required to classify investments into trading, available-for-sale, and held to maturity for reporting purposes.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

18.
The purpose of a performance indicator is to provide an operating measure for not-for-profit health care organizations that is equivalent to income from continuing operations of for-profit health care organizations.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Performance indicators
 

 

19.
The GASB and the FASB provide the same criteria for recognizing and reporting services donated to a health care entity.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

20.
Unlike other not-for-profit entities, the FASB requires health care entities to prepare a statement of changes in net assets.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Not-for-profit hospital – Required financial statements
 

 

21.
The format for a not-for-profit health care entity’s statement of operations is the same as that for other types of not-for-profits; the FASB requires a different title on the statement since most revenues are derived from user charges.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

22.
In accordance with the FASB Codification estimated uncollectible account amounts are reported in the same manner for patient accounts receivable and donor pledges receivable.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Uncollectible patient accounts
 

 

23.
Assets limited as to use are unrestricted assets whose use is limited by parties other than donors or grantors.

TRUE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Assets limited as to use
 

 

24.
In accordance with the FASB Codification, net assets released from restriction should be included as part of the performance indicator on a health care entity’s statement of operations.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Performance indicators
 

 

25.
Both the FASB and the GASB would require that a contribution received for the construction of a future medical facility be reported as an investing activity on the statement of cash flows.

FALSE

 

 

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Performance indicators
 

 

Multiple Choice Questions

26.
According to FASB standards, which of the following entities would not be considered a health care organization?

 

A.
The Heart Research Institute.

 

B.
The St. George Hospital.

 

C.
The Family Practice Medical Clinic.

 

D.
The Northeast Health Maintenance Organization.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations.
Topic: Reporting and accounting issues
 

 

27.
Which of the following is (are) considered an authoritative source of GAAP for nongovernmental not-for-profit health care entities?

 

A.
The AICPA Audit and Accounting Guide Health Care Entities.

 

B.
The Healthcare Financial Management Associations’ Financial Accounting and Reporting Manual.

 

C.
The FASB Accounting Standards Codification (ASC).

 

D.
All of the above are considered GAAP according to the GAAP hierarchy.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations.
Topic: Reporting and accounting issues
 

 

28.
Which of the following is not a financial statement prepared by nongovernmental not-for-profit health care entities?

 

A.
Statement of changes in net assets.

 

B.
Statement of revenues, expenses, and changes in net assets.

 

C.
Balance sheet.

 

D.
Statement of cash flows.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Not-for-profit hospital – Required financial statements
 

 

29.
Contractual adjustments that arise from differences between the gross charge for patient services and the amount paid by a third party payor are reported as:

 

A.
Deductions from gross patient revenue in arriving at net patient revenue.

 

B.
Disclosures in the notes to the financial statements.

 

C.
Either deductions from gross patient revenue or disclosure in the notes, depending on the dollar amount of the adjustments relative to billings.

 

D.
Bad debt expense.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Revenue reporting
 

 

30.
Which of the following would be considered an asset limited as to use?

 

A.
Cash donated for an endowment.

 

B.
Cash from a federal research grant, which is to be used for water quality research.

 

C.
Cash the board of directors has designated for equipment acquisitions.

 

D.
Cash contributions that are to be used for the building fund.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Assets limited as to use
 

 

31.
Which of the following statements is true about diagnosis-related groups (DRGs)?

 

A.
DRGs are the basis for a cost accounting method that groups costs together by departments performing the services.

 

B.
A DRG is a case-mix classification scheme that is used to determine the payment provided to the hospital for inpatient services, regardless of how much the hospital spends to treat a patient.

 

C.
The federal Medicare system of retroactive payment for services depends on DRGs.

 

D.
The DRGs method is the prevailing practice of billing third-party payors for a health care organization’s average cost for providing care for locally defined similar medical conditions.

 

AACSB: Knowledge Application
AICPA: BB Industry
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

32.
The primary source of revenue for most hospitals is:

 

A.
Nonexchange transactions, such as contributions.

 

B.
Exchange transactions, such as fees for services.

 

C.
Investment income.

 

D.
Capitation fees from health maintenance organizations.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Revenue reporting
 

 

33.
A hospital originally recorded all patient services it provided as a $500,000 debit to accounts receivable. Upon review the hospital determined that a contractual adjustment of $200,000 needs to be made, and estimated bad debts of $5,000 need to be recorded. In addition, at the time the receivable was recorded the hospital did not realize $100,000 should be considered charity services. Based on the information provided, what is the net amount of accounts receivable that the hospital would report on its financial statements?

 

A.
$495,000.

 

B.
$300,000.

 

C.
$200,000.

 

D.
$195,000.

 

AACSB: Analytical Thinking
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Revenue reporting
 

 

34.
Charity service and bad debts in a government hospital that follows business-type accounting are:

 

A.
Both reported as deductions from gross patient revenue in arriving at net patient revenue.

 

B.
Both reported as expenses.

 

C.
Reported differently, with charity service disclosed in the notes to the financial statements and bad debts reported as a deduction from revenue.

 

D.
Reported differently, with charity service reported as a deduction from gross patient revenue and bad debts reported as an expense.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Uncollectible patient accounts
 

 

35.
Which of the following volunteer services is most likely to be reported by a nongovernmental not-for-profit hospital as contribution revenue and an expense?

 

A.
Community members who plant flowers on the grounds once a year in the spring.

 

B.
Volunteers in the gift shop who work a few hours a day serving customers.

 

C.
Nurses from a religious organization who volunteer to assist in the care of critically ill children.

 

D.
An accountant who is a member of the board of directors.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

36.
Which of the following could be included in the performance indicator measure provided by a nongovernmental not-for-profit hospital?

 

A.
Contribution to an endowment.

 

B.
Gain on sale of equipment.

 

C.
Grant restricted for diabetes research.

 

D.
Interest income that is temporarily restricted.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Performance indicators
 

 

37.
Which of the following would usually be considered as temporarily restricted net assets in a nongovernmental not-for-profit hospital?

 

A.
Funds designated by the board of directors for future equipment purchases.

 

B.
Donated services by senior citizens.

 

C.
A permanent endowment received from the city’s leading citizen.

 

D.
A research grant from the federal government to study high blood pressure.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

38.
Where does a nongovernmental not-for-profit health care entity report increases that have occurred in its temporarily restricted net assets?

 

A.
Statement of changes in net assets.

 

B.
Statement of operations.

 

C.
Balance sheet.

 

D.
Similar to governmental health care entities, it would not report the change on the face of a financial statement.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

39.
Contractual Adjustments is properly characterized as:

 

A.
An expense.

 

B.
An other financing use.

 

C.
A liability.

 

D.
A contra revenue.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

40.
In accordance with the FASB Codification, donated medicines that normally would be purchased by a hospital should be recorded at fair value and credited to which of the following?

 

A.
Net Patient Service Revenue.

 

B.
Other Revenue.

 

C.
Nonoperating Gains.

 

D.
Deferred Revenues.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

41.
An annual contributor to a nongovernmental not-for-profit hospital made an unrestricted pledge in October 2016 that will be paid in March 2017. Assuming the hospital’s fiscal year-end is December 31, 2016, the pledge should be credited to:

 

A.
Contributions—Temporarily Restricted in 2016.

 

B.
Contributions—Unrestricted in 2016.

 

C.
Contributions—Temporarily Restricted in 2017.

 

D.
Contributions—Unrestricted in equal amounts in 2016 and 2017.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

42.
How would the cash acquisition of equipment be reported on a health care entity’s statement of cash flows?

 

A.
Investing activity applying GASB standards.

 

B.
Investing activity applying FASB standards.

 

C.
Financing activity applying FASB standards.

 

D.
Operating activity applying GASB standards.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

43.
Where would a capitation fee be reported on a health care entity’s financial statements?

 

A.
Service revenue.

 

B.
Other professional expense.

 

C.
Other revenue.

 

D.
Short-term liability.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

44.
In accordance with the FASB Codification, which of the following would be an appropriate performance indicator for a not-for-profit health care organization?

 

A.
Revenues.

 

B.
Excess of revenues and gains over expenses and losses.

 

C.
Expenses and losses.

 

D.
Contributions to long-lived assets.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Performance indicators
 

 

45.
The GASB requires business-type health care organizations to prepare which of the following financial statements?

 

A.
Statement of revenues, expenses, and changes in net position; statement of net position; and statement of cash flows.

 

B.
Statement of operations; statement of net assets; and a statement of cash flows.

 

C.
Statement of revenues, expenses, and changes in net position; and statement of net position.

 

D.
Statement of activities; statement of net position; statement of changes in net position; and statement of cash flows.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

46.
Which of the following statements concerning the Patient Protection and Affordability Act (also known as the Affordable Care Act) is true?

 

A.
Since the Act primarily focuses on the insurance industry there is little impact on health care accounting.

 

B.
Since the Act is a federal law it only affects governmental health care facilities.

 

C.
Since all portions of the Act have only recently been enacted the full impact on health care accounting is unknown.

 

D.
The Act will have no impact on a nongovernmental hospital’s Internal Revenue Service filing of the Form 990, since the Act is not under the oversight of the Internal Revenue Service.

 

AACSB: Knowledge Application
AICPA: BB Industry
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Patient Protect and Affordability Act
 

 

47.
Which of the following is shown on a statement of changes in net assets?

 

A.
An increase in temporarily restricted net assets.

 

B.
A gain on the sale of equipment.

 

C.
A loss from a discontinued operation.

 

D.
An unrestricted contribution.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

48.
Which of the following would be considered service revenue of a health care entity?

 

A.
Revenue from the hospital cafeteria.

 

B.
Capitation fees received from a health maintenance organization.

 

C.
Fee revenue received for providing medical transcripts.

 

D.
Revenue received for the rental of an assisted living facility’s conference room to a local not-for-profit.

 

AACSB: Knowledge Application
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Revenue reporting
 

 

Short Answer Questions

49. The following are key terms in Chapter 16 that relate to accounting for health care organizations:

A. Contractual adjustments
B. Capitation fees
C. Charity care
D. Diagnosis-related groups
E. Prospective payment system
F. Health maintenance organizations
G. Performance indicator
H. Third-party payor

For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

___1. A prepaid health care plan that functions as a broker of health care between the consumer/patient requiring services and health care provider
___2. Medicare’s system in which payments are based on allowed services cost with in the same diagnosis-related group rather than a actual cost of services rendered
___3. Fixed dollar amount of fees per person paid periodically by a third-party payor to a health care provider
___4. the difference between the gross patient service and the negotiated payment by third-party payors in arriving at net patient service revenue
___5. health service provided to person with a demonstrated inability to pay

 

1. F, 2. E, 3. B, 4. A, 5. C

 

AACSB: Knowledge Application
AICPA: FN Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Revenue reporting
 

 

50. Record in general journal form the following selected transactions for Avalon General Hospital, a nongovernmental not-for-profit institution.

1. Gross charges for patient services rendered during the period amounted to $7,870,000, of which $350,000 represented charity care for indigent patients.
2. During the year the provision for bad debts was set at $190,000 and contractual adjustments amounted to $435,000.
3. A wealthy donor donated $2,000,000 to construct a new cardiology wing on the hospital.
4. During the year, the new cardiology wing (see item 3) was one-half completed at a cost of $1,000,000.

 

    Debits Credits
(1) Accounts and Notes Receivable 7,520,000  
     Patient Service Revenue   7,520,000
       
  (Note: charity service must be excluded.)    
       
(2) Provision for bad debts 190,000  
  Contractual Adjustments 435,000  
     Allowance for Uncollectible Receivables   190,000
     Accounts and Notes Receivables   435,000
       
(3) Cash 2,000,000  
     Contributions-Temporarily Restricted   2,000,000
       
(4) Construction in Progress 1,000,000  
  Cash   1,000,000
       
  Net assets Released from Restrictions-Temporarily Restricted 1,000,000  
  Net assets Released from Restrictions-Unrestricted   1,000,000

 

AACSB: Analytical Thinking
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities.
Topic: Reporting and accounting issues
 

 

51. Show entries in general journal form for the following transactions of Bothwell Regional Hospital, a nongovernmental not-for-profit hospital.

1. For the month just ended the hospital received in cash $8,000 from the hospital’s gift shop sales, and received donated medicines with a fair value of $47,000. These medicines are of the type the hospital normally would purchase.
2. The hospital’s finance officer, in compliance with the directive of the governing board, invested $600,000 of operating cash in certificates of deposit to be held for future purchases of equipment.
3. New equipment costing $750,000 was purchased from money given the hospital in a prior year to be held until needed for equipment purchases.
4. A federal grant was received in cash in the amount of $400,000 to be used for heart research. During the current year only $50,000 was spent for this research program.

 

    Debits Credits
(1) Cash 8,000  
    Inventory-Pharmacy 47,000  
        Other Revenue   55,000
       
(2) Assets Limited as to Use-Investments 600,000  
     Cash   600,000
       
(3) Equipment 750,000  
     Cash   750,000
       
  Net assets Released from Restrictions-Temporarily Restricted 750,000  
       Net assets Released from Restrictions-Unrestricted   750,000
       
(4) Cash 400,000  
     Contributions-Temporarily Restricted   400,000
       
  Operating Expenses 50,000  
    Cash   50,000
       
  Net assets Released from Restrictions-Temporarily Restricted 50,000  
      Net assets Released from Restrictions-Unrestricted   50,000

 

AACSB: Analytical Thinking
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

52. Georgetown Hospital, a governmental hospital, recorded during its fiscal year ended September 30, gross patient services valued at $15,000,000, excluding charity care services of $1,600,000. However, contractual adjustments by third-party payors amounted to $1,200,000. In May of that year it received donated medical supplies worth $2,000; supplies it had planned to purchase had it not been for the gift. At year-end, the governing board set aside investments in the amount of $500,000 for future plant expansion and $250,000 to be invested with the related earnings used for a special prenatal care program.

1. In its operating statement for the year ended September 30, how much Georgetown should report as net patient services revenue? Justify your answer.
2. For the year ended September 30, how should the donation of medical supplies be reported?
3. What amount of unrestricted net position should Georgetown report in its balance sheet as board designated, assuming it had no board designated net position at the beginning of the year?

1. $13,800,000. The $15,000,000 gross patient service revenue must be adjusted for the $1,200,000 contractual adjustments, which are contra-revenues. Charity care service is not recorded and has already been excluded from the $15,000,000. None of the other items are considered patient service revenue.
2. The donation should be reported as other revenue in the amount of $2,000 and as either supplies inventory or expense, depending on whether the donation was used in the current period.
3. Designated net position should be reported in the amount of $750,000 ($500,000 for future plant expansion plus $250,000 for designated investments).

 

AACSB: Analytical Thinking
AICPA: FN Reporting
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

Essay Questions

53.
There are three main reasons why a nongovernmental not-for-profit hospital does not receive the full amount that it normally charges for a room: 1) contractual adjustments arising from transactions with third-party payors, 2) charity service provided to indigent patients, and 3) bad debts. Compare the accounting treatment for the three reasons listed.

 

 

Current GAAP requires that contractual adjustments and bad debts be reported as deductions from gross patient revenue in arriving at net patient revenue. Charity service is not recorded at all but should be reported in the notes to the financial statements.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

54.
Congress mandated diagnosis-related groups (DRG) as a method for recording costs in health care organizations, in part to facilitate Medicare’s prospective payment system. Explain what the DRG system is and describe the impact this change may have had on the cost accounting systems of health care organizations.

 

 

Diagnosis-related groups (DRGs) are a case-mix classification scheme instituted by Congress to determine the amount that Medicare would pay health care providers for inpatient hospital services. Costs are accumulated in a group that is based on the patient’s diagnosis. All the costs it takes to treat that patient are recorded in that group, so that averages can be computed and health care costs across organizational form and across the country can be compared. Prior to this system, hospitals most likely accumulated costs in the traditional manner; that is, by departments, such as laboratory, radiology, pharmacy, emergency room, or functions.

 

AACSB: Communication
AICPA: BB Industry
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations.
Topic: Reporting and accounting issues
 

 

55.
Contrast the statement of cash flows that nongovernmental not-for-profit hospitals prepare to those that governmental hospitals prepare.

 

 

Not-for-profit hospitals prepare their cash flows statement in conformity with FASB standards, whereas governmental hospitals prepare their statement in conformity with GASB standards. The two standards have several differences. The major differences are in the activity classifications in which various cash flows are reported. One example is interest paid and interest received are reported as capital and related financing activities and investing activities in the GASB statement, respectively, but as operating activities in the FASB statement, except for investment income added to temporarily or permanently restricted net assets which is reported as a financing activity. Acquisitions of property and equipment are reported as capital and related financing activities in the GASB statement but as investing activities in the FASB statements. GASB standards also require that the statement of cash flows be prepared using the direct method, which is optional under FASB standards. Additional differences are explained in Chapter 16 and examples of each statement are provided in Illustrations 16-5 and 16-6.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-03 Journalize transactions and prepare the basic financial statements for not-for profit and governmental health care organizations.
Topic: Reporting and accounting issues
 

 

56.
Describe what prepaid health care plans are and some of the related accounting issues.

 

 

Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) function as brokers between the consumer/patient and health care provider. In general, the employer or person buying into those plans pays a fixed amount per month and is allowed a set of services for which there is no payment, or a relatively small co-pay at the time of service. If the cost of services exceeds revenue that is brought in, then the plan will have a loss. The cost of future services to be rendered, net of anticipated revenue, should be recorded as a liability upon receipt of the monthly premium paid by the consumer/patients/employers. Plans are complex and vary greatly in the contractual arrangements that are drawn up among the parties, so the accounting treatment of each transaction must carefully consider the facts and circumstances of the agreements.

 

AACSB: Communication
AICPA: FN Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Reporting and accounting issues
 

 

57.
What auditing issues are of particular significance to the health care industry?

 

 

Auditors must be sure that contingent liabilities are recorded or disclosed as appropriate. Health care providers may receive federal funds and therefore be required to have a single audit following OMB Uniform Guidance. In calculating the threshold expenditures/expenses level of $750,000 to determine if the organization must have a single audit, Medicare and Medicaid reimbursements are not considered. Auditors must assess whether the organization has complied with laws and regulations. In the health care industry, the federal government has enacted legislation to curb fraud and illegal acts, so auditors need be familiar with these laws. There are also tax and other regulatory acts that may affect the audit. As time passes, auditors can expect to see an increased impact on reporting and internal controls related to the Affordable Care Act. Related entities, joint ventures and restructuring are common practices among health care providers, particularly as the cost of health care increases and organizations look for efficiencies in providing services. The degree of control of one organization over the other is an important consideration for an auditor in determining the reporting unit and its component entities and whether those relationships dictate display of information on the face of the statements or disclosure in the notes to the financial statements.

 

AACSB: Communication
AICPA: BB Industry
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Reporting and accounting issues
 

 

58.
“The goal of financial and operational analysis for the manager is to determine the creditworthiness of the health care organization.” Do you agree with the statement? Why or why not?

 

 

Disagree. A manager certainly cares about the ability of the organization to provide for debt service; however, that objective is more likely associated with financial analysts who evaluate the organization in determining whether to invest in its bonds. Managers primarily have an internal focus and analyze finances and operations for the purpose of assessing performance for which they are accountable. Managers are also aware that third-party payors, such as insurance companies and the federal government, analyze the financial and operational performance of the organization in order to determine appropriate payments for service, either retroactively or prospectively.

 

AACSB: Communication
AICPA: BB Industry
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Performance indicators
 

 

59.
Explain how one can evaluate both the financial performance of a hospital and the quality of health care the hospital provides.

 

 

National organizations such as the Healthcare Financial Management Association (HFMA) publish annual benchmark data for hospital financial indicators. An example of indicators provided by the HFMA is presented in Chapter 16. To evaluate the quality of health care provided by a particular hospital, with comparisons to benchmarks for other nearby hospitals or state and national averages, one can obtain the necessary data from the National Consumer Assessment of Healthcare Providers and Systems (CAHPS) at the hospital compare Web site (www.hospitalcompare.hhs.gov).

 

AACSB: Communication
AICPA: BB Industry
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 16-05 Explain financial and operational analysis of health care organizations.
Topic: Performance indicators
 

 

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