Accounting for Governmental & Nonprofit Entities 17th edition by reck

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Accounting for Governmental & Nonprofit Entities 17th edition by reck

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 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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