Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 1: The government and not-for-profit environment

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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 1: The government and not-for-profit environment. Chapter 1 - The government and not-for-profit environment. After studying Chapter 1 you should understand characteristics that distinguish governments and not-for-profit organizations from businesses, accounting and reporting practices and their implications, the overall purpose of financial reporting.
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Lecture note Government and not-for-profit accounting: Concepts and practices (7/e) – Chapter 1: The government and not-for-profit environment. Chapter 1 - The government and not-for-profit environment. After studying Chapter 1 you should understand characteristics that distinguish governments and not-for-profit organizations from businesses, accounting and reporting practices and their implications, the overall purpose of financial reporting..

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Click icon to add picture Chapter 1 The Government and Not-for-Profit Environment Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Thoughts to Ponder “We make a living by what we get. We make a life by what we give.” - Winston Churchill “Service to others is the rent you pay for your room here on earth.” - Mohammed Ali Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Learning Objectives After studying Chapter 1 you should understand • Characteristics that distinguish governments and not-for-profit organizations from businesses • Accounting and reporting practices and their implications • The overall purpose of financial reporting • The information requirements of the primary users • Objectives of financial reporting, as established by the GASB, FASB, and FASAB • How differences in accounting principles affect financial reporting and can have economic consequences • The institutional arrangements for establishing accounting standards for these entities Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. How Do Governments and Not-For-Profits Compare with Businesses? •Different missions • Goal of government and not-for-profit is to provide services for the betterment of society • Goal of business is to earn profit •No direct and proportional relationship between resources provided and the benefits received. •Absence of transferable ownership rights. •Collective ownership by constituents. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. How Do Governments and Not-For-Profits Compare with Businesses? •The basic accounting equation • For profit - based businesses, the accounting equation is as follows: Assets = Liabilities + Equity • For governments, the accounting equation is: Assets - Liabilities = Net Position (Equity, aka net assets) •For GNP entities, budget is very important. • Budget is the culmination of the political process • The budget is the key fiscal document • Budgets drive accounting and financial reporting •Revenues may not be linked to constituent demand or satisfaction •No direct link between revenues and expenses •Less distinction between internal and external accounting and reporting. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. How Do Governments and Not-For-Profits Compare with Businesses? •Ensure interperiod equity for most GNPs • Interperiod equity – concept that constituents pay for services they receive and not shift burdens to their children •Resources may be restricted for particular activities or purpose • Use fund accounting • Example • Federal government grants for low-income housing • State gasoline tax may be targeted by law at highway construction and maintenance. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. How Do Governments and Not-For-Profits Compare with Businesses? •Power ultimately rests in the hands of the people. •Citizens vote and delegate that power to elected officials. •Exercise their sovereign power to collect taxes. •Created by and accountable to a higher level government. •Different reporting objectives. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Objectives of Financial Reporting State and Local Governments •Financial reports are used primarily to: • Compare actual results with the budget. • Assist in determining compliance. • Assist in evaluating efficiency & effectiveness. • Assess financial condition and results of operations. •Remember: • Financial statements are a report of the past; your focus must be on the future. • One main objective of financial analysis is to derive the economic substance of a transaction from the data provided in the financial statements. Then, it is up to you to recast the data in a form that best facilitates the decisions that you must make. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Objectives of Financial Reporting State and Local Governments •“ACCOUNTABILITY is the cornerstone of all financial reporting in government,” (GASB Concepts Statement No. 1, par. 56). •Please see the summary of Concepts Statement 1. • What do we mean by accountability? • How does “interperiod equity” relate to accountability? Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Objectives of Financial Reporting State and Local Governments •What is accountability? • Accountability arises from the citizens’ “right to know.” • It imposes a duty on public officials to be accountable to citizens for raising public monies and how they are spent. Granof, et al. – 7th edition © 2016 John Wiley & Sons, Inc. Chapter 1 | All rights reserved. Objectives of Financial Reporting State and Local Governments • How does “interperiod equity” relate to accountability? • Interperiod equity is a government’s obligation to disclose whether current-year revenues were sufficient to pay for current-year benefits—or did current citizens defer payments to future taxpayers?

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