1.

GASB financial reporting standards assist users in assessing the operational

accountability of a government’s business-type activities and the fiscal
accountability of its governmental activities. Do you agree or disagree with this
statement? Why or why not?
I Disagree: -The statement is incomplete. While it is true that GASB standards assist in
assessing operational accountability of business-type activities, those standards assist in
assessing both fiscal accountability and operational accountability of governmental activities.
Specifically, governmental fund reporting standards promote fiscal accountability reporting by
helping elected officials demonstrate that they have complied with spending restrictions related
to the legally approved budget. Government-wide reporting standards for governmental activities
help officials report on operational accountability whether the government’s resources were
utilized efficiently and effectively in meeting operating objectives.
2. How does the modified accrual basis of accounting differ from the accrual basis?
Modified accrual basis of accounting Revenues recognized at amounts estimated to be collected
& when Measurable and Available Expenditures recognized when incurred or when expected to
be liquidated with current financial resources Accrual basis of accounting Revenues recognized
when earned or as specified by Revenues recognized when earned or as specified by GASB
standards Expenses recognized when incurred.
Modified and accrual accounting processes are the two most common choices that businesses
have when choosing how to represent their transactions and expenses. But within the category
of accrual accounting, businesses also have to choose between two primary options, known as
full accrual (or just accrual) and modified accrual. The differences between the two are
primarily focused on how the business records its expenses and how it wants to approach
budget planning.

Full Accrual

Full accrual is the process of tracking only transactions, not cash flow. In accrual accounting,
the point is to actually record all transactions when the action took place, not the actual transfer
of money. When the business performs a service, it records the income earned. When a
business buys an item or service, it records the expense, regardless of income received and

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expenses paid. This helps the business properly align when it actually incurred costs or earned
income with the property dates involved.

Modified Accrual

The modified accrual method combines some elements of cash method accounting with the full
accrual method. In this case, income earned is primarily recorded the same as the full accrual
method, but expenses are only recorded when they are actually paid. This means that a
business can decide to buy an asset and actually purchase it, but the expense will only be
counted -- and only reduce net income -- in the period in which the check is actually cashed.

Purposes

The full accrual method is useful when a business wants to record all of its expenses and profit
when the operations actually took place and there is little debt involved. The accrual method is
often very timely and helps a business keep tighter control over its cash flow. The modified
method provides the timeliness of the accrual practice but allows the business more leeway,
letting it adjust its budgets more easily in the face of changes and represent costs to executives
and directors when they actually occur.

Considerations

The full accrual method is useful, but it does not easily take into account delays. A cost can be
created but not actually paid for months, requiring the business to keep records of both its real
and its book values when it comes to income and expenses. Likewise, recording expenses only
when they occur can blind executives, making it difficult for them to see what projects they
have already approved in the budget if costs are only recorded when checks clear.

This table summarizes the differences between modified and full accrual bases.
  Modified Accrual Full Accrual
Accounts In the absence of an applicable modification, Recognize a payable in the
Payable accounts payable are recognized in the fiscal year fiscal year in which the
in which the agency incurs the liability. agency incurs the liability.
Prepaid Items Under GAAP, it is optional to use either the Consumption method:

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 purchases method or the consumption method. The Recognize an asset when
Comptroller’s office adopted the consumption an item is purchased and an
method and agencies must use the consumption expense when an item is
method in the AFR. Recognize an asset when an used or consumed.
item is purchased and an expense when the item is
used or consumed.
Long-Term Recognize the liability as it matures or to the Recognize the liability in
Liabilities – extent the liability is expected to be liquidated with the fiscal year in which the
Current expendable available financial resources. agency incurs the liability.
Portion
Long-Term The portion that does not meet the criteria for Recognize the liability in
Liabilities – recognition as a current liability is a noncurrent the fiscal year in which the
Noncurrent long-term liability. agency incurs the liability.
Revenues Governmental funds recognize revenues as cash is Recognize the revenue in
received during or soon after the end of the year the fiscal year in which the
and when it is earned and both measurable and agency earns the revenue
available and it is measurable.
Availability is not a factor.
Expenditures In the absence of an applicable modification, Fund expenditures are
expenditures are recognized in the fiscal year in recognized in the fiscal
which they are expended or when they are subject year in which the agency
to accrual. Accruals are recorded when they are incurs a liability.
expected to use expendable financial resources. Adjustments may be
needed to ensure the
matching principle is
followed.
Capital Asset Recognize the expenditure at the acquisition date. Recognize the cost of the
Acquisitions asset and depreciate the
value over the expected
useful life of the asset.
Inventories Under GAAP, it is optional to use either the Consumption method:
purchases method or the consumption method. The Recognize an asset when
Comptroller’s office adopted the consumption inventory is purchased and

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 method and agencies must use the consumption an expense when inventory
method in the AFR. Recognize an asset when is used or consumed.
inventory is purchased and an expense when
inventory is used or consumed.
Compensated Recognize a liability as payments come due each Recognize the liability and
Absences fiscal year on the occurrence of resignations or the expense in the fiscal
retirements. year in which the agency
incurs the liability.
Claims & Recognize a liability to the extent they are Recognize the liability in
Judgments normally expected to be liquidated with the fiscal year in which the
expendable available financial resources. agency incurs the liability.

3. Describe how citizens can use the financial trend monitoring system (FTMS) of the
ICMA to assess the financial condition of their local government.
Citizens can only use this tool if the government managers have made reports available to the
public describing how it is doing with respect to the financial indicators in the FTMS compared
to prior time periods or to similar governments. However, if a city routinely disseminates this
information, then a citizen can review a graphic of an indicator Illustration 10-2 that reports on
Indicator 35, Rate of Employment for the City of Columbia, MO), as well as a description of a
warning trend (i.e., is an increase or decrease in the trend preferred?). Usually a table of the data
that underlies the graph, and a description and analysis of what the data indicates about the
government’s financial condition is provided.

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 4. Identify some financial indicators or ratios that are designed to measure the short-
term financial position of a governmental entity. Why are these measures not as
useful in assessing long-term financial or economic condition?
Financial indicators or ratios that measure relationships among balance sheet accounts are most
likely to provide information useful in assessing whether the government has enough current
resources to meet its current obligations. Current and quick ratios (quick ratios do not consider
inventory in the numerator) are commonly used to indicate how many times current assets can
cover, or pay for, current liabilities. Balances in unrestricted net assets and fund balance also
provide information about the near-term ability of the government to weather a “rainy day.”
These ratios are not as useful in assessing long-term financial or economic condition because
they do not consider long term assets and long-term liabilities (and the related depreciation and
interest expense on these balance sheet elements.
5. Explain how organizations in the not-for-profit sector differ from organizations in
the public sector or for-profit business sector. Provide an example of an entity in
each sector.
There are many other kinds of not-for-profit organizations, such as cemetery organizations, civic
organizations, fraternal organizations, labor unions, libraries, museums, cultural institutions,
performing arts organizations, political parties, private schools, professional and trade
associations, social and country clubs, research and scientific organizations, and religious
organizations.
Distinguishing between for profit, not for-profit, and governmental/nongovernmental is more
useful. “Governmental” not for-profit organizations may receive tax revenue or be owned or

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controlled by a government but are not governments. Examples of entities that receive special
tax revenue include libraries and transportation authorities. Governments often control museums,
cemeteries, development authorities, housing authorities, public hospitals, public colleges and
universities, and other public benefit corporations. Some such organizations are reported as a
department or unit of a general purpose government.
Non-profit organizations are those that do not have an economic or profit-making goal.
They are generally organizations that have community or aid purposes of some kind.
This type of aid can be of religious origin, charitable, educational, investigative, or
environmental protection purposes. However, and although these companies do not have
economic profit as their goal, they do need monetary funds for the development of said
organization. These organizations accept investments from state or private entities.
In these organizations, their members generally do not receive remuneration for the time they
perform their functions for the organization.
On the other hand, these companies are usually exempted from taxes in order to collaborate
economically with the cause they carry out (although this will depend on each country in
particular).
Characteristics of non-profit organizations:
They are organizations
This means that as an organization they have similar characteristics such as the fulfillment of
1. They are private
Non-profit organizations cannot be a government instrument.
2. Autonomy
This refers to the fact that organizations of this type are independent from other private or state
organizations and control their own activities themselves.
3. Volunteer staff
Both donations and the time that members invest in the organization are voluntary and should
not be stipulated under any law.
4. They need funds and staff
These institutions may periodically or sporadically receive financial contributions of public or
private origin. Likewise, the collaboration of its members is not carried out with the objective of

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receiving a salary or an income for each of them, but rather that the members exercise their
functions adhonorem. These contributions are known as donations.
5. Administration of donations
This area should be carefully and carefully controlled not only to meet the goals of the
organization but also to know when they should request more funds or if they can deal with a
certain community issue depending on the amount of funds with those who have. However,
although this is an objective or goal in the short term (immediate), it is also intended to last over
time and to be able to solve unforeseen events that may arise within society (for example after a
natural catastrophe).
6. Community Leadership
It is generally elected by a board or by all its members. It must have as general characteristics the
knowledge of the objectives of the organization but it must also possess characteristics of
leadership and empathy for obtaining economic assets that favor the permanence of the
institution in society.
As their names indicate, nonprofit and for-profit businesses vary greatly in some aspects of their
operation and most definitely in the overall purpose of their existence. As the Houston
Chronicle's James Green writes, "While the aim of for-profit organizations is to maximize profits
and forward these profits to the company's owners and shareholders, nonprofit organizations aim
to provide society's needs. Non-profit organizations have no owners. Instead of maximizing
profits, which means maximizing revenues while minimizing costs, they are more concerned
with ensuring the revenue is greater than costs. This ensures that the nonprofit can still provide
society's needs." Another key element that makes a nonprofit organization different than a for-
profit is that the company's income is never to be distributed to any owners "but is to be recycled
back into the nonprofit corporation's public benefit mission and activities."
Besides these basic differences in organization and purpose, there are several more technical
areas worth mentioning when discussing the differences between nonprofits and their for-profit
counterparts. While for-profit organizations are responsible for paying taxes based on their net
income, nonprofit organizations are exempt from paying income tax. Since a nonprofit's goal is
to make the world a better place and invest time, resources, and funds into the community, the
government credits nonprofits with benefits in this way. While nonprofits are not required to pay
taxes on net income, they are responsible for state and property taxes.

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Another difference between a nonprofit and for-profit organization is that a for-profit will put
together an income statement each quarter. Income statements are prepared in order to assess a
company's financial performance four times each year. Instead of income statements, nonprofit
organizations will typically provide its donors and the general public a statement of activities
which will include all revenues, expenses, and plus net assets. The other resource a nonprofit
depends on is a quarterly balance sheet listing the owner's equity. Since nonprofit organizations
do not operate with owners at the helm, they will typically produce a document which shows the
organization's liabilities and assets known as a statement of financial position.
Business professionals desiring to make a difference in the world will often take positions in
nonprofit organizations, and many times find the best way to influence and direct meaningful
work is pursuing a career in nonprofit management.

“A for-profit can raise money from private investors, for which it must give equity or dividends
to shareholders; ultimately, a return on investment is expected,” she wrote. “A nonprofit, on the
other hand, can seek donations from individuals, foundations and corporations. Such
stakeholders generally expect a ‘social return’ on capital.”
A for-profit organization is one that operates with the goal of making money. Most businesses
are for-profits that serve their customers by selling a product or service. The business owner
earns an income from the for-profit and may also pay shareholders and investors from the profits.
Whether you decided to start a for-profit, not-for-profit or nonprofit, the first steps to creating
your entity are the same. Start by filing for a business entity in the state in which you wish to run
your operations. Your business entity might be a corporation, LLC, sole proprietorship or
partnership. All of these entities can operate as for-profit, nonprofit or not-for-profit
organizations.

A not-for-profit organization (NFPO): is one that does not earn profit for its owners. All
money earned through pursuing business activities or through donations goes right back into
running the organization.
However, not-for-profits are not required to operate for the benefit of the public good. A not-for-
profit can simply serve the goals of its members. A good example is a sports club; the purpose of
the club is to exist for its members’ enjoyment.

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These organizations must apply for tax-exempt status from the IRS, including exemptions from
sales tax and property taxes. That also means that money donated by an individual to an NFPO
cannot be deducted on that person’s tax return.

For-profit and not-for-profit organizations share many qualities but also have some distinct
differences. At face value, the term "for-profit" suggests a company seeking to make money (and
usually as much as possible), while the term "not-for-profit" suggests a company that doesn't
make money. Actually, not-for-profit organizations seek to generate revenues to serve a specific
organization mission, transferring a lot of the profit to defined community efforts.

Examples of not-for-profits might be charities, clubs or community organizations. For-profit

organizations are everyday businesses.

Business Entity Creation

Whether a for-profit or a not-for-profit, the early stages of the entity are the same. The early
stages begin with filing for a business entity in the state in which the organization opens its
operations. Business entity types include: corporations, limited liability companies,
partnerships or sole proprietors.

Entities are initially filed with the secretary of state. There are different tax benefits with these
entities that suit different business owners of for-profit companies. Most not-for-profits start as
corporations.

Applying for an Employer Identification Number

Once a business entity is formed, it then applies for an Employer Identification Number (EIN)
with the Internal Revenue Service (IRS). This is the official tax number any business entity
needs to open bank accounts, to apply for loans and to file tax returns. Once the EIN is
obtained, a not-for-profit must apply for "tax exempt status" with the IRS, using Form 1024
seeking exempt status under IRS Code 501(c).

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Tax-Exempt Status

Once an organization is given tax-exempt status, it is considered a not-for-profit or charity type

of business. Even though these are tax-exempt organizations, they still file annual tax returns
like for-profit companies. Tax-exempt organizations must adhere to public disclosure
requirements, and must make meeting minutes and financial documents of the previous three
years publicly available upon request by anyone in the public. The IRS Exempt Organization
Status Check is a database that maintains the current exempt status for all tax-exempt
organizations.

Methods of Generating Revenues

A significant distinction between a for-profit and a not-for-profit is how each type of

organization generates revenues. For-profit companies generally sell a product or provide a
service. A not-for-profit organization usually operates fundraising efforts with donations,
events and corporate sponsors. Not-for-profits might still sell products. Girl Scout Cookies are
a prime example of a product that's produced and sold by a not-for-profit that generates
revenues to support the mission of the organization.

Organization Oversight and Management

As business entities, both for-profit and not-for-profit organizations maintain a separation of

assets and liabilities between employees and executives. Both entities must vote for an annual
board of directors that holds regular meetings to review the progress and direction of the
company.

Not-for-profits usually have larger boards of directors that might be voluntary members
bringing in resources to help expand the organization's community outreach and fundraising
efforts. The volunteer labor force is distinct to the not-for-profit organization, whereas for-
profits have paid employees and contractors that perform duties. Larger not-for-profits,
including some local agencies, do have pay rolled employees running the organization.

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