Accounting forGovernmental andNonprofit Entities

Fifteenth Edition

Earl R. Wilson, Ph.D., CPAProfessor EmeritusUniversity of Missouri—Columbia

Jacqueline L. Reck, Ph.D.,CPAAssociate Professor and James E. and C. Ellis RooksDistinguished Professor in AccountingUniversity of South Florida

Susan C. Kattelus, Ph.D.,CPA, CGFMProfessor of PracticeMichigan State University

Boston Burr Ridge, IL Dubuque, IA Madison, WI New York San Francisco St. LouisBangkok Bogotá Caracas Kuala Lumpur Lisbon London Madrid Mexico CityMilan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

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ACCOUNTING FOR GOVERNMENTAL AND NONPROFIT ENTITIES

Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020.Copyright © 2010, 2007, 2004, 2001, 1999, 1995, 1992, 1989, 1985, 1980, 1974, 1969, 1961, 1956, 1951 by The McGraw-Hill Companies,Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database orretrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or otherelectronic storage or transmission, or broadcast for distance learning.

American Institute of Certified Public Accountants, Inc. materials reproduced are copyright © 2008 by AICPA, reproduced with permission.

Portions of various GASB documents, copyright by the Governmental Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk,CT 06856-5116, U.S.A., are reproduced with permission. Complete copies of these documents are available from the GASB.

Portions of various ICMA documents are adapted/reprinted with permission of the International City/County Management Association, 777 North Capitol Street, NE, Suite 500, Washington, DC 20002. All rights reserved.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

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ISBN 978-0-07-337960-9MHID 0-07-337960-3

Vice president and editor-in-chief: Brent GordonEditorial director: Stewart MattsonPublisher: Tim VertovecSenior sponsoring editor: Alice HarraDevelopmental editor: Emily A. HattebergAssociate marketing manager: Dean KarampelasSenior project manager: Bruce GinFull service project manager: Jackie Henry, Aptara, Inc.Senior production supervisor: Debra R. SylvesterDesign coordinator: Joanne MennemeierSenior media project manager: Greg BatesCover design: JoAnne SchoplerCover Image: © Corbis ImagesTypeface: 10.5/12 Times New RomanCompositor: Aptara, Inc.Printer: R.R Donnelley

Library of Congress Cataloging-in-Publication DataWilson, Earl Ray, 1939-

Accounting for governmental and nonprofit entities / Earl R. Wilson, Jacqueline L. Reck,Susan C. Kattelus.—Fifteenth ed.

p. cm.Includes index.ISBN-13: 978-0-07-337960-9 (alk. paper)ISBN-10: 0-07-337960-3 (alk. paper)1. Finance, Public—Accounting. 2. Nonprofit organizations—Accounting. 3. Nonprofit

organizations—United States—Accounting. I. Reck, Jacqueline L. II. Kattelus, Susan C. (SusanConvery) III. Title. HJ9733.W48 2010657'.825—dc22

2009000175

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About the AuthorsIn Memoriam: This edition is dedicated to the memory and long serviceof Dr. Leon E. Hay as an author of the third through twelfth editions ofAccounting for Governmental and Nonprofit Entities. Dr. Hay was anationally recognized leader and educator in the field of governmental andnot-for-profit accounting.

Earl R. WilsonIs Professor Emeritus of Accountancy at the University of Missouri—Columbia. Hereceived his BA and MBA from Chapman University and his MA and PhD in Accoun-tancy from the University of Missouri—Columbia. He is a certified public accountant(Missouri).

Professor Wilson has contributed substantially to standards setting in governmentalaccounting and auditing, having served as an academic fellow with the GovernmentalAccounting Standards Board (GASB) and as a member of the Governmental AccountingStandards Advisory Council, the U.S. Comptroller General’s Advisory Council onGovernmental Auditing Standards, the American Institute of CPAs GovernmentAccounting and Auditing Committee, and as chair of the Missouri Society of CPAs(MSCPA) Government Accounting Committee and president of the American AccountingAssociation Government and Nonprofit (AAA-GNP) Section. In addition, he has servedon several GASB task forces and conducted financial reporting research for the GASB.

Dr. Wilson has published numerous research articles in journals such as TheAccounting Review; Journal of Accounting Research; Contemporary AccountingResearch; Journal of Accounting and Public Policy; Journal of Accounting, Auditing,and Finance; Research in Governmental and Nonprofit Accounting; Public Budgetingand Finance, and others. Many of these articles are frequently cited as influentialstudies of the municipal bond market. He has been an author of this text since the ninthedition in 1992. He has extensive experience teaching governmental and nonprofitaccounting, including online courses.

Professor Wilson has received a number of awards for his teaching and research,including the Enduring Lifetime Contribution Award from the AAA-GNP section, the2003 Cornelius Tierney/Ernst & Young Research Award from the Association ofGovernment Accountants, Outstanding Teacher of the Year for 2002 from the KansasCity MU Business Alumni Association, and the 2000 Outstanding Educator of the Yearand 2008 Outstanding CPA in Government awards from the MSCPA. He has chairedor served as reader of more than 30 doctoral dissertations, many in the area ofgovernmental accounting.

Jacqueline L. ReckIs an associate professor and the James E. and C. Ellis Rooks Distinguished Professorin Accounting for the School of Accountancy at the University of South Florida. Shereceived a BS degree from North Dakota State University, BS and MAcc degrees fromthe University of South Florida, and her PhD from the University of Missouri–Columbia.She is a certified public accountant (Florida).

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Dr. Reck worked for state government for several years before joining academia.Currently, she is active in several professional associations. In addition to teachinggovernmental and not-for-profit accounting, Dr. Reck frequently presents continuingprofessional education workshops and sessions. She has provided workshops ongovernmental and not-for-profit accounting for local accounting firms and the stateauditor general’s staff. Dr. Reck has received several teaching and research awards, iscurrently the doctoral program coordinator for the School of Accountancy, and haschaired or served on several doctoral dissertation committees.

Dr. Reck has published articles in The Journal of Accounting and Public Policy;Research in Governmental and Nonprofit Accounting; Journal of Public Budgeting,Accounting and Financial Management; and the Journal of Information Systems,among others. She joined as an author on the 14th edition.

Susan C. KattelusIs Professor Emeritus of Accounting at Eastern Michigan University and currently aProfessor of Practice at Michigan State University. She received her BBA and PhDfrom Michigan State University and MSA from Eastern Michigan University. ProfessorKattelus is a certified public accountant (Michigan) and a certified governmentfinancial manager.

Professor Kattelus has served on the Governmental Accounting Standards AdvisoryCouncil as the academic representative of the American Accounting Association(AAA), president of the Government and Nonprofit Section of the AAA, and chair ofthe Nonprofit Task Force of the Michigan Association of CPAs. She teaches the publicand nonprofit accounting course for accounting majors and the principles of managerialaccounting course for business students.

Dr. Kattelus has published articles in The Accounting Review; Research inGovernmental and Nonprofit Accounting; Journal of Government Financial Management;Public Budgeting and Finance; Issues in Accounting Education; Journal of AccountingEducation; and Journal of Public Budgeting, Accounting and Financial Management,among others. She joined as an author on the 11th edition in 1999.

iv About the Authors

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PrefaceFor almost 60 years, Accounting for Governmental and Nonprofit Entities has been theleader in the market. It is a comprehensive governmental and not-for-profit accountingtext written for students who will be auditing and working in public and not-for-profitsector entities. Originally published in 1951 and written by Professor R. M. Mikesell,this book—and the several subsequent editions revised by Professor Leon E. Hay—hasgiven generations of instructors and students a comprehensive knowledge of the spe-cialized accounting and financial reporting practices of governmental and not-for-profit organizations, as well as an understanding of how those organizations can bettermeet the information needs of a diverse set of financial statement users and decisionmakers. The vision of these original authors continues to be reflected in this 15th edition,and their strategy of providing a large and innovative set of instructional supportmaterials prepared and tested in the classroom by the authors continues to be a guidingprinciple today. The current author team brings to this edition their extensive experi-ence teaching government and not-for-profit courses as well as insights gained fromscholarly writing and professional activities. The result is a relevant and accurate textthat includes the most effective instructional tools.

ORGANIZATION AND CONTENTThe 15th edition of Accounting for Governmental and Nonprofit Entities is separatedinto three parts: Part I covers state and local governments (Chapters 2 through 10), PartII focuses on accountability for public funds (Chapters 11 through 13), and Part IIIexamines not-for-profit organizations (Chapters 14 through 17). Chapter 1 continuesto form a broad foundation for the more detailed material in Chapters 2–17. The orderof the chapters is similar to previous editions, but some topics and chapters have beenrearranged to facilitate a variety of courses and formats used by adopters of the text.For example, a course focused on state and local governments may cover Chapter 1 andParts I and II, while a course focused on not-for-profit organizations may coverChapter 1 and Parts II and III. Part II is a bridge between the public and not-for-profitsectors that includes accountability topics (e.g., federal government, auditing, andbudgeting) applicable to all types of entities that receive public funds.

KEY CHANGES IN THIS EDITIONAs always, readers can count on this edition to include authoritative changes from theFinancial Accounting Standards Board, Governmental Accounting Standards Board,Federal Accounting Standards Advisory Board, American Institute of Certified PublicAccountants, Office of Management and Budget, Internal Revenue Service, andGovernment Accountability Office. Update bulletins will be provided periodically onthe text Web site as new authoritative statements are issued.

Several significant changes have been made in this edition of the text. The samplefinancial statements have been moved to an appendix in Chapter 1 and the manage-ment’s discussion and analysis (MD&A) has been moved to an appendix in Chapter 9for easier reference. A new appendix on managing investments has been added toChapter 8. In a slight reorganization of coverage, what was formerly Chapter 11,“Auditing of Governmental and Not-for-Profit Organizations,” is now Chapter 12. This

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chapter also has been modified to increase its focus on generally accepted governmentauditing standards. In Chapter 13, more emphasis has been placed on performancegiven the unique nature of governments. In addition, an appendix on cost and budgetissues in grant accounting has been added to Chapter 13. Illustrative financialstatements for the American Heart Association and related discussion have beenincorporated into Chapter 14.

In addition to these changes, all chapters have been updated to reflect changes in theareas of accounting and auditing affecting governments and not-for-profit entities.Based on comments received and the collective experience of the authors, some itemsin this edition have received increased attention (e.g., major funds and postemploymentbenefits). A most significant enhancement is that this edition now features a secondcomputerized practice set, the City of Bingham, which is equally as comprehensiveand effective as the widely used City of Smithville practice set. Both practice sets arenow downloadable from the publisher’s Web site (for more information, see inside thefront cover of this text).

INNOVATIVE PEDAGOGYFor state and local government accounting, the authors have found that dual-trackaccounting is an effective approach in showing the juxtaposition of government-wideand fund financial statements in GASB’s integrated model of basic financial state-ments. It allows students to see that each transaction has an effect on the fund financialstatements (that are designed to show fiscal compliance with the annual budget), on thegovernment-wide financial statements (that demonstrate accountability for operationalperformance of the government as a whole), or both. This approach better servesstudents who will design and use accounting information systems, such as enterprisesystems, to allow information to be captured once and used for several purposes.Accounting for federal agencies as well as nongovernmental, not-for-profit entitiesclosely parallels this approach as traditional fund accounting may be appropriate forkeeping track of resources with restricted purposes, but citizens and donors also needto see the larger picture provided by the entity as a whole. The dual-track approach isfurther described inside the front cover of this text.

Governments may continue to prepare fund-based statements throughout the yearand convert to accrual-based government-wide statements at the end of the year untilthey invest in information systems that can deliver real-time information for decisionmaking. We want students to think beyond being transaction-bookkeepers and aspire todesign and use the systems that will make government-wide financial informationavailable when managers and citizens need it. The City of Bingham and City ofSmithville Continuous Computerized Problems are teaching tools that develop theseskills and perspective. The authors feel so strongly that this general ledger software toolhelps students understand the material that we again provide it with the text. Studentshave enthusiastically told us that they like “learning by doing” and that these continuouscomputerized problems helped them to understand the concepts in the book.

TARGET AUDIENCEThe text continues to be best suited for senior and graduate accounting majors whoplan to sit for the certified public accountant (CPA) exam and then audit governmentalor not-for-profit entities. Public administration and other students who plan to providefinancial management or consulting services to government and not-for-profit entitiesreport that the text provides a more comprehensive set of competencies than traditional

vi Preface

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public budgeting texts. Students in not-for-profit management education programsfind that the coverage of accounting, financial reporting, auditing, taxation, and infor-mation systems for both governmental and not-for-profit entities provides the exposurethey need to work across disciplines and sectors. Finally, students preparing for thecertified government financial manager (CGFM) exam will also find Chapters 1through 12 useful for Examination 2. We encourage all students who use this book toconsider the challenges and rewards of careers in public service—in federal, state, andlocal governments as well as not-for-profit organizations.

SUPPLEMENT PACKAGEThe following ancillary materials are prepared by the authors to ensure consistency andaccuracy and are available on the Instructor’s Resource CD-ROM and the textbook’sWeb site, www.mhhe.com/wilson15e.

• Instructor’s Guide and Solutions Manual.• PowerPoint lecture presentations.• Test Bank (including a computerized version using E-Z Test software).• The City of Bingham and City of Smithville Continuous Computerized

Problems––general ledger practice sets, downloadable from the publisher’s Web site.• The City of Bingham and City of Smithville Instructor’s Version software, providing

guidance for instructors, solution data files, and solution page image (.pdf) files for allrequired financial statements, schedules, and reports.

Students can access the PowerPoint lecture presentations, flashcards of key terms, andmultiple-choice practice quizzes for each chapter at the Online Learning Center on thetext’s Web site, www.mhhe.com/wilson15e.

Preface vii

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AcknowledgmentsWe are thankful for the encouragement, suggestions, and counsel provided by manyinstructors, professionals, and students in writing this book. They include the follow-ing professionals and educators who read portions of this book and previous editionsin various forms and provided valuable comments and suggestions:

viii

Kelli A. BennettCity and County of DenverDr. Barbara ChaneyUniversity of MontanaMr. Jeremy CraigChesterfield, MissouriMs. Rebecca CraigSt. Charles County, MissouriMr. Michael CrawfordCrawford & AssociatesMs. Mary FoelsterAmerican Institute of Certified PublicAccountantsMs. Kristen HockmanUniversity of Missouri—ColumbiaMs. Marie HunniecuttFormerly, University of South FloridaMr. Roger P. MurphyIowa State University, retiredMs. Melanie NelsonCalifornia State University—San Marcos

Dr. David O’BryanPittsburgh State UniversityDr. Suzanne M. OgilbyCalifornia State University—SacramentoDr. James PattonFederal Accounting Standards AdvisoryBoard and University of PittsburghMs. Janet ProwseUniversity of Nevada, Las VegasDr. Walter A. RobbinsUniversity of AlabamaKen SchermannGovernmental Accounting StandardsBoardDr. Mark SutterLas Cruces, New MexicoDr. Relmond P. Van DanikerAssociation of Government AccountantsMr. Jay WahlundMinot State UniversityMr. James F. WhiteHarvard Extension School

We acknowledge permission to quote pronouncements and reproduce illustrationsfrom the publications of the Governmental Accounting Standards Board, AmericanInstitute of Certified Public Accountants, International City/County ManagementAssociation, and Crawford and Associates. Dr. Wilson would like to give specialthanks to his wife, Florence J. Wilson, for her patience, support, and understanding incompleting this and several prior editions of the book. Dr. Reck dedicates the book inmemory of her husband, Albert F. Hohenstein.

Although we are extremely careful in checking the text and end-of-chaptermaterial, it is possible that errors and ambiguities remain in this edition. As readersencounter such, we urge them to let us know so that corrections can be made. Wealso invite every user of this edition who has suggestions or comments about thematerial in the chapters to share them with one of the authors, either by regular mailor e-mail. The authors will continue the service of issuing Update Bulletins toadopters of this text that describe changes after the book is in print. These bulletins

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can be downloaded from the text Web site at www.mhhe.com/wilson15e or any ofthe authors’ Web sites:

Dr. Earl R. Wilson School of Accountancy University of Missouri––Columbia 303 Cornell Columbia, MO 65211 wilsonea@missouri.edu http://web.missouri.edu/~wilsonea

Dr. Jacqueline L. Reck School of Accountancy University of South Florida 4202 East Fowler Avenue, BSN 3403 Tampa, FL 33620 jreck@coba.usf.edu http://www.coba.usf.edu/departments/accounting/faculty/reck

Dr. Susan C. Kattelus Department of Accounting and Information SystemsMichigan State University N235 Business College Complex East Lansing, MI 48824 kattelus@msu.edu http://www.msu.edu/~kattelus

Acknowledgments ix

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Brief Contents

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Preface v

1 Introduction to Accounting and FinancialReporting for Governmental and Not-for-Profit Entities 1

PART ONE State and Local Governments 35

2 Principles of Accounting and FinancialReporting for State and Local Governments 37

3 Governmental Operating StatementAccounts; Budgetary Accounting 65

4 Accounting for Governmental OperatingActivities—Illustrative Transactions andFinancial Statements 111

5 Accounting for General Capital Assetsand Capital Projects 169

6 Accounting for General Long-term Liabilities and Debt Service 211

7 Accounting for the Business-type Activities of State and Local Governments 255

8 Accounting for Fiduciary Activities—Agency and Trust Funds 305

9 Financial Reporting of State and LocalGovernments 353

10 Analysis of Governmental Financial Performance 407

PART TWO Accountability for Public Funds 445

11 Accounting and Reporting for the Federal Government 447

12 Auditing of Governmental and Not-for-Profit Organizations 493

13 Budgeting and Performance Measurement 529

PART THREE Not-for-Profit Organizations 577

14 Accounting for Not-for-Profit Organizations 579

15 Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues 629

16 Accounting for Colleges and Universities 661

17 Accounting for Health Care Organizations 701

GLOSSARY 741

GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS 769

INDEX 773

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Table of Contents

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Preface v

Chapter 1Introduction to Accounting and FinancialReporting for Governmental and Not-for-Profit Entities 1What Are Governmental and Not-for-Profit Organizations? 2Distinguishing Characteristics of Governmental andNot-for-Profit Entities 3Sources of Financial Reporting Standards 4

Determining Whether a Not-for-Profit Organization IsGovernmental 5

Objectives of Financial Reporting 6Financial Reporting of State and Local Governments 8

Illustrative Financial Statements—City and County ofDenver 9

Major Funds 12

Comprehensive Annual Financial Report 13Expanding the Scope of Accountability Reporting 14Overview of Chapters 2 through 17 14

GASB Statement No. 34 Principles, Standards, andFinancial Reporting 14

Accountability for Public Funds 15

Not-for-Profit Organizations 15A Caveat 15Appendix: Illustrative Financial Statements—Cityand County of Denver 15Key Terms 29Questions 29Cases 30Exercises and Problems 31

PART ONE State and Local Governments 35

Chapter 2Principles of Accounting and FinancialReporting for State and Local Governments 37

Activities of Government 38Governmental Financial Reporting Entity 38

Integrated Accounting and Financial ReportingModel 39

Government-wide and Fund Financial Statements 40

Fiscal Accountability and Fund Accounting 41

Fund Categories 42Major Fund Reporting 49

Determination of Major Funds 49

Nonmajor Fund Reporting 50Appendix: Summary Statement of GovernmentalAccounting and Financial Reporting Principles 52Key Terms 56Selected References 56Questions 56Cases 57Exercises and Problems 59

Chapter 3Governmental Operating StatementAccounts; Budgetary Accounting 65

Classification and Reporting of Expenses and Revenues at the Government-wide Level 66

Reporting Direct and Indirect Expenses 66

Program Revenues and General Revenues 68

Reporting Special Items and Transfers 69Structure and Characteristics of the General Fund;Classification and Description of Operating Statement Accounts 70

Governmental Fund Balance Sheet and OperatingStatement Accounts 70

Budgetary Accounts 75Terminology and Classification for GovernmentalFund Budgets and Accounts 78

Classification of Appropriations and Expenditures 78

Classification of Estimated Revenues and Revenues 81

Budgetary Accounting 86Recording the Budget 87

Budgetary Control of Revenues 88

Budgetary Control of Encumbrances and Expenditures 89

Accounting for Allotments 92

Accounting Information Systems 92

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Concluding Remarks 95Appendix: Accounting for Public School Systems 95Key Terms 99Selected References 99Questions 99Cases 100Exercises and Problems 102

Chapter 4Accounting for Governmental OperatingActivities—Illustrative Transactions andFinancial Statements 111

Illustrative Case 112Measurement Focus and Basis of Accounting 112

Dual-track Accounting Approach 114Illustrative Journal Entries 115

Recording the Budget 115

Interfund Transfer to Create a New Fund 115

Encumbrance Entry 117

Payment of Liabilities 119

Payrolls and Payroll Taxes 120

Revenues Recognized as Received in Cash 121Accounting for Property Taxes 123

Recording Property Tax Levy 123

Collection of Current Taxes 124

Collection of Delinquent Taxes 125

Tax Anticipation Notes Payable 127

Repayment of Tax Anticipation Notes 128

Other Taxes 129Interim Financial Reporting 129Special Topics 131

Correction of Errors 131

Receipt of Goods Ordered in Prior Year 131

Revision of the General Fund Budget 133

Internal Exchange Transactions 134

Adjusting Entries 135

Pre-Closing Trial Balance 138

Closing Entries 138

Year-end Financial Statements 140Special Revenue Funds 143

Accounting for Operating Grants 144

Financial Reporting 144Interfund Activity 145

Reciprocal Interfund Activity 145

Nonreciprocal Interfund Activity 147

xii Contents

Intra- versus Inter-Activity Transactions (Government-wide Level) 148

Intra-Entity Transactions 148Permanent Funds 148

Budgetary Accounts 149

Illustrative Case 149Appendix: Concepts and Rules for Recognition ofRevenues and Expenses (or Expenditures) 153Key Terms 156Selected References 156Questions 157Cases 157Exercises and Problems 160

Chapter 5Accounting for General Capital Assets andCapital Projects 169

Accounting for General Capital Assets 170Required Disclosures about Capital Assets 171

Classification of General Capital Assets 172

General Capital Assets Acquired under Capital Lease Agreements 177

Costs Incurred after Acquisition 179

Reduction of Cost 179

Asset Impairments and Insurance Recoveries 180

Illustrative Entries 180Capital Projects Funds 182

Legal Requirements 183

Illustrative Transactions—Capital Projects Funds 183

Illustrative Financial Statements for a Capital Projects Fund 189

Alternative Treatment of Residual Equity or Deficits 189

Bond Premium, Discount, and Accrued Interest onBonds Sold 190

Retained Percentages 192

Claims and Judgments Payable 193

Bond Anticipation Notes Payable and the Problem ofInterest Expenditures 193

Investments 195

Multiple-Period and Multiple-Project Bond Funds 195

Reestablishment of Encumbrances 196

Capital Projects Financed by Special Assessments 197

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Financial Reporting for Capital Projects Funds 198

Key Terms 199Selected References 199Questions 199Cases 200Exercises and Problems 201

Chapter 6Accounting for General Long-term Liabilities and Debt Service 211

General Long-term Liabilities 212Accounting for Long-term Liabilities 212

Pollution Remediation Obligations 213

Long-term Liability Disclosures 214

Debt Limit and Debt Margin 214

Overlapping Debt 215Debt Service Funds 221

Number of Debt Service Funds 221

Use of General Fund to Account for Debt Service 221

Budgeting for Debt Service 221

Types of Serial Bonds 222

Debt Service Accounting for Term Bonds 228

Financial Reporting 232

Valuation of Debt Service Fund Investments 232

Deposit and Investment Disclosures 235

Debt Service Accounting for Special Assessment

Debt 236

Use of Debt Service Funds to Record Capital LeasePayments 238

Accounting for Debt Refunding 239

Advance Refunding of Debt 240Key Terms 241Selected References 241Questions 241Cases 242Exercises and Problems 245

Chapter 7Accounting for the Business-type Activities ofState and Local Governments 255

Proprietary Funds 256Assets Acquired under Lease Agreements 256

Financial Reporting Requirements 257Internal Service Funds 259

Contents xiii

Illustrative Case—Supplies Fund 261

Illustrative Statements Using Supplies Fund 265

External Financial Reporting of Internal ServiceFunds 267

Internal Service Funds with Manufacturing Activities 268

Internal Service Funds as Financing Devices 269

Dissolution of an Internal Service Fund 270Enterprise Funds 270Water Utility Funds 272

Current and Accrued Assets 273

Restricted Assets 273

Utility Plant 274

Current Liabilities 274

Liabilities Payable from Restricted Assets 275

Long-term Liabilities 275

Net Assets 275

Illustrative Case—Water Utility Fund 276

Illustrative Statements Using Water Utility Fund 281

External Financial Reporting of Enterprise Funds 285

Regulatory Accounting Principles (RAP) 285

Accounting for Nonutility Enterprises 286

Accounting for Municipal Solid Waste Landfills 287

Required Segment Information 288Key Terms 289Selected References 289Questions 289Cases 290Exercises and Problems 292

Chapter 8Accounting for Fiduciary Activities—Agencyand Trust Funds 305

Agency Funds 306Agency Fund for Special Assessment Debt Service 306

Tax Agency Funds 307

“Pass-through” Agency Funds 313

Financial Reporting of Agency Funds 314Trust Funds 314Investment Pools 315

Creation of an Investment Pool 315

Operation of a Cash and Investment Pool 319

Withdrawal of Assets from the Pool 323

Closing Entry 323

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Illustrative Financial Statements 324Private-Purpose Trust Funds 325Pension Funds 326

Required Financial Reporting for Defined BenefitPension Plans 327

Evaluating the Status of a Pension Plan 332

Illustrative Transactions for a Defined Benefit Pension Plan 332

Employer’s Pension Accounting 334

Employer Recording and Reporting of Pension Expenditure/Expense 337

Other Postemployment Benefits (OPEB) 338Termination Benefits 338Appendix: Managing Investments 338Key Terms 340Selected References 340Questions 340Cases 341Exercises and Problems 342

Chapter 9Financial Reporting of State and Local Governments 353

Concepts Related to Financial Reporting 353The Governmental Reporting Entity 354

Defining the Financial Reporting Entity 355

Component Units 356

Reporting by Other Government Organizations 358Governmental Financial Reports 359

Need for Periodic Reports 359

Interim Financial Reports 359

Annual Financial Reports 360Preparation of Basic Financial Statements 363

Fund Financial Statements 368

Required Reconciliations 371Current Financial Reporting Topics and Issues 373

Popular Reporting 374

Other Comprehensive Basis of Accounting (OCBOA) 374

International Accounting Standards 375Appendix A: Converting Accounting Informationfrom the Modified Accrual to the Accrual Basis ofAccounting 376Appendix B: Management’s Discussion and Analysis (MD&A)—City and County of Denver 380

xiv Contents

Key Terms 392Selected References 392Questions 392Cases 393Exercises and Problems 397

Chapter 10Analysis of Governmental Financial Performance 407

The Need to Evaluate Financial Performance 407Government Financial Performance Concepts 409

Financial Position versus Financial Condition 409

Economic Condition 410Internal Financial Trend Monitoring 411

Environmental Factors 413

Organizational Factors 416

Financial Factors 416Analyzing Government-wide Financial Statements 418Use of Benchmarks to Aid Interpretation 421

Sources of Governmental Financial Data 425

Credit Analyst Models 427Key Terms 428Selected References 428Questions 428Cases 429Exercises and Problems 431

PART TWOAccountability for Public Funds 445

Chapter 11Accounting and Reporting for the FederalGovernment 447

Federal Government Financial Management Structure 448

Comptroller General 450

Secretary of the Treasury 450

Director of the Office of Management and Budget 451

Director of the Congressional Budget Office 451Generally Accepted Accounting Principles for theFederal Government 451

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Hierarchy of Accounting Principles and Standards 452

Conceptual Framework 453Concepts Statements 453

Funds Used in Federal Accounting 455Required Financial Reporting—U.S. Government-wide 456Required Financial Reporting—Government Agencies 458

Management’s Discussion and Analysis 459

Performance Reports 459

Financial Statements 459

Other Accompanying Information 469Dual-Track Accounting System 469

Illustrative Transactions and Entries 471

Adjusting Entries 476

Illustrative Financial Statements 477Summary of Accounting and Reporting for FederalGovernment Agencies 481Key Terms 483Selected References 483Questions 483Cases 484Exercises and Problems 485

Chapter 12Auditing of Governmental and Not-for-ProfitOrganizations 493Financial Audits by Independent CPAs 494

Generally Accepted Auditing Standards 494

Format of the Audit Report 495

Types of Opinions 497

The Audit Process 498

Materiality for Government Audits 500

Required Supplementary Information 500Government Auditing Standards 501

Types of Audits and Engagements 502

GAGAS Financial Audits 503

Ethics and Independence 505Single Audits 507

History of the Single Audit 507

Single Audit Act Amendments of 1996 507

Determining who Must Have a Single Audit 508

Single Audit Requirements 511

Selecting Programs for Audit 512

Reports Required for the Single Audit 514

Contents xv

Other Single Audit Requirements 516

Single Audit Quality 517Impact of SOX on Governments and Not-for-Profits 518

Best Practices—Audit Committees 518

Best Practices—Internal Controls 518Key Terms 519Selected References 519Questions 519Cases 520Exercises and Problems 524

Chapter 13Budgeting and Performance Measurement 529

Objectives of Budgeting 530Compliance with Laws 530

Communicate Performance Effectiveness 531Integration of Planning, Budgeting, and PerformanceMeasurement 533Budgeting Approaches 535

Line-item Budgeting 535

Performance Budgeting 536

Program Budgeting 536

Entrepreneurial Budgeting 537Budgeting Process in a State or Local Government 537

Budgeting Governmental Appropriations 537

Budgeting Governmental Revenues 541

Budgeting Capital Expenditures 542

Budgeting Cash Receipts 542

Budgeting Cash Disbursements 543Managerial Tools to Improve Performance 545

Total Quality Management 545

Customer Relationship Management 546

Service Efforts and Accomplishments (SEA) 547

Activity-based Costing 550

Balanced Scorecards 554Conclusion 555Appendix: Budget and Cost Issues in GrantAccounting 556Key Terms 561Selected References 561Questions 561Cases 562Exercises and Problems 564

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PART THREENot-for-Profit Organizations 577

Chapter 14Accounting for Not-for-Profit Organizations 579

Characteristics of the Not-for-Profit Sector 580GAAP for Nongovernmental NPOs 580Financial Reporting and Accounting 582

Financial Reporting 582

Accounting for Revenues and Gains 590

Accounting for Expenses 595

Accounting for Assets 597Financially Interrelated Entities 599

Investments in For-Profit Entities 599

Financially Interrelated NPOs 599

Funds Received as an Intermediary 600

Funds Held in Trust by Others 600

Combinations of NPOs 601

Component Units of Governmental Entities 601Optional Fund Accounting 602Illustrative Transactions—Voluntary Health andWelfare Organizations 603

End-of-the-Year Adjusting Journal Entries 608

End-of-the-Year Reclassification Journal Entries 609

End-of-the-Year Closing Journal Entries 610Key Terms 616Selected References 616Questions 616Cases 617Exercises and Problems 620

Chapter 15Not-for-Profit Organizations—Regulatory,Taxation, and Performance Issues 629

Oversight Authority 630State Regulation 631

Not-for-Profit Incorporation Laws 631

Registration, Licenses, and Tax Exemption 632

Lobbying and Political Activity 633Federal Regulation 634

Tax-exempt Status 634

Unrelated Business Income Tax 639

Political Activity 640

xvi Contents

Intermediate Sanctions 641

Reorganization and Dissolution 642

Emerging Issues 642Governance 643

Incorporating Documents 643

Board Membership 643Benchmarking and Performance Measures 644

Financial Performance Measures 645

Nonfinancial Performance Measures 647Uniform Policies across States 648Summary 648Key Terms 649Selected References 649Questions 650Cases 650Exercises and Problems 652

Chapter 16Accounting for Colleges and Universities 661

Accounting and Financial Reporting Standards 662

Public Colleges and Universities 663

Private Colleges and Universities 663

Fund Accounting 667Accounting and Reporting Issues 668

Statement of Net Assets or Financial Position 668

Statement of Revenues, Expenses, and Changes inFund Net Assets 672

Statement of Cash Flows 676

Segment Reporting 676Illustrative Transactions for Private Colleges andUniversities 676

Adjusting Entries 682

Closing Entries 682Other Accounting Issues 683

Performance Measures 683

Auditing Colleges and Universities 687

Federal Financial Assistance 687

Related Entities 688Key Terms 689Selected References 689Questions 689Cases 689Exercises and Problems 693

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Chapter 17Accounting for Health Care Organizations 701

GAAP for Health Care Providers 702Financial Reporting 704

Balance Sheet or Statement of Net Assets 705

Operating Statement 708

Statement of Changes in Net Assets 709

Statement of Cash Flows 709Accounting and Measurement Issues 710

Revenues 710

Assets 711

Expenses 712

Liabilities 712Illustrative Case for a Not-for-Profit Health CareOrganization 713Financial Reporting for a Governmental Health CareOrganization 721Related Entities 723

Contents xvii

Other Accounting Issues 723Budgeting and Costs 723

Auditing 724

Taxation and Regulatory Issues 724

Prepaid Health Care Plans 725

Continuing Care Retirement Communities 725Financial and Operational Analysis 725Conclusion 726Key Terms 727Selected References 727Questions 727Cases 728Exercises and Problems 730

Glossary 741

Governmental and Not-for-Profit Organizations 769

Index 773

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