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Assessing Governmental and Not-for-profit Accounting

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Question 1:
Government organizations and not-for-profit organizations (NPOs) are largely governed by their budgets, not the marketplace. Consequently, the budget, not the financial statements, is the most significant financial document. Nonetheless, most financial reports do not present much detail on the budget.

How, in your opinion, can the budget be described as important, but comprise a small component of the governmental financial reports? Do you think the coverage of the budget in the financial statements is adequate? Why? Which stakeholders might be more interested in the budget rather than the financial statements? Why?
Some governments do not integrate their budgets into their accounting system or encumber the cost of goods or services for which they are committed. Both scenarios reduce the budgeting process' ability to control spending. Under what circumstances should a government choose not to encumber the cost of goods and services? Under what circumstances would a government not integrate its budget? Under these conditions, how is budgetary control achieved?

Question 2:
A political official boasts that the year-end excess of revenues over expenditures was significantly greater than was budgeted. Are favorable budget variances necessarily a sign of efficient and effective governmental management? Explain why and provide two examples to support your answer. Moreover, the variances reported in the final budget-to-actual comparisons may be of no value in revealing the reliability of budget estimates made at the start of the year. Do you agree or disagree? Provide at least two examples to support your answer.

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Solution Summary

This solution discusses the purpose and use of governmental and not-for-profit accounting.

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Not-for-Profit Accounting

Southern State University has chosen to report as a public university, reporting as a special-purpose entity engaged only in business-type activities. Deferred revenues were reported as of July 1, 2004, in the amount of $5,500,000. Record the following transactions related to revenue recognition for the year ending June 30, 2005. Include in the account titles the proper revenue classification (operating revenues, nonoperating revenues, etc.).

1. Deferred revenues related to unearned revenues for the summer session, which ended in August 2004.
2. During the fiscal year ending June 30, 2005, student tuition and fees were assessed in the amount of $56,000,000. Of that amount, $49,000,000 was collected in cash. Also, of that amount, $4,000,000 pertained to that portion of the 2005 summer session that took place after June 30, 2005.
3. Student scholarships, for which no services were required, amounted to $1,700,000. Students applied these scholarships to their tuition bills at the beginning of the fall and spring semesters.
4. Student scholarships and fellowships, for which services were required, such as graduate assistantships, amounted to $2,500,000. These students also applied their scholarship and fellowship awards to their tuition bills at the beginning of each semester.
5. Auxiliary enterprise revenues amounted to $4,700,000.
6. The state appropriation for operations amounted to $43,000,000.
7. The state appropriation for capital outlay amounted to $12,000,000.
8. Gifts for endowment purposes amounted to $1,100,000. Gifts for unrestricted purposes amounted to $2,000,000. Interest income, all unrestricted, amounted to $540,000.

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