Robert J. FreemanTexas Tech University

Craig 0. ShouldersUniversity of North CarolinaPembroke

Gregory S. AllisonUniversity of North CarolinaChapel Hill

Terry K. PattooMidwestern State University

G. Robert Smith, Jr.Middle Tennessee State University

NINTH EDITION

Pearson Education International

Preface 1

CHAPTER 1

Governmental and Nonprofit Accounting: Environment and Characteristics 11

Characteristics and Types of G&NP Organizations 12G&NP Sector Significance 12The G&NP Environment 13

Objectives of G&NP Accounting and Financial Reporting 16

Authoritative Sources of G&NP Accounting Principles and Reporting Standards 16TheFAF 17TheFASB 17FASB-GASB Jurisdictions 17"Government" Defined 181-1 In Practice-. Not-for-Profit (Nonprofit) Organizations May Be Governments 18TheGASB 19GAAP Hierarchies 21

Concepts and Objectives of SLG Accounting and Financial Reporting 22Governmental-Type Activities 23Financial Report Users 27Financial Report Uses 28Business-Type Activities 28Users and Uses of Financial Reports 29Financial Reporting Objectives 30

Characteristics of SLG Accounting and Financial Reporting 31Fund Accounting 31Budgets and Appropriations 32Other Distinguishing Characteristics 33Commercial Accounting Comparison 34

Concluding Comments 34

APPENDIX 1-1 Evolution of Accounting Principles and Standards—Prior to the GASB 34

Questions 37

Exercises 38

Problems 40

CHAPTER 2

State and Local Government Accounting and Financial Reporting Model: The Foundation 42

Overview of the GASB Financial Reporting Model 43

The Fundamental Features of the SLG Accounting and Financial Reporting Model 45GAAP and Legal Compliance 46Fund Accounting 47Fund Categories 48Transaction Analysis 53Types of Funds 542-1 In Practice: Governmental Fund Accounting for the Dallas Cowboys Football Stadium 59Comparative Financial Statement Formats 62

Annual Financial Reporting 65

Concluding Comments 69

Questions 69

IX

X Contents

Exercises 70Problems 74Cases 77

CHAPTER 3The General Fund and Special Revenue Funds 79

Measurement Focus 80Purposes and Assumptions of This Chapter 81

General Fund Accounting—Illustrative Example 81Entries During 20X1 82Year-End Adjustments 93Preclosing Trial Balances 94Illustrative Example Worksheets 9420X1 Closing Entries 94Reserve for Encumbrances 96Postclosing Trial Balance 97

Balance Sheets 98Interim Balance Sheet 98Year-End Balance Sheet 98Fund Balance 99 •••Fund Balance Reserves 100Unreserved Fund Balance 101Fund Balance Designations 101Interfund Receivables and Payables 102Capital Assets and Long-Term Liabilities 102

Statement of Revenues, Expenditures, and Changes in Fund Balances 103Restatements 105Extraordinary Items and Special Items 105

Classification of Expenditures 105Combining Special Revenue Fund Statements 108Concluding Comments 110APPENDIX 3-1 General Ledger Worksheet and Subsidiary Ledgers 110APPENDIX 3 -2 Classification of Expenditures 110APPENDIX 3 -3 Alternative Account Structure and Entries 119Questions 120Exercises 120Problems 123Cases 126

CHAPTER 4Budgeting, Budgetary Accounting, and Budgetary Reporting 129The Government Budgetary Perspective 130Budgetary Accounting and Reporting 131

Budgetary Accounting and Control 131Recording the Budget—General Ledger and Subsidiary Ledger 134Budget Revisions 135Revenues and Expenditures Ledgers Incorporating Budgetary Accounts 140Level of Detail in Subsidiary Ledgers 145

Budgetary Reporting Overview 146The Budgetary Basis 146Interim Budgetary Statements 146

Contents XI

Budget Comparison Schedule or Statement of Revenues, Expenditures, and Changes in Fund Balance—Budgetand Actual 149

Budgetary Comparison Statement Illustrated—Budgetary Basis Same as GAAP 150Budgetary Comparison Statement Illustrated—Budgetary Basis Differs from GAAP 150

Entries During 20X2 153Use of a Budgetary Fund Balance Account 154

Budgetary Planning, Control, and Evaluation 155Planning 156Control 156Evaluation 156

Basic Budgetary Terminology 157Capital vs. Current Budgets 157Tentative vs. Enacted Budgets 157General vs. Special Budgets 158Fixed vs. Flexible Budgets 158Executive vs. Legislative Budgets 158

Budgetary Approaches and Emphases 159

Budget Preparation 160Overview 160Preliminary Estimates 160Preparing the Budget " 161Revenue Estimates and Requests 162Expenditure Estimates and Requests 162Expenditure Budgeting Approaches 162

Legislative Consideration and Action 165

Budget Execution 166

Concluding Comments 166

Questions 166

Exercises 167

Problems 171

Cases 175

Harvey City Comprehensive Case 178

CHAPTER 5

Revenue Accounting—Governmental Funds 183

Revenue Definition and Recognition 184

Nonexchange Transactions 186

Governmental Fund and Proprietary Fund Revenue Recognition Compared 188

Classification of Revenue Accounts 190General Fund Revenues 190Other Governmental Funds Revenues 190

Taxes 191Taxpayer-Assessed Taxes 191Property Taxes 192Property Tax Statements/Schedules 201

Licenses and Permits 201

Intergovernmental Revenues 201Intergovernmental Revenue Classifications 202Intergovernmental Revenue Accounting 203

Charges for Services 206Interfund Services vs. Reimbursements 206Charges for Services 206

XII Contents

Fines and Forfeits 208

Investment Earnings 209

Miscellaneous Revenues 212Escheats 212Private Contributions 213

Selected Nonrevenue Fund Balance Increases 213Capital Asset Sales/Losses 213Internal PILOTS 213Col lateral ized Borrowings 214

Revenue Reporting: GAAP vs. Budgetary 214

Changes in Accounting Principles 214

Error Correction 217

Concluding Comments 218

Questions 218

Exercises 219

Problems 223

Cases 227

Harvey City Comprehensive Case 228

CHAPTER 6Expenditure Accounting—Governmental Funds 230

Expenditure Definition and Recognition 231Capital Outlay Expenditures 232Debt Service Expenditures 233Intergovernmental Expenditures 233Current Operating Expenditures 233Inventories and Prepayments 233Expenditure Recognition Summary 234

Expenditure Accounting Controls 235

Expenditure Accounting Procedures 235' Personal Services 236Materials and Supplies 238Other Services and Charges 242

Adjusting Entries 2456-1 In Practice: Government Lease Transactions 246Encumbrances 247Debt Service 248Claims and Judgments 248Compensated Absences 252Pension/OPEB Plan Contributions 253

Expenditure Reporting: GAAP vs. Budgetary 254

Changes in Accounting Principles 255Alternative Principles 255New GASB Standards 258

Error Correction 259

Concluding Comments 259

Questions 260

Exercises 260

Problems 262

Cases 269

Harvey City Comprehensive Case 270

Contents XI11

CHAPTER 7Capital Projects Funds 272Capital Projects Fund Operations and Accounting Standards 274

CPF Financial Resources 274Number of Funds 274CPF Life Cycle 275The Budget 276Interim Financing 277Project Costs 278Intergovernmental Revenues 279Recording Bond Issues 279

Capital Projects Fund—Case Illustration Begun, 20X1 279Budgetary Entry 280Transaction/Event Entries 281General Ledger Worksheet(s) 282Preclosing Trial Balance 283Closing Entries 284Financial Statements 285

Capital Projects Fund—Case Illustration Concluded, 20X2 28920X1 Accounts Closed 289Case Illustration Assumptions and Entries—20X2 289General Ledger Worksheet 29220X2 Financial Statements 292

Other Capital Projects Fund Operations, Accounting, and Reporting Matters 295Bond Anticipation Notes (BANs) 295Investments and Arbitrage 297Remaining Fund Balance 297Reporting Multiple Projects 297Combining CPF Statements 298

Concluding Comments 298Questions 299Exercises 299Problems 302Cases 307Harvey City Comprehensive Case 309

CHAPTER 8Debt Service Funds 3 1 1Debt Service Fund Environment, Financing, and Expenditure Recognition 312

Long-Term Liabilities 312Fixed vs. Variable Rates 313Debt Service Payments 314Bonds and Fiscal Agents 314Required DSF Reserves 315Bond Ratings 315Bond Insurance 315Sources of Financing 315DSF Investments 316DSF Expenditure Recognition 316

Debt Service Fund for a Serial Bond Issue: Case Illustration 317Illustrative Entries 318Financial Statements 320

XIV Contents

Special Assessment Debt Service Funds 320Illustrative Entries 322Illustrative Financial Statements 324

Other Conventional Debt Service Fund Considerations 325Nonaccrual of Interest 325Combining Balance Sheet 325Combining Operating Statement 325

Debt Service Fund for a Term Bond Issue 325

Sinking Fund Requirements 327

Debt Service Funds for Deep Discount Issues 328

Refundings 329Reasons for Refundings 330Refundings Defined 330Defeasance of Debt 3318-1 In Practice: GFOA Recommended Practice: Analyzing an Advance Refunding 332

Debt Service Funds for Refundings 332Current Refunding 333Advance Refunding 335Debt and Non-Debt Financing 336Reporting Refundings 338

' Advance Refunding Disclosures 338

Concluding Comments 339

Questions 341

Exercises 341

Problems 344

Cases 348

Harvey City Comprehensive Case 350

CHAPTER 9General Capital Assets; General Long-Term Liabilities; Permanent Funds:Introduction to Interfund-GCA-GLTL Accounting 352

Overview of General Capital Assets and General Long-Term Liabilities Accounting Procedures 353

General Capital Assets 354General Capital Assets Defined 354Initial Valuation 355Classification 356Capitalization Policy 3569-1 In Practice 357Property Records 358Capital Assets Inventory 359Additions, Betterments, and Renewals 359Depreciation/Accumulated Depreciation 359Updating GCA Accounts 361Recording Depreciation 364Sale, Replacement, or Retirement 364Intragovernmental Transactions 366Impairment 368Insurance Recoveries 370Damage or Destruction 370Reporting and Disclosures 371

General Long-Term Liabilities 3719-2 In Practice 373CPF-DSF-GLTL 374

Contents XV

Serial Debt 375Special Assessment Debt 375Other Government Liabilities 375Interest-Related Adjustments 377Defaulted Bonds 377In-Substance Defeasance 378GLTL Records 378GLTL Reporting and Disclosures 378

Permanent Funds 379Introduction to Interfund-GCA-GLTL Accounting 382Concluding Comments 3 8 6Questions 386Exercises 387Problems 3 9 0Cases 394Harvey City Comprehensive Case 396

CHAPTER 10Enterprise Funds 399Common Characteristics and Principles of Proprietary Funds 399

Accounting Equation 399Accounting Principles 400Financial Statements 400

Enterprise Funds 409Enterprise Funds Defined 409Specific EF Topics 410EF Accounting Illustrated 414Enterprise Fund Reporting Illustrated 425

Combining Enterprise Fund Financial Statements 4 2 8Concluding Comments 4 3 4Questions 434Exercises 435Problems 438Cases 443Harvey City Comprehensive Case 4 4 6

CHAPTER 11Internal Service Funds 4 4 8Overview of Accounting Principles 449

Initial Establishment 449Pricing Policies 452Pricing Methods 452Relation to Budget 453Financial Statements 453

Internal Service Fund Accounting Illustrated 454Automotive Equipment Unit 454Central Stores Fund 458Self-Insurance Fund 46211-1 In Practice: Practice Examples: Internal Service Funds 462

11-2 In Practice: Practice Examples: Self-Insurance Note Disclosure 463

Disposition of Increase or Decrease in Net Assets 467

Dissolution of an Internal Service Fund 467

XVI Contents

Combining Internal Service Fund Financial Statements 467Concluding Comments 467Questions 471Exercises 471Problems 474Cases 476Harvey City Comprehensive Case 478

CHAPTER 12Trust and Agency (Fiduciary) Funds: Summary of Interfund-GCA-GLTL Accounting 480The Accountability Focus 481Agency Funds 482

Simpler Agency Funds 48312-1 In Practice: Practice Examples: Agency Funds 484Tax Agency Funds 484Special Assessment Agency Funds 488

Trust Funds 489Private-Purpose Trusts 489Investment Trusts 491Pension Trusts 492 *

. 12-2 In Practice: Defined Benefit Pension Trust Funds: Statement Information vs. Schedule of Funding Progress 495

Combining Trust and Agency Fund Financial Statements 500Additional Interfund—General Capital Asset—General Long-Term Liability Accounting Illustrations 500Concluding Comments 506Questions 506Exercises 507Problems 510Cases 513Harvey City Comprehensive Case 515

CHAPTER 13Financial Reporting: The Basic Financial Statements and Required Supplementary Information 516Basic Financial Statements Overview 518Fund Financial Statements 519

Major Fund Reporting 520Fund-Based Financial Statements 52813-1 In Practice 52913-2 In Practice: GFOA Policy Statement: Budgetary Reporting 531

Government-Wide Financial Statements 532Statement of Net Assets 534Statement of Activities 536Measurement Focus 538Reporting Expenses 539Program vs. General Revenues 541Internal Service Funds 544Infrastructure Capital Assets 544

Note Disclosures 544

Required Supplementary Information 544Management's Discussion and Analysis 544Other RSI 546Special Purpose Governments 546

Contents XVII

Concluding Comments 546

APPENDIX 13-1 Illustrative Management's Discussion and Analysis 548

Questions 555

Exercises 555

Problems 558

Cases 561

Harvey City Comprehensive Case 564

CHAPTER 14

Financial Reporting: Deriving Government-Wide Financial Statements and Required Reconciliations 565

Deriving Governmental Activities Data 567

Deriving Government-Wide Financial Statement Data for Governmental Activities—A Worksheet-Based Approach 568The Conversion Worksheets 568Balance Sheet Conversion Worksheet Adjustments 573Farley County Balance Sheet Conversion 575Operating Statement Conversion Worksheet Conversion Adjustments 579Farley County Operating Statement Conversion 582

Deriving Business-Type Activities Data 587Statement of Net Assets, 588Statement of Activities 588Reconciliations 591

Concluding Comments 593

APPENDIX 14-1 A One-Worksheet Approach to Deriving Governmental Activities Data 593

Questions 603

Exercises 604

Problems 607

Cases 615

Harvey City Comprehensive Case 619

CHAPTER 15

Financial Reporting: The Comprehensive Annual Financial Report and the Financial Reporting Entity 621

The Comprehensive Annual Financial Report 622The Introductory Section 622The Financial Section 624The Statistical Section 628

Supplemental and Special Purpose Reporting 632

Financial Reporting—Complex Entity Structure 632Reporting Entity Definition 633Reporting Entity Disclosures 635

Integrating Component Units Into the Reporting Entity 63515-1 In Practice: Component Units, Joint Ventures and Related Organizations 636Blending 638Discrete Presentation 638Dual Reporting Entity Model 640Other Issues 640

15-2 In Practice: State Component Unit Data 640

Separate Issuance of Primary Government Financial Statements 641

Related Organizations, Joint Ventures, and Jointly Governed Organizations 641

Concluding Comments 642

Questions 644

XVIII Contents

Exercises 644

Problems 648

Cases 651

Harvey City Comprehensive Case 653

CHAPTER 16Non-SLG Not-for-Profit Organizations: SFAS 116 and 117 Approach 654

Classification of Organizations 655Voluntary Health and Welfare Organizations 656Other Not-for-Profit Organizations 656

Classes of Net Assets 657

Non-GAAP Accounting and Reporting Requirements 658

Basis of Accounting 658

SFAS 117 Financial Statements 658Balance Sheet 658Statement of Activities 660Statement of Cash Flows 668Statement of Functional Expenses 668

Nongovernment VHWO and ONPO Accounting and Reporting Illustration 668Transactions and Entries 668Illustrative Financial Statements 67516-1 In Practice 681

Concluding Comments 682

Questions 682

Exercises 683

Problems 686

CHAPTER 17

Accounting for Colleges and Universities 693

Classification as "Engaged Only in Business-Type Activities" 694

GAAP Reporting Requirements 695Balance Sheet 695Operating Statement 69717-1 In Practice: Government University Financial Statement: Practice Example 700Statement of Cash Flows 702

Case Illustration—A Government University 703Other Resources 707

Annuity and Life Income Gifts 713Annuity Gifts 713Life Income Gifts 717

Colleges and Universities Engaged in Both Governmental and Business-Type Activities 718

Nongovernment Not-For-Profit University Reporting 718

Concluding Comments 722

Questions 722

Exercises 722

Problems 724

CHAPTER 18Accounting for Health Care Organizations 731

Funds—Government Hospitals 732Basic Principles 733

Contents XIX

Unique Measurement and Display Features 733Distinguishing Primary Activities 733Classes of Revenues 73318-1 In Practice: Third-Party Payers: Significance and Accounting Policies 734Gains 736Donations 736Expense Classification 736Restricted Assets 737Property, Plant, and Equipment 738

Illustrative Case 738Summary of Transactions and Events 738

Financial Statements 747Balance Sheets 747Operating Statement 747

Statement of Cash Flows 747

Nongovernment Not-for-Profit Hospital Reporting 747

Concluding Comments 754

Questions 754

Exercises 755

Problems 758

CHAPTER 19Federal Government Accounting 761

The Federal Financial Management Environment 762Financial Accounting Responsibilities 762Overview 764

The Budgetary Process 765The Budget Cycle 765Exceeding Budget Authority 768

Accounting Principles and Standards for Federal Agencies 768The Federal Model 768Standard General Ledger 772Federal Fund Structure 773Financial Reporting 77319-1 In Practice: Federal Government Accounting Issues 111

Federal Agency Accounting and Reporting Illustrated 777A Case Illustration 777Maintaining Budgetary Control 777Maintaining Proprietary Accounts 782Other Transactions and Entries 782Closing Entries 786Reporting 788

Concluding Comments 792

Questions 793 ^

Exercises 793

Problems 795

CHAPTER 20Auditing Governments and Not-for-Profit Organizations 798Overview 799What is an Audit? 799

Classifications of Audits 799Management's Representations 801

XX Contents

External Auditor Classifications 801Engagement Letter 802

Auditing Standards 802AICPA Auditing Standards 802GAO Auditing Standards 804GAGAS Summary 805

The Financial Audit 806Auditing Standards 806Audit Procedures 806The Audit Report 807

The Single Audit 809Purposes 810Applicability 810Definitions 810Objectives 811Overview 812Auditee Responsibilities 812Auditor's Responsibilities^ 814Auditing Guidance 816Major FFA Programs 817Findings & Questioned Costs 821Illegal Acts 822Subrecipients 822Auditor Reports—Single Audit 823Auditee Reporting Responsibilities 824

Other Matters 827

Concluding Comments 827

APPENDIX 20-1 Glossary 827APPENDIX 20-2 Data Collection Form for Reporting on Audits of States, Local Governments,

and Nonprofit Organizations 829Questions 833

Exercises 833

Problems 837

Cases 838

Index 841