GOVERNMENTAL AND NONPROFIT ACCOUNTING Theory and Practice TENTH EDITION Robert J. Freeman Texas Tech University Craig D. Shoulders Western Carolina University Gregory S. Allison University of North Carolina Chapel Hill G. Robert Smith, Jr. Middle Tennessee State University PEARSON Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
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GOVERNMENTALAND NONPROFITACCOUNTINGTheory and Practice
TENTH EDITION
Robert J. FreemanTexas Tech University
Craig D. ShouldersWestern Carolina University
Gregory S. AllisonUniversity of North CarolinaChapel Hill
G. Robert Smith, Jr.Middle Tennessee State University
PEARSONBoston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam
Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto DelhiMexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo
Contents
Preface xxi
CHAPTER 1Governmental and Nonprofit Accounting: Environment and Characteristics 1
Characteristics and Types of G&NP Organizations 2G&NP Sector Significance 2The G&NP Environment 3
Objectives of G&NP Accounting and Financial Reporting 6
Authoritative Sources of G&NP Accounting Principles and Reporting Standards 6TheFAF 7TheFASB 7FASB-GASB Jurisdictions 7"Government" Defined 7TheGASB 9GAAP Hierarchies 11
Concepts and Objectives of SLG Accounting and Financial Reporting 12Governmental-Type Activities 13Financial Report Users 17Financial Report Uses 18Business-Type Activities 18Users and Uses of Financial Reports 19Financial Reporting Objectives 20
Characteristics of SLG Accounting and Financial Reporting 21Fund Accounting 21Budgets and Appropriations 22Other Distinguishing Characteristics 23Commercial Accounting Comparison 24
Concluding Comments 24
APPENDIX 1-1 Evolution of Accounting Principles and Standards—Prior to the GASB 25
Questions 28
Exercises 28
Problems 30 . ]
CHAPTER 2State and Local Government Accounting and FinancialReporting Model: The Foundation 31
Overview of the GASB Financial Reporting Model 32
The Fundamental Features of the SLG Accounting and Financial Reporting Model 33GAAP and Legal Compliance 35Fund Accounting 36Fund Categories 37Transaction Analysis 42Types of Funds 45Comparative Financial Statement Formats 50Annual Financial Reporting 55
CHAPTER 3The General Fund and Special Revenue Funds 69
Measurement Focus 70Purposes and Assumptions of This Chapter 71 r
General Fund Accounting—Illustrative Example 71Entries During 20X1 71Year-End Adjustments 83Preclosing Trial Balances 84Illustrative Example Worksheets 8420X1 Closing Entries 84Postclosing Trial Balance 86
Statement of Revenues, Expenditures, and Changes in Fund Balances 93Restatements 94Extraordinary Items and Special Items 95
Classification of Expenditures 95Combining Special Revenue. Fund Statements 98Concluding Comments 100APPENDIX 3-1 General Ledger Worksheet and Subsidiary Ledgers 100APPENDIX 3 -2 Classification of Expenditures 100APPENDIX 3 -3 Alternative Account Structure and Entries 109Questions 110Exercises 110Problems 115Cases 119
CHAPTER 4Budgeting, Budgetary Accounting, and Budgetary Reporting 121The Government Budgetary Perspective 122Budgetary Accounting and Reporting 123
Budgetary Accounting and Control 123Recording the Budget—General Ledger and Subsidiary Ledger 127Budget Revisions 127Revenues and Expenditures Ledgers Incorporating
Budgetary Accounts 132Level of Detail in Subsidiary Ledgers' 137
Budgetary Planning, Control, and Evaluation 146Planning 146Control 146Evaluation 147
Basic Budgetary Terminology 147 t
Capital vs. Current Budgets 147Tentative vs. Enacted Budgets 148General vs. Special Budgets 149Fixed vs. Flexible Budgets 150Executive vs. Legislative Budgets 150
Budgetary Approaches and Emphases 150
Budget Preparation 151Overview 151Preliminary Estimates 151Preparing the Budget 152Revenue Estimates and Requests 153Expenditure Estimates and Requests 153Expenditure Budgeting Approaches 153
Legislative Consideration and Action 155
Budget Execution 156
Concluding Comments 157
Questions 157
Exercises 158
Problems 162
Cases 166
Harvey City Comprehensive Case 169
CHAPTER 5
Revenue Accounting—Governmental Funds 174
Revenue Definition and Recognition 175
Nonexchange Transactions 177
Governmental Fund and Proprietary Fund Revenue Recognition Compared 179
Classification of Revenue Accounts 181General Fund Revenues 181Other Governmental Funds Revenues 181
Debt Service Fund for a Serial Bond Issue: Case Illustration 307Illustrative Entries 308Financial Statements 310
XIV Contents
Special Assessment Debt Service Funds 311Illustrative Entries 312Illustrative Financial Statements 314 '!
Other Conventional Debt Service Fund Considerations 315Nonaccrual of Interest 315Combining Balance Sheet 315Combining Operating Statement 316
Debt Service Fund for a Term Bond Issue 316
Sinking Fund Requirements 318
Debt Service Funds for Deep Discount Issues 319 '
Refundings 320Reasons for Refund ings 320Refundings Defined 320Defeasance of Debt 321
Debt Service Funds for Refundings 323Current Refunding 324Advance Refunding' 325Debt and Nondebt Financing 326Reporting Refundings 327 f
Advance Refunding Disclosures 327
Concluding Comments 330
Questions 331
Exercises 332
Problems 335
Cases 340
Harvey City Comprehensive Case 341
CHAPTER 9General Capital Assets; General Long-Term Liabilities; Permanent Funds:Introduction to Interfund-GCA-GLTL Accounting 343
Overview of General Capital Assets and General Long-TermLiabilities Accounting Procedures 344
General Capital Assets 345General Capital Assets Defined 345Initial Valuation 346Classification 347 • 'Capitalization Policy 347Property Records 349Capital Assets Inventory 350Additions, Betterments, and Renewals 350Depreciation/Accumulated Depreciation 351Updating GCA Accounts 352Recording Depreciation 356Sale, Replacement, or Retirement 356Intragovernmental Transactions 357Impairment 359Insurance Recoveries 361Damage or Destruction 362Reporting and Disclosures 363
General Long-Term Liabilities 363CPF-DSF-GLTL 366Serial Debt 366
Contents XV
Special Assessment Debt 367Other Government Liabilities 367Interest-Related Adjustments 368Defaulted Bonds 369In-Substance Defeasance 369GLTL Records 369GLTL Reporting and Disclosures 370
Permanent Funds 3 7 0Introduction to Interfund-GCA-GLTL Accounting 373Concluding Comments 3 7 8Questions 378Exercises 379Problems 383Cases 387Harvey City Comprehensive Case 3 8 9
CHAPTER 10Enterprise Funds 3 9 2 c
Common Characteristics and Principles ofProprietary Funds 392
Budgeting and Appropriations 396Interfund Activity * 396 'Intergovernmental Grants 396Interest Capitalization 397Establishment of Fund and Acquisition of Plant 397Accounting for Routine Operating Transactions 398Preclosing Trial Balance and Financial Statements—Basic Example 401
EF Accounting—Extended Illustration 4 1 0
Enterprise Fund Reporting—Extended Example 4 2 0
Combining Enterprise Fund Financial Statements 4 2 5
Concluding Comments 4 2 9 •'
Questions 4 2 9
Exercises 4 3 0
Problems 4 3 3
Cases 4 3 8
Harvey City Comprehensive Case 4 4 1
CHAPTER 11Internal Service Funds 443Overview of Accounting Principles 4 4 4
Combining Trust and Agency Fund Financial Statements 494
Additional Interfund-General Capital Asset-General Long-Term Liability Accounting Illustrations 495
Concluding Comments 500
Questions 501
Exercises 501
Problems 504
Cases 507
Harvey City Comprehensive Case 509
CHAPTER 13Financial Reporting: The Basic Financial Statements and RequiredSupplementary Information 510
Basic Financial Statements Overview 512
Fund Financial Statements 513Major Fund Reporting 513Fund-Based Financial Statements 523
Government-Wide Financial Statements 526Statement of Net Position 528Statement of Activities 529Measurement Focus 532Reporting Expenses 533Program vs. General Revenues 533Internal Service Funds 536Infrastructure Capital Assets 537
Note Disclosures 537
Contents XVII
Required Supplementary Information 539Management's Discussion and Analysis 539Other RSI 539Special Purpose Governments 539
Concluding Comments 541
Questions 541
Exercises 541
Problems 544
Cases 547
Harvey City Comprehensive Case 550
CHAPTER 14
Financial Reporting: Deriving Government-Wide Financial Statements and Required Reconciliations 551
Deriving Governmental Activities Data 553
Deriving Government-Wide Financial Statement Data for Governmental Activities—A Worksheet-Based Approach 554The Conversion Worksheets 554Balance Sheet Conversion Worksheet Adjustments 559Farley County Balance Sheet Conversion 562Operating Statement Conversion Worksheet Adjustments 564Farley County Operating Statement Conversion 567
Deriving Business-Type Activities Data 570Statement of Net Position 572Statement of Activities 572Reconciliations 575
Concluding Comments 577
APPENDIX 14-1 A One-Worksheet Approach to Deriving Governmental Activities Data 577Questions 587
Exercises 588
Problems 591
Cases 598
Harvey City Comprehensive Case 602
CHAPTER 15Financial Reporting: The Comprehensive Annual Financial Reportyand the Financial Reporting Entity 603
The Federal Financial Management Environment 744Financial Accounting Responsibilities 744Overview 746
The Budgetary Process 747The Budget Cycle 747Exceeding Budget Authority 750 '
Accounting Principles and Standards for Federal Agencies 750The Federal Model 750Standard General Ledger 754Federal Fund Structure 755Financial Reporting 755
Federal Agency Accounting and Reporting Illustrated 759A Case Illustration 759Maintaining Budgetary Control 759Maintaining Proprietary Accounts 764Other Transactions and Entries 764Closing Entries 768Reporting 770
Concluding Comments 775
Questions 775
Exercises 775
Problems 777
CHAPTER 20Auditing Governments and Not-for-Profit Organizations 780
Overview 781
What Is an Audit? 781Classifications of Audits 781Management's Representations 783External Auditor Classifications 783Engagement Letter 784