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Chapter 1 The Government and Not-For-Profit Environment
TRUE/FALSE (CHAPTER 1
1.
The main main objectiv objectivee of a typical typical governm governmental ental or or not-for-pr not-for-profit ofit entity entity is to earn earn a profit. profit.
2.
A govern governme ment’ nt’ss budget budget may may be back backed ed by the the force force of of law. law.
.
!overnmen !overnmental tal entit entities ies have no need need for for an accountin accounting g system. system.
".
A governme government’s nt’s interna internall managers managers rely on general general purpose purpose financi financial al statemen statements ts for a considerable amount of information about their government.
#.
!overnmen !overnments ts and not-fornot-for-prof profits its may never never engage engage in business-t business-type ype activi activities. ties.
$.
%enders %enders use the the financial financial statemen statements ts of governmen governments ts and not-for not-for profits profits just just as they would would those of businesses& that is& to help assess the borrower’s credit-worthiness. credit-worthiness.
'.
(inancial (inancial stateme statements& nts& no matter matter how how prepared& prepared& do not directly directly affect the the economi economicc worth of of an entity.
).
The (inancia (inanciall Accountin Accounting g *tandards *tandards Adviso Advisory ry +oard’s +oard’s standards standards do do not apply apply to the federal federal ,epartment of Treasury.
.
!overnmen !overnments ts may be subje subject ct to the same same pressures pressures that that led led to accounti accounting ng scandals scandals like like nron.
1/. The !overnmental !overnmental Accounting Accounting *tandards *tandards +oard +oard establishes establishes generally generally accepted accounting principles for all state state and local government government entities& as well as all all not-for-profit entities. entities.
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age 1
!ULT"PLE CH#"CE (CHAPTER 1
1.
A primary characteristic that distinguishes distinguishes governmental entities from business business entities entities is a The need need to generate generate revenues revenues e3ual e3ual to or in e4cess e4cess of e4pendi e4penditures tures5e4p 5e4penses enses.. b The importance of the budget budget in the governing governing process. c The need need to prov provide ide good goodss or serv service ices. s. d The correlat correlation ion between between revenue revenuess generated generated and demand demand for goods goods or service services. s.
2.
A primary characteristic that distinguishes distinguishes not-for-profit entities from business business entities entities is a The need need to generate generate revenues revenues e3ual e3ual to or in e4cess e4cess of e4pendi e4penditures tures5e4p 5e4penses enses.. b The importance of the budget budget in the governing governing process. c The need need to to provi provide de goods goods or or servic services. es. d The correlat correlation ion between between revenue revenuess generated generated and demand demand for goods goods or service services. s.
.
6hich of the following following characteristics characteristics distinguishes distinguishes a governmental governmental or not-for-profit entity from a business entity7 a There is always always a direct link link between between revenues revenues generated generated and e4pendi e4penditures tures5e4pe 5e4penses nses incurred. b 0apital assets are used to to produce revenues and save save costs. c 8evenues 8evenues are alway alwayss indicative indicative of of demand demand for goods goods and servic services. es. d The mission mission of of the entity entity will determ determine ine the goods goods or services services provide provided. d.
".
The most most significant significant financial document provided provided by a governmental governmental entity is the a The The bal balan ance ce shee sheet. t. b The operating statement. statement. c The The ope opera rati ting ng budg budget et.. d The The cash cash flo flow w stat statem emen ent. t.
#.
6hich of the following statements is true7 a !overnmen !overnments ts may engage engage in activities activities similar similar to activiti activities es engaged engaged in by for-profit for-profit entities. b There are a limited number number of different types of governments. governments. c All govern government mental al entitie entitiess engage engage in the the same same activities activities.. d 9anagers 9anagers may have a long-term long-term focus focus and thereby thereby sacrifice sacrifice the short-te short-term rm li3uidity li3uidity of the entity.
$. 6hich of the following activities activities is :;T :;T an activity in which a governmental entity entity might engage7 a *ell *ellin ing g ele elect ctri ricc powe power. r. b ;perating a golf course. course. c ;pera ;perati ting ng a boo books ksto tore re.. d All of the the above are activi activities ties that that might might be carried carried out by a governme government. nt. '.
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age 2
).
6hich of the following following can be affected affected by !AA7 a %egal %egal abilit ability y to to iss issue ue bon bonds ds.. b Ability to balance the budget. c Amount Amount reported reported as employ employee ee pension pension plan plan contrib contributio utions. ns. d 0laim 0laimss and judgm judgment entss settl settled. ed.
. 6hich of the following characteristics characteristics is uni3ue to a governmental governmental entity7 entity7 a The ability ability to to have activi activities ties financ financed ed with ta4-e4emp ta4-e4emptt debt. b The power to impose impose fees. c The abil ability ity to to issue issue ta4-e ta4-e4em 4empt pt debt. debt. d The ability ability to to have activi activities ties financ financed ed by (ederal (ederal grants grants.. 1/. To obtain a comprehensive understanding understanding of a government’s fiscal health& a financial analyst analyst should obtain an understanding of which of the following7 a All of of the resour resources ces owned owned by the governm governmental ental entity. entity. b All of the resources which which may be summoned by a governmental governmental entity. entity. c ,emograph ,emographic ic data about about the reside residents nts served served by the the government governmental al entity. entity. d All All of of the the abov above. e. 11. 6hich of the following is common common to both governments and not-for-profit entities entities but distinguishes these entities from for-profit entities7 a The budg budget et is a legal legal&& financi financial al docum document ent.. b 8evenues are usually indicative indicative of demand for goods goods or services. c There is direct direct matching matching of of revenue revenuess and e4penses. e4penses. d There are no defined defined owners ownership hip interests interests.. 12. 6hich of the following is :;T a purpose of e4ternal financial financial reporting by governments7 governments7 4ternal financial reports should allow users to a Ass Assess ess financ financial ial condit condition ion.. b 0ompare actual results with with the budget. c Assess Assess the abili ability ty of elected elected offici officials als to effecti effectively vely manage manage people people.. d valua valuate te efficie efficiency ncy and effec effectiv tivene eness. ss. 1. 6hich of the following is :;T a reason why users need governmental governmental and not-for-profit e4ternal financial statements7 a To determi determine ne the ability ability of of the entity entity to meet meet its oblig obligatio ations. ns. b To determine the ability ability of the entity to continue continue to provide services. services. c To pred predict ict future future fiscal fiscal solv solvenc ency. y. d To evaluat evaluatee the overall overall profitabi profitability lity of of the entity entity.. 1". =sers of government financial statements statements should be interested in information information about compliance with laws and regulations for which of the following reasons7 a To determ determine ine if the the entity entity has has complied complied with bond coven covenants ants.. b To determine if the entity entity has complied with ta4ing limitations. limitations. c To determin determinee if the entity has complied complied with with donor donor restricti restrictions ons on the the use of funds. funds. d To determ determine ine all of the the above. above.
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age
1#. 6hich of the following is :;T generally considered considered a main user of government and not-for profit entity e4ternal e4ternal financial statements7 statements7 a
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age "
21. 6hich of the following is an objective of financial financial reporting for not-for-profit entities entities as established by (A*+7 (inancial reporting should should provide information that is useful to present and potential potential resource providers and other other users in> a Assessin Assessing g the types types of services services provide provided d and the need need for those those services. services. b Assessing the services services provided and the the entity’s ability to earn a profit. c 9aking 9aking rational rational decisions decisions about about the allocatio allocation n of resources resources to those organi?a organi?ations tions.. d Assessin Assessing g how how manager managerss have have manage managed d personn personnel. el. 22. As used by !A*+& interperiod e3uity e3uity refers to which of the following7 (inancial reporting reporting should> a ,emonstra ,emonstrate te compliance compliance with with finance-rel finance-related ated contract contractual ual re3uirem re3uirements. ents. b rovide information to to determine whether current-year current-year revenues were sufficient sufficient to pay for current-year services. c ,emonstra ,emonstrate te whether whether resources resources were obtaine obtained d and used in accordance accordance with with the entity’ entity’ss legally adopted budget. d rovide rovide information information to assist assist users in assessing assessing the governm government’ ent’ss economy& economy& efficiency efficiency&& and effectiveness. 2. !iven a specific set set of data& the basis of accounting accounting selected by or imposed imposed on a governmental entity will least affect which of the following7 a ,etermin ,etermining ing whether whether or not not the governme governmental ntal entity entity has a balanced balanced budget budget.. b ,etermining whether whether or not the governmental governmental entity has the ability ability to issue debt. c ,etermin ,etermining ing whether whether or or not certain certain economic economic events events occurre occurred. d. d ,etermin ,etermining ing the annual annual payments payments to a government-sp government-sponsor onsored ed pension pension plan. 2". The basis of accounting accounting selected by or imposed imposed on a governmental governmental entity can influence which which of the following7 a A decision decision to contractcontract-out out a specific specific service service rather than than provide provide that service service itself. itself. b The amount of salary increases increases proposed by union union negotiators. c The amount amount that that is available available to spend spend on a donor-s donor-specif pecified ied project project or service. service. d All All of of the the abov above. e. 2#. The !overnmental Accounting Accounting *tandards +oard is the primary standard-setting standard-setting body for> a All All gove govern rnme ment nts. s. b All state and local governments. governments. c All governmen governments ts and and all all not-fornot-for-profi profitt entiti entities. es. d All state state and local local governmen governments ts and all not-for not-for-prof -profit it entities entities.. 2$. =nder certain circumstances a governmental governmental entity might use standards established established by which of the following standard-setting bodies7 a !A*+. b (A*+. c A<0A. d All All of of the the abov above. e.
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age #
2'. The primary standard-setting standard-setting body for accounting and financial reporting reporting by a statesupported college or university is> a !A*+. b (A*+. c A<0A. d All All of of the the abov above. e. 2). a (A*+ *tatemen *tatements ts and a stablish stablish accoun accounting ting stand standards ards for for not-for-pr not-for-profit ofit entitie entities. s. b stablish accounting accounting standards for federal federal entities. c stablish stablish accoun accounting ting stand standards ards for for all governm governmental ental entit entities. ies. d stablish stablish accounti accounting ng standards standards for non-federa non-federall governmental governmental entities entities..
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age $
PR#$LE!S (CHAPTER 1
1.
Thorn 0ounty 0ounty adopted adopted a cash budget budget for (B2//' as as follows. follows. The 0ity budget laws laws prohibit prohibit budgeting or operating operating at a deficit. ,uring the year year the 0ounty collected or spent spent the following amounts. 6as the 0ounty in compliance with with budget budget laws7 ,id the 0ounty accomplish the goal of of interperiod e3uity7 e3uity7 4plain your answers answers in detail.
8eceipts from roperty ta4 collections (rom the 2//$ levy (rom the 2//' levy
+udgeted
4planations provided by the 0ity for the differences between budget and actual are as follows. roperty ta4 collections are down because the major major industry in the community closed and many citi?ens citi?ens are currently unemployed. unemployed. ;perating e4penses e4penses are up because the only bridge over a river bisecting the 0ity sustained damages by an uninsured motorist and had to be repaired immediately. immediately. The repair was not budgeted. budgeted.
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age '
2. *ave-the-+irds *T+& a not-for-profit entity entity dedicated to to ac3uiring and and preserving habitat habitat for upland birds& prepares financial statements in accordance with generally accepted accounting principles. 0urrently& standards re3uire re3uire that a not-for-profit not-for-profit entity report virtually virtually all contributions as revenue revenue in the year received. received. ,uring the current year year *T+ received a donation of several hundred acres of prime habitat for upland birds. birds. *T+ will re3uire several hundred thousand dollars in additional donations in order to make the land completely suitable for the birds. birds. +efore embarking on its fund-raising fund-raising campaign *T+ prepares prepares financial statements which are summari?ed as follows. *tatement of (inancial osition +alance *heet 0ash C )&/// *upplies C 2&/// 3ui 3uipm pmen entt net net of depr deprec ecia iati tion on C #&// #&/// / %and C1&///&/// Total Assets C1&/1#&/// %iabilities :et Assets@=nrestricted Assets@=nrestricted :et Assets@8estricted Tota Totall %iab %iabil ilit itie iess and and :et :et Asse Assets ts
C 1&/// C 1"&/// C1&///&/// C1&/ C1&/1# 1#&// &/// /
*tatement of Activities *alaries C /&/// 0hange in :et Assets C1&///&/// 6hat difficulties& if any& will *ave-the-+irds encounter in its new fund-raising drive7 Enowing that the donation of the land accounted for C1&///&/// of the revenue reported by *ave-the-+irds& do you think the financial statements present fairly the financial position and results of operations of this not-for-profit entity7 entity7
. Fohnson 0ity prepares its budget budget on the cash basis and prepares its e4ternal financial statements on the accrual accrual basis. (rom the following data data prepare statements of activity activity income statements on both the cash basis and the accrual basis. basis. 6hich statement best represents the results of operations of the 0ity7 0ity7 6hich statement best demonstrates demonstrates compliance with laws and regulations7 regulations7 6hich statement statement would you you rather see7 6hich conveys the best information to the citi?ens of Fohnson 0ity7 The 0ity levies ta4es in in the current year of C1 million. million. ;f this amount C. million million is collected during the current year& C./# will be collected ne4t year& and C./" will be collected in the future. C./1 will never be collected. collected. ,uring the current current year the 0ity 0ity pays bills bills from prior periods C./$ million& million& bills of the current period period C.) million& and defers payment payment until future periods on bills that that were received for services consumed consumed during the current current period C.1 million.
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age )
". 0ertain 0ertain fiscal fiscal practices practices of of governmen governments ts promote promote interper interperiod iod e3uity e3uity while while others others do do not. (or the situations listed below& indicate whether interperiod e3uity is promoted or undermined. 6hy7 a.
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b b d c a d c c c d d c d d d a d b a b c b c d b d a a b b
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age 11
ANS&ERS T# PR#$LE!S (CHAPTER 1
1.
The 0ity adopted a cash budget that projected an operating surplus of C1'/&///I therefore& it was in compliance with the GbudgetingH portion of budget laws.
2.
*ave-the-+irds will be launching a major fund-raising drive with a financial statement that shows C1&//&/// in donations donations and only C/&/// in e4penses.
!ranof Test +ank 0hapter 1
age 12
. Fohnson 0ity financial financial statements would be be as follows> Cash Basis
C. mill illion ion ./$ ./$ mill millio ion n .) million C./" million
Accrual Basis
ro roperty erty ta4 ta4 rec recei eip pts rop roper erty ty ta4 ta4 rev reven enue uess rio riorr perio period d e4pe e4pens nses es Accrued e4penses 0urrent e4penses G:et
C. C. mil milli lion on .1 million .) million C./ million
The cash basis financial statement would best demonstrate compliance with the budget but the non-cash basis financial financial statement would would best convey results results of operations. As a citi?en& < would like to see both because legal compliance is important to me but so are results of operations.
". a.
b.
c.
d.
e.
romo romote tess inte interp rper erio iod d e3ui e3uity ty.. +eca +ecaus usee the the bond bondss are are re3u re3uir ired ed to to be be repa repaid id over over the the life of the capital assets& the cost of those assets is allocated to the periods over which ta4payers benefit from the use of the assets. =ndermines interperiod interperiod e3uity. The employee benefits costs@pension costs@pension benefits@are benefits@are paid by an entirely different different generation of ta4payers@long ta4payers@long after the employees employees earned the benefits by providing services. romo romote tess inte interp rper erio iod d e3ui e3uity ty.. Alth Althou ough gh not not par parti ticu cula larl rly y mat mater eria ial& l& sup suppl plie iess do not not benefit ta4payers until until they are used to provide provide services. 8eporting these as e4penditures when purchased reports the cost in a different period from when the benefit is provided. provided. =nde =nderm rmin ines es int inter erpe peri riod od e3u e3uit ity y. =sin =sing g debt debt to to fina financ ncee oper operat atin ing g cost costss sprea spreads ds the the cost of providing services provided in a single period over over the entire term of the long-term debt.
!ranof Test +ank 0hapter 1
age 1
ANS&ERS T# ESSA% 'UEST"#NS (CHAPTER (CHAPTER 1
1. Accounting standards for educational institutions institutions differ by the nature of the ownership. ownership. ublic schools E-12 are accounted for in the same way as state and local governments& as are public colleges and universities& universities& theoretically. rivate schools& colleges& colleges& and universities are accounted for using not-for-profit standards established established by (A*+. (or-profit educational educational institutions would use the (A*+ rules for other for-profit entities. +ecause these entities are all involved in delivering the same basic service@education@it service@education@it would appear that they should have the same standards. standards. Dowever& public schools are subject subject to the same openness as other government activities. activities. The citi?ens should have a voice in determining what services are offered through the schools and how those services are delivered. The budget process is the opportunity opportunity for the public to be heard and the adopted budget is a plan of action action to which citi?ens citi?ens can& and should& hold officials officials accountable. (or profit schools are organi?ed organi?ed to generate profits and should measure measure net income using full accrual accounting. :ot-for-profit entities entities generate revenues from tuition and solicit contributions from the public& public& or a select group of the public. ,onors to not-for-profit entities entities may be interested in different information than ta4payers are interested in. KNote *tudents will have differing opinions about the appropriateness of different accounting standards for educational institutions determined by ownership rather than b y activity. The 3uestion is designed designed to solicit solicit their thoughts.L 2.
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age 1"
. ,onors to not-for-profit :( entities are probably interested in information information about the costs incurred by the not-for-profit. ,onors would be interested in comparing comparing the cost incurred in delivering services by one entity compared to the cost incurred by another entity for delivering the same same type of service. The amount spent on programs programs compared to the amount amount spent on fund-raising and general and administrative costs would be of interest to donors. 9ajor donors should be very interested in the amounts spent on salaries to top :( officials because major donors are& in effect& effect& paying those salaries. salaries. +eneficiaries would be interested in the costs of delivering the goods and services and the success of the :( in securing the funds necessary to continue to deliver those goods and services. 8egulatory agencies& such as the <8*& would be very interested in the financial information of :( entities to assess whether they should continue continue to be considered considered a :( entity. !overnments would would be interested in the financial financial information of :( :( entities. 9any governments are considering considering outsourcing or or privati?ing the delivery delivery of goods and services. services.
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