CHAPTER 13—PERSONAL FINANCIAL STATEMENTS AND ACCOUNTING FOR GOVERNMENTS AND NOT-FOR-PROFIT ORGANIZATIONS
MULTIPLE CHOICE
1.Which of the following is not an example of a nonprofit institution?
a. / universityb. / hospital
c. / state government
d. / church
e. / none of the answers are correct
ANS:E
2.Cash receipts and disbursements, of governmental agencies, related to the payment of interest and principal on long-term debt describe which of the following?
a. / appropriationsb. / debt service
c. / capital projects
d. / general fund
e. / proprietary funds
ANS:B
3.All cash receipts and disbursements, of governmental agencies,not required to be accounted for in another fund are accounted for in which of the following funds?
a. / fiduciary fundb. / proprietary fund
c. / general fund
d. / debt service fund
e. / special assessment fund
ANS:C
4.In accounting for governments, which of the following provides necessary resources and the authority for their disbursements?
a. / general fundb. / encumbrances
c. / internal services
d. / appropriations
e. / special assessments
ANS:D
5.For a statement of changes in net worth, which of the following would be a realized decrease in net worth?
a. / dividend incomeb. / change in value of land
c. / decrease in value of boat
d. / personal expenditures
e. / salary
ANS:D
6.For a statement of changes in net worth, which of the following would be an unrealized decrease in net worth?
a. / decrease in value of furnishingsb. / salary
c. / income taxes
d. / increase in value of land
e. / interest income
ANS:A
7.Which of the following would not be a source of information for personal financial statements?
a. / broker's statementsb. / income tax returns
c. / safe deposit box
d. / checkbook
e. / all of the answers would be a source of information
ANS:E
8.Which of the following would not likely be a reason for preparing personal financial statements?
a. / obtaining personal creditb. / determining the tax basis of marketable securities
c. / income tax planning
d. / retirement planning
e. / estate planning
ANS:B
9.Which of the following would not be a reasonable suggestion for reviewing the Statement of Financial Condition?
a. / Determine unrealized increases in net worth.b. / Determine the personal net worth amount.
c. / Determine the amounts of the assets that are very liquid.
d. / Determine the due period of liabilities.
e. / Compare specific assets and specific liabilities, indicating net investment in assets.
ANS:A
10.Which of the following would not be an acceptable presentation on a personal financial statement?
a. / Marketable securities are presented at estimated current values.b. / The estimated current value of an investment in life insurance is the cash value of the policy less the amount of any loans against it.
c. / Investments in real estate should be presented at their estimated current values.
d. / Payables and other liabilities should be presented at the discounted amounts of cash to be paid.
e. / The liability for income taxes payable includes unpaid income taxes for completed tax years only.
ANS:E
11.Under GASB Statement No. 34, which of the following is not a minimum requirement for general purpose external financial statements—state and local governments?
a. / Management’s Discussion and Analysisb. / government-wide financial statements
c. / fund financial statements
d. / notes to the financial statements
e. / cash projected financial statements
ANS:E
12.Government-wide financial statements help users do all but which of the following?
a. / Relate cash receipts and disbursements to the acquisition of long-lived assets.b. / Assess the finances of the government in its entirety, including the year’s operating results.
c. / Determine whether the government’s overall financial position improved or deteriorated.
d. / Evaluate whether the government’s current-year revenues were sufficient to pay for current-year services.
e. / Make better comparisons between governments.
ANS:A
TRUE/FALSE
1.Personal financial statements are financial statements of individuals, husband and wife, or a larger family group.
ANS:T
2.Personal financial statements predominately use historical cost information.
ANS:F
3.The basic statement prepared for personal financial statements is the statement of changes in net worth.
ANS:F
4.For personal financial statements, the statement of financial condition is similar to a balance sheet.
ANS:T
5.The statement of changes in net worth is presented in terms of realized increases (decreases) and unrealized increases (decreases).
ANS:T
6.For personal financial statements, the statement of changes in net worth replaces the income statement.
ANS:T
7.For a statement of financial condition, the figure that will usually be most important is the total asset amount.
ANS:F
8.The accounting for a nonprofit institution does not include a single entity concept or efficiency.
ANS:T
9.The principal of fiduciary funds may be distributed.
ANS:F
10.The Governmental Accounting Standards Board is a branch of the Financial Accounting Foundation.
ANS:T
11.State and local governments serve as a steward over public funds. This stewardship responsibility dominates the accounting for state and local governments.
ANS:T
12.The budget for a state or local government is merely a plan of future revenues and expenses.
ANS:F
13.The rating for an industrial revenue bond represents the probability of default by the governmental unit.
ANS:F
14.The GASB has a seven-member board. A simple majority of four is needed to issue a pronouncement.
ANS:T
15.Nonprofit institutions, other than governments, use forms of financial reporting that vary from the fund type of system to a commercial type of reporting.
ANS:T
16.Some government and not-for-profit organizations have added budgeting by objectives and/or measures of productivity to their financial reporting.
ANS:T
17.Personal financial statements present assets at their historical cost.
ANS:F
18.Using appropriate interest rates at the date of the financial statements, personal financial statements should present receivables at the discounted amounts of cash the person estimates will be collected.
ANS:T
19.Several procedures or combinations of procedures may be used to determine the estimated current value of a closely held business.
ANS:T
20.The statement of changes in net worth is required when presenting personal financial statements.
ANS:F
21.In general, SFAS No. 116 directs that contributions received by not-for-profit organizations are recognized as revenues in the period received at their fair value.
ANS:T
22.GASB Statement No. 34 calls for financial statements integrated with government-wide reporting and enhanced fund reporting.
ANS:T
23.GASB Statement No. 34 makes it clear that government-wide statements are considered superior to fund statements.
ANS:F
24.Under GASB Statement No. 34, the basic financial statements are to be preceded by the management’s discussion and analysis (MD&A).
ANS:T
25.For the government-wide statements, governmental activities are to be presented separately from the financial statements of business-type activities.
ANS:T
26.Under GASB Statement No. 34, a government entity will not continue to present fund statements.
ANS:F
27.Under governmental accounting, a fund is defined as a fiscal and accounting entity with a self-balancing set of accounts.
ANS:T
28.Under GASB Statement No. 34, the notes to the financial statements must include budgetary information that includes the original budget and revised budgets.
ANS:T
29.The financial data of the component units are included with the government entities reporting entity because of the significance of their operational or financial relationships with the government entity.
ANS:T
PROBLEMS
1.Required: Match the definitions to the terms.
Term / Definition_____ 1. / appropriations / a. / Cash receipts and disbursements related to the payment of interest and principal on long-term debt.
_____ 2. / debt service / b. / Cash receipts and disbursements related to improvements or services for which special property assessments have been levied.
_____ 3. / capital projects / c. / Service centers that supply goods or services to other governmental units on a cost reimbursement basis.
_____ 4. / special assessments / d. / Intention is to maintain the fund's assets through cost reimbursement by users or partial cost recovery from users and periodic infusion of additional assets.
_____ 5. / internal services / e. / Future commitments for expenditure.
_____ 6. / enterprises / f. / Provide necessary resources and the authority for their disbursements.
_____ 7. / proprietary funds / g. / Cash receipts and disbursements related to the acquisition of long-lived assets.
_____ 8. / general fund / h. / Operations that are similar to private businesses where service users are charged fees.
_____ 9. / fiduciary funds / i. / All cash receipts and disbursements not required to be accounted for in another fund.
_____ 10. / encumbrances / j. / The principal of these funds must remain intact. Typically, revenues earned may be distributed.
ANS:
1. / f2. / a
3. / g
4. / b
5. / c
6. / h
7. / d
8. / i
9. / j
10. / e
2.Required:
a. / Pat and Lou Krammer purchased their home in Mt.Vernon in 1997 for $60,000. The unpaid mortgage is $10,000. A new roof was added for $4,000 immediately after the purchase. Real estate prices in Mt.Vernon increased 20% since the purchase. What amount should be shown on the Krammer statement of financial condition?b. / Dick Roth bought a home in 1996 for $100,000. Currently, the mortgage on the home is $30,000. Because of the current high interest rates, the bank has offered to retire the mortgage for $20,000. What is the estimated current value of this liability?
c. / Sue Kern guaranteed a loan of $5,000 for her boyfriend to buy a boat. Sue's boyfriend is behind in payments on the boat. What liability should be shown on Sue's statement of financial condition?
d. / Chuck owns 1,000 shares of Tago. Tago is a local company whose stock is sold by a broker on a work-out basis. (The broker tries to find a buyer.) The most recent selling price was $5. The commission to sell these securities will be $100. What is the estimated current value of these securities?
e. / Anne has a certificate of deposit with a $5,000 balance. Accrued interest is $300. The penalty for early withdrawal is $400. What is the estimated current value of the certificate of deposit?
ANS:
a.$60,000 / purchase price
4,000 / improvements
$64,000
1.2 / increase in inflation rate
$76,800
10,000 / less mortgage
$66,800
b. / If the offer to buy back the mortgage is still outstanding, the estimated current value of the debt would be $20,000. If the buy back offer has expired, then the estimated current value of the mortgage is $30,000.
c. / The guarantee should not be presented as a liability. It should be disclosed in a note, if material.
d. / 1,000 shares $5 = / $5,000
Less commission / 100
$4,900
e. / Certificate of deposit / $5,000
Accrued interest / 300
$5,300
Less early withdrawal penalty / 400
$4,900
3.For Larry and Carl, the assets and liabilities and the effective income tax rates are as follows at December 31, 2010.
Account / TaxBases / Estimated
Current
Value / Excess of
Estimated
Current
Values
Over (Under)
Tax Bases / Effec-
tive
Income
Tax
Rates / Amount
of
Esti-
mated
Income
Taxes
Cash
Marketable Securities
Residence
Furnishings
Jewelry
Autos
Mortgage Payable
Credit Cards / $10,000
20,000
80,000
20,000
5,000
15,000
30,000
4,000 / $ 10,000
25,000
100,000
18,000
4,000
12,000
30,000
4,000 / 5,000
20,000
( 2,000)
( 1,000)
( 3,000) / 16%
10%
Required:
a. / Compute the estimated tax liability on the differences between the estimated current value of the assets and liabilities and their tax bases.b. / Present a statement of financial condition for Larry and Carl at December 31, 2010.
ANS:
a. / Marketable Securities / $5,000 16% = $ 800Residence / 20,000 10% = 2,000
$2,800
b.
Larry and CarlStatement of Financial Condition
December 31, 2010
Assets
Cash / $ 10,000
Marketable securities / 25,000
Residence / 100,000
Furnishings / 18,000
Jewelry / 4,000
Autos / 12,000
Total assets / $169,000
Liabilities
Mortgage payable / $ 30,000
Credit cards / 4,000
Total liabilities / $ 34,000
Estimated income taxes on differences between estimated current value of assets and their tax basis / 2,800
Net worth / 132,200
Total liabilities and net worth / $169,000
4.For Bob and Jane, the assets and liabilities and the effective income tax rates are as follows at December 31, 2010.
Account / TaxBases / Estimate
of
Current
Value / Excess of
Estimated
Current
Values
Over
Tax Bases / Effec-
tive
Income
Tax
Rates / Amount
of
Estimated
Income
Taxes
Cash
Marketable Securities
Options
Residence
Royalties
Furnishings
Auto
Mortgage Payable
Auto Loan / $30,000
50,000
-0-
120,000
-0- 30,000
10,000
(60,000)
(4,000) / $30,000 60,000
20,000
160,000 10,000
25,000
8,000
(60,000)
(4,000) / 10,000
20,000
40,000
10,000
(5,000)
(2,000) / 20%
20%
10%
20%
Required:
a. / Compute the estimated tax liability on the differences between the estimated current value of the assets and liabilities and their tax bases.b. / Present a statement of financial condition for Bob and Jane at December 31, 2010.
ANS:
a. / Marketable Securities / $10,000 20% = $ 2,000Options / 20,000 20% = 4,000
Residence / 40,000 10% = 4,000
Royalties / 10,000 20% = 2,000
$12,000
b.
Bob and JaneStatement of Financial Condition
December 31, 2010
Assets
Cash / $ 30,000
Marketable securities / 60,000
Options / 20,000
Residence / 160,000
Royalties / 10,000
Furnishings / 25,000
Auto / 8,000
Total assets / $313,000
Liabilities
Mortgage payable / $ 60,000
Auto loan / 4,000
Total liabilities / $ 64,000
Estimated income taxes on
differences between estimated
current value of assets and
their tax basis / 12,000
Net worth / 237,000
Total liabilities and net worth / $313,000
5.For Bill and Linda, the changes in net worth for the year ended December 31, 2010, are detailed as follows.
Realized increases in net worth:Salary / $40,000
Interest income / 5,000
Realized decreases in net worth:
Income taxes / 10,000
Interest expenses / 8,000
Personal expenditures / 30,000
Unrealized increases in net worth:
Marketable securities / 3,000
Land / 4,000
Residence / 2,000
Unrealized decreases in net worth:
Furnishings / 2,000
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax bases / 8,000
Net worth at the beginning of year / 80,000
Required:
Prepare a statement of changes in net worth for the year ended December 31, 2010.
ANS:
Bill and LindaStatement of Changes in Net Worth
For the Year Ended December 31, 2010
Realized increases in net worth:
Salary / $40,000
Interest income / 5,000
$45,000
Realized decreases in net worth:
Income taxes / $10,000
Interest expenses / 8,000
Personal expenditures / 30,000
$48,000
Net realized decreases in
net worth / $(3,000)
Unrealized increases in net worth:
Marketable securities / $ 3,000
Land / 4,000
Residence / 2,000
$9,000
Unrealized decreases in net worth:
Furnishings / $ 2,000
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax bases / 8,000
$10,000
Net unrealized decreases in
net worth / (1,000)
Net decrease in net worth / $ (4,000)
Net worth at the beginning of the year / 80,000
Net worth at the end of the year / $76,000
6.For Howard and Joyce, the changes in net worth for the year ended December 31, 2010, are detailed as follows.
Realized increases in net worth:Salary / $50,000
Interest income / 500
Dividend income / 400
Realized decreases in net worth:
Income taxes / 12,000
Interest expenses / 4,000
Personal expenditures / 25,000
Unrealized increases in net worth:
Marketable securities / 5,000
Residence / 2,000
Unrealized decreases in net worth:
Furnishings / 4,000
Boat / 2,000
Estimated income taxes on the
differences between the
estimated current values of
assets and the estimated
current amounts of
liabilities and their
tax bases / 7,000
Net worth at the beginning of year / 60,000
Required:
Prepare a statement of changes in net worth for the year ended December 31, 2010.
ANS:
Howard and JoyceStatement of Changes in Net Worth
For the Year Ended December 31, 2010
Realized increases in net worth:
Salary / $50,000
Interest income / 500
Dividend income / 400
$50,900
Realized decreases in net worth:
Income taxes / $12,000
Interest expenses / 4,000
Personal expenditures / 25,000
$41,000
Net realized increases in net worth / $9,900
Unrealized increases in net worth:
Marketable securities / $ 5,000
Residence / 2,000
$ 7,000
Unrealized decreases in net worth:
Furnishings / $ 4,000
Boat / 2,000
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax basis / 7,000
$13,000
Net unrealized decreases in net worth / (6,000)
Net increase in net worth / $ 3,900
Net worth at the beginning of the year / 60,000
Net worth at the end of the year / $63,900