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. university
b. 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. appropriations
b. 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 fund
b. 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 fund
b. 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 income
b. 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 furnishings
b. 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 statements
b. 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 credit
b. 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 Analysis
b. 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 selfbalancing 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
_____ 1. appropriations
_____ 2. debt service
_____ 3. capital projects
_____ 4. special assessments
_____ 5. internal services
_____ 6. enterprises
_____ 7. proprietary funds
_____ 8. general fund
_____ 9. fiduciary funds
_____ 10. encumbrances
ANS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
f
a
g
b
c
h
d
i
j
e
Definition
a. Cash receipts and disbursements related to the payment of
interest and principal on long-term debt.
b. Cash receipts and disbursements related to improvements
or services for which special property assessments have
been levied.
c. Service centers that supply goods or services to other
governmental units on a cost reimbursement basis.
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.
e. Future commitments for expenditure.
f. Provide necessary resources and the authority for their
disbursements.
g. Cash receipts and disbursements related to the acquisition
of long-lived assets.
h. Operations that are similar to private businesses where
service users are charged fees.
i. All cash receipts and disbursements not required to be
accounted for in another fund.
j. The principal of these funds must remain intact. Typically,
revenues earned may be distributed.
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
4,000
$64,000
1.2
$76,800
10,000
$66,800
purchase price
improvements
increase in inflation rate
less mortgage
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 =
Less commission
$5,000
100
$4,900
e. Certificate of deposit
Accrued interest
Less early withdrawal penalty
$5,000
300
$5,300
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
Cash
Marketable
Securities
Residence
Furnishings
Jewelry
Autos
Mortgage Payable
Credit Cards
Tax
Bases
Estimated
Current
Value
$10,000
$ 10,000
20,000
80,000
20,000
5,000
15,000
30,000
4,000
25,000
100,000
18,000
4,000
12,000
30,000
4,000
Excess of
Estimated
Current
Values
Over (Under)
Tax Bases
5,000
20,000
( 2,000)
( 1,000)
( 3,000)
Effective
Income
Tax
Rates
Amount
of
Estimated
Income
Taxes
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
Residence
$5,000  16% = $ 800
20,000  10% = 2,000
$2,800
b.
Larry and Carl
Statement of Financial Condition
December 31, 2010
Assets
Cash
Marketable securities
Residence
Furnishings
Jewelry
Autos
Total assets
Liabilities
Mortgage payable
Credit cards
Total liabilities
Estimated income taxes on differences
between estimated current value of
assets and their tax basis
Net worth
Total liabilities and net worth
$ 10,000
25,000
100,000
18,000
4,000
12,000
$169,000
$ 30,000
4,000
$ 34,000
2,800
132,200
$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
Cash
Marketable Securities
Options
Residence
Royalties
Furnishings
Auto
Mortgage Payable
Auto Loan
Tax
Bases
$30,000
50,000
-0120,000
-030,000
10,000
(60,000)
(4,000)
Estimate
of
Current
Value
$30,000
60,000
20,000
160,000
10,000
25,000
8,000
(60,000)
(4,000)
Excess of
Estimated
Current
Values
Over
Tax Bases
10,000
20,000
40,000
10,000
(5,000)
(2,000)
Effective
Income
Tax
Rates
Amount
of
Estimated
Income
Taxes
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
Options
Residence
Royalties
$10,000
20,000
40,000
10,000




20%
20%
10%
20%
= $ 2,000
=
4,000
=
4,000
=
2,000
$12,000
b.
Bob and Jane
Statement of Financial Condition
December 31, 2010
Assets
Cash
Marketable securities
Options
Residence
Royalties
Furnishings
Auto
Total assets
$ 30,000
60,000
20,000
160,000
10,000
25,000
8,000
$313,000
Liabilities
Mortgage payable
Auto loan
Total liabilities
$ 60,000
4,000
$ 64,000
Estimated income taxes on
differences between estimated
current value of assets and
their tax basis
Net worth
Total liabilities and net worth
12,000
237,000
$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
Interest income
$40,000
5,000
Realized decreases in net worth:
Income taxes
Interest expenses
Personal expenditures
10,000
8,000
30,000
Unrealized increases in net worth:
Marketable securities
Land
Residence
Unrealized decreases in net worth:
Furnishings
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax bases
Net worth at the beginning of year
Required:
3,000
4,000
2,000
2,000
8,000
80,000
Prepare a statement of changes in net worth for the year ended December 31, 2010.
ANS:
Bill and Linda
Statement of Changes in Net Worth
For the Year Ended December 31, 2010
Realized increases in net worth:
Salary
Interest income
Realized decreases in net worth:
Income taxes
Interest expenses
Personal expenditures
Net realized decreases in
net worth
Unrealized increases in net worth:
Marketable securities
Land
Residence
Unrealized decreases in net worth:
Furnishings
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax bases
Net unrealized decreases in
net worth
Net decrease in net worth
Net worth at the beginning of the year
Net worth at the end of the year
$40,000
5,000
$45,000
$10,000
8,000
30,000
$48,000
$(3,000)
$ 3,000
4,000
2,000
$ 9,000
$ 2,000
8,000
$10,000
(1,000)
$ (4,000)
80,000
$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
Interest income
Dividend income
$50,000
500
400
Realized decreases in net worth:
Income taxes
Interest expenses
Personal expenditures
12,000
4,000
25,000
Unrealized increases in net worth:
Marketable securities
Residence
Unrealized decreases in net worth:
Furnishings
Boat
Estimated income taxes on the
differences between the
estimated current values of
assets and the estimated
current amounts of
liabilities and their
tax bases
Net worth at the beginning of year
5,000
2,000
4,000
2,000
7,000
60,000
Required:
Prepare a statement of changes in net worth for the year ended December 31, 2010.
ANS:
Howard and Joyce
Statement of Changes in Net Worth
For the Year Ended December 31, 2010
Realized increases in net worth:
Salary
Interest income
Dividend income
Realized decreases in net worth:
Income taxes
Interest expenses
Personal expenditures
Net realized increases in net worth
Unrealized increases in net worth:
Marketable securities
Residence
Unrealized decreases in net worth:
Furnishings
Boat
Estimated income taxes on the
differences between the
estimated current amounts
of liabilities and their
tax basis
Net unrealized decreases in net worth
Net increase in net worth
Net worth at the beginning of the year
Net worth at the end of the year
$50,000
500
400
$50,900
$12,000
4,000
25,000
$41,000
$ 9,900
$ 5,000
2,000
$ 7,000
$ 4,000
2,000
7,000
$13,000
(6,000)
$ 3,900
60,000
$63,900