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www.downloadslide.net www.downloadslide.net Essentials of Accounting for Governmental and Not-for-Profit Organizations Thirteenth Edition Paul A. Copley, Ph.D., CPA Professor School of Accounting James Madison University www.downloadslide.net ESSENTIALS OF ACCOUNTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS, THIRTEENTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2018 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2015, 2013, and 2011. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LCR 21 20 19 18 17 ISBN  978-1-259-74101-2 MHID 1-259-74101-X Chief Product Officer, SVP Products & Markets: G. 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Library of Congress Cataloging-in-Publication Data Names: Copley, Paul A., author. Title: Essentials of accounting for governmental and not-for-profit organizations / Paul A. Copley, Ph. D., CPA, KPMG Professor, Director, School of Accounting, James Madison University. Description: Thirteenth Edition. | Dubuque : McGraw-Hill Education, 2017. | Revised edition of the author’s Essentials of accounting for governmental and not-for-profit organizations, [2015]. Identifiers: LCCN 2016041136 | ISBN 9781259741012 (paperback : alk. paper) Subjects: LCSH: Administrative agencies—United States—Accounting. | Nonprofit organizations—United States—Accounting. | BISAC: BUSINESS & ECONOMICS / Accounting / Governmental. Classification: LCC HJ9801 .H39 2017 | DDC 657/.83500973—dc23 LC record available at https://lccn.loc.gov/2016041136 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered www.downloadslide.net Preface Thank you for considering the thirteenth edition of Essentials of Accounting for Governmental and Not-for-Profit Organizations. The focus of the text is on the preparation of external financial statements. The coverage is effective in preparing candidates for the CPA examination. I have used the text with traditional three-semester-hour classes, with half-semester GNP courses, and as a module in advanced accounting classes. It is appropriate for accounting majors or as part of a public administration program. The most notable change from earlier editions is in the presentation of college and university accounting. Both private sector and public sector colleges are now presented in a single chapter, Chapter 11. Readers are taken through a representative set of transactions for two similar-sized colleges. By examining both public and private institutions at the same time, it is easier to gain an appreciation for the similarities and differences in these two groups. Among other changes, the thirteenth edition is updated for recent professional pronouncements including: ∙ GASB Statement No. 72: Fair Value Measurement and Application ∙ GASB Statement Nos. 74 and 75: Financial Reporting for Postemployment Benefit Plans Other Than Pensions and Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions ∙ GASB Statement No. 76: Hierarchy of Generally Accepted Accounting Principles for State and Local Governments ∙ GASB Statement No. 81: Irrevocable Split-Interest Agreements. Additionally, a discussion is provided in Chapter 10 of FASB Accounting Standards Update (2016-14) - Presentation of Financial Statements of Not-for-Profit Entities. This newly issued standard becomes effective in 2018. The text contains a discussion of the GASB Codification of Financial Reporting Standards. References are made throughout the text to specific segments of the Codification. With the implementation of GASB 54 (Fund Balance Reporting), the last vestige of budgetary accounting is phased out of government financial statements. The thirteenth edition continues to provide budget and encumbrance journal entries, but presents these as distinct accounts that are not commingled with the accounts appearing in the basic financial statements. This approach should reduce confusion sometimes experienced by students, particularly with the recording of encumbrances. Among the more challenging aspects of state and local government reporting is the preparation of government-wide financial statements. The approach demonstrated in the text is similar to that used in practice. Specifically, day-to-day events are recorded at the fund level using the basis of accounting for fund financial statements. Governmental activities are recorded using the modified accrual basis. The fund-basis statements are then used as input in the preparation of government-wide statements. The preparation of government-wide statements is presented in an Excel worksheet. This approach has two advantages: (1) it is the approach most commonly applied in practice, and (2) it is iii www.downloadslide.net iv Preface an approach familiar to students who have studied the process of consolidation in their advanced accounting classes. State and local government reporting is illustrated using an ongoing example integrated throughout Chapters 4 through 8 and 13. Additional features of the text are available in Connect and the ebook, including: ∙ An auto-gradable test bank and chapter-specific quizzes; ∙ A continuous homework problem in Chapters 4 through 8 and 13, available in the instructor library in Connect; ∙ An Instructor’s Guide; ∙ PowerPoint slides; ∙ Excel-based assignments; and ∙ An additional practice set. TestGen TestGen is a complete, state-of-the-art test generator and editing application software that allows instructors to quickly and easily select test items from McGraw-Hill’s TestGen testbank content and to organize, edit and customize the questions and answers to rapidly generate paper tests. Questions can include stylized text, symbols, graphics, and equations that are inserted directly into questions using built-in mathematical templates. With both quick-and-simple test creation and flexible and robust editing tools, TestGen is a test generator system for today’s educators. Acknowledgments I am indebted to users of the textbook for their helpful suggestions, particularly: Susan Borkowski (La Salle University), Georgia Smedley (University of Missouri–Kansas City) and especially to Mary Fischer (University of Texas at Tyler). I am especially appreciative of Loretta Manktelow (James Madison University) for her thorough review and advice. Additional comments and suggestions are welcome and may be addressed to: copleypa@JMU.edu. Paul A. Copley In memory of Ann Koch Copley and Joe Ernsberger. www.downloadslide.net Contents v Required=Results ©Getty Images/iStockphoto McGraw-Hill Connect® Learn Without Limits Connect is a teaching and learning platform that is proven to deliver better results for students and instructors. Connect empowers students by continually adapting to deliver precisely what they need, when they need it, and how they need it, so your class time is more engaging and effective. 73% of instructors who use Connect require it; instructor satisfaction increases by 28% when Connect is required. Analytics Connect Insight® Connect Insight is Connect’s new oneof-a-kind visual analytics dashboard that provides at-a-glance information regarding student performance, which is immediately actionable. By presenting assignment, assessment, and topical performance results together with a time metric that is easily visible for aggregate or individual results, Connect Insight gives the user the ability to take a just-in-time approach to teaching and learning, which was never before available. Connect Insight presents data that helps instructors improve class performance in a way that is efficient and effective. Using Connect improves retention rates by 19.8%, passing rates by 12.7%, and exam scores by 9.1%. www.downloadslide.net Adaptive THE ADAPTIVE READING EXPERIENCE DESIGNED TO TRANSFORM THE WAY STUDENTS READ ©Getty Images/iStockphoto More students earn A’s and B’s when they use McGraw-Hill Education Adaptive products. SmartBook® Proven to help students improve grades and study more efficiently, SmartBook contains the same content within the print book, but actively tailors that content to the needs of the individual. SmartBook’s adaptive technology provides precise, personalized instruction on what the student should do next, guiding the student to master and remember key concepts, targeting gaps in knowledge and offering customized feedback, and driving the student toward comprehension and retention of the subject matter. Available on tablets, SmartBook puts learning at the student’s fingertips—anywhere, anytime. Over 8 billion questions have been answered, making McGraw-Hill Education products more intelligent, reliable, and precise. www.mheducation.com www.downloadslide.net Contents Preface iii Chapter One INTRODUCTION TO ACCOUNTING AND FINANCIAL REPORTING FOR GOVERNMENTAL AND NOT-FOR-PROFIT ORGANIZATIONS 2 Generally Accepted Accounting Principles 4 Sources of Generally Accepted Accounting Principles 6 Definition of Government 8 Objectives of Accounting and Financial Reporting 9 Objectives of Accounting and Financial Reporting for State and Local Governmental Units 9 Objectives of Financial Reporting by the Federal Government 10 Objectives of Financial Reporting by Notfor-Profit Entities 11 State and Local Government Financial Reporting 11 Comprehensive Annual Financial Report 11 Measurement Focus and Basis of Accounting 13 Fund Structure for State and Local Government Accounting and Reporting 14 Number of Funds Required 17 Chapter Two OVERVIEW OF FINANCIAL REPORTING FOR STATE AND LOCAL GOVERNMENTS 20 The Governmental Reporting Entity 21 Reporting by Major Funds 23 Overview of the Comprehensive Annual Financial Report (CAFR) 23 Introductory Section 24 Financial Section: Auditor’s Report 25 Management’s Discussion and Analysis (MD&A) 26 Statement of Net Position 28 Government-wide Statement of Activities 30 Governmental Funds: Balance Sheet 32 Governmental Funds: Statement of Revenues, Expenditures, and Changes in Fund Balance 34 Proprietary Funds: Statement of Net Position 36 Proprietary Funds: Statement of Revenues, Expenses, and Changes in Fund Net Position 38 Proprietary Funds: Statement of Cash Flows 40 Fiduciary: Statement of Fiduciary Net Position 42 Fiduciary: Statement of Changes in Fiduciary Net Position 42 Notes to the Financial Statements 44 Required Supplementary Information Other Than MD&A 46 Combining Statements 48 Statistical Information 48 Summary 49 vii www.downloadslide.net viii Contents Chapter Three MODIFIED ACCRUAL ACCOUNTING: INCLUDING THE ROLE OF FUND BALANCES AND BUDGETARY AUTHORITY 54 Modified Accrual Accounts 55 Balance Sheet Accounts 55 Financial Statement Activity Accounts 60 Budgetary Accounts 62 Expenditure Cycle 62 Revenue Recognition for Nonexchange Transactions 64 Summary 67 Appendix: Budgetary Accounting Illustrated 67 Budgets and Budgetary Accounts 67 Accounting for Revenues 69 Accounting for Encumbrances and Expenditures 70 Budget Revisions 74 Budgetary Comparison Schedule 74 Chapter Four ACCOUNTING FOR THE GENERAL AND SPECIAL REVENUE FUNDS 83 Overview of Modified Accrual Accounting 84 Interfund Transactions 85 Interfund Loans 85 Interfund Services Provided and Used 87 Interfund Transfers 87 Interfund Reimbursements 87 Illustrative Case—General Fund 87 Use of Budgetary Accounts 88 Recording the Budget 88 Re-establishment of Encumbrances 89 Recording Prior-Year Property Taxes as Revenues 89 Tax Anticipation Notes Payable 89 Payment of Liabilities as Recorded 90 Encumbrance Entry 90 Recording Property Tax Levy 90 Collection of Delinquent Taxes 90 Collection of Current Taxes 91 Other Revenues 91 Repayment of Tax Anticipation Notes 92 Recognition of Expenditures for Encumbered Items 92 Payrolls and Payroll Taxes 92 Payment on Account and Other Items 93 Correction of Errors 93 Amendment of the Budget 94 Interfund Transactions 94 Write-off of Uncollectible Delinquent Taxes 96 Accrual of Interest and Penalties 97 Deferral of Property Tax Revenue 97 Special Item 97 Preclosing Trial Balance 97 Closing Entries 99 Year-End Financial Statements 101 Illustrative Case—Special Revenue Fund 102 Motor Fuel Tax Revenues 103 Expenditures for Road Repairs 105 Reimbursement to General Fund 105 Reimbursement Grant Accounting 105 Closing Entry 106 Year-End Financial Statements 106 Recognition of Inventories in Governmental Funds 107 Summary 108 Chapter Five ACCOUNTING FOR OTHER GOVERNMENTAL FUND TYPES: CAPITAL PROJECTS, DEBT SERVICE, AND PERMANENT 118 Capital Projects Funds Illustrative Case 121 120 Final PDF to printer www.downloadslide.net Contents ix Debt Service Funds 126 The Modified Accrual Basis—As Applied to Debt Service Funds 126 Additional Uses of Debt Service Funds 127 Debt Service Accounting for Serial Bonds 127 Illustrative Case—Regular Serial Bonds 127 Other Issues Involving Payment of LongTerm Debt 130 Debt Service Accounting for Deferred Serial Bonds 130 Debt Service Accounting for Term Bonds 130 Bond Refundings 130 Permanent Funds 131 Financial Reporting for Governmental Funds 133 Financial Statements—Governmental Funds 133 Summary 137 Chapter Six PROPRIETARY FUNDS Internal Service Funds 146 148 Establishment and Operation of Internal Service Funds 149 Illustrative Case—Supplies Fund 149 Other Issues Involving Internal Service Funds 153 Risk Management Activities 153 Implications for Other Funds 154 Enterprise Funds 154 Illustrative Case—Water Utility Fund 156 Proprietary Fund Financial Statements 161 Statement of Net Position 162 Statement of Revenues, Expenses, and Changes in Fund Net Position 162 Statement of Cash Flows 164 Environmental Liabilities cop4101X_fm_i-1.indd ix 167 Accounting for Municipal Solid Waste Landfills 167 Pollution Remediation Costs 168 Summary 168 Chapter Seven FIDUCIARY (TRUST) FUNDS 182 Agency Funds 185 Tax Agency Funds 185 Accounting for Tax Agency Funds 186 Financial Reporting for Agency Funds 187 A Note about Escheat Property 187 Private-Purpose Trust Funds 189 Accounting for Investments 189 Illustrative Case—Private-Purpose Trust Funds 190 Investment Trust Funds 192 Public Employee Retirement Systems (Pension Trust Funds) 193 Accounting and Reporting for Defined Benefit Pension Plans 194 Additional Disclosures 197 Other Postemployment Benefit Trust Funds 200 A Note about IRS 457 Deferred Compensation Plans 202 A Final Comment on Fund Accounting and Reporting 202 Chapter Eight GOVERNMENT-WIDE STATEMENTS, CAPITAL ASSETS, LONG-TERM DEBT 213 Conversion from Fund Financial Records to Government-wide Financial Statements 214 Capital Asset–Related Entries 216 Long-Term Debt–Related Entries 221 12/05/16 02:50 PM