“1-21. Rule 203 of the AICPA’s Code of Professional Conduct pertains toa. CPAs’ independenceb. authorities designated to establish accountingstandardsc. standards of competencyd. solicitation of new clients by a CPA2. Which of the following rule-making authorities would establish accounting standards for Stanford University (a private university)?a. the AICPAb. the FASBc. the FASABd. the GASB3. Which of the following rule-making authorities would establish accounting standards for the University of Texas (a public university)?a. the AICPAb. the FASBc. the FASABd. the GASB4. If the GASB has not issued a pronouncement on a specific issue, which of the following is true with respect to FASB pronouncements?a. they would automatically governb. they could be taken into account but wouldhave no higher standing than other accountingliteraturec. they are irrelevantd. they could be taken into account by thereporting entity, but only if disclosure ismade in notes to the financial statements5. The FASB is to the GASB asa. a brother is to a sisterb. a father is to a sonc. a son is to a fatherd. a daughter is to a friend6. Standards promulgated by the FASB are most likely to be adhered to by which of the following governmental units?a. a police departmentb. a public schoolc. an electric utilityd. a department of highways7. Which of the following practices is most likely to undermine interperiod equity?a. paying for a new school building out ofcurrent operating fundsb. paying the administrative staff of a schoolout of current operating fundsc. issuing 20-year bonds to finance constructionof a new highwayd. recognizing gains and losses on marketablesecurities as prices increase and decrease8. The term ‘‘independent sector’’ refers toa. states that have opted not to receive federalfundsb. not-for-profit organizationsc. churches that are unaffiliated with a particulardenominationd. universities that are not affiliated with aparticular athletic conference9. Which of the following is not an objective of external financial reporting by either the GASB or the FASB?a. to enable the statement user to detect fraudb. to disclose legal or contractual restrictionson the use of resourcesc. to provide information about how the organizations meet their cash requirementsd. to provide information that would enable auser to assess the service potential of longlivedAssets10. Which of the following is the least appropriate use of the external financial statements of a government?a. to assess the entity’s financial positionb. to assess whether the compensation of managementis reasonable in relation to that incomparable entitiesc. to compare actual results with the budgetd. to evaluate the efficiency and effectivenessof the entity in achieving its objectives1-3Budgeting practices that satisfy cash requirements may not promote interperiod equity. The Burnet County Road Authority was established as a separate government to maintain county highways. The road authority was grantedstatutory power to impose property taxes on county residents to cover its costs, but it is required to balance its budget, which must be prepared on a cash basis. In its first year of operations it engaged in the following transactions, all of which were consistent with its legally adopted, cash-based budget: Purchased $10 million of equipment, all of which had an anticipated useful life of 10 years. Tofinance the acquisition, the authority issued $10 million in 10-year term bonds (i.e., bonds that mature in 10 years) Incurred wages, salaries, and other operatingcosts, all paid in cash, of $6 million Paid interest of $0.5 million on the bonds Purchased $0.9 million of additional equipment, paying for it in cash. This equipment had a useful life of only three years1. The authority’s governing board levies property taxes at rates that are just sufficient to balance the authority’s budget. What is the amount of tax revenue that it is required to collect?2. Assume that in the authority’s second year of operations, it incurs the same costs, except that it purchases no new equipment. What amount of tax revenue is it required to collect?3. Make the same assumption as to the tenth year, when it has to repay the bonds. What amount of tax revenue is it required to collect?4. Comment on the extent to which the authority’s budgeting and taxing policies promote interperiod equity. What changes would you recommend?1-4The dual objectives of assessing interperiod equity and ensuring budgetary compliance may necessitate different accounting practices. A city engages in the transactions that follow. For each transaction, indicate the amount of revenueor expenditure that it should report in 2012. Assume first that the main objective of the financial statements is to enable users to assess budgetary compliance. Then assume alternatively that the main objective is to assess interperiod equity.The city prepares its budget on a ‘‘modified’’ cash basis (that is, it expands the definition of cashto include short-term marketable securities), and its fiscal year ends on December 31.1. Employees earned $128,000 in salaries and wages for the last five days in December 2012. They were paid on January 8, 2013.2. A consulting actuary calculated that, per an accepted actuarial cost method, the city should contribute $225,000 to its firefighters’ pension fund for 2012. However, the city contributed only $170,000, which is the amount budgetedat the start of the year.3. The city acquired three police cars for $35,000 cash each. The vehicles are expected to last for three years.4. OnDecember 1, 2012, the city invested $99,000 in short-term commercial paper (promissory notes). The notes matured January 1, 2013. The city received $100,000. The $1,000 difference between the two amounts represents the city’s return (interest) on the investment.5. On January 2, 2012, the city acquired a new $10 million office building, financing it with 25-year serial bonds. The bonds are to be repaid evenly over the period during which they are outstanding—that is, $400,000 per year. The useful life of the building is 25 years.6. On January 1, 2012, the city acquired another $10 million office building, financing this facility with 25-year term bonds. These bonds will be repaid entirely when they mature January 1, 2037. The useful life of this building isalso 25 years.7. City restaurants are required to pay a $1,200 annual license fee, the proceeds of which the city uses to fund its restaurant inspection program. The license covers the period July 1 through June 30. In 2012 the city collected $120,000 in fees for the license period beginning July 1, 2012.8. The city borrowed $300,000 in November 2012 to cover a temporary shortage of cash. It expects to repay the loan in February 2013.1-5Year-end financial accounting and reporting can reveal the economic substance of government actions that have been taken mainly to balance the budget.Public officials, it is often charged, promote measures intended to make the government ‘‘look good’’ in the short-term, but that may be deleteriousin the long term. Assume that a city’s budget is on a cash or near-cash basis. Further assume that the following actions, designed to increase areported surplus, were approved by the city council and did indeed reduce budgetary expenditures or increase budgetary revenues:a. The city reduced its contributions to the employee defined benefit pension plan from the $10 million recommended by the city’s actuary to $5 million. Under a defined benefit plan, the employer promises employees specified benefits upon their retirement, and the level of benefits is independent of when and how much the employer contributes to the plan over the employees’ years of service.b. It reduced by $1 million the city’s cash transfer to a rainy-day reserve that is maintained to cover possible future reductions in tax collections attributable to a downturn in the region’s economy.c. It sold securities that had been held as an investment. The securities had been purchased five years earlier at a cost of $2 million. Market value at the time of sale was $5 million.d. It delayed until the following year $10 million of maintenance on city highways.1. Suppose that you were asked to propose accounting principles for external reporting that would capture the true economic nature of these measures—actions that, in substance, did not improve the city’s financial performanceor position. For each measure, indicate how you would require that it be accounted for and reported.2. Can you see any disadvantages to the principlesthat you propose?1-6Choice of accounting principles may have significant economic consequences.In preparing its budget proposals, a city’s budget committee initially estimated that total revenues would be $120 million and total expenditureswould be $123 million. In light of the balanced budget requirements that the city has to meet, the committee proposed several measures to either increase revenues or decrease expenditures. They included the following:a. Delay the payment of $0.4 million of city bills from the last week of the fiscal year covered by the budget to the first week of the next fiscal year.b. Change the way property taxes are accounted for in the budget. Currently, property taxes are counted as revenues only if they are expected to be collected during the budget year. New budgetary principles would permit the city toinclude as revenues all taxes expected to be collected within 60 days of the following fiscal year, in addition to those collected during theyear. The committee estimates that the change would have a net impact of $1.2 million.c. Change the way that supplies are accounted for in the budget. Currently, supplies are recognized as expenditures at the time they are ordered. The proposal would delay recognition of the expenditure until the supplies are actually received. The committee estimatesa net effect of $0.8 million.d. Defer indefinitely $1.5 million of maintenanceon city roads. Except as just noted with respect to supplies, the city currently prepares its budget on a cash basis, even though other bases are also legallypermissible. It prepares its year-end financial statements, however, on an accrual basis.1. Indicate the impact of each of the proposals on the city’s (1) budget, (2) annual year-end financial statements, (3) ‘‘substantive’’ economic well-being. Be sure to distinguish between direct and indirect consequences.2. It is sometimes said that choice of accounting principles doesn’t matter in that the principles affect only the way in which the entity’s fiscal ‘‘story’’ is told; they have no impact on the entity’s actual financial history or current status. Do you agree? Explain.