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Chapter One

In: Business and Management

Submitted By yomna
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CHAPTER ONE: Characteristics and Types of G&NP Organizations FAC 402
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1) ------------------------------------------------- G & NP organizations exist because a community or society decides to provide certain goods or services to its group as a whole. Explain the general and major characteristics that differentiate G&NP organizations from profit-seeking entities?
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Generally governments provide goods and services to the public regardless of whether the costs incurred will be recovered through charges for the goods and services or whether those paying for the goods and services will benefit from them. Also, some services cannot be provided by public entities, like infrastructure projects.
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The similarities of government and nonprofit (or not-for-profit) organizations and profit-seeking (or for-profit) organizations: a. ------------------------------------------------- Both types of entities operate in the same economy and use the same financial, human and capital resources to accomplish their goals. b. ------------------------------------------------- Both must get and convert scarce resources to produce goods and services. c. ------------------------------------------------- Both use information systems that will make their jobs easier through evaluating, planning, directing and controlling the resources and their uses. d. ------------------------------------------------- Both aim to effectively, efficiently, and economically employ their resources. e. ------------------------------------------------- Both can operate similar goods and services, however the fees charged and the level of service offered will differ.
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Characteristics of G&NP organizations: (the doctor said not to study this part but I believe it can help you in understanding the objectives) * ------------------------------------------------- government and nonprofit (G&NP) organizations are service-oriented and operate without profit motives * ------------------------------------------------- they usually are "owned" collectively, and ownership interests cannot be sold or traded; * ------------------------------------------------- contributors of financial resources to G&NP organizations do not necessarily receive any direct or proportionate shares of their goods or services; for example: all citizens must pay taxes to the government to finance governmental schools even if they do not have children in these schools * ------------------------------------------------- they often provide goods or services that are not feasibly provided through the private sector; * -------------------------------------------------
Their major policy decisions are typically made by consensus vote of an elected or appointed governing body * -------------------------------------------------
The decisions are taken in meetings open to the public
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The major differences include: organizational objectives – sources of financial resources – methods of evaluating performance and operating results.
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a. -------------------------------------------------
Organizational objectives: * ------------------------------------------------- Profit seeking entities: * ------------------------------------------------- seek to increase their wealth for the benefit of their owners who expect income or gain when providing resources to profit-seeking enterprises. * ------------------------------------------------- G&NP organizations: * -------------------------------------------------
Increase the amount of available resources to enable the governments to provide better services and not to increase their wealth * ------------------------------------------------- aim to provide as much services each year as their financial and other resources would permit them. * -------------------------------------------------
Operating in a year to year basis obligates them to raise as many financial resources as they can and expand them in serving their goals and obligations. b. -------------------------------------------------
Evaluating performance and operating results: * -------------------------------------------------
Profit seeking entities: * -------------------------------------------------
Will modify or withdraw unprofitable goods and services offered because the financial resources each customer provides dictates the type and quality of goods and services the company will provide. * -------------------------------------------------
G&NP organizations: * -------------------------------------------------
Governments continue to operate even if they are ineffective or inefficient as they have the power to tax but do not provide services for the market competition. The consumer’s dollar does not dictate the quality of the goods and services to be provided * -------------------------------------------------
It is very difficult to evaluate the performance of governments and their operating results for the following reasons: 1. -------------------------------------------------
The forces of supply and demand do not dictate the value of the products provided 2. -------------------------------------------------
There is a limited relationship between the contributors and receivers of resources 3. -------------------------------------------------
Because they do not operate for profit, a test of profit measurement would not make sense in their case, would be invalid and would not be an indicator for an entity’s success 4. -------------------------------------------------
Governments can force financial contributions through taxes 5. ------------------------------------------------- the only way to achieve a minimal evaluation of performance is to have rules and regulation, and measure the degree of compliance to these rules and regulations. Any deviations should be taken into consideration and the person responsible should be held accountable.
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------------------------------------------------- 2) ------------------------------------------------- Explain the parties who are in crucial need of the financial reports of the G&NP organizations. (p.17,18) & objectives of financial reporting (p.6)
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The objectives of the accounting and financial reports of G&NP organizations stem primarily from:
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1) the needs of the external users who generally cannot prescribe the information they need from an organization. (the citizens)
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2) the governing bodies also need many internal accounting information to carry out their responsibilities in planning and controlling activities. (Governmental administrative)
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3) the legislative and oversight bodies: the ones who represent the citizens (people’s assembly)
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4) the investors and creditors: who lend and participate in the lending process, whether they were institutions or individuals.
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The above users need information that is useful to provide to present and potential providers and other users in order to: 1) -------------------------------------------------
Making rational decisions about the allocation of resources to those other organizations 2) -------------------------------------------------
Assessing the services that non-financial organizations provide and their ability to continue on providing these services. 3) -------------------------------------------------
Assessing how managers of a non-business organization have discharged their stewardship responsibilities and other aspects of their performance.
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3) ------------------------------------------------- Discuss the two types of activities that governments may be involved in. (p. 13-20) A) Governmental-type activities
Fire, police protection, the courts, traffic control – general governmental activities that are not charged to the public for a fee * The government’s purpose of existence: * Is to offer goods and services to all citizens regardless of their ability to pay for these services. * Therefore their absence of profit motive makes it difficult to evaluate their performance and hard to compare with other business activities. * Since the government does not obtain enough financial resources from the users, the financial resources provided by one person in a certain service can be used to finance another service, and the governmental goods and services are not automatically given to the users who are able to pay.

* Accountability of the governments: * The governments are accountable to 3 types of individuals: * The citizens: the officials are elected by citizens in order to make sure that the government is efficiently and effectively using the finance resources gathered. * Other governments: who give out grants have the right to hold the borrowing government accountable for its actions of it fails to comply with the terms of the grant. * Legislative and executive bodies: the two governmental bodies are accountable to each other through the budget process. * Types of Accountability: * Fiscal Accountability: it is the government’s responsibility to show that it is complying with the public decisions regarding the spending and the gathering of financial resources * Operational Accountability: it is the government’s responsibility to show the extent to which it has met its operating objectives and whether it can continue on meeting other future objectives

* Reporting Issues and Problems: * Demonstrate compliance with restrictions on use of financial resources: governments cannot exceed the designated budget specified for the activities * Budgetary reporting: appropriate budget reporting would mean that at the end of every financial year, the government must compare the actual revenues and expenditures with the budgeted revenues and expenditures * Impact of restrictions on revenue recognition: grants and donations made by other governments cannot be included as a revenue or expenditure in the borrowing government’s financial statements * Difficulty in measuring effectiveness and efficiency of operations: because services provided by the government are monopolistic in nature like utilities and police protection, it is hard to evaluate the performance because there are no other competitors * Opportunity to hide or disguise availability of resources: by improperly reporting transactions between the different governmental funds (إهدار المال العام) * The existence of tax and debt limits * Impact of materiality of reporting certain actions: in most countries, the law can allow some items that are immaterial in nature to be left out and not to be disclosed, however in Egypt, it is required by law to fully disclose all information.

* Users of governmental financial reports: * The citizens: the taxpayers, the voters, the recipients of services, who are the main people which the government is accountable * Legislative and oversight bodies: the ones who represent the citizens * Investors and creditors: the ones who lend the government * Uses of governmental financial reports: * Comparing results with legally adopted budgets * Assessing financial condition and results of operations: economic entities like the utilities companies must have an idea of their profits and losses * Assisting in determining compliance with finance-related laws, rules & regulations: evaluating the performance of the government through the application of the rules and regulation, any laws used to report the different disbursement items in the financial statements must be declared in the annual report * Assisting in evaluating efficiency & effectiveness: it is hard to evaluate whether the government is efficiently and effectively doing its job correctly because of the absence of competitors in most of the services it provides.

B) Business-type activities
Public utilities like water and electricity – activities directed and owned by the government that operate the same as the private businesses, and the users are charged a fee according to their use. They operate separately than SLG as legally sufficient organizations. * The relationship between the services received and the resources provided by the consumers: * Provide the same type of services as the private sector business (telephones) * Involve exchange relationships: there is a direct relationship between the service provided and the fee charged from the customer. * Examples include: toll for the use of a road, a charge for the water/electricity. * The users of financial information focus on measuring the cost of providing the service, and the resources inflow and outflow, and whether the revenues charged for the services can maintain the level of the service provided. * Calculating the difference between the costs of the service and the revenue generated from the service is important because it can influence the future user charges. * Revenue Producing Capital Assets: * Because most capital assets in a business-type activity are revenue producing, they are not as motivated as governmental-type activities to substitute or maintain these assets. * Similarly Designated Activities and Potential for Comparison: * Because governmental business-type activities incur the same costs and perform the same functions as private businesses in the services they provide like water treatment, there is a higher possibility of comparability in regards to the quality of the service provided. However, the governmental services are unique and not provided by the private sector therefore cannot be easily compared. * The Nature of the Political Process: * Usually, the business-type activities are legally separate from the government, therefore they should not be affected by any governmental decisions, however this might not happen in every case, especially if the laws or regulations affect the way the business-type organization performs its work within the country. * Budgets and Fund Accounting: * The governmental business-type activities have two sets of financial statements: * One is written according to the governmental accounting laws under the fund accounting principle, including the budgetary control systems. * Another is written according to the financial accounting laws to be provided to the public. * Users of the Financial Reports: * The users are the same as the governmental-type organizations, however, they are more interested in whether the company is able to generate profits to meet the debt service requirements, and its compliance with governmental rules. * Financial Reporting Objectives: * The financial reports of the business-type activities serve to describe the nature of information needed to meet the needs of the users. * The financial reports will help the users in: * Assessing accountabilities and the compliance with legal requirements * Evaluate the entities’ operation results and how the financial resources were collected and expensed * Assess the level of the services provided and whether the entity is able to continue financing its operations and meet its debt obligations.…...

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