Distinguish between a debt security and an equity security:
A debt security can be classified as held-to-maturity; however an equity security has no maturity date. Furthermore, a debt security can easily by either bought or sold between two parties. Examples of debt securities include: municipal bonds, CDs, CDOs, and corporate bonds.

What are the main distinctions between a traditional financial instrument and a derivative financial instrument?
Three basic characteristics of derivative financial instruments distinguish derivatives from traditional financial instruments: (i) The instrument has one or more underlyings and an identified payment provision; (ii) The instrument requires little or no investment at the inception of the contract; (iii) The instrument requires or permits net settlement.

Trading securities:
Example – A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold.

Held-to-maturity securities:
Example – 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock.

Example – Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

Example – A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now.

Available-for-sale securities:
Example – 10-year bonds were purchased this year. The bonds mature at the first of next year.

Example – Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold.

Either using a previous selected government entity CAFR or another government entity, identify where the government-wide statements have been presented using the fund statements:
In the State of Arizona’s 2008 CAFR, government-wide statements are presented in the Independent Auditor’s Report. State of Arizona Government-wide Statements include governmental activities – Arizona Health Care Cost Containment System, Department of Transportation; business-type activities – Lottery Department, Arizona Health Care Cost Containment System, Department of Transportation; aggregate discretely presented component unites – Component Units, Universities—Affiliated Component Units.

What is a governmental reporting entity?
A governmental reporting entity consists of a primary government and its component units. Examples of primary governments are state governments, municipalities, counties, or special-purpose state and/or local governments. Special-purpose governments can include school districts, municipal utilities, and transportation authorities. A component unit is a legally separate government for which elected officials of the primary government are financially accountable.

Either using a previous selected NFP CAFR or another NFP CAFR you are interested in; identify what financial statements are required of that organization?
The not-for-profit financial reports for the AARP – a nonprofit, nonpartisan membership organization that helps people 50 and over improve the quality of their lives.

How are they different or comparable to those provided by organizations that operate for profit?
The AARP’s consolidated financial statements include: Independent Auditors’ Report, Consolidated Statements of Financial Position, Consolidated Statements of Activities, Consolidation Statements of Cash Flows, and Notes to Consolidated Financial Statements.

How does the retained earnings section of for-profit organizations differ from that of the net assets section of not-for-profits?
According to FASB Statement No. 17, not-for-profits must classify their net assets into three categories based on the existence or absence of donor-imposed restrictions – unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

Many of us make pledges such as to NPR, or other organizations (religious groups, social organizations, etc…) When a not-for-profit (NFP) receives these they must account for them. Sometimes though, they may have a “gift” for making a donation. And this may have different consequences. Think of an NFP that you know of. How do they raise money and are these pledges/contributions?
The AARP raises money by receiving charitable and advocacy program donations. Charitable contributions are received by the Foundation and Legal Counsel for the Elderly. Advocacy contributions are received and reported by the AARP directly. These donations are a combination of contributions and pledges.

What determines how they are recorded?
Contributions received with restrictions are reported as temporarily restricted. When the program or time restriction is met, the temporarily restricted net assets are reclassified to unrestricted net assets and are reported as net assets released from restrictions and detailed in the statement of activities.

How do these differ from exchange transactions?
A contribution is a transfer of assets in which the donor does not expect to receive equal value in return. An exchange transaction is a reciprocal transfer in which each party receives and gives up resources of commensurate value.

In both cases, when is revenue recorded?
Revenue is recorded when the service or action is carried out.

What is the distinction, as drawn by the GASB, between a fiduciary fund and a permanent fund?
Permanent funds are government funds that are accounted for on the modified accrual basis. These funds are reported the same as other governmental funds, though each permanent fund is displayed in a separate column. Fiduciary funds can be either expendable or nonexpendable and there are four major types of fiduciary funds: (i) pension (and other employee benefit) trust funds; (ii) investment trust funds; (iii) private purpose trust funds; and (iv) agency funds.

How should governments report permanent fund and fiduciary fund balances and income in their government-wide statements?
Governments report permanent fund and fiduciary fund balances and income in their government-wide statements as specific program revenues, if restricted to a specific program. If not restricted to a specific program these items should be shown as investment earnings within the general revenues category.

Why do the balance sheets of agency funds contain only assets and liabilities, but no fund balances?
The balance sheet of agency funds contain only assets and liabilities, but no fund balances, because agency funds are used in accounting for resources held by an organization in a custodial capacity, where assets always equal liabilities.

Why is it often unclear whether the resources relating to a particular activity should be accounted for in an agency fund or a governmental fund?
It is often unclear whether the resources relating to a particular activity should be accounted for in an agency fund or a governmental fund due to agency funds being custodial in nature. Therefore if an agency fund happens to carry out an operation that affects the governments that administered them, they should be reported as governmental funds.

What is CAFR and what are its main components?
CAFR is a comprehensive annual financial report for government agencies. It includes the organization’s year-end financial statements. Main components of a CAFR typically include an introductory section, which includes a letter of transmittal, an organizational overview, and details about organizational officials. The next main component is the financial section. In this section users can locate an independent auditor’s report, management’s discussion and analysis, basic financial statements, required supplementary information, and a combination of financial statements and schedules. A CAFR may also include a third section for statistical information.

Differences between a budget and a comprehensive annual financial report mainly exist between the purpose for which each is prepared. A government entity is required by GASB to prepare two sets of financial statements, the government-wide statements and the fund financial statements. The government-wide statement consolidates all of the entity’s operations and includes a focus of the government’s economic resources. Fund financial statements show the government as a collection of separate funds. A CAFR goes beyond the GASB required statements, by preparing basic fiscal year-end financial statements for users which details all assets, liabilities, revenues, and expenditures. A CAFR will often provide users with a comparison of the original budget, the final budget with appropriations included, and an actual expenditures schedule. This is beneficial for all stakeholders of the organization, including state agencies and departments, employees, and funding contributors so that they can quickly identify budgetary concerns – overspending and lack of funding, or even the welfare of retirement funds for current and past employees.