Question

Q1. Realizing the need of public transportation, the government of KSA has established a legally separate public benefit corporation named Metro City Transport. In the law establishing Metro City Transport, it was authorized to appoint Metro's entire governing body. When Metro City Transport went to prepare its financial statements, two questions were raised. Was Metro City Transport a government? And if it were a government, how should it prepare its Cash flow statement? Required:

a. Discuss whether Metro City Transport is or is not a governmental entity. What are the specific factors in this situation that cause Metro to be one or the other? What are the other activities that any government does for its country?

b. Discuss the Standard Setters that Metro City Transport uses to prepare its Cash flow statement and what are the three standard setters that government organization should follow in preparing its Financial statements.

Answer 1

The Metro City Transport is a governmental entity and some of the factors that validate it are mentioned in the explanation below.

Explanation:

Was Metro City Transport a government?

Yes, Metro City Transport is a government based transport system because it is clearly written that while establishing the law, Metro City Transport is authorized to appoint Metro as the entire governing body. Hence, all the revenue and expense will be realized and expensed by the government only. Moreover, the government in future may transfer the transport system into private hands by way of privatization. But for the time, Metro is handled under the direct supervision of government.

And if it were a government, how should it prepare its Cash flow statement?

The government is required to report cash flow under the following four categories for classifying the cash transactions:-

(a) Operating activity

(b) Non capital financing activity

(c) Capital and related financing activity

(d) Investing activity

a.Discuss whether Metro City Transport is or is not a governmental entity. What are the specific factors in this situation that cause Metro to be one or the other?

1. The Metro City Transport is a governmental entity only, as it is specifically written that Metro City Transport is authorized to appoint Metro as the entire governing body.
2. All the revenue and expense will be realized and expensed by the government only.
3. As the metro is set up for the purpose of benefiting people at large from traffic and other transportation issues, the government will retain this system in its hand only because metro transportation is a high revenue generating system. Therefore, government will likely to keep this transportation system in its hand only.

What are the other activities that any government does for its country?

There are many activities that government does for its country. These activities include expenditures, investments, activities for public welfare and activities for uplifting the status of people/society etc. Since, the question is related with the public issues, I will share the activities that government do for eliminating the public issues.

1. For lowering down the traffic and other transportation related issues, government initiates to build flyover, highways, bridges in order to run the traffic smoothly.
2. Metro transportation is an economical way of travelling from a viewpoint of public. Metro provides smooth travelling amenities at cheap cost.
3. Government also provides free elementary education.
4. Government hospitals provides health care check ups and health tests at very low prices.
5. Government also provides risk-free investment avenues such as treasury bills etc.

b. Discuss the Standard Setters that Metro City Transport uses to prepare its Cash flow statement.

The Government Accounting Standards Board (GASB) is responsible for setting up the standards for state and local government in the United States of America. It establishes various standards and accounting principles such as Generally Accepted Accounting Principles (GAAP) for the purpose of reporting of financials of state and local government.

The Financial Accounting Foundation (FAF) oversights the Government Accounting Standards Board (GASB). The GASB establishes and improve standards for governmental accounting. The GASB also guides auditors, issuers and public at large to use the standards established.

What are the three standard setters that government organization should follow in preparing its Financial statements.

The three standard setters that government and other public organizations must follow while preparing the financial statements are:-

(a) Financial Accounting Standards Board (FASB) - The board is responsible for establishing the financial reporting standards for public and government organizations.

(b) International Accounting Standards Board (IASB) - The FASB is also working with IASB for establishing the compatible standards worldwide.

(c) Government Accounting Standards Board (GASB) - The GASB establishes and improve standards for the purpose of financial reporting.