Chapter 3 Adjusting the Accounts E 3-1 The 1997-1998 Government of Canada accounts recorded a $2.

5 billion expense for the Millennium Scholarship Fund, even though the first Millennium scholarships werent awarded until the year 2000! The government accused by the opposition of cooking the books to minimize the current budgetary surplus staunchly maintained that it was appropriate to record these financial charges in the books in the year the program was announced. a) What is the difference between the accrual and cash basis of accounting? Accrual Basis Yes When earned When services or goods are used or consumed when generating revenue Cash Basis No When cash is received When cash is paid

Follows GAAP When is revenue recorded When is expense recorded

b) With respect to recording the $2.5 billion expense for the Millennium scholarships, is the government using the cash basis of accounting, the accrual basis of accounting, or some other basis of accounting? Explain why the government believed it was appropriate to record the scholarship expense in the year the program was announced. I believe the government was using the cash basis of accounting due to the definition of cash basis of accounting and some knowledge I learned in financial applications. In financial applications I learned that the money to give scholarships is usually from the annual bank interest earned from storing a sum of money. So the 2.5 billion dollars are actually money stored but not used in the bank. I noticed that they started in 1997 so they must have needed the previous interest to accumulate enough money to get enough interest for the future payout. Also, the cash basis of accounting states that expense are recorded when cash is paid, so perhaps the government felt they can neglect the time period GAAP because the money is going to be put in expense later on, the indefinite length of the program, and the necessity of the three year interest in the compound interest. c) Prior to 2001, the federal government used the cash basis of accounting for many of its transactions. In 2001, the government moved all of its accounting systems to the accrual basis. Write a letter to your Member of Parliament explaining what effect you think the adoption of the accrual basis of accounting will have on the government accounts.

March 30, 2012

Mr. Brian Masse MP Windsor West Government 2-1398 Ouellette Avenue Windsor, ON N8X 1J8

Dear Mr. Masse: I would like to inform you of the effects of the adoption of the accrual basis of accounting will have on the government accounts. I hope you will consider the following information plausible. Since accrual basis of accounting follows GAAPs, I would think that the opposition will no longer have the grounds to accuse your party of cooking the books. I would think that more money would have to be spent on the accounting department due to the newly addition of work given to them. They should remember to do adjusting entries at the end of the time period. I would expect that the revenue will be recorded when earned and expense when services or goods are used or consumed due to the generation of revenue. The revenue recognition principle and the matching principle will probably be followed as it is part of GAAPs, therefore the government accounts will be easier to analyze and will have a more accurate net income. It is easier to analyze as the revenue and the expenses match up, so you know how much you earned or lost per assignment and if it is worth it to continue the assignment. Since this is a positive change that will help with the accuracy of the books, I will continue to support your party. I look forward to the results. Thank you for your time and attention. Sincerely,

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