Accounting for the Business-type Activities of State and Local
Multiple Choice Questions
Question 1
Which of the following statements is true about proprietary funds in governmental accounting?
A) They operate on a modified accrual basis.
B) They do not produce financial statements.
C) They use an accrual basis of accounting.
D) They cannot be used to account for business-type activities.
Answer: C) They use an accrual basis of accounting.
Question 2
What is the main financial statement prepared for enterprise funds?
A) Statement of Revenues, Expenditures, and Changes in Fund Balance
B) Statement of Net Position
C) Budgetary Comparison Schedule
D) Statement of Fiduciary Net Position
Question 3
Which of the following activities is most likely accounted for in an enterprise fund?
A) Police services
B) Public park maintenance
C) Utility services
D) Debt service
Question 4
In a statement of net position, what category includes long-term assets like buildings and infrastructure?
A) Restricted Net Position
B) Noncurrent Liabilities
C) Net Investment in Capital Assets
D) Unrestricted Net Position
Question 5
What measurement focus is used in enterprise funds?
A) Economic resources
B) Current financial resources
C) Net expenditure resources
D) Budgetary compliance
Question 6
When reporting cash flows for a water utility fund, which method is required under GASB standards?
A) Indirect method
B) Direct method
C) Modified accrual method
D) Hybrid method
Question 7
Which of the following statements is correct about proprietary funds?
A) They are not subject to budgetary control.
B) They only report on cash flows from operations.
C) They do not include depreciation.
D) They report liabilities as they are incurred.
Question 8
In the Statement of Revenues, Expenses, and Changes in Fund Net Position, non-operating revenues are typically derived from:
A) Charges for services
B) Interest income
C) Depreciation expense
D) Employee salaries
Question 9
Which financial statement includes both current and long-term liabilities in proprietary funds?
A) Statement of Revenues, Expenditures, and Changes in Fund Balance
B) Statement of Net Position
C) Government-wide Financial Statements
D) Statement of Cash Flows
Question 10
What is the purpose of restricted net position in enterprise fund accounting?
A) To show the portion of net position unavailable for general purposes
B) To track unbudgeted funds
C) To measure the level of outstanding debt
D) To disclose operational losses
Question 11
Enterprise funds must be used if:
A) The government earns less than 10% of its revenues from user fees.
B) The activity is financed with debt secured solely by revenues from fees and charges.
C) The activity does not involve general government services.
D) General obligation bonds are used to finance operations.
Question 12
What is the primary distinction between enterprise funds and internal service funds?
A) Enterprise funds serve internal departments, while internal service funds serve the public.
B) Enterprise funds are self-supporting through user charges, while internal service funds serve other governmental units.
C) Internal service funds are required by law, while enterprise funds are optional.
D) Enterprise funds use modified accrual, and internal service funds use full accrual.
Question 13
In proprietary fund financial statements, which type of activity is not included under operating activities?
A) Interest paid
B) Cash received from customers
C) Cash payments to employees
D) Cash payments to suppliers
Question 14
Which of the following is classified as a capital contribution in an enterprise fund?
A) A transfer of funds from the general fund
B) Proceeds from bonds issued to fund operations
C) A grant from the federal government to finance construction
D) Utility charges collected from customers
Question 15
What is included in the “Investing Activities” section of a proprietary fund’s Statement of Cash Flows?
A) Acquisition of equipment
B) Payment of interest
C) Purchase of marketable securities
D) Repayment of principal on bonds
Question 16
Which term describes costs incurred by a government to operate a public utility?
A) Indirect costs
B) Administrative charges
C) Operating expenses
D) Non-operating expenses
Question 17
How are restricted assets reported in enterprise fund financial statements?
A) Combined with unrestricted assets in the notes
B) Segregated on the Statement of Net Position
C) Amortized over time
D) Reported as a liability
Question 18
Which of the following represents a “non-exchange transaction” in an enterprise fund?
A) User fees
B) Parking meter revenue
C) Grant funds awarded for a specific project
D) Utility charges for excess water usage
Question 19
Proprietary fund liabilities payable from restricted assets are typically reported:
A) Separately within the liabilities section of the Statement of Net Position
B) As a reduction to restricted net position
C) Only in the notes to the financial statements
D) With current liabilities
Question 20
Which of the following is considered an “internal service fund” activity?
A) A municipal water supply system
B) A state-run transportation authority
C) A centralized vehicle maintenance department
D) A publicly-owned electric utility
Question 21
Which GASB Statement primarily governs the reporting of proprietary funds?
A) GASB Statement No. 34
B) GASB Statement No. 56
C) GASB Statement No. 68
D) GASB Statement No. 72
Question 22
A proprietary fund’s Statement of Revenues, Expenses, and Changes in Net Position separates operating and non-operating items. An example of a non-operating item is:
A) Salaries and wages
B) Utility revenues
C) Interest expense
D) Depreciation
Question 23
Depreciation expense in a proprietary fund is reported:
A) Only in the notes to the financial statements
B) As an operating expense
C) As a non-operating expense
D) In the budgetary comparison schedule
Question 24
When calculating unrestricted net position, which of the following items is deducted from total net position?
A) Restricted net position and net investment in capital assets
B) Current liabilities
C) Cash and cash equivalents
D) Transfers from other funds
Question 25
How should governments report external investment pools in their financial statements?
A) As a liability in the fiduciary funds
B) As an asset in the general fund
C) As an investment in proprietary funds
D) As separate investment trust funds
Question 26
What term describes the allocation of enterprise fund revenues to support general government activities?
A) Shared revenues
B) Interfund transfer
C) Capital contribution
D) PILOT (Payment in Lieu of Taxes)
Question 27
When an enterprise fund operates at a deficit, the most appropriate accounting treatment is to:
A) Transfer funds from the general fund to cover the deficit.
B) Reclassify enterprise fund revenues as unrestricted.
C) Report a reduction in net position.
D) Record an increase in restricted assets.
Question 28
Proprietary funds are required to prepare a:
A) Balance sheet
B) Statement of Changes in Fund Balance
C) Statement of Cash Flows
D) Budgetary Comparison Schedule
Question 29
Which of the following types of debt would be reported in an enterprise fund?
A) General obligation bonds
B) Revenue bonds payable solely from enterprise fund revenues
C) Tax anticipation notes
D) Pension-related debt
Question 30
For enterprise funds, GASB requires the presentation of which of the following reconciliations?
A) A reconciliation of total fund balances to total net position
B) A reconciliation of operating income to net cash flows from operating activities
C) A reconciliation of cash balances to restricted net position
D) A reconciliation of expenditures to capital contributions
Question 31
The “Statement of Cash Flows” for enterprise funds is divided into how many major sections?
A) Two
B) Three
C) Four
D) Five
Question 32
Which category in the Statement of Net Position would include customer deposits for a water utility fund?
A) Restricted liabilities
B) Restricted net position
C) Noncurrent liabilities
D) Current liabilities
Question 33
When an enterprise fund provides goods or services to other governmental funds, the transaction is classified as:
A) An interfund transfer
B) An interfund loan
C) A quasi-external transaction
D) A reimbursement
Question 34
What accounting method is used for the long-term liabilities of enterprise funds?
A) Modified accrual
B) Cash basis
C) Accrual basis
D) Budgetary basis
Question 35
In enterprise fund accounting, an asset is considered “restricted” if:
A) It is pledged as collateral for a liability.
B) It is part of a capital improvement plan.
C) It is designated for use by management.
D) It is unrestricted and available for general use.
Question 36
Depreciation on fixed assets used in enterprise fund operations is:
A) Not required to be recorded.
B) Included as an expense in the fund’s income statement.
C) Recorded in the General Fund.
D) Allocated to other funds.
Question 37
If a government operates a parking garage that is funded by user fees, it is most likely accounted for in:
A) A special revenue fund.
B) A general fund.
C) An enterprise fund.
D) A fiduciary fund.
Question 38
What is the purpose of the “Unrestricted Net Position” in proprietary fund reporting?
A) To reflect amounts legally restricted for debt service.
B) To measure all available financial resources.
C) To identify net resources available for general purposes.
D) To report equity in capital assets.
Question 39
Which of the following is classified as an operating revenue for an enterprise fund?
A) Tax revenue allocated by the state
B) Sale of electricity to residents
C) Issuance of municipal bonds
D) Investment earnings
Question 40
How is interest expense on enterprise fund debt reported in the Statement of Revenues, Expenses, and Changes in Fund Net Position?
A) As an operating expense
B) As a reduction in net investment in capital assets
C) As a non-operating expense
D) As a restricted liability
Question 41
When recording interfund loans to enterprise funds, the borrowing fund recognizes:
A) A transfer in.
B) A liability.
C) Revenue.
D) An intergovernmental grant.
Question 42
Which GASB standard requires governments to prepare the Statement of Cash Flows for proprietary funds?
A) GASB 10
B) GASB 34
C) GASB 68
D) GASB 87
Question 43
Revenues earned but not collected by year-end in an enterprise fund should be reported as:
A) Deferred inflows of resources.
B) Unearned revenue.
C) Accounts receivable.
D) Restricted net position.
Question 44
Enterprise funds report transfers to other funds as:
A) Operating expenses.
B) Non-operating expenses.
C) Other financing uses.
D) Reductions in fund balance.
Question 45
An enterprise fund’s cash flows from capital and related financing activities include:
A) Proceeds from customer payments.
B) Grants for infrastructure projects.
C) Interest received from investments.
D) Salaries and wages.
Question 46
What is included in the “cash flows from investing activities” in proprietary fund reporting?
A) Debt issuance costs
B) Purchases of capital assets
C) Interest income
D) Operating revenues
Question 47
Proprietary funds must disclose “segment information” when:
A) They issue revenue bonds backed by a single activity.
B) The fund operates in multiple jurisdictions.
C) Management decides to allocate restricted assets.
D) The government receives federal grants.
Question 48
In enterprise funds, the amortization of bond premiums is reported as:
A) A reduction in interest expense.
B) A non-operating expense.
C) An operating expense.
D) An increase in liabilities.
Question 49
When the enterprise fund makes a principal payment on debt, this transaction is reported in:
A) Operating activities
B) Non-operating expenses
C) Capital and related financing activities
D) Investing activities
Question 50
What distinguishes restricted net position from unrestricted net position in enterprise funds?
A) Restricted net position is only used for debt payments.
B) Restricted net position is legally or contractually limited.
C) Restricted net position includes all capital assets.
D) Restricted net position measures operational efficiency.
Question 51
Which of the following would not be included in an enterprise fund’s financial statements?
A) Budgetary comparison schedules
B) Statement of Cash Flows
C) Statement of Revenues, Expenses, and Changes in Fund Net Position
D) Statement of Net Position
Question 52
Transfers into an enterprise fund from the general fund are recorded as:
A) Operating revenues.
B) Other financing sources.
C) Non-operating revenues.
D) Restricted revenues.
Question 53
Enterprise fund equity is divided into which categories?
A) Assigned and unassigned net position
B) Fund balance and retained earnings
C) Net investment in capital assets, restricted, and unrestricted net position
D) Reserved and unreserved fund balance
Question 54
Which of the following would appear in the “financing activities” section of the cash flow statement?
A) Depreciation
B) Proceeds from bond issuance
C) Payments to suppliers
D) Customer service revenues
Question 55
The GASB recommends presenting which of the following additional schedules for enterprise funds?
A) A schedule of fund balances by activity
B) A reconciliation of fund balance to cash flows
C) A schedule of long-term obligations
D) A schedule of net position by activity
Question 56
Which statement is true regarding the reporting of enterprise funds in government-wide financial statements?
A) Enterprise funds are aggregated with governmental activities.
B) Enterprise funds are reported as business-type activities.
C) Enterprise funds are excluded from government-wide financial statements.
D) Enterprise funds are reported under fiduciary funds.
Question 57
A public transportation authority operating as an enterprise fund should record the purchase of new buses as:
A) Operating expenses.
B) Capital assets.
C) Non-operating expenses.
D) Restricted expenditures.
Question 58
In an enterprise fund, bond issuance costs are treated as:
A) Current operating expenses.
B) Capitalized costs amortized over the life of the bond.
C) Non-operating expenses in the year incurred.
D) Deferred outflows of resources.
Question 59
If an enterprise fund receives a federal grant restricted for a specific project, how should it be reported?
A) As unrestricted revenue.
B) As a restricted revenue.
C) As a liability until spent.
D) As an intergovernmental transfer.
Question 60
Enterprise funds are commonly used to account for activities that:
A) Are legally required to cover costs with user fees.
B) Are funded through property taxes.
C) Provide services exclusively to other departments.
D) Are subsidized entirely by general fund revenues.
Question 61
What is the primary focus of enterprise fund financial statements?
A) Financial compliance with the budget.
B) Accountability for capital asset usage.
C) Measurement of revenues and expenses over time.
D) Cost recovery for services provided to the public.
Question 62
In proprietary funds, expenses are categorized primarily based on:
A) Operational functions.
B) The timing of cash payments.
C) The source of funding.
D) The economic resource measurement focus.
Question 63
The primary financial objective of an enterprise fund is to:
A) Maintain a positive fund balance.
B) Balance revenues and expenses.
C) Generate a profit for future investments.
D) Recover costs of providing services, including capital costs.
Question 64
When assets are transferred from a general fund to an enterprise fund, they should be recorded as:
A) Contributions to capital.
B) Non-operating revenues.
C) Deferred inflows of resources.
D) Transfers in.
Question 65
Enterprise funds must disclose the following in their notes to the financial statements:
A) Cash flow reconciliation for internal service funds.
B) The policies for setting user charges.
C) Future capital improvement plans.
D) Long-term liabilities and commitments.
Question 66
Which of the following is true about interfund transactions in an enterprise fund?
A) They are treated as external revenues.
B) They are eliminated in government-wide financial statements.
C) They increase net position.
D) They are not disclosed in the financial statements.
Question 67
Which of the following would result in an increase in net investment in capital assets?
A) Issuance of revenue bonds.
B) Depreciation expense.
C) Acquisition of new capital assets with cash.
D) Repayment of bond principal.
Question 68
The term “available for appropriation” in enterprise fund accounting refers to:
A) Unrestricted net position.
B) Restricted revenues.
C) Unrestricted fund balance.
D) Budgetary reserves.
Question 69
Enterprise funds are required to prepare financial statements that include:
A) A reconciliation of fund balance to cash flows.
B) Statement of Expenditures by Activity.
C) Notes on related party transactions.
D) Segment reporting, if applicable.
Question 70
Which of the following would be classified as an operating expense in an enterprise fund?
A) Interest on long-term debt.
B) Depreciation of equipment.
C) Capital asset acquisition.
D) Principal repayment on debt.
Question 71
If user fees collected in an enterprise fund exceed the cost of providing the service, the excess is classified as:
A) Retained earnings.
B) Net position.
C) Restricted revenues.
D) Reserved fund balance.
Question 72
What type of fund would account for the operation of a municipal airport?
A) General Fund
B) Capital Projects Fund
C) Enterprise Fund
D) Special Revenue Fund
Question 73
GASB requires that the proprietary fund financial statements include:
A) A schedule of general fund revenues.
B) Budgetary comparison schedules.
C) Statement of Cash Flows using the direct method.
D) A reconciliation of accrual and cash basis results.
Question 74
How is depreciation reported in the enterprise fund’s Statement of Revenues, Expenses, and Changes in Fund Net Position?
A) As an adjustment to capital assets.
B) As an operating expense.
C) As a non-operating expense.
D) As a reduction in net position.
Question 75
How are enterprise fund revenues classified when reported in the Statement of Revenues, Expenses, and Changes in Fund Net Position?
A) Non-operating and restricted revenues
B) Operating and non-operating revenues
C) Appropriated and unappropriated revenues
D) Direct and indirect revenues
True / False Questions
(1) Enterprise funds must follow accrual basis accounting.
True False
(2) The primary objective of an enterprise fund is to generate profits for the government.
True False
(3) Depreciation is recorded as an expense in enterprise funds.
True False
(4) Enterprise funds account for activities that are financed and operated similarly to private businesses.
True False
(5) Enterprise fund financial statements are included under governmental activities in government-wide statements.
True False
(6) Capital contributions to an enterprise fund are reported as operating revenues.
True False
(7) Restricted net position in enterprise funds represents resources subject to external constraints.
True False
(8) Proprietary funds are required to prepare a Statement of Cash Flows.
True False
(9) Operating revenues in enterprise funds include taxes levied by the government.
True False
(10) Enterprise funds are used to account for activities like utilities and public transportation systems.
True False
(11) Interest expense on long-term debt is considered an operating expense in enterprise funds.
True False
(12) Enterprise funds may receive transfers from the general fund to subsidize operations.
True False
(13) Enterprise funds can be used for internal government services provided exclusively to other funds.
True False
(14) GASB standards require enterprise funds to use the indirect method for the Statement of Cash Flows.
True False
(15) Revenues from user fees are typically the primary source of funding for enterprise funds.
True False
(16) Unrestricted net position in enterprise funds can be used for any purpose decided by management.
True False
(17) Enterprise funds are classified as fiduciary funds in the governmental accounting structure.
True False
(18) The acquisition of capital assets in an enterprise fund is reported as an expense.
True False
(19) Government utilities are commonly accounted for in enterprise funds.
True False
(20) Interfund transactions involving enterprise funds are eliminated in the government-wide financial statements.
True False
Essay Questions and Answers For Learning
Explain the purpose and importance of enterprise funds in state and local government accounting.
Answer:
Enterprise funds are a type of proprietary fund used by state and local governments to account for activities that operate similarly to private businesses. The purpose of enterprise funds is to provide transparency and accountability for services that are primarily financed through user charges, such as utilities, public transportation, and airports.
The importance of enterprise funds lies in their focus on full cost recovery. By charging fees for services, governments can ensure that users bear the cost of the services they consume. This minimizes the reliance on taxes and promotes fiscal sustainability. Enterprise funds also help governments track the financial performance of their business-like activities, providing detailed information about revenues, expenses, and net position. This transparency supports decision-making, encourages efficient resource use, and ensures compliance with accounting standards like GASB.
Discuss the key components of the Statement of Net Position for enterprise funds and their significance.
Answer
The Statement of Net Position for enterprise funds presents the financial position of the fund at a specific point in time. It includes three main components:
- Assets: These are resources owned by the fund, categorized as current (e.g., cash, receivables) and noncurrent (e.g., capital assets). The distinction between current and noncurrent assets highlights the liquidity and long-term investment of the fund.
- Liabilities: These are obligations the fund owes, divided into current liabilities (e.g., accounts payable, short-term debt) and noncurrent liabilities (e.g., bonds payable). This separation helps assess the fund’s ability to meet short-term and long-term obligations.
- Net Position: This represents the residual interest in the fund’s assets after deducting liabilities. It is classified into three categories:
- Net investment in capital assets: Reflects the fund’s equity in its capital assets, net of related debt.
- Restricted net position: Includes resources constrained by external parties or legislation.
- Unrestricted net position: Available resources for general use.
The Statement of Net Position is significant because it provides insights into the financial health and sustainability of the enterprise fund, helping stakeholders evaluate its ability to deliver services and meet financial commitments.
Analyze the role of depreciation in enterprise fund accounting and its impact on financial reporting.
Answer:
Depreciation is a systematic allocation of the cost of tangible capital assets over their useful lives. In enterprise fund accounting, depreciation is treated as an operating expense and is reported on the Statement of Revenues, Expenses, and Changes in Fund Net Position.
The role of depreciation in enterprise funds includes:
- Reflecting asset usage: Depreciation provides a measure of how much of the asset’s value has been consumed during the reporting period.
- Encouraging capital planning: It highlights the need for reinvestment in infrastructure by accounting for wear and tear.
- Matching costs with revenues: By allocating asset costs over time, depreciation ensures that expenses align with the revenues generated by the asset.
The impact of depreciation on financial reporting is significant. It reduces the operating income of the fund, providing a more realistic picture of financial performance. Depreciation also affects net position by reducing the value of capital assets, emphasizing the need for long-term financial planning. However, it is a non-cash expense, meaning it does not affect cash flows, which must be separately analyzed to understand the fund’s liquidity.
Describe the significance of the Statement of Cash Flows in enterprise fund accounting and the information it provides.
Answer:
The Statement of Cash Flows is a crucial component of enterprise fund financial reporting, providing detailed insights into cash inflows and outflows during a reporting period. It is divided into four sections:
- Operating activities: Includes cash flows related to the core services of the fund, such as receipts from customers and payments to suppliers and employees.
- Non-capital financing activities: Covers transactions not related to capital assets, such as transfers and grants.
- Capital and related financing activities: Reports cash flows related to acquiring and financing capital assets, including debt issuance and repayment.
- Investing activities: Includes cash flows from investments, such as interest income and the purchase or sale of securities.
The significance of this statement lies in its ability to provide a clear view of the fund’s liquidity and financial sustainability. Unlike accrual-based financial statements, the Statement of Cash Flows focuses solely on cash transactions, enabling stakeholders to assess the fund’s ability to generate cash, meet obligations, and fund future operations. It also helps identify cash flow trends, such as whether the fund relies on external financing or generates sufficient cash from operations.
Explain the treatment of interfund transactions in enterprise fund accounting and their impact on financial statements.
Answer:
Interfund transactions occur when one fund interacts financially with another fund within the same government entity. In enterprise fund accounting, these transactions are categorized as:
- Interfund services provided and used: These are reciprocal transactions where the enterprise fund provides goods or services to another fund at market rates. They are treated as operating revenues for the enterprise fund.
- Interfund transfers: These are non-reciprocal transactions where resources are moved between funds without an expectation of repayment. Transfers into the enterprise fund are reported as other financing sources, while transfers out are other financing uses.
- Interfund loans: When one fund lends money to another, the enterprise fund records the loan as a receivable (if lending) or a liability (if borrowing).
The impact of interfund transactions on financial statements varies:
- In fund-level statements, they reflect the financial relationships between funds.
- In government-wide statements, most interfund transactions are eliminated to avoid double-counting and to present a consolidated view of government activities.
Proper accounting and disclosure of interfund transactions ensure transparency and prevent the misrepresentation of a fund’s financial position or results of operations.