Financial Reporting of State and Local Governments Practice Exam
Which financial statement reports the overall financial position of a government at a given date?
A) Statement of Activities
B) Statement of Net Position
C) Balance Sheet
D) Cash Flow Statement
Which fund type is used to account for resources restricted to specific purposes, such as grants?
A) General Fund
B) Debt Service Fund
C) Special Revenue Fund
D) Capital Projects Fund
What basis of accounting is used in government-wide financial statements?
A) Modified accrual
B) Cash basis
C) Full accrual
D) Deferral basis
What is the main purpose of the Statement of Activities in governmental reporting?
A) To report changes in the financial position of the government over time
B) To reconcile fund financial statements to government-wide financial statements
C) To show the revenues and expenses of the government during a specific period
D) To display the cash position of the government
Which fund is used to account for a government’s day-to-day operations that are not restricted by specific purposes?
A) General Fund
B) Special Revenue Fund
C) Enterprise Fund
D) Debt Service Fund
Under GASB standards, what is the term for the amount that remains after subtracting liabilities from assets in government-wide statements?
A) Fund balance
B) Net position
C) Revenue
D) Current assets
Which financial statement would show an increase or decrease in net position for the government as a whole?
A) Statement of Net Position
B) Statement of Cash Flows
C) Statement of Activities
D) Budgetary Comparison Schedule
What type of fund is used to account for activities that are primarily self-supporting through user fees or charges?
A) General Fund
B) Capital Projects Fund
C) Enterprise Fund
D) Internal Service Fund
Which type of fund is used for assets held by a government in a trustee capacity?
A) Fiduciary Fund
B) Special Revenue Fund
C) Debt Service Fund
D) General Fund
What is the purpose of GASB Statement No. 34?
A) To guide financial reporting for private-sector organizations
B) To establish comprehensive standards for government-wide and fund financial statements
C) To specify the use of the cash basis of accounting
D) To promote budgetary control for state and local governments
Which of the following best describes the term “modified accrual accounting”?
A) Revenue is recognized when earned, and expenditures are recorded when paid.
B) Revenue is recognized when measurable and available, and expenditures are recorded when the liability is incurred.
C) Revenue is recognized when cash is received, and expenditures are recorded when cash is disbursed.
D) Revenue and expenditures are recorded when budgeted.
Which fund is used to account for resources set aside for capital projects such as building a new library?
A) Debt Service Fund
B) Special Revenue Fund
C) Capital Projects Fund
D) General Fund
What is reported in the “Reconciliation of the Governmental Funds Balance Sheet to the Government-wide Statement of Net Position”?
A) A summary of the current year’s budget compliance
B) Adjustments to convert fund balances from modified accrual to the accrual basis
C) The general fund’s cash position at year-end
D) The government’s budgetary surplus
Which of the following funds is considered a proprietary fund?
A) Special Revenue Fund
B) Internal Service Fund
C) General Fund
D) Trust Fund
What is a key difference between governmental and proprietary funds?
A) Governmental funds use the accrual basis, while proprietary funds use the modified accrual basis.
B) Governmental funds focus on short-term financial activities, while proprietary funds focus on long-term financial activities.
C) Governmental funds focus on accountability, while proprietary funds focus on profitability.
D) Governmental funds are only for capital projects, while proprietary funds are for operating services.
Which of the following statements is true regarding restricted fund balances?
A) They are available for any purpose set by the government.
B) They are restricted by external parties or legislation.
C) They can only be used for operating expenses.
D) They represent budgetary surpluses.
What type of fund would a government use to account for a pension plan it manages for employees?
A) General Fund
B) Fiduciary Fund
C) Enterprise Fund
D) Special Revenue Fund
Which of the following is NOT a component of net position in government-wide financial statements?
A) Net investment in capital assets
B) Unrestricted net position
C) Nonspendable fund balance
D) Restricted net position
What is the primary purpose of the Statement of Cash Flows in government reporting?
A) To show changes in fund balances
B) To display the government’s budgetary compliance
C) To report cash inflows and outflows during a specific period
D) To provide details on revenue and expenses for a period
What is the correct order of the fund hierarchy from most restrictive to least restrictive?
A) Committed, assigned, restricted, nonspendable
B) Restricted, committed, assigned, unassigned
C) Nonspendable, restricted, assigned, unassigned
D) Unassigned, assigned, restricted, committed
Which fund type is used for long-term infrastructure projects that are financed by bonds?
A) Debt Service Fund
B) Capital Projects Fund
C) Special Revenue Fund
D) General Fund
In government-wide financial statements, which of the following would be included in the “expenses” category?
A) Transfer of funds to another government
B) Increase in net position
C) Cost of services provided by the government
D) Receivables collected during the year
What does GASB Statement No. 54 specifically address?
A) Measurement of fair value for assets
B) Budgetary compliance for governments
C) Fund balance classifications and reporting
D) Governmental pension plans
Which of the following best describes the term “unassigned fund balance”?
A) Resources that have been restricted for specific purposes by external parties
B) The portion of fund balance that is not classified as nonspendable, restricted, committed, or assigned
C) Amounts set aside for capital projects and debt payments
D) The portion of the budget that is unspent at the end of the year
What type of fund is used for activities that provide goods or services to other departments on a cost-reimbursement basis?
A) General Fund
B) Internal Service Fund
C) Debt Service Fund
D) Special Revenue Fund
Which fund type is used to account for financial resources that are legally restricted for use in specific programs, such as a grant for a public health initiative?
A) General Fund
B) Special Revenue Fund
C) Enterprise Fund
D) Capital Projects Fund
In governmental financial reporting, which of the following is considered a nonspendable fund balance?
A) Amounts restricted for debt service
B) Amounts set aside for capital projects
C) Inventories and prepaid expenses
D) Cash held in an investment fund
What type of fund is used for activities that are similar to those conducted by private businesses and are expected to recover costs primarily through user charges?
A) Internal Service Fund
B) General Fund
C) Enterprise Fund
D) Special Revenue Fund
Which type of government fund focuses on financial accountability for operations that provide goods or services to the public on a self-supporting basis?
A) General Fund
B) Enterprise Fund
C) Special Revenue Fund
D) Capital Projects Fund
Which accounting basis is used for governmental funds in fund financial statements?
A) Full accrual
B) Cash basis
C) Modified accrual
D) Accrual with deferrals
Which of the following is true about the “Statement of Cash Flows” for proprietary funds?
A) It reports only on cash receipts from taxes.
B) It shows the change in net position over time.
C) It classifies cash flows into operating, investing, and financing activities.
D) It reports on non-cash activities only.
In the government-wide Statement of Net Position, what would be included in “net investment in capital assets”?
A) Unrestricted cash and investments
B) The value of buildings and equipment minus related debt
C) Fund balances from special revenue funds
D) Future revenue projections
Which GASB statement provides guidance on the reporting of other post-employment benefits (OPEB)?
A) GASB Statement No. 34
B) GASB Statement No. 45
C) GASB Statement No. 68
D) GASB Statement No. 75
What is the purpose of a “Budgetary Comparison Schedule” in government financial reporting?
A) To compare the government’s financial results to the budgeted figures
B) To display cash flows for a government entity
C) To report the government’s long-term debt
D) To show the net change in position for the government as a whole
Which financial statement shows changes in fund balances during the reporting period for governmental funds?
A) Statement of Net Position
B) Statement of Activities
C) Balance Sheet
D) Statement of Revenues, Expenditures, and Changes in Fund Balances
What type of accounting entry would be used to record a grant received for a specific purpose in a special revenue fund?
A) Debit: Revenues; Credit: Grants Receivable
B) Debit: Cash; Credit: Deferred Revenue
C) Debit: Deferred Revenue; Credit: Revenues
D) Debit: Expenditures; Credit: Cash
Which of the following best describes an “assigned fund balance”?
A) Amounts that cannot be spent due to legal restrictions
B) Amounts that are planned for specific purposes by the government but are not legally restricted
C) Amounts that represent the government’s available cash at year-end
D) Amounts that represent revenues earned but not yet collected
What is the role of the Governmental Accounting Standards Board (GASB)?
A) To oversee all state and local government budgets
B) To establish standards for accounting and financial reporting for U.S. state and local governments
C) To prepare financial statements for government entities
D) To review audits performed by independent auditors
Which of the following statements is true regarding “unrestricted net position” in government-wide financial statements?
A) It represents the net assets available for general use and not restricted by external parties.
B) It includes resources set aside for debt service.
C) It is restricted for specific purposes as per external parties.
D) It must be reported as a liability.
In governmental accounting, what is an example of a non-exchange transaction?
A) Payment of a utility bill
B) Collection of property taxes
C) Sale of a government-owned vehicle
D) Service charges for water use
What does “capital outlay” refer to in government financial reporting?
A) Funds spent for day-to-day operations
B) Payments for employee salaries and wages
C) Expenditures for acquiring, upgrading, or maintaining capital assets
D) Payments for routine maintenance services
What is the main focus of a “governmental fund financial statement”?
A) Reporting the overall financial health of the government
B) Displaying detailed information about the government’s capital assets
C) Reporting on the current financial position of individual governmental funds
D) Showing revenue and expense patterns for the entire government
Which of the following would be classified as a long-term liability in the government-wide Statement of Net Position?
A) Accrued salaries payable
B) Uncollected property taxes
C) Bonds payable
D) Due to other funds
What is the purpose of the “statement of revenues, expenditures, and changes in fund balances”?
A) To provide details of fund balances at year-end
B) To report how revenues are collected and spent by different funds
C) To show the change in net assets for the government as a whole
D) To present operating cash flows
Which of the following would be reported as an “other financing source” in the governmental fund financial statements?
A) General revenues
B) Transfers in from other funds
C) Investment income
D) Property tax revenue
How are donated capital assets typically recorded in government financial statements?
A) At fair value as a liability
B) At historical cost plus any related acquisition costs
C) At fair value as revenue
D) As a deferred revenue item
Which of the following describes a “deferral” in governmental accounting?
A) Recording revenue before it is earned
B) Reporting an expense when it is paid
C) Recognition of revenue or expense after the period in which it was earned or incurred
D) Adjusting budgeted figures to match actual spending
Which of the following is considered a government fund type that operates similarly to a business?
A) Special Revenue Fund
B) General Fund
C) Enterprise Fund
D) Debt Service Fund
What is the term used for amounts that represent the future obligations of a government?
A) Revenue
B) Deferred outflows
C) Liabilities
D) Net position
Under the accrual basis of accounting, how are revenues recognized?
A) When cash is received
B) When earned and realizable
C) When the budget is approved
D) When cash is disbursed
What type of fund is used to account for resources that are legally restricted to be used for specific purposes, such as donations for a public library?
A) General Fund
B) Special Revenue Fund
C) Debt Service Fund
D) Enterprise Fund
Which financial statement provides a comprehensive view of the government’s financial position at the end of the fiscal year?
A) Statement of Revenues, Expenditures, and Changes in Fund Balances
B) Statement of Net Position
C) Statement of Activities
D) Statement of Cash Flows
Which GASB statement is used to establish financial reporting standards for the measurement and recognition of pension obligations?
A) GASB Statement No. 34
B) GASB Statement No. 45
C) GASB Statement No. 68
D) GASB Statement No. 75
In governmental accounting, what type of fund is used to report resources that are legally restricted for the payment of principal and interest on long-term debt?
A) General Fund
B) Debt Service Fund
C) Capital Projects Fund
D) Special Revenue Fund
How are general fixed assets reported in governmental funds?
A) As expenditures when purchased
B) As assets in the government-wide financial statements only
C) As an expense in the fund financial statements
D) As a liability on the balance sheet
Which type of fund is used to account for activities where the government charges fees for services provided, such as water or sewer services?
A) General Fund
B) Internal Service Fund
C) Enterprise Fund
D) Capital Projects Fund
Which of the following would be considered a “revenue” in governmental accounting?
A) Payment of a government grant
B) Salary expense
C) Investment income
D) Transfer from another fund
What is the purpose of a “capital projects fund”?
A) To manage the day-to-day operations of the government
B) To account for resources used for the construction or acquisition of major capital assets
C) To report funds used for debt repayment
D) To track all general operating revenues
Which of the following is considered an operating activity in the Statement of Cash Flows for proprietary funds?
A) Sale of capital assets
B) Receipt of grant funding
C) Collection of user charges
D) Issuance of long-term debt
What does the “modified accrual basis” of accounting focus on?
A) Recognizing revenue when earned and expenses when incurred
B) Recognizing revenue when measurable and available and expenses when incurred
C) Recognizing revenue only when received in cash
D) Recognizing all transactions when they occur, regardless of cash flow
Which of the following statements about a “special revenue fund” is true?
A) It accounts for resources used to support the general operations of the government.
B) It is used for activities that are similar to private businesses and generate revenue.
C) It accounts for resources restricted for specific programs or purposes.
D) It reports financial results for the payment of long-term debt.
Which of the following best describes a government-wide financial statement?
A) A detailed breakdown of each fund’s activities
B) A summary of general fund operations only
C) A comprehensive report that combines the financial activities of all funds
D) A report on operational budgets and forecasts
In governmental financial reporting, what is the role of “deferred inflows of resources”?
A) To record resources that will be spent in the next fiscal year
B) To recognize resources that have been received but not yet earned
C) To record future liabilities
D) To show unrestricted cash available for operations
What type of fund is used for operations that provide services to other government departments on a cost-reimbursement basis?
A) General Fund
B) Internal Service Fund
C) Debt Service Fund
D) Special Revenue Fund
Which of the following is an example of a non-exchange revenue?
A) Fees for licenses and permits
B) Sales of government-owned assets
C) Property taxes collected
D) Water service charges
How are expenditures classified in the governmental fund financial statements?
A) By the nature of the asset being acquired
B) By the type of government service provided
C) By the time they are paid
D) By the type of fund they are recorded in
What does GASB Statement No. 34 require governments to report for the first time?
A) A detailed schedule of government contracts
B) A Statement of Cash Flows for all funds
C) Government-wide financial statements
D) Budget vs. actual expenditure reports
What does the term “fund balance” refer to?
A) The total revenues collected in a fiscal year
B) The amount of unrestricted cash available in a fund
C) The difference between total assets and total liabilities in a fund
D) The interest income earned by a fund over a year
Which financial statement is used to report the changes in net position for a government entity over a period?
A) Statement of Net Position
B) Statement of Activities
C) Statement of Cash Flows
D) Statement of Fund Balances
Which of the following is true about “restricted net position” in government-wide financial statements?
A) It represents net assets not yet earned.
B) It includes net assets that are legally restricted for specific purposes.
C) It refers to funds available for general use without limitations.
D) It includes unreserved funds held for emergencies.
What type of transaction is recognized when a government entity receives a grant for a specific purpose but has not yet met the eligibility requirements?
A) Revenue
B) Deferred inflow of resources
C) Expenditure
D) Transfer of funds
Which of the following is included in the “operating revenues” for a proprietary fund?
A) Proceeds from selling capital assets
B) Transfers from other government funds
C) Charges for services provided by the fund
D) Property tax revenue
What would be reported as a “transfer out” in the governmental fund financial statements?
A) A loan repayment from a special revenue fund
B) A grant received from the federal government
C) The allocation of resources to another fund for its use
D) Payment for purchased equipment
Under which fund type would you report the financial position and activities of a government’s public library?
A) General Fund
B) Special Revenue Fund
C) Enterprise Fund
D) Debt Service Fund
What type of fund is used to account for the government’s activities that are similar to those of a business enterprise?
A) Special Revenue Fund
B) General Fund
C) Internal Service Fund
D) Enterprise Fund
Answer: D) Enterprise Fund
Which of the following is an example of an interfund transfer?
A) A payment made by a government to an external contractor
B) The allocation of resources from the general fund to the debt service fund
C) An interest payment on government bonds
D) The purchase of capital assets for a public park
What is the primary focus of governmental fund financial statements?
A) To report on the government’s overall economic position
B) To provide a measure of financial resources available for spending
C) To reflect the financial results of proprietary activities
D) To report on the cash flows from operating activities
Which financial statement shows how a government’s net position has changed over the fiscal period?
A) Statement of Net Position
B) Statement of Activities
C) Statement of Cash Flows
D) Budgetary Comparison Schedule
What is the main purpose of the “Statement of Cash Flows” for proprietary funds?
A) To show the flow of financial resources in and out of governmental funds
B) To provide information on the cash inflows and outflows from operating, investing, and financing activities
C) To report the accrual basis revenues and expenses of a government
D) To detail all long-term liabilities of a government
Under the modified accrual basis of accounting, when are revenues recognized?
A) Only when cash is collected
B) When earned and measurable and available to finance current expenditures
C) When services are provided to residents
D) When the budget is approved
Which of the following is NOT considered a deferred inflow of resources?
A) Unavailable property tax revenue
B) Unearned grant revenue
C) Prepaid expenses
D) Uncollected special assessments
What is “net position” in the context of government-wide financial statements?
A) The total value of all government assets at year-end
B) The difference between total assets and total liabilities in the government-wide statement
C) The change in cash over a given period
D) The budget surplus for the fiscal year
In a governmental fund, how are capital outlay expenditures recorded?
A) As capital assets in the fund financial statements
B) As an expenditure when incurred
C) As a liability until paid off
D) As a deferred inflow of resources
What kind of fund is used for the construction or acquisition of major capital assets?
A) General Fund
B) Special Revenue Fund
C) Capital Projects Fund
D) Debt Service Fund
Under GASB standards, what is the primary difference between governmental funds and proprietary funds?
A) Governmental funds use the accrual basis of accounting; proprietary funds use modified accrual
B) Governmental funds focus on current financial resources, while proprietary funds report economic resources
C) Governmental funds are only for long-term assets; proprietary funds are for short-term liabilities
D) Proprietary funds report revenues and expenses in their entirety, unlike governmental funds
Which statement would a government use to report changes in financial position and results of operations?
A) Statement of Net Position
B) Statement of Activities
C) Statement of Changes in Fund Balance
D) Budgetary Comparison Schedule
What is considered a major fund in governmental accounting?
A) A fund that has at least 5% of the total assets of all governmental funds
B) A fund that is legally mandated to be used only for specific purposes
C) A fund that has at least 10% of the total assets or liabilities of all governmental and proprietary funds combined
D) A fund with a budget surplus at the end of the fiscal year
What should be reported in the “Statement of Net Position” for proprietary funds?
A) Only the cash balance
B) Assets, liabilities, and net position
C) Total revenues and total expenses
D) General fund balances and investments
Which type of accounting method is used for the government-wide financial statements?
A) Modified accrual basis
B) Full accrual basis
C) Cash basis
D) Budgetary basis
Which financial statement helps assess whether a government is financially stable?
A) Budgetary Comparison Schedule
B) Statement of Revenues, Expenditures, and Changes in Fund Balances
C) Statement of Net Position
D) Statement of Activities
What is the purpose of the “budgetary comparison schedule”?
A) To show the year-end balance of funds
B) To compare the actual expenditures and revenues to the budgeted amounts
C) To report long-term debts and obligations
D) To display the net position of governmental activities
How should encumbrances be reported in a governmental fund?
A) As assets until they are fulfilled
B) As liabilities when the budget is passed
C) As a reservation of fund balance until the related expenditure is incurred
D) As revenues to offset future expenses
When a government entity receives grant funds that are not yet earned, how are they classified?
A) As revenue in the government-wide statement
B) As deferred inflows of resources in the fund financial statements
C) As an expenditure in the governmental funds
D) As an asset on the balance sheet
What does GASB Statement No. 75 address?
A) The reporting of pension liabilities and related expenses
B) The requirements for governmental fund financial statements
C) Revenue recognition for capital grants
D) Budget reporting for proprietary funds
In governmental accounting, what does “intergovernmental revenue” include?
A) Revenue from sales of government property
B) Revenue from charges for services
C) Grants and transfers received from other governments
D) Fines and penalties collected by the government
Which financial statement is used to report the activities of governmental funds for a fiscal period?
A) Statement of Net Position
B) Statement of Activities
C) Statement of Revenues, Expenditures, and Changes in Fund Balances
D) Statement of Cash Flows
What is an example of an expenditure that should be recorded in a governmental fund?
A) Depreciation expense on capital assets
B) Interest payment on long-term debt
C) Purchase of a new vehicle for public safety
D) Gains on the sale of investments
Which of the following best describes a “fund balance” in governmental accounting?
A) The amount of current cash and cash equivalents available
B) The total assets minus total liabilities of a fund
C) The total revenues collected during the fiscal year
D) The net change in cash for a fiscal period
What is a “special assessment” in governmental accounting?
A) A tax levied to fund general government operations
B) A fee collected from property owners for specific local improvements
C) A charge for providing public education services
D) An income from government investments
What does GASB Statement No. 34 require regarding the Statement of Net Position?
A) It should only report the budgeted assets and liabilities for the year.
B) It must include both governmental activities and business-type activities.
C) It should not include any long-term assets or liabilities.
D) It must report only current liabilities and cash balance.
Which type of fund should be used for a public transportation system operated by a government?
A) General Fund
B) Internal Service Fund
C) Enterprise Fund
D) Capital Projects Fund
How are long-term assets reported in a governmental fund?
A) As expenditures in the fund financial statements
B) As capital assets in the government-wide financial statements
C) As liabilities on the balance sheet
D) As a reduction in revenues
What is a key characteristic of a governmental fund?
A) It is used to account for resources that are legally restricted for specific purposes.
B) It only tracks assets and liabilities with long-term impacts.
C) It reports on the financial position using the accrual basis of accounting.
D) It is only used for proprietary activities.
In what situation would an entity recognize a liability for compensated absences?
A) When the budget is passed
B) When the employee earns the leave time
C) When the leave time is used by the employee
D) When the employee retires and is compensated for unused leave
What is the proper way to report restricted grants in the fund financial statements?
A) As an unrestricted revenue item
B) As a deferred outflow of resources
C) As revenue when the eligibility requirements are met
D) As a liability until spent
Which of the following best describes “expenditure recognition” under the modified accrual basis of accounting?
A) Recognizing an expenditure when the payment is made
B) Recognizing an expenditure when the liability is incurred
C) Recognizing an expenditure when the budget is approved
D) Recognizing an expenditure when an invoice is received
What type of fund reports assets and liabilities using the economic resources measurement focus?
A) General Fund
B) Capital Projects Fund
C) Enterprise Fund
D) Special Revenue Fund
Which of the following is true about a “debt service fund”?
A) It is used to manage general operational expenses of a government.
B) It tracks revenues and expenditures for public education programs.
C) It accounts for resources used to repay long-term debt.
D) It is used for the construction of new government buildings.
What is the significance of the “Statement of Activities” for government-wide financial statements?
A) It details the changes in fund balance for all funds.
B) It reports the financial position of the government as of the fiscal year-end.
C) It shows how the net position has changed due to operational activities.
D) It lists the budgetary comparisons for the current year.
Which type of revenue recognition is applied for governmental funds under the modified accrual basis?
A) Recognized when earned and realizable
B) Recognized when received in cash
C) Recognized when measurable and available
D) Recognized only when billed to the taxpayer
What type of fund is used to track resources designated for specific projects like road repairs?
A) General Fund
B) Special Revenue Fund
C) Capital Projects Fund
D) Debt Service Fund
Which of the following best describes the term “available” for revenue recognition in governmental accounting?
A) Revenue that has been collected in cash
B) Revenue that will be collected during the next fiscal period
C) Revenue that is expected to be collected within 60 days of year-end
D) Revenue that has been accrued at year-end
What is the treatment of donations received for a specific purpose in a governmental fund?
A) Recognized as a general revenue item
B) Deferred as a liability until spent
C) Recognized as restricted revenue when received
D) Not reported until it is expended
Which of the following is true about the reporting of capital assets in the government-wide financial statements?
A) Capital assets are reported as expenditures in the fund financial statements only.
B) Capital assets are depreciated and reported as assets.
C) Capital assets are not reported at all in government-wide financial statements.
D) Capital assets are recognized only when sold.
What is the “economic resources measurement focus” used for in proprietary funds?
A) To report only the revenue sources and expenditures
B) To report the long-term assets and liabilities, including net position
C) To track current financial resources available
D) To exclude long-term obligations and assets
Answer: B) To report the long-term assets and liabilities, including net position
Which of the following is an example of a long-term liability for a government entity?
A) Accounts payable
B) Uncollected taxes
C) Bonds payable
D) Wages payable
Which of the following statements about the General Fund is true?
A) It accounts for all special assessments.
B) It is used to account for the main operating activities of the government.
C) It only reports long-term assets and liabilities.
D) It is used for capital projects and construction activities.
Which of the following would be reported as a “deferred inflow of resources” in a governmental fund?
A) Grant revenues received for a future period
B) Cash collected for property tax not yet levied
C) Interest earned on investments
D) Salaries payable
What does GASB Statement No. 54 focus on?
A) Reporting on pension obligations
B) Clarifying fund balance classifications in governmental funds
C) The presentation of long-term debt in the statement of net position
D) Revenue recognition in enterprise funds
What type of fund is used to account for activities that provide goods or services to the public and charge for them?
A) Special Revenue Fund
B) General Fund
C) Enterprise Fund
D) Debt Service Fund
What is the purpose of the “Statement of Net Position” in government-wide financial reporting?
A) To show the revenue and expenditure of all government funds
B) To detail the government’s budget surplus or deficit
C) To report the government’s assets, liabilities, and net position
D) To display changes in the fund balances of all governmental funds
Which of the following is considered a nonspendable fund balance?
A) Cash restricted for debt service
B) Investments that cannot be sold within the next year
C) Encumbrances for future spending
D) Unassigned fund balance in a special revenue fund
How are expenses reported in the government-wide statement of activities?
A) On a budgetary basis of accounting
B) When cash is paid out
C) When incurred, using the accrual basis of accounting
D) Only when a budget is approved
What type of funding source is most often used to finance capital projects?
A) General Fund revenues
B) Special Revenue Fund grants
C) Capital Projects Fund proceeds
D) Debt Service Fund surplus
Which of the following best describes a government’s “unassigned fund balance”?
A) Amounts set aside for specific purposes like debt service
B) Resources restricted for capital projects
C) The portion of fund balance that is not restricted, committed, or assigned
D) Investments that cannot be spent within a year
Which of the following is considered a revenue in the governmental fund financial statements?
A) Depreciation of capital assets
B) Interest on bonds payable
C) Property tax revenue
D) Payment of long-term debt
How is an “internal service fund” typically financed?
A) Through tax revenues
B) By charging user fees to other government departments
C) By grants and donations
D) Through government bonds
Which type of financial statement would report “program revenues”?
A) Statement of Net Position
B) Statement of Activities
C) Budgetary Comparison Schedule
D) Statement of Revenues, Expenditures, and Changes in Fund Balances
What is the main difference between the “General Fund” and the “Special Revenue Fund”?
A) The General Fund tracks fixed assets; the Special Revenue Fund does not.
B) The Special Revenue Fund accounts for specific restricted revenues, whereas the General Fund is for general purposes.
C) The General Fund is for capital assets; the Special Revenue Fund is for operational expenses.
D) The Special Revenue Fund reports long-term debt; the General Fund does not.
What financial statement would a government use to assess changes in its financial position over time?
A) Statement of Net Position
B) Statement of Revenues, Expenditures, and Changes in Fund Balances
C) Statement of Activities
D) Statement of Cash Flows
Under which basis of accounting are revenues recognized when they are both earned and available?
A) Accrual basis
B) Modified accrual basis
C) Cash basis
D) Full accrual basis
What is the primary purpose of the “budgetary comparison schedule”?
A) To show the net change in fund balances
B) To display the revenues and expenditures for each program
C) To compare the actual financial performance with the budgeted amounts
D) To report on the total assets and liabilities of the government
Which of the following would be considered an “expenditure” in governmental accounting?
A) Depreciation on equipment
B) Payment to an external auditor
C) Increase in fund balance
D) Sale of government bonds
Which type of fund is used to account for resources used for activities like police services that are financed primarily through taxes?
A) Enterprise Fund
B) General Fund
C) Special Revenue Fund
D) Internal Service Fund
What is a key characteristic of the “accrual basis of accounting”?
A) Revenue and expenses are recognized only when cash is received or paid.
B) Revenues are recognized when they are both measurable and available.
C) Revenue and expenses are recognized when earned or incurred, regardless of when cash is received or paid.
D) Only long-term liabilities are recorded.
Essay Questions and Answers
Discuss the purpose and importance of governmental fund accounting and how it differs from proprietary and fiduciary fund accounting.
Answer:
Governmental fund accounting is designed to track and report the financial resources that governments use to provide services to their citizens. The primary purpose is to demonstrate accountability over public funds, ensuring that resources are spent in accordance with laws, regulations, and budgetary constraints. This type of accounting uses the modified accrual basis, which recognizes revenue when it is both measurable and available and expenditures when they are incurred.
In contrast, proprietary fund accounting uses the accrual basis, similar to business accounting, which recognizes revenue when earned and expenses when incurred. This approach is used for activities where the government charges for goods or services, such as public utilities or transit systems. Fiduciary fund accounting tracks assets held by the government in a trustee capacity for others, ensuring that these funds are managed according to the terms of trust agreements or state laws.
The main difference between governmental fund accounting and proprietary/fiduciary accounting is that the former focuses on financial accountability and compliance, while the latter emphasizes full economic measurement and performance reporting.
Explain the concept of fund balance classifications and their significance in governmental financial reporting.
Answer:
Fund balance classifications refer to how the unassigned portion of a fund’s balance is categorized to reflect constraints on the use of resources. The Governmental Accounting Standards Board (GASB) Statement No. 54 established a hierarchy of fund balance classifications to provide clarity on how funds can be spent.
The classifications are as follows:
- Nonspendable: Resources that cannot be spent, such as inventory or prepaid items.
- Restricted: Resources with external constraints imposed by creditors, grantors, or laws.
- Committed: Resources that are constrained by the government’s highest level of decision-making authority, such as a city council resolution.
- Assigned: Resources intended for specific purposes by the government but not formally restricted or committed.
- Unassigned: The portion of the fund balance that is not restricted, committed, or assigned, available for any purpose.
The significance of these classifications is that they provide stakeholders with insight into the availability and use of financial resources. This transparency helps ensure that financial statements accurately reflect the government’s financial position and adherence to budgeting policies.
Describe how the government-wide financial statements differ from the fund financial statements, and explain the purpose of each.
Answer:
The government-wide financial statements are designed to present a broad overview of a government’s financial activities and position, providing an aggregate view of the government’s operations as a whole. These statements use the accrual basis of accounting and include the Statement of Net Position and the Statement of Activities. The Statement of Net Position reports all assets, liabilities, and net position (the difference between assets and liabilities), giving an overall picture of financial health. The Statement of Activities shows the revenues, expenses, and changes in net position, helping users understand the financial results of government operations over time.
Fund financial statements, on the other hand, focus on specific funds within the government. These statements use the modified accrual basis of accounting and include governmental funds and proprietary and fiduciary fund statements. They provide detailed information on how resources were spent and the remaining balances within individual funds. The primary purpose of fund financial statements is to demonstrate compliance with budgetary and legal requirements, ensuring that resources are used according to their intended purpose.
While government-wide statements give a macro-level view of the financial status of the entire entity, fund financial statements allow for more detailed insights into individual funds’ operations and financial condition.
Discuss the recognition and reporting of capital assets in the government-wide financial statements.
Answer:
Capital assets, such as land, buildings, and equipment, are reported in the government-wide financial statements to provide a complete picture of the government’s resources and financial position. Under the accrual basis of accounting, these assets are recognized at their historical cost, including all necessary costs for preparation and acquisition. For example, when a government acquires a new building, its purchase price, legal fees, and any other associated costs are capitalized as an asset in the Statement of Net Position.
Once capital assets are recorded, they must be depreciated over their estimated useful lives, except for land, which is not depreciated. Depreciation expense is reported in the Statement of Activities, which helps stakeholders understand the allocation of resources over time and the wear and tear on government assets.
Additionally, capital assets are reported as non-current assets, reflecting their long-term nature. This treatment allows for an accurate measure of net position by factoring in the total value of assets minus accumulated depreciation and related liabilities.
Explain the significance of the modified accrual basis of accounting for governmental funds and how it differs from the full accrual basis used in proprietary funds.
Answer:
The modified accrual basis of accounting is significant for governmental funds as it aligns financial reporting with the focus on accountability and budgetary control. Under this method, revenues are recognized when they are both measurable and available, meaning they must be collected within the current period or soon enough thereafter to finance current expenditures. Expenditures are recognized when the related liability is incurred, regardless of the timing of the cash payment.
This basis of accounting is different from the full accrual basis used in proprietary funds, which recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid. Full accrual accounting provides a comprehensive view of an entity’s financial position and results of operations, akin to private-sector accounting, as it includes all assets and liabilities, both current and non-current.
The modified accrual basis helps governments focus on short-term fiscal accountability, ensuring that they stay within budgeted limits and manage cash flows effectively. The full accrual basis, however, is better suited for assessing long-term financial health and sustainability.