Government and Non-Profit Accounting Exam
Government and Non-Profit Accounting focuses on fund-based financial reporting, budgetary control, and compliance with regulatory standards. Unlike for-profit entities, these organizations use fund accounting to track resources restricted for specific purposes. Governmental funds, including the General Fund, Special Revenue Funds, and Capital Projects Funds, follow the modified accrual basis, recognizing revenues when measurable and available, and expenditures when incurred. Proprietary and fiduciary funds use the accrual basis, similar to business accounting.
Financial reporting standards are governed by GASB (Governmental Accounting Standards Board) for government entities and FASB (Financial Accounting Standards Board) for non-profits. Key statements include the Statement of Activities, Statement of Net Position, and Fund Financial Statements. Revenue recognition differs based on restrictions, with grants and contributions often classified as with or without donor restrictions. Budgetary compliance, pension liabilities, leases (GASB 87), and interfund transfers are essential for accurate reporting. Understanding these principles ensures transparency, accountability, and adherence to financial regulations.
Sample Questions and Answers
Which basis of accounting is primarily used by governmental funds?
A) Cash basis
B) Accrual basis
C) Modified accrual basis
D) Hybrid basis
Answer: C) Modified accrual basis
Explanation: Governmental funds use the modified accrual basis, recognizing revenues when they are both measurable and available and expenditures when liabilities are incurred.
In fund accounting, what is the primary focus of governmental funds?
A) Economic resources measurement focus
B) Cash flow measurement focus
C) Financial position and changes in financial position
D) Net income measurement
Answer: C) Financial position and changes in financial position
Explanation: Governmental funds emphasize accountability, reporting financial position and changes rather than profit-oriented measures.
Which of the following is not a proprietary fund?
A) Internal service fund
B) Enterprise fund
C) Capital projects fund
D) None of the above
Answer: C) Capital projects fund
Explanation: Proprietary funds include enterprise and internal service funds, whereas capital projects funds are governmental funds used to account for major capital expenditures.
Which of the following funds uses the accrual basis of accounting?
A) General fund
B) Special revenue fund
C) Enterprise fund
D) Debt service fund
Answer: C) Enterprise fund
Explanation: Enterprise funds (a type of proprietary fund) use the accrual basis of accounting, recognizing revenues when earned and expenses when incurred.
What financial statement is not required for governmental funds?
A) Statement of revenues, expenditures, and changes in fund balance
B) Balance sheet
C) Statement of cash flows
D) Budgetary comparison statement
Answer: C) Statement of cash flows
Explanation: Governmental funds do not prepare a statement of cash flows; only proprietary funds require this statement.
Which fund type is used to account for resources legally restricted to expenditures for specific purposes?
A) Capital projects fund
B) Special revenue fund
C) Enterprise fund
D) Internal service fund
Answer: B) Special revenue fund
Explanation: A special revenue fund accounts for resources that must be used for specific purposes due to legal or grant restrictions.
What is the primary purpose of encumbrance accounting?
A) To record actual expenditures
B) To prevent overspending in budgetary funds
C) To recognize revenue when available
D) To ensure the correct allocation of capital assets
Answer: B) To prevent overspending in budgetary funds
Explanation: Encumbrance accounting reserves funds for commitments made (e.g., purchase orders) to avoid exceeding the budget.
What is the primary objective of a Comprehensive Annual Financial Report (CAFR)?
A) To ensure profitability of government entities
B) To present government-wide financial statements and fund financial statements
C) To calculate tax revenues
D) To prepare a detailed analysis of government expenses
Answer: B) To present government-wide financial statements and fund financial statements
Explanation: A CAFR provides a complete picture of government financial activities, including government-wide and fund-specific reporting.
The government-wide financial statements are prepared using which basis of accounting?
A) Cash basis
B) Modified accrual basis
C) Accrual basis
D) Budgetary basis
Answer: C) Accrual basis
Explanation: Government-wide financial statements use the accrual basis of accounting, recognizing revenues and expenses when they occur.
What does the Net Position section of a government-wide financial statement represent?
A) The balance in the general fund
B) The total amount of governmental revenue
C) Assets minus liabilities, including capital assets and long-term debt
D) The government’s total annual budget
Answer: C) Assets minus liabilities, including capital assets and long-term debt
Explanation: The net position reflects the government’s financial position, similar to equity in for-profit entities.
Which of the following funds is not classified as a fiduciary fund?
A) Pension trust fund
B) Private-purpose trust fund
C) Special revenue fund
D) Investment trust fund
Answer: C) Special revenue fund
Explanation: Fiduciary funds include pension trust, private-purpose trust, investment trust, and agency funds, while special revenue funds belong to governmental funds.
Under GASB standards, what is the appropriate method for recognizing revenue from property taxes?
A) When cash is received
B) When taxes are levied
C) When taxes are available and measurable
D) When the fiscal year ends
Answer: C) When taxes are available and measurable
Explanation: The modified accrual basis requires property tax revenue to be recognized when it is both measurable and available to finance expenditures.
Which financial statement reports expenses by function for a government entity?
A) Government-wide statement of activities
B) Balance sheet
C) Statement of revenues, expenditures, and changes in fund balance
D) Statement of cash flows
Answer: A) Government-wide statement of activities
Explanation: The statement of activities reports expenses by function (e.g., public safety, education) and matches them with related revenues.
What type of government fund records depreciation?
A) General fund
B) Special revenue fund
C) Enterprise fund
D) Capital projects fund
Answer: C) Enterprise fund
Explanation: Only proprietary funds (enterprise & internal service funds) use the accrual basis, which requires recording depreciation.
When are expenditures typically recognized in governmental funds?
A) When the invoice is received
B) When they are incurred
C) When they are paid
D) When a purchase order is issued
Answer: B) When they are incurred
Explanation: Under modified accrual accounting, expenditures are recognized when liabilities are incurred, except for debt service and certain other transactions.
What is the primary difference between governmental and proprietary funds?
A) Proprietary funds use the modified accrual basis
B) Governmental funds do not focus on profit measurement
C) Proprietary funds do not record capital assets
D) Governmental funds recognize revenues when earned
Answer: B) Governmental funds do not focus on profit measurement
Explanation: Governmental funds emphasize accountability and financial position, while proprietary funds operate similarly to businesses, using the accrual basis.
What is the purpose of an internal service fund?
A) To provide services to the general public for a fee
B) To account for general government operations
C) To finance and account for services provided internally within government agencies
D) To manage investment activities for pension funds
Answer: C) To finance and account for services provided internally within government agencies
Explanation: Internal service funds account for services (e.g., IT, fleet management) provided internally on a cost-reimbursement basis.
Which fund is used for long-term capital asset acquisition and construction?
A) Debt service fund
B) Capital projects fund
C) Special revenue fund
D) Enterprise fund
Answer: B) Capital projects fund
Explanation: The capital projects fund tracks financial resources used for major capital acquisitions (e.g., buildings, highways).
What does a debt service fund account for?
A) Collection of property taxes
B) Payment of principal and interest on long-term debt
C) Short-term loan transactions
D) Internal borrowing between departments
Answer: B) Payment of principal and interest on long-term debt
Explanation: The debt service fund ensures that governments properly manage and account for debt repayments.
Which of the following is a non-exchange transaction?
A) A city selling land to a private developer
B) Utility services provided by a government-owned water company
C) A state receiving federal grant money
D) A toll road charging user fees
Answer: C) A state receiving federal grant money
Explanation: Non-exchange transactions involve one party giving resources without receiving equal value in return, such as grants or taxes.
What is the primary purpose of fund balance classifications in governmental accounting?
A) To ensure compliance with federal tax laws
B) To track available resources and spending constraints
C) To identify future profit potential
D) To determine salary increases for government employees
Answer: B) To track available resources and spending constraints
Explanation: Fund balance classifications (e.g., restricted, committed, assigned) help identify how government resources can be used.
How are capital assets reported in government-wide financial statements?
A) Expensed in the year of acquisition
B) Recognized as an asset and depreciated
C) Not reported at all
D) Reported as revenues when acquired
Answer: B) Recognized as an asset and depreciated
Explanation: Government-wide statements (using the accrual basis) capitalize and depreciate capital assets over their useful lives.
What is the distinguishing feature of permanent funds?
A) Principal remains intact while earnings are used for public purposes
B) They fund short-term government projects
C) They generate revenue through tax collection
D) They are used for business-type activities
Answer: A) Principal remains intact while earnings are used for public purposes
Explanation: Permanent funds hold principal amounts in perpetuity, with earnings used for specific government activities.
What is a major requirement for government budgets under GASB standards?
A) Budgets must be prepared using cash basis accounting
B) Governments must adopt an annual budget for all funds
C) Budgetary comparisons must be presented in the financial statements for the general fund
D) Governments must maintain a balanced budget at all times
Answer: C) Budgetary comparisons must be presented in the financial statements for the general fund
Explanation: GASB requires budgetary comparison statements for the general fund and major special revenue funds with legally adopted budgets.
What is an example of an exchange transaction in government accounting?
A) Sales taxes collected from businesses
B) Grant money received for education programs
C) Fines imposed on citizens
D) Utility services provided by a government-owned company
Answer: D) Utility services provided by a government-owned company
Explanation: In exchange transactions, both parties receive something of equal value, such as government utilities charging fees for services.
Which of the following does not appear in proprietary fund financial statements?
A) Statement of net position
B) Statement of revenues, expenses, and changes in fund net position
C) Statement of fiduciary net position
D) Statement of cash flows
Answer: C) Statement of fiduciary net position
Explanation: Proprietary funds do not include fiduciary activities, as fiduciary funds are reported separately.
What is the purpose of the MD&A (Management’s Discussion and Analysis) section in a government’s financial report?
A) To provide an overview of financial activities and changes
B) To present detailed financial transactions
C) To list taxpayer complaints and budgetary concerns
D) To provide an audit opinion
Answer: A) To provide an overview of financial activities and changes
Explanation: The MD&A offers a narrative analysis explaining financial trends, significant changes, and future outlooks.
Which of the following best describes interfund transfers in governmental accounting?
A) Loans between different government entities
B) Transactions in which one fund provides goods or services to another
C) Nonreciprocal transactions between funds with no expectation of repayment
D) Federal funding provided to state or local governments
Answer: C) Nonreciprocal transactions between funds with no expectation of repayment
Explanation: Interfund transfers are movements of resources between funds without an exchange of services or goods, typically used to finance operations.
In governmental accounting, when a government issues bonds to finance a capital project, how is the bond proceeds recorded in the capital projects fund?
A) As long-term debt
B) As revenue
C) As other financing sources
D) As an expense
Answer: C) As other financing sources
Explanation: Bond proceeds are classified as “other financing sources” rather than revenue since they are not derived from normal government operations.
A government-wide statement of net position reports assets, liabilities, and net position for which types of activities?
A) Only business-type activities
B) Only governmental activities
C) Both governmental and business-type activities
D) Only proprietary funds
Answer: C) Both governmental and business-type activities
Explanation: The government-wide statement of net position includes both governmental and business-type activities, consolidating financial information.
What is the primary financial reporting objective for governmental entities?
A) To maximize profits
B) To provide useful financial information for accountability and decision-making
C) To attract investors
D) To comply with tax regulations
Answer: B) To provide useful financial information for accountability and decision-making
Explanation: Governments prepare financial reports to demonstrate accountability and aid in decision-making rather than profit generation.
Which of the following transactions would be recorded in a fiduciary fund?
A) Collection of local sales taxes
B) Investment income earned for a pension fund
C) Purchase of police vehicles
D) Payment of public school teachers’ salaries
Answer: B) Investment income earned for a pension fund
Explanation: Fiduciary funds (e.g., pension trust funds) account for resources held in trust for others, such as government employees’ pensions.
What is the fund balance classification that includes amounts that can only be spent for specific purposes imposed by law or external parties?
A) Nonspendable
B) Restricted
C) Committed
D) Assigned
Answer: B) Restricted
Explanation: A restricted fund balance includes resources that must be used for specific purposes due to legal or grantor restrictions.
When a government purchases supplies, what is the correct initial accounting treatment in a governmental fund?
A) Expense the full amount when received
B) Record as an encumbrance and then as an expenditure when used
C) Record as an inventory asset and expense when consumed
D) Report the purchase in the proprietary funds only
Answer: B) Record as an encumbrance and then as an expenditure when used
Explanation: Governments use encumbrance accounting to record commitments, then classify as an expenditure when supplies are received.
The modified accrual basis of accounting recognizes revenues when they are:
A) Earned and received
B) Measurable and available
C) Collected in cash
D) Budgeted
Answer: B) Measurable and available
Explanation: Under modified accrual accounting, revenues are recognized when they are measurable and available (usually within 60 days after year-end).
In which of the following situations would a government-wide statement of activities report program revenues?
A) General tax revenues
B) Traffic fines collected by the police department
C) Interest earned on investments
D) Income taxes collected from residents
Answer: B) Traffic fines collected by the police department
Explanation: Program revenues result from specific services or fines charged to users, such as parking tickets and licensing fees.
How should infrastructure assets (e.g., bridges, roads) be reported in government-wide financial statements under GASB rules?
A) Expensed in the year of acquisition
B) Capitalized and depreciated over their useful life
C) Not reported as assets
D) Reported only when maintenance costs exceed a threshold
Answer: B) Capitalized and depreciated over their useful life
Explanation: Government-wide financial statements capitalize infrastructure assets and depreciate them, unless the modified approach is used.
What distinguishes a permanent fund from other governmental funds?
A) The principal must remain intact, and only earnings can be spent
B) It is used only for enterprise activities
C) It is accounted for using the accrual basis of accounting
D) It is primarily used for capital projects
Answer: A) The principal must remain intact, and only earnings can be spent
Explanation: Permanent funds hold principal investments in perpetuity, and only earnings are used for government purposes.
Which of the following is not a component of the net position in government-wide financial statements?
A) Net investment in capital assets
B) Restricted net position
C) Unassigned fund balance
D) Unrestricted net position
Answer: C) Unassigned fund balance
Explanation: The government-wide net position includes net investment in capital assets, restricted, and unrestricted net positions but not the unassigned fund balance, which applies to governmental fund reporting.
What is the primary purpose of a budgetary comparison schedule in government financial reporting?
A) To track changes in net position over time
B) To compare actual financial results with the legally adopted budget
C) To evaluate proprietary fund performance
D) To determine capital asset depreciation
Answer: B) To compare actual financial results with the legally adopted budget
Explanation: The budgetary comparison schedule shows whether government spending stayed within budgeted amounts, ensuring accountability.
A city issues a $1,000,000 bond to finance a new school building. What is the correct journal entry in the Capital Projects Fund?
A)
Dr. Cash $1,000,000
Cr. Other Financing Sources – Bond Proceeds $1,000,000
B)
Dr. Cash $1,000,000
Cr. Bonds Payable $1,000,000
C)
Dr. Bonds Payable $1,000,000
Cr. Cash $1,000,000
D)
Dr. Other Financing Sources – Bond Proceeds $1,000,000
Cr. Cash $1,000,000
Answer: A)
Explanation: Governmental funds do not record long-term liabilities like bonds payable. Instead, they recognize bond proceeds as Other Financing Sources.
A city government collects $200,000 in property taxes but expects $10,000 to be uncollectible. What journal entry should be made?
A)
Dr. Cash $200,000
Cr. Property Tax Revenue $200,000
B)
Dr. Cash $190,000
Dr. Allowance for Uncollectible Taxes $10,000
Cr. Property Tax Revenue $200,000
C)
Dr. Cash $200,000
Dr. Property Tax Expense $10,000
Cr. Property Tax Revenue $190,000
D)
Dr. Cash $200,000
Cr. Deferred Revenue $10,000
Cr. Property Tax Revenue $190,000
Answer: B)
Explanation: The government must recognize an allowance for uncollectible taxes, reducing revenue.
A non-profit receives a $50,000 grant restricted for scholarships. How should it record this?
A)
Dr. Cash $50,000
Cr. Contributions – With Donor Restrictions $50,000
B)
Dr. Cash $50,000
Cr. Contributions – Without Donor Restrictions $50,000
C)
Dr. Cash $50,000
Cr. Deferred Revenue $50,000
D)
Dr. Cash $50,000
Cr. Unearned Revenue $50,000
Answer: A)
Explanation: Since the funds are restricted, they must be recorded in net assets with donor restrictions.