BEC B5 Practice notes +BAR B5 practice quiz

What was the total reciprocal interfund activity for Curtain during May?

$5,000 Reciprocal = cycling the fund. Reciprocal interfund activity for the city of Curtain is $5,000. Reciprocal interfund activity includes interfund loans and interfund services provided and used. Billing by the internal service fund to a department financed by the general fund for services rendered is the only transaction meeting this definition. Nonreciprocal transfers include interfund transfers (which are displayed as either other financing sources or uses on the governmental fund financial statements or purely as transfers in proprietary fund financial statements) and interfund reimbursements (which are not shown on the face of the financial statements).

Which of the following is the most likely result of imposing tariffs to increase domestic employment?

A long-run reallocation of workers from export industries to protected domestic industries. (A tariff is a tax imposed on imported goods and services. One of the desired effects of implementing a tariff is that if imported goods and services become more expensive, companies and individuals will be more likely to produce domestically—thereby increasing domestic employment. Taxes will have a negative effect on international business, thereby increasing domestic business. Workers will be needed to meet the demand domestically.)

In which of the following cases would a municipality record a lease using a right-of-use ROU asset account?

A proprietary fund entering into an agreement as a lessee in an agreement properly accounted for as a lease other than a short-term lease and contract that transfers ownership

Which internal account should Spring Township credit when it issues a purchase order for supplies?

A purchase order is a binding document and thus is recorded when issued. The journal entry made for internal accounting when a purchase order is issued is.

Which of the following definitions best describes a business cycle?

Activity that alternates periods of growth and decline in an economy's GDP. (Business cycles represent the rise and fall of economic activity relative to long-term growth trends. As economic activity is frequently measured using a country's gross domestic product (GDP), business cycles show GDP rising and falling over time.)

Encumbrances would not appear in which fund?

An enterprise fund would not use encumbrance accounting. Encumbrance accounting is used in the governmental (GRaSPP) funds but is not used in the proprietary (SE) or fiduciary (CIPPOE) funds. Enterprise is the "E" in

After seeing several years of declining production and increased competition from foreign entities, the U.S. government recently implemented tariffs to protect the manufacturing industry. This move will entail:

Applying a tax on imported goods to protect domestic producers. (A tariff is a tax assessed on imported goods. Tariffs generate revenue for domestic governments and they help protect domestic producers by making imported goods more expensive and therefore less attractive.)

Frome City signed a 20-year office property lease for its general staff Frome could terminate the lease at any time after giving one year's notice, but termination is considered a remote possibility The lease meets the criteria for a lease other than a short- term lease and contract that transfers ownership. What is the effect of the lease on the asset amount in Frome's capital assets and the liability amount in Frome's governmental activities column of the government-wide statement of net position?

Asset amount (Increase) Liability amount (Increase) Rule: Leases other than short-term leases and contracts that transfer ownership are recognized as a right-of-use asset with related debt for net present value of lease payments. The lease liability for a 20-year office property recorded as a lease other than short-term lease and contracts that transfer ownership should be reported in the government-wide statement of net position as an increase in assets and liabilities in the governmental activities column. Capital assets and non-current liabilities are not recorded in the governmental funds.

Assets (such as property taxes receivable) associated with unavailable revenues (such as property taxes collected more than 60 days after year-end) should be recorded by crediting:

Assets associated with unavailable revenues should be recorded by crediting deferred inflows of resources as follows:

A natural monopoly exists because:

Economic and technical conditions permit only one efficient supplier. (A natural monopoly exists when economic and technical conditions permit only one efficient supplier.)

To decrease the money supply, the Fed might:

Sell government securities on the open market. (To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio.)

Which of the following statements is correct regarding an economy at the peak of the business cycle?

The economy will be at the natural rate of unemployment. (At the natural rate of unemployment, there is frictional, structural, and seasonal unemployment; cyclical unemployment is at 0 percent, which implies that the economy is operating at its highest potential level.)

What account should be debited in the general fund at inception of the lease if the equipment is a governmental capital asset and not use a capital projects fund?

The expenditures control account should be debited in the general fund at the inception of the lease for the principal portion of the lease payments consistent with other capital acquisitions in governmental funds.

A city ordinance that freezes rent prices may cause:

The quantity demanded of rental space exceeds the quantity supplied. (A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied. This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent-stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause.)

The Overton County Utility System operates under the general authority granted by state public service commission. Authority to raise rates for utility service is granted by the public service commission upon application by the utility systems under their supervision. The Overton County Utility System has requested a $1,000,000 increase in rates to fund plant improvements. When the utility fully bills the increased rates that have been authorized by the commission, what would the utility recognize?

$1,000,000 deferred inflows until the improvements are made. The Overton County Utility System would recognize deferred inflows for regulator-approved rate increases associated with future capital improvements. Deferred inflows of resources may result from rate actions by a regulator that impose limits on the assets of a government, including establishment of current rates at a level adequate to recover costs that are expected to be incurred in the future.

Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the budgetary control after the supplies and invoice were received?

$5,000. After the supplies and invoice are received, Elm should debit the internal account for budgetary control for the same $5,000 estimated amount that the account was credited when the purchase order was issued. The journal entries would be

During its fiscal year ended June 30, Year 1 , Cliff City issued purchase orders totaling $5,000,000, which were properly charged to encumbrances at that time. Cliff City's appropriations do not lapse. Cliff received goods and related invoices at the encumbered amounts totaling before year-end. The remaining goods of $500,000 were not received until after year-end. Cliff paid $4,200,000 of the invoices received during the year. What amount of Cliffs encumbrances were outstanding at June 30, Year 1?

$500,000. The encumbrances outstanding at year-end are the $500,000 of remaining goods ordered but not yet received at year-end_ If the encumbrances do not lapse at year-end and are considered material, the aggregate amount is displayed as a commitment of unassigned fund balance and disclosed in the notes to the financial statements. Purchase orders that encumber current year appropriations will expire at the end of the budget year unless there is a policy to honor those purchase orders into the next year. If purchase orders continue to obligate a previous year's budget, the appropriations do not lapse and the related outstanding encumbrance amount is recognized on the face of the financial statements (generally) as a commitment of fund balance and disclosed.

Classification of fund balance

- Nonspendable Fund Balance: Represent resources in a form that cannot be spent or are legally or contractually required to remain whole. - Unassigned Fund Balance: Fund balance resources associated with spendable assets that are neither restricted, committed, nor assigned. (is the residual classification for the general fund) - Committed Fund Balance: Can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision-making authority. - Assigned Fund Balance: Constrained by the government's intent to be used for specific purposes, but are neither restricted nor committed. - Restricted Fund Balance: Fund balance resources associated with assets restricted by external sources such as creditors, contributors, other governments, laws, constitutional provisions or enabling legislation.

Projections indicate that the economy is entering a slowdown. What is the expected outcome in the near future?

A drop in interest rates (When the economy enters a slowdown, the government and the Federal Reserve will consider fiscal and monetary policies respectively that will help to stimulate economic growth. Lowering interest rates (specifically, the discount rate) is a monetary policy action that will help spur economic growth by making it cheaper for market participants to borrow money.

Monopolistic competition is characterized by:

A relatively large group of sellers who produce differentiated products. (Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products. There are few barriers to entry and firms exert some influence over the price and the market. Best examples are brand name consumer products.)

Information regarding four aluminum manufacturers is as follows: According to international law, which of the following aluminum producers is dumping?

Alpha. (Dumping occurs when the price charged to foreign customers on exported goods is less than either the price charged in the domestic market or less than the production cost. For Alpha, the price to foreign customers is $59, which is less than the production cost of $60. So even though domestic customers are only paying $56, the fact that the foreign price of $59 is less than the production cost of $60 qualifies this as dumping.

A country recently experienced a drop in consumer purchases and a rise in business inventories of durable goods. Wages grew slowly and unemployment increased. Business investment in plant and equipment dropped sharply and profits fell. Both interest rates and stock prices fell. Which of the following statements best represents the country's current economy?

Amid an economic recession. (A recession occurs when economic activity or output, as measured by GDP, declines. A decline in consumer purchases (likely due to slow wage growth), increased unemployment, and falling stock prices indicate an uncertain economic outlook and a reduction of wealth. Rising inventories, decreases in business investment, and falling profits indicate an economy in decline. Falling interest rates represent an attempt to reduce borrowing costs and to spur economic growth.)

If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:

An acceleration in the inflation rate, unless government expenditures are also reduced. (A tax cut results in higher net income and profits, which allows higher compensation, more discretionary income, and rising price levels. A reduction in government spending will help to offset rising prices.)

A city council designates funds in the enterprise fund for future equipment replacement. The enterprise fund should report this as.

An unrestricted component of net position. Designations of an enterprise fund's net position for future equipment replacement would be displayed as unrestricted net position. Net position will include classifications for investment in capital assets net of related debts, amounts restricted by external sources and unrestricted components. Internal designations are classified as unrestricted.

The budget for the City of Goodville for the year ending December 31 was adopted and recorded on January 2 of the same year. After recording the budget, the accounting records showed a debit balance of $50,000 in the Budgetary Control account. What does this indicate?

Appropriations are $50,000 greater than estimated revenues. A debit balance in budgetary control accounts would indicate that appropriations are in excess of budgeted revenues. Budgetary accounts have natural balances that are opposite of actual accounts. Recording the budget would result in the following entry (with hypothetical amounts: Appropriations = 100, Estimated revenues = 80):

Which of the following would indicate that the economy is in an expansionary phase?

Businesses increase capital investment. (In an expansionary phase, GDP increases, firms' profits rise, and the demand for goods and services increases. To capitalize on this rising economic activity, businesses increase their capital investment and expand the size of their workforce.)

At the peak of a business cycle, which of the following conditions is most true?

Capacity constraints and labor shortages are likely to put upward pressure on the overall price level. (The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on the overall price level.)

It is inappropriate to record depreciation expense in a (an):

Capital projects fund

A government is most likely to reduce taxes on investments when:

Capital spending is expected to be unusually low. (Reducing taxes is a fiscal policy decision designed to increase disposable income and facilitate future spending and economic growth. Lower-than-expected capital spending can be addressed through lower taxes, which puts more money into the hands of businesses and consumers.)

The movement along the demand curve from one price-quantity combination to another is called a(n):

Change in the quantity demanded. (References to the change in quantity demanded refer to a single demand curve, which is downward sloping to the right. Changes in the quantity demanded result from changes in price.)

What amount should Dayne County report as expenditures in its governmental funds statement of revenues, expenditures, and changes in fund balances?

Current: expenditures (payments to vendors) $500,000 Debit service payment Capital outlay: computer purchase expenditure 300,000 payments to vendors Debt service principal payment on long-term debt 100,000 Capital purchase Total reported expenditures $900,000

The City of Edgar leased a convention center to Prime Time Entertainment Inc. for a period of three years. Ownership of the convention center will remain with the city at the end of the lease. The convention center is currently accounted for in a convention center fund that is supported by user fees. The accounts the city would debit and credit to initially record the lease are:

DR Lease receivable CR Deferred inflows of resources The City of Edgars lease with Prime Tme Entertainment Inc. is an agreement other than a short-term lease (it exceeds one year) and contract that transfers ownership (the convention center remains the property of the city). The convention center fund is most likely an enterprise fund because it is supported by user fees. Proprietary funds (as lessors) record a lease receivable and deferred inflows of resources for leases of this character. The entry to record the lease is.

The budget of a governmental unit, for which the appropriations exceed the estimated revenues, was adopted and recorded in the general ledger at the beginning of the year. During the year, expenditures and encumbrances were less than appropriations; whereas revenues equaled estimated revenues. The budgetary control account is:

Debited at the beginning of the year and credited at the end of the year. When appropriations exceed estimated revenues at the beginning of the year (per JE #1 below), and then expenditures and encumbrances are less than appropriations (per JE #2 below) the budgetary control account is debited at the beginning of the year (per JE #1 below) and credited at the end of the year (per JE #2 below):

An increase in the quantity demanded for a product would be associated with a(n):

Decrease in the price of that product (The fundamental law of demand holds that there is an inverse relationship between price of the product and the quantity demanded. We move along the demand curve D-D.)

Variations between business cycles most likely are attributable to which of the following factors?

Duration and intensity. (Variations in business cycle are attributed or described in terms of how long they last (duration) and the degree of peak or trough (intensity). While a recession, for example, is defined as two consecutive quarters of negative economic growth, a depression is more qualitatively assessed after consideration of both severity (depth) and duration.)

Which one of the following is not a key assumption of perfect competition?

Each firm can price its product above the industry price. (A key assumption of perfect competition is that the firm is a "price taker," that is, it cannot fix the price. Accordingly, it is not true that each firm can price its product above the industry price. Key assumptions of perfect competition include: - Customers are indifferent about which firm they buy from. - The level of a firm's output is small relative to the industry's total output. - There is freedom of entry into and exit out of the industry.

If a company's output is increasing at 100 percent while its input is increasing at 80 percent, the cause is most likely the company's:

Economies of scale. (Economies of scale occur when companies experience cost advantages resulting from gains in production efficiencies. Essentially, the more that is produced, the faster and the more efficient the production process becomes. This ultimately results in cost savings. If inputs are only increasing by 80 percent while outputs are increasing by 100 percent, the company clearly has been able to take advantage of efficiencies that have resulted in greater outputs from fewer inputs.)

Budgetary Entries

Est. Rev. - property taxes, license, inter-governmental revenues Est. Other Financing sources - Transfer funds, proceeds of debt issue

Which one of the following most accurately describes the normal sequence of a business cycle?

Expansion, peak, contraction, and trough. (The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity.)

A period during which GDP is rising and unemployment is falling is called a(n):

Expansion. (During an expansion, GDP is rising and unemployment is falling. - A recession is when GDP is falling NOT rising. - A peak is the highest point of economic activity. It is the point where GDP is at its highest level in the cycle and unemployment is at its lowest level in the cycle. - A trough is the lowest level of economic activity. It is the point where GDP is at its lowest level in the cycle and unemployment is at its highest level in the cycle.)

Park incurred salaries and wages of $800 000 for the month of April Year 1. What account should Park debit to record this $800,000

Expenditures control. Salaries and wages incurred by Park City general fund should be recorded as a debit to expenditures control.

Any business firm that has the ability to control the price of the product it sells:

Faces a downward-sloping demand curve. (Any business firm that has the ability to control the price of the product it sells faces a downward- sloping demand curve for the firm. Only the firm in a competitive market is a price-taker facing a horizontal demand curve at the market equilibrium price.)

For state and local governmental units, generally accepted accounting principles require that encumbrances outstanding at year- end be reported as:

For state and local governmental units, generally accepted accounting principles (GAAP) require that encumbrances outstanding at year-end be reported as a component of committed or assigned fund balance so that funds will be available when the goods and/or services are received

An increase in the personal income tax will tend to cause:

GDP to fall and unemployment to rise. (An increase in the personal income tax will take money out of the hands of consumers and lead to a reduction in economic activity. As a result, an increase in taxes causes GDP to fall and unemployment to rise.)

An increase in government spending will tend to cause:

GDP to rise and unemployment to fall. (An increase in government spending provides more money to industries and companies, leading to increases in production and overall economic activity. As a result, an increase in government spending causes GDP to rise and unemployment to fall.)

Which of the following concepts can best be used to understand oligopoly behavior?

Game theory model. (Game theory is a study of mathematical models of conflict and cooperation between rational decision makers. There are several versions of game theory models that are used to evaluate participant behavior under oligopolies.)

Lease classifications

Government leases: - A short-term lease is an agreement to convey the right of use of another entity's nonfinancial assets for a maximum period of less than 12 months. - A "contract that transfers ownership" as defined by governmental accounting standards. A contract that transfers ownership is a contract that conveys ownership of the underlying asset to the lessee in a financed purchase. Commercial leases: - An operating lease is a classification title used in commercial accounting, not governmental accounting. - a finance lease is a classification title used in commercial accounting and is associated with the purchase/sale of an asset.

Interfund transfers received by a governmental-type fund should be reported in the Statement of Revenues, Expenditures, and changes in Fund balance as a (an):

Governmental funds report interfund transfers as other financing sources (uses).

When markets are perfectly competitive, consumers:

Have goods and services produced at the lowest in the long run. (Since price is barely sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced to produce at the most efficient output rate.)

Which of the following segments of the economy will be least affected by the business cycle?

Healthcare industry. (The business cycle is the rise and fall of economic activity relative to its long-term growth trend. During a contraction or a recession, most industries experience a decline in sales and profits. Similarly, during an expansion, most industries experience an increase in sales and profits. However, health care services are typically not affected by business cycles. People need medical services regardless of whether or not the economy is doing well. Thus, the health care industry is the least affected by the business cycle.)

When Rolan County adopted its budget for the year ending June 30, Year 1, was recorded for estimated revenues control. Actual revenues for the year ended June 30, Year 1, amounted to $17,000,000. In closing the budgetary accounts at June 30, Year 1:

In closing the budgetary accounts at June 30, Year 1, the estimated revenues control account should be credited for to offset the $20,000,000 debit balance that existed before closing.

Which of the following might be considered the most expansionary set of fiscal policies?

Increase government purchases, decrease in taxes. (Expansionary fiscal policy involves increasing government purchases and/or decreasing taxes. Both increases in government spending and decreases in taxes cause the aggregate demand curve to shift right and thus cause GDP (output) to increase.)

Which of the following methods may the Federal Reserve use to reduce inflationary pressures?

Increase margin requirements. (The Federal Reserve can increase margin requirements as a means to decrease the economy's money supply. This is a viable contractionary monetary policy used by the Federal Reserve to lower the economy's price level (inflation).

A decrease in which economic indicator would most appropriately encourage a business owner to move forward on a planned expansion?

Initial claims for unemployment (Leading indicators are used to predict economic activity, as they tend to change before the economy follows a certain trend. Average new unemployment claims is considered a leading indicator. If a business owner sees decreases in unemployment claims, that is a positive sign for the economy overall as it means fewer people are out of work. When there is low unemployment, the economy is strong and business owners may be more inclined to move forward with planned expansions.)

Which of the following correctly lists the three ways to increase the money supply?

Lower the required reserve ratio, decrease the discount rate, buy bonds in the open market. (The three ways the Fed can increase the money supply are: (1 ) buy (purchase) government securities in the open market, (2) lower the discount rate, and (3) lower the required reserve ratio.)

Under pure competition, strategic plans focus on:

Maintaining the market share and being responsive to market conditions related to sales price. (Under pure (or perfect) competition, strategic plans include maintaining the market share and responsiveness of the sales price to market conditions.)

Under monopolistic competition, strategic plans focus on:

Maintaining the market share and planning for enhanced product differentiation. (Under monopolistic competition, strategic plans include maintaining the market share (as with pure competition), but they also likely include plans for enhanced product differentiation and allocation of resources to advertising, product research, etc.)

Under an oligopoly structure, strategic plans focus on:

Maintaining the market share, ensuring product differentiation, and adapting to changes in price and/or production volume. (Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume.)

In order to sell at the rate of output in markets controlled by monopolists, price is set where:

Marginal revenue equals marginal cost. (No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at MR = MC. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal cost. The monopolist's price will be higher than MR resulting in large profits.)

Expenditures of a governmental unit for insurance extending over more than one accounting period

May be allocated between or among accounting periods or may be accounted for as expenditures of the period of acquisition. Expenditures extending over more than one period may be allocated between or among accounting periods. Non spendable current resources such as inventory or prepaid may be recorded using either the consumption or the purchases method. Current assets of this character serve as the basis for classification of fund balance as non spendable.

A market with many independent firms, low barriers to entry, and product differentiation is best classified as:

Monopolistic competition. (A market with many independent firms, low barriers to entry, and product differentiation is best classified as monopolistic competition. There are few barriers to entry and firms exert some influence over price in such a market. Best examples are brand name consumer products.)

The Baker County Headstart fund, which is properly accounted for as a special revenue fund, overspent its available resources. The deficit in this fund would likely be displayed as.

Negative fund balance - restricted. If expenditures incurred for specific purposes exceed the amounts restricted, committed or assigned to those purposes, it may be necessary to report a negative unassigned fund balance.

Which of the following is an assumption in a perfectly competitive financial market?

No single trader or traders can have a significant impact on market prices. (The inability of market participants (a single trader in this instance) to influence market prices is an attribute of perfect (pure) competition. Attributes of perfect competition also include a large number of suppliers, customers acting independently, very little product differentiation (homogeneous products), and no barriers to entry exist.)

The County Road & Bridge fund is funded by gas taxes whose use is restricted by law to road construction and is properly classified as a special revenue fund. The fund maintains inventories of road signage and road construction materials. Resources associated with those inventories would be classified within fund balance as:

Non-spendable. Inventories are considered non-spendable. Non-spendable fund balances represent resources in a form that cannot be spent (e.g., inventories or prepaid expenditures) or are legally or contractually required to remain whole (e.g., permanent fund principal).

An industry that is oligopolistic would be best characterized by:

One firm selling a product with no close substitutes. Significant barriers to entry. (Oligopoly market conditions are characterized by: - Few firms in the market - Significant barriers to entry - Differentiated products - Fixed (or semi fixed) prices - Kinked demand curves

Which of the following options describes the phases of a business cycle, in order of occurrence?

Peak, recession, trough, recovery. (Business cycles reflect the natural rise and fall of economic activity. These cycles represent fluctuations that follow a specific order. Against a backdrop of long-term economic growth, business cycles include a peak (the high point of economic activity), followed by contraction (indicative of a recession), a trough (the low point of economic activity), a recovery phase, and a return to the peak.)

Which of the following conditions is most true during a recession:

Potential output will exceed actual output. (During a recession, potential output will exceed actual output.)

Compared to firms in a perfectly competitive market, a monopolist tends to:

Produce substantially less but charge a higher price. (Compared to firms in a perfectly competitive market, a monopolist tends to produce substantially less but charge a higher price.)

Under monopoly, strategic plans focus on:

Profitability from production levels that maximize profits. (Under monopoly, strategic plans ignore market share and focus on profitability from production levels that will maximize profits.)

If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?

Purchase additional U.S. government securities and lower the discount rate. (Federal Reserve Bank purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence, these measures would help implement an expansionary monetary policy.)

Which of the following strategies would the Federal Reserve most likely pursue under an expansionary policy?

Purchase federal securities and lower the discount rate. (Under an expansionary policy, the Federal Reserve would most likely purchase government securities. Purchasing these securities increases the money supply and expands the economy.)

The Federal Reserve wishes to conduct expansionary monetary policy. Which of the following policy approaches will be most successful?

Purchase government securities and lower the discount rate. (The tools that the Federal Reserve has available to control the money supply include open market operations, changes in the discount rate, and changes in the required reserve ratio. In order to conduct expansionary monetary policy, the Fed would purchase government securities, lower the discount rate, and/or lower the reserve requirement. Each of these actions would increase the money supply by making it easier for banks to lend money and by putting more money into the marketplace.)

The discount rate set by the Federal Reserve is the:

Rate that the central bank charges for loans to commercial banks. (The discount rate refers to the rate established by the Federal Reserve for short-term (often overnight) loans it makes to member banks.)

Greenwood Corporation has been in business for 20 years. This year its profits have hit a record low and three of its factories are working a three-day week as a result of low product demand. Redwood Corporation, however, has shown steadily rising profits over the last three years and is actively recruiting the staff being laid off by Greenwood. Select the answer that most appropriately describes the phase of business experienced by these two businesses.

Redwood is showing rising profits, but there is no indication of its having reached a peak. It is recruiting staff, and that is a clear indication of an expansionary phase. Greenwood has clearly hit a record low as stated in the question and is reducing staff (a clear indication of the trough phase).

Entry into monopolistic competition is:

Relatively easy, with only a few obstacles. (The characteristics of monopolistic competition include: - Numerous firms with differentiated products. - Ease of entry - few barriers. - Firms exact some influence over price and market. - Non-price competition is frequent and critical.

Suppose a stock market boom causes a large increase in wealth. If the Federal Reserve wanted to counteract the effect of the stock market boom on the economy it could:

Sell government securities or increase the discount rate. (A large increase in wealth would lead to an increase in GDP (economic activity) and rising price levels. The Federal Reserve might intervene in such a case to offset these inflationary effects. To do so, the Fed would have to decrease the money supply. It could decrease the money supply by selling government securities or increasing the discount rate.)

The U.S. government and the Federal Reserve Bank are working to help the economy rebound from a recent and prolonged economic slump. Which of the following actions is least likely to help them meet their objectives?

Selling U.S. Treasury bills and notes. (Selling government securities (such as Treasury bills and notes) is a type of monetary policy that reduces the money supply by taking money out of investors' hands and putting it into the government's hands. A reduction in the money supply leads to higher interest rates, which in turn will reduce economic output and growth. If the goal is to help the economy rebound from a slump, an appropriate action is to buy (not sell) government securities.)

If the Federal Reserve raises the discount rate, which of the following effects is likely to occur?

Short-term interest rates will likely increase. (Increasing or decreasing the discount rate (the interest rate charged by the Federal Reserve to its member banks for short-term loans) is one of the main mechanisms by which the Federal Reserve controls the money supply. Increasing the discount rate leads to a reduction in borrowing from member banks and, therefore, a reduction in the money supply. Declines in the money supply lead to an increase in interest rates.)

The kinked demand curve is associated with:

The analysis of oligopoly. (The demand curve for any individual oligopolist is kinked sharply downward. This occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction so they do not lose market share but will not match any price increase of an individual firm. Therefore, for the individual firm attempting to raise its prices beyond equilibrium, consumers will quickly buy from other firms in the market and demand will drop off sharply creating a kinked demand curve.)

claims and judgments expenditures Current liability at January 1, Year 1 $100,000 Claims paid during Year 1 $800,000 Current liability at December 31, Year 1 $140,000 Non-current liability at December 31 Year 1 200,000

The claims and judgments expenditures = the claims paid ($800,000) and the increase in the current liability ($40,000), or a total of $840,000. The noncurrent liability is not an expenditure of the governmental fund for Year 1

Which of the following is not a feature of a firm operating in a monopolistic competition environment?

The firm faces a downward sloping and fairly inelastic demand curve. (A downward sloping, fairly elastic (not inelastic) demand curve is a feature of a firm in monopolistic competition. - Note: Firms in a monopolistically competitive market produce "similar" goods; however, unlike in a perfectly competitive market, the goods are NOT identical or perfect substitutes. The definition of being able to "influence prices" is that the firm has a downward sloping demand curve. A firm in a monopolistic competition environment has little market control, but it is still able to influence prices. It cannot influence them as much as a pure monopoly can, but the influence is still there. The firm is still not a price-taker; it is a price-maker (hence the downward-sloping demand curve), so, again, it is able to influence to some degree.

At the beginning of Year 2, a government entity had a $500,000 judgment outstanding. The government entity paid $400,000 of the judgment during Year 2. The remaining balance of the judgment includes $25,000 payable early in Year 3 and $75,000 payable at the end of Year 4. What amount should the government entity report as a liability for the judgment in its Year 2 governmental fund financial statements?

The governmental entity would report a $25,000 liability in their governmental funds consistent with the current financial resources measurement focus. Expenditures are generally recorded when the related fund liability is incurred but are limited to the amounts payable from available expendable resources. No non-current liabilities are reported.

The demand curve for a product reflects which of the following?

The impact that price has on the amount of a product purchased. (The demand curve illustrates the maximum quantity of a specific good that consumers are willing and able to purchase at each and every price, all else being equal. Thus, the demand curve reflects the impact that price has on the amount of a product purchased.)

In Year 1 , New City issued purchase orders and contracts of S850,000 that were chargeable against Year 1 budgeted appropriations of $1,000,000. The journal entry to record the issuance of the purchase orders and contracts should include a:

The issuance of purchase orders or the signing of contracts represents a commitment to expend resources. Such a commitment is recorded as an encumbrance and a credit to budgetary control. The entry to record the issuance of the purchase orders and contracts is.

Which of the following characteristics would indicate that an item sold would have a high price elasticity of demand?

The item has many similar substitutes. (If an item has many similar substitutes, its price elasticity of demand will be high. Customers can always switch to a substitute, so a change in price may affect demand substantially.)

Clay City levied property taxes of $600,000 for the current year, and estimated that $25,000 would be uncollectible. Which of the following is the correct general fund journal entry to record the property tax levy?

The journal entry to record property taxes receivable and revenue (imposed nonexchange revenues) occurs when the levy takes place and reduces the amount of revenue recognized to the amount measurable and available. An allowance is created, but no periodic bad debt amount is displayed.

An increase in the discount rate would cause:

The money supply to decrease and interest rates to rise. (An increase in the discount rate discourages borrowing by member banks and thus decreases the money supply. A decrease in the money supply causes interest rates to rise.)

Which of the following statements is correct regarding the variety and price of products produced under monopolistic competition as compared to production under perfect competition?

The monopolistically competitive industry produces a greater variety of products at a higher cost per unit. (Under perfect competition, there is very little product differentiation and because prices are set by the market, costs have to be kept low in order for a company to survive. Under monopolistic competition, firms have more influence over price and can afford to incur higher costs because they can charge more for their products. Also, there is more differentiation than what exists under perfect competition.)

net property tax revenues in its fund financial statements

The net property tax revenues would include the $500,000 collections during the year plus the $100,000 expected collections within 60 days of year-end, for a total of $600,000. The remaining expected collections of $90,000 ($60,000 + $30,000) would be recorded as deferred inflows of resources and not revenues. The $10,000 estimated to be uncollectible would not be considered because revenues are accounted for net of the estimated uncollectible amount.

Which one of the following changes will cause the demand curve for gasoline to shift to the left?

The price of cars increases. (A shift left in any demand curve represents a decrease in demand (at all price levels) for that product. Because gasoline and cars are considered complementary goods, the demand for gasoline is directly impacted by the demand for cars. If the price for cars increases, the demand for cars will decrease, causing the demand for gasoline to decrease, and the gasoline demand curve to shift left)

What is the major difference between an exchange transaction and a non-exchange transaction for governmental units?

The relationship between the amount of value given and received. (An exchange transaction is a reciprocal transfer in which each party receives and sacrifices something of approximately equal value. A non-exchange transaction involves giving/receiving value without receiving/giving equal value in return With an exchange transaction, there is a bargained value in the transaction, with a non exchange transaction there is no bargained value or arms length transaction.)

Financial statements for which fund type generally report net position in their individual fund financial statements?

The term used to identify the equity section in proprietary funds is "net position." An enterprise fund is a proprietary fund and it will report net position as fund equity

Gross domestic product includes which of the following measures?

The total monetary value of all final goods and services produced within a nation in one year. (Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced within the economy in a given time period. The emphasis is on the final goods and services.)

The Town of Pancetta has assets of $100,000 and liabilities of $65,000, including unpaid amounts on a short-term lease that total $5,000. The town has open purchase orders that total $12,000. Budgetary commitments do not lapse. What is the city's unassigned fund balance?

The unassigned fund balance is $23,000. The city's total fund balance is equal to the difference between its assets ($100,000) and its liabilities ($65,000), or $35,000. Unassigned balances for the general fund = total fund balance - any fund balance amounts subject to constraints. The existence of open purchase orders that the city will honor will likely result in a committed or assigned component of fund balance - $12,000. The unassigned balance is $23,000 ($35,000 - $12,000).

The trough of a business cycle is generally characterized by:

Unused productive capacity and an unwillingness to risk investments. (The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.

The expenditure element "salaries and wages" is an example of which type of classification?

Wages and salaries is an example of an object classification. This is the most specific classification in the hierarchy and represents the chart of accounts title. Expenditures of governmental resources should be classified by object classes according to the type of items purchased or services obtained.

Derived (non-exchange) tax revenues

imposed on/derived from exchange transactions: commercial sales (sales taxes), taxpayer income (income taxes).

An oligopolist faces a "kinked" demand curve. This terminology indicates that:

oligopolist raises its price, the other firms will ignore the price change. (In an oligopoly, each firm faces a "kinked" demand curve. Others will match price cuts, but ignore price increases. The "kink" is at the prevailing price. Best real world examples of oligopoly are the airline and auto industries.)

The revenues control account of a governmental unit is increased when:

revenue control account is increased when property taxes are levied