AFA Final Exam Practice Questions
A primary government can be either a general-purpose government or a special-purpose government. What is the difference in these two? How does an activity qualify as a special-purpose government?
A general-purpose government is a traditional government such as a city, county, or state. A special purpose government (such as a school system or transit authority) can also be a primary government for reporting purposes if it meets certain requirements. Classification as a special purpose government requires meeting three criteria: a. It has a separately elected governing body. b. It is legally independent. It can sue and be sued and buy, sell, and lease property. c. It is fiscally independent of other state and local governments. It can determine its own budget, levy and set tax rates, and issue bonded debt without outside approval.
Why have accountability and control been so important in the traditional accounting for state and local government units?
Accountability and control have been a constant goal of governmental accounting over the decades. Governmental accounting provides the citizenry of a democracy with a method for evaluating the essential government activities of raising and allocating resources. Elected and appointed officials have authority over the public's money. Citizens should hold them accountable for first generating and then using those resources wisely in meeting the public's needs. Control is necessary to prevent waste and theft. A government should structure its accounting system to help citizens evaluate officials based on the honesty, wisdom, and stewardship of their actions.
What is an encumbrance? When is an encumbrance recorded? What happens to this balance? How are encumbrances reported in government-wide financial statements?
An encumbrance is the recording of a purchase commitment (such as a contract or a purchase order). The government records an encumbrance entry at the time a commitment is made. This recording shows the spending control emphasis of the fund financial statements. At any point in time, summation of the Expenditures and the Encumbrances provides the total amount of current financial resources spent and committed to date. Thus, chances decrease that the government will over commit its resources. The government removes the encumbrance when this commitment becomes a legal liability. Until then, no transaction has taken place so encumbrances are not included in government-wide financial statements.
What costs necessitate the reporting of an expenditure by a governmental fund?
Expenditures include outflows or reductions of net current financial resources from the acquisition of goods or services (or the payment of a noncurrent liability). Modified accrual accounting recognizes these expenditures when a claim against current financial resources is incurred that will be paid from resources that are available. Fund accounting for the governmental funds records expenditures instead of both expenses and capital assets as a way of disclosing the use made of a fund's financial resources during the current period.
What are the four fund types within the fiduciary funds? What types of events does each report?
Fiduciary Funds: Account for monies held by the government in a trustee capacity. a. Investment Trust Fund. Accounts for the outside portion of investment pools where the reporting government has accepted funds from other governments resulting in a larger investment and hopefully a higher return. b. Private-Purpose Trust Fund. Accounts for money held in a trustee capacity, for example, unclaimed property, specifically designated external parties, or money confiscated from illegal operations. c. Pension Trust Fund. Accounts for the employee retirement system. d. Custodial (formerly Agency) Fund. Accounts for resources held by the government as an agent for individuals, private organizations, or other government units.
How have users' needs impacted the development of accounting principles for the reporting of state and local government units?
Individuals and groups who seek information about a state or local government have needs that are often complex and contradictory. Specific procedures in the governmental reporting process are an outgrowth of those needs. GASB identifies three primary user groups: citizenry, legislative and oversight bodies, and investors and creditors. The needs of these users are broad and no single set of financial statements and accounting principles can meet all expectations. Satisfying diverse user needs is a constant focus (and challenge) of governmental accounting. This need has led to the dual-perspective model which results in the production of two distinct types of financial statements
In government-wide financial statements, how do intra-activity and interactivity transactions differ? How does a state or local government report each type of transaction?
Intra-activity transactions occur totally within the governmental activities or totally within the business-type activities so that no net effect is created for that group of funds. Therefore, these transfers do not appear in the reporting of government-wide financial statements. Interactivity transactions occur between a governmental activity and a business-type activity so that they affect the balances in each. Consequently, the impact of these transactions is reported in both columns on the government-wide financial statements but are then offset so that no figure is reported in the total column.
At what point does a governmental fund report an expenditure?
Modified accrual accounting recognizes expenditures when a claim against the current financial resources is incurred that will be paid from financial resources that are available. Governments must disclose the length of time (often 60 days) used to determine availability.
How is the issuance of a long-term bond reported on fund financial statements for a governmental fund? How is the issuance of a long-term bond reported on government-wide financial statements?
No revenues are recognized in either set of financial statements because the proceeds of bonds must be repaid. In fund financial statements, Cash is increased along with an "Other Financing Sources" figure. For example, if the bonds were issued for a construction project, this entry is recorded in the Capital Projects Fund. Payments of both interest and debt are then recorded when they become a claim on current financial resources. An Expenditure account is recognized for the debt and for the related interest and is usually shown in the Debt Service Fund. In government-wide financial statements, the cash and debt are both increased when issued and the subsequent payment of debt and interest is reported in a manner similar to that of a for-profit enterprise.
What are the basic financial statements that a state or local government now produces?
Two financial statements make up the government-wide financial statements: The (a) Statement of Net Position and the (b) Statement of Activities. In contrast, there are a number of fund financial statements. The two fundamental fund financial statements covered in the current chapter are the Balance Sheet for the governmental funds and the Statement of Revenues, Expenditures, and Other Changes in Fund Balances for the governmental funds.
What are the two government-wide financial statements? What does each normally present?
. The two government-wide financial statements are the Statement of Net Position and the Statement of Activities. The Statement of Net Position includes: a. All assets and long-term liabilities. b. Capital assets net of accumulated depreciation including newly acquired infrastructure assets. c. Deferred outflows of resources and deferred inflows of resources. d. The primary government is divided into governmental activities and business-type activities. e. The internal balances reflect inter-activity transactions between governmental activities and business-type activities. These balances are offset in coming up with totals for the government. f. Discretely presented component units are shown to the far right of the statement. The Statement of Activities includes: a. Expenses reported by function for governmental activities, business-type activities and component units. b. Interest expense on long-term debt, often shown as a function. c. Related program revenues including charges for services, operating grants and contributions, and capital grants and contributions. d. Net expense or net revenue for each function. e. Net expense or net revenue for each category of the government. f. General revenues for governmental activities, business-type revenues, or component units. g. Special items that are significant transactions or other events within the control of management that are either unusual or infrequent in nature. h. Transfers between governmental activities and business-type activities
When does a government recognize a receivable for property tax assessments? When is the associated revenue recognized?
A receivable is not recorded for property taxes until the demand for money represents an enforceable legal claim, which is normally specified by state or local laws. Many governments encourage early payment of property taxes (by sending out bills early or by giving some type of a cash discount). Thus, cash can actually be reported before the government even records the initial receivable. Revenue from the property tax is reported net of estimated uncollectible amounts in the period in which the money is supposed to be used or the first period in which it can be used. For example, property taxes assessed to finance the government's costs in 2020 should be reported as revenue in 2020. Because the receivable and the revenue recognition are split, it is possible to record the receivable (or cash, if collected early) before the revenue. In that case, an unavailable property tax account is established which is reclassified when revenue recognition is appropriate. This is not normally a liability (the money will not have to be repaid) so it is reported as a deferred inflow of resources.
What is a special assessment project? Describe the reporting of a special assessment project.
A special assessment project is an improvement made to property by a government, which is paid for (in part or in whole) by the owners of the property being benefited. Adding curbing and sidewalks to a local street is an example of a special assessment if the residents of that street are required to pay a portion of the cost. Typically, the government places a lien on the property to insure payment. Accounting for special assessment projects depends on the level of liability accepted by the government. If the government is in no way liable for the work done and any debt that is incurred, a Custodial Fund is used to record the monetary inflows and outflows. The government is simply serving as a conduit to get the project completed and the debt paid. If the government is responsible (even secondarily responsible) for the cost of the project, a more elaborate method of accounting is necessary. In the government-wide financial statements, both the debt and the infrastructure asset are recorded. Amounts are assessed, reported as revenues, collected, and used to pay the debt. Even if the government has liability, the infrastructure asset and long-term debt are not recorded in the fund financial statements. Instead, expenditures for the work are recorded in a Capital Projects Fund while cash collected from citizens is recorded as revenue and accumulated in a Debt Service Fund to pay off any amount borrowed to finance the work.
What is an internal exchange transaction, and how is it reported?
An internal exchange transaction is a transfer within the government that is recorded as if the transaction had actually occurred with an outside party. Such transactions occur between one of the government's activities and an internal service or enterprise fund and are paid for work or services rendered. These exchanges are reported as revenues and as either expenditures or expenses. An example would be a payment from a police department to the city's motor pool for vehicle maintenance. This exchange is included by both departments in the fund financial statements as if it were a transaction with an outside party. On government-wide financial statements, any such transactions between a government activity and a related internal service fund is considered an intra-activity transaction because both fund types are classified as government activities and, therefore, there is no impact on overall figures.
The Willingham Museum qualifies as a component unit of the City of Willingham. How does an activity or function meet the requirements to be deemed a component unit of a primary government?
Classification as a component unit requires an organization to meet one of two criteria: a. The activity is fiscally dependent on a primary government. It cannot determine its own budget, levy and set tax rates, or issue bonded debt without outside approval. Further, the primary government and the component unit must be financially interdependent (a relationship exists of potential financial benefit or burden between the two). or b. An outside primary government appoints a voting majority of the governing board of the activity. The primary government must also be able to do one or more of the following: impose its will on the board of the other organization, or provide a financial benefit to the component organization, or the component provides a financial benefit to the primary government.
How are budget results shown in the financial reporting of a state or local government?
Comparisons between the original budget, the final budget (as amended), and actual figures are reported in the required supplemental information presented after the notes to the financial information in the comprehensive annual financial report. Alternatively, the government can present the information as a separate statement within the government's fund financial statements
What assets are viewed as current financial resources?
Current financial resources are primarily cash, investments, and receivables because the government can quickly turn them into cash for spending purposes. These resources are available to meet the current period spending needs of the governmental funds.
The general fund of a city reports assets of $300,000 and liabilities of $200,000 in fund financial statements. Explain what is meant by each of the following balances: fund balance—nonspendable of $40,000, fund balance—restricted of $28,000, fund balance—committed of $17,000, fund balance—assigned of $4,000, and fund balance—unassigned of $11,000
Fund balance—nonspendable - provides the balance for all current financial resources that cannot be spent by government officials. Prepaid items and supplies, for example, cannot be spent by their very nature. Resources conveyed to a government where only subsequent income can be spent also fall into this category.---Fund balance—restricted - provides the balance for all current financial resources that must be used in a designated fashion as specified by a party outside the government. Amounts usually come from gifts or grants from other organizations, charities, or governments. ---Fund balance—committed - provides the balance for all current financial resources that must be used in a designated fashion as specified by the highest level of decision-making authority within the government. --Fund balance—assigned - provides the balance for all current financial resources that must be used in a designated fashion as specified by individuals within the government but who do not possess the highest level of decision-making authority. --Fund balance—unassigned - provides the balance for all current financial resources that have not been designated in some fashion. Government officials are free to use these assets as they see fit
What are the four classifications of nonexchange revenues that a state or local government can report? In each case, when are revenues normally recognized?
GASB lists four classifications of nonexchange revenues that a state or local government can report: a. Derived tax revenues. An underlying exchange takes place and a tax assessment is levied. The government records revenue at the time of the underlying event. For example, a government recognizes revenues for a sales tax when a sale occurs and the tax is imposed. b. Imposed nonexchange revenues. The government imposes an assessment but no underlying transaction takes place. Examples include property taxes and fines or penalties. The government recognizes revenues in the period when resources are required to be used or in the first period in which use is permitted. c. Government-mandated nonexchange transactions. Monies are provided from one government to another to help pay for legally required programs or actions. Examples include grants from the federal government to a city that must be used to help achieve a mandated legal requirement such as an improvement in the school system. Revenues are recognized when all eligibility requirements have been met. d. Voluntary nonexchange transactions. Monies conveyed willingly to a state or local government by an individual, another government, or an organization usually for a specific purpose but without legally mandated requirements. Revenues are recognized when all eligibility requirements have been met. An example would be money donated to the city for the beautification of the local parks.
What measurement focus is used in government-wide financial statements? What system is applied to determine the timing of revenue and expense recognition?
Government-wide financial statements use the economic resources measurement focus and accrual accounting for the timing of revenue and expense recognition. The accounting is very similar to that of for-profit organizations.
What are the three categories of funds? What funds are included in each of these three categories?
Governmental Funds: Account for activities with a service orientation a. General Fund b. Special Revenue Fund c. Capital Projects Fund d. Debt Service Fund e. Permanent Fund Proprietary Funds: Account for functions that are financed (at least in part) by user charges. a. Enterprise Fund b. Internal Service Fund Fiduciary Funds: Account for monies held by the government in a trustee capacity. a. Investment Trust Fund b. Private-Purpose Trust Fund c. Pension Trust Fund d. Custodial (formerly Agency) Fund
What is the difference between a blended component unit and a discretely presented component unit?
If blended, component units are included in the primary government as if they were part of the government (the same as one of its own funds). The component unit is legally separate but so intertwined and substantially the same as the primary government that inclusion is necessary for appropriate presentation. A component unit will be blended if its total debt will be repaid entirely, or almost entirely, from resources of the primary government. A discretely presented component unit is shown separately on the far-right side of the government-wide financial statements because the organization is not substantially the same as the government and can stand alone
What measurement focus is used in fund financial statements for governmental funds? What system is applied to determine the timing of revenue and expenditure recognition?
In fund accounting, governmental funds use the current financial resources measurement focus and the modified accrual basis for the timing of revenue and expense recognition. Current financial resources include assets such as cash, receivables, and investments that can enable spending. Reported liabilities are claims to those current resources. These statements also report some deferred outflows of resources and deferred inflows of resources. The modified accrual basis recognizes revenues when they become available and measurable. Expenditures are recorded when they create a reduction in current financial resources. Governments must disclose the length of time used to determine availability. A period of 60 days is common although not required except for property tax revenues. Proprietary and fiduciary funds generally use the economic resources measurement focus and the accrual basis for the timing of revenue and expense recognition. The economic resources measurement focus reports all assets (including capital and other noncurrent assets) as well as all liabilities (including long-term obligations). Deferred outflows of resources and deferred inflows of resources also might require recognition.
Fund financial statements have separate columns for each activity. Which activities are reported individually in this manner?
In fund financial statements, for governmental funds, a government creates a separate column for (a) the General Fund, (b) any other fund that qualifies as major, and (c) all remaining funds accumulated as a whole.
How does a state or local government report interfund transfers in the fund financial statements for the governmental funds?
In fund financial statements, interfund transactions are recorded in both funds simultaneously at the time of authorization. For example, monetary transfers from the General Fund to another fund such as the Debt Service Fund are recorded in both funds. The recipient records this transfer as an "Other Financing Source" and the party making the transfer records an "Other Financing Use." These balances both appear in the statement of revenues, expenditures, and other changes in fund balance but are not offset in arriving at totals for the government. If the transfer is being made to a proprietary fund, it is shown in the statement of revenues, expenses, and other changes in net position for that fund usually as a "capital contribution" or as a "transfer in."
What are the two major divisions reported in government-wide financial statements? What funds are not reported in these financial statements?
In government-wide financial statements, financial figures appear as either (a) governmental activities or (b) business-type activities. All governmental funds and most internal service funds are included within the governmental activities. The government combines all enterprise funds and any remaining internal service funds to form the business-type activities. Internal service funds are viewed as governmental activities or business-type activities based on the funds that they primarily service.
How are internal service funds reported on government-wide financial statements?
On government-wide financial statements, internal service funds are combined with the governmental activities (or business-type activities if that connection is more appropriate). Their placement is based on the identity of the functions that they primarily serve. If an internal service fund is mainly used to assist one or more governmental funds, then it should be included with the governmental activities
For a state or local government, what is the difference between program revenues and general revenues? Why is that distinction important?
Program revenues are those revenues derived from a specific program (such as parks and recreation) or from outsiders seeking to contribute to reduce the cost of that function. They include charges rendered for services, operating grants and contributions, and capital grants and contributions. General revenues are those from the population as a whole including property taxes, sales taxes, unrestricted grants, and investment income. They are not traced to any individual program, activity, or function. This distinction is important because program revenues are matched with expenses for each activity providing a net expense or net revenue figure to disclose the cost or the benefit of providing each activity.
What are the five fund types within the governmental funds? What events do each of these five fund types report?
The following fund types fall within the governmental funds classification: a. The General Fund accounts for ongoing activities such as public safety and sanitation. More specifically, the General Fund records any activities that do not fall under one of the other fund types. b. Special Revenue Funds account for financial resources that have been restricted as to expenditure for a specified operating purpose (other than debt service and capital asset construction or acquisition). This money often comes from sources such as grants, taxes, and gifts. c. Capital Projects Funds account for monies (and their eventual expenditure) that have been designated (either externally or internally) for the acquisition or construction of government facilities or other capital assets. d. Debt Service Funds account for the accumulation of resources the government will use to pay the principal and interest of long-term debts incurred by the service activities. e. Permanent Funds account for assets conveyed to a government with the stipulation that the principal cannot be spent but any income should be used by the government, often for a designated purpose.
What are the two fund types within the proprietary funds? What types of events does each report?
The following fund types fall within the proprietary funds classification: a. An Enterprise Fund accounts for any governmental activity that is open to the public and financed in whole or in part by user charges, such as a subway system or a toll road. b. An Internal Service Fund is used to record any activity that provides service to other departments or agencies within the government on a cost-reimbursement basis. A motor pool, a centralized computer operation, or a print shop are examples of Internal Service Funds assuming that a user fee is charged and the activity only exists to serve other functions of government.
A teacher employed by the City of Lights qualifies for a defined benefit pension plan. The city sets up a pension trust fund to monitor the resources held for these future payments. How is the amount of net pension liability to be reported in the government-wide financial statements determined?
The money set aside by this government for its retirement program is maintained in a pension trust fund that will likely have a positive net position because of the money and investments being held for future payments. At the same time, an estimate is made of the future amount of money that will have to be paid as a result of the defined benefit plan. The portion of that total that relates to work that has already been provided is then determined. The present value of that part of those future cash payments is calculated. If the resulting pension liability is greater than the net position of the pension trust fund, the excess amount is reported in the government-wide financial statements as a net pension liability
Why does a government determine the net expenses or revenues for each of the functions within its statement of activities?
The net expense or net revenue format allows the readers of a government's financial statements to determine the relative financial burden (or benefit) that each of its reporting functions has on its taxpayers. In other words, the users of the statement can determine what it costs for the government to provide benefits such as public safety or a library.
Why are budgetary entries recorded in several of the individual funds of a state or local government?
The physical recording of a budget discloses government policies and financial intent, providing a financial plan for the period. The budget establishes spending limitations, which enhances financial planning and control. Adoption of a budget for each activity anticipates the inflow of financing resources and sets approved expenditure levels. Subsequently, interested parties can draw comparisons between actual and budgeted figures at any time during the fiscal period to enable evaluation of the performance of the government. The governing body can approve subsequent amendments as amounts available and government needs change.
How has the dual system of financial statements affected the financial reporting of state and local governments?
The traditional approach of government accounting places its priority on individual accountability for the various separate government activities. Unfortunately, the resulting information has not necessarily met all user needs (especially the needs of bond investors who want to know whether a government will be able to repay its debts). Today, government reporting still focuses on current financial resources in the fund financial statements (for the governmental funds), but also provides extensive additional data about all assets and all liabilities in government-wide financial statements. Thus, in the present system, financial reporting is able to meet a broader range of user needs
What are the two fund financial statements for governmental funds? What information does each normally present?
The two fund financial statements for the governmental funds are the Balance Sheet and the Statement of Revenues, Expenditures, and Other Changes in Fund Balance. The Balance Sheet measures current financial resources and uses modified accrual accounting and includes: a. Separate columns are included for the general fund and every other major fund. They report current financial resources and claims against current financial resources. b. Non-major funds are combined and reported as "other governmental funds." c. Totals for the government funds. d. Fund Balance amounts should be classified as nonspendable, restricted, committed, assigned, or unassigned. The Statement of Revenues, Expenditures, and Other Changes in Fund Balance includes: a. The general fund and each major fund in separate columns, with all other funds combined in another column. b. Revenues. c. Expenditures. d. Other financing sources and uses. e. Special items. f. A reconciliation between the ending change in fund balances and the ending change in net position for governmental activities in the government-wide financial statements.
What are the two different ways that a state or local government can report the cost and use of supplies and prepaid items on fund financial statements for governmental funds?
Traditionally, governments use the purchases method to report prepaid items and supplies. The government records cost as an expenditure when it incurs the liability. The government inserts any assets that remain at the end of the period into the records along with an offsetting increase to "Fund Balance-Nonspendable." Another method GASB allows for reporting these items is the consumption method. It is similar to the approach used by for-profit organizations and is used in the government-wide financial statements and by the proprietary and fiduciary funds. The government records supplies and prepayments as assets when acquired even though they are not current financial resources. As consumed, the cost is reclassified as an expenditure. At the end of the period, an amount equal to the remaining assets is reclassified from fund balance-unassigned to fund balance— nonspendable. On fund financial statements for the governmental funds, a government can use either the purchases method or the consumption method.
In applying the current financial resources measurement focus, when are liabilities recognized in fund financial statements for the governmental funds?
Under the current financial resources focus, a government recognizes liabilities when there is a claim against current financial resources. That normally means the government owes a debt and will make a payment during the current period or a short time into the subsequent period. Disclosure is required for the number of days applied for that time extension. Often, 60 days is used, a time period that is mandated for property taxes.
How do governmental funds report capital outlay in fund financial statements? How do government-wide financial statements report capital expenditures?
Within the governmental funds, fund financial statements focus on expenditures rather than expenses or capital assets. Expenditures should be recorded when the related liability is incurred. Therefore, the government records the entire cost of capital assets as an expenditure when the liability is incurred. Government-wide financial statements record capital assets in a manner similar to that in the reporting of for-profit organizations. The government capitalizes the cost of buildings, machines, and other capital assets and depreciates the cost as an expense over their useful lives.