1. Correct. The state and local governmental environment is different in a number of ways from that of business; these differences influence financial reporting objectives.
2. Incorrect. Many governments’ resources come from taxes.
3. Incorrect. The organizational purpose of a government is different than that of a business.
4. Incorrect. Governments rarely go out of business because they have the ability to tax.

1. Incorrect. The primary source of revenue for a business is voluntary exchange transactions.
2. Incorrect. A difference between government and business is how resources are provided.
3. Correct. Governments are accountable to citizens and taxpayers and must provide them information on how financial resources are used.
4. Incorrect. Governmental budget controls are achieved through budgets legally adopted by elected officials.

1. Correct. To meet one of the financial reporting objectives, governments must be able to compare actual financial results with the legally adopted budget.
2. Incorrect. Budgets are often recorded in the accounting system.
3. Incorrect. Budgets are often reviewed to compare actual financial results with the legally adopted budget.
4. Incorrect. Budgets are legally binding on governments.

Permanent fund – Endowment fund for purchase of library books

Capital project fund – City Hall construction fund

Debt service fund – General long-term bond redemption fund

Internal service fund – Central print shop fund

Enterprise fund – Parking deck fund

Special revenue fund – Federal grant fund

Capital project fund – State grant for new bridge fund

Private purpose trust fund – High school graduate scholarship fund.

Internal service fund – Fleet center fund

Pension (and other employee benefit) trust fund – Employee retirement fund

P Enterprise fund

G Permanent fund

G Debt service fund

F Investment trust fund

G General fund

G Special revenue fund

G Capital project fund

F Private purpose trust fund

P Internal service fund

F Pension (and other employee benefit) trust fund

1. Correct. A grant or other restricted revenue source may require the use of a separate fund.
2. Incorrect. A government may start a new activity that it wants to track separately.
3. Incorrect. The governing board may create a new fund at any time during the year.
4. Incorrect. A new fund can be established at any time.

1. Correct. Investment trust funds are used to account for the external portion of investment pools reported by sponsoring governments.
2. Incorrect. Private-purpose trust funds are fiduciary funds.
3. Incorrect. Custodial funds are used to account for resources held by the government in a purely custodial capacity.
4. Incorrect. There are four fiduciary fund types.

1. Correct. There are separate fund financial statements for each fund category.
2. Incorrect. Only proprietary funds report a statement of cash flows.
3. Incorrect. All funds report fund financial statements.
4. Incorrect. Fund financial statements use different MFBOAs.

1. Incorrect. Budgets consist of both estimated revenues and appropriations.
2. Incorrect. The budget process typically involves several public hearings.
3. Correct. Elected officials must balance the need for services against how much taxpayers are willing to provide.
4. Incorrect. Once approved, budgets are legal contracts between the government and its citizens.

1. Incorrect. Budgets for proprietary funds are often not legally adopted.
2. Incorrect. For business-type activities, there is a relationship between revenues and expenses.
3. Correct. Proprietary fund budgets are usually flexible.
4. Incorrect. Elected officials are usually more concerned with rates charged by business-type activities than with the amount of projected expenses.

1. Incorrect. Total appropriation represents the amount that can be spent for the year.
2. Incorrect. It is not computed by subtracting actual expenditures from estimated revenue.
3. Correct. It is computed by subtracting actual expenditures and outstanding commitments from the appropriated amount.
4. Incorrect. It does not represent the amount spent.

1. Incorrect. Proprietary funds use a flow of economic resources measurement focus.
2. Incorrect. Proprietary funds would account for both current and noncurrent assets and liabilities.
3. Correct. The financial statements measure whether the economic resources have increased or decreased for the accounting period.
4. Incorrect. Proprietary funds report inflow of resources as revenue and gains.

1. Incorrect. Governmental funds recognize transactions using one basis of accounting; proprietary funds use another.
2. Incorrect. The basis of accounting used by governments is linked directly with the measurement focus.
3. Correct. The basis of accounting is concerned with when a transaction or event is recognized in the accounting system.
4. Incorrect. The basis of accounting is concerned with when a transaction or event is recognized in the accounting system.

1. Correct. Governmental funds receive revenues from a variety of sources.
2. Incorrect. Normally, two of the largest revenue sources for governmental funds are taxes and intergovernmental revenue.
3. Incorrect. Governments report revenues by major source.
4. Incorrect. The amount of revenue estimated to be uncollectible is recorded as a reduction in revenue.

1. Correct. GASB Statement No. 33 provides guidance on recognizing both receivables and revenues for nonexchange transactions.
2. Incorrect. Sales taxes are a type of derived tax revenue.
3. Incorrect. Nonexchange transactions are transactions that do not involve an exchange of value.
4. Incorrect. Property taxes are a type of imposed nonexchange revenue.

1. Incorrect. The purchase of capital assets and payment of debt principal are recorded as expenditures.
2. Correct. Expenditures are recognized in the period in which the fund liability is incurred.
3. Incorrect. Governments should report expenditures by major function and major character.
4. Incorrect. The consumption method or purchase method can be used for reporting the purchase of inventories.

1. Correct. Either an enterprise or an internal service fund can be used any time there is a fee charged for goods and services.
2. Incorrect. Internal service funds may be used to report any activity that provides goods or services to other funds, departments, or other agencies of the primary government and its component units, or to other governments, on a cost-reimbursement basis.
3. Incorrect. Using a proprietary fund allows the government to measure the cost of providing such goods and services using a business model.
4. Incorrect. There are three situations when the use of an enterprise fund is required.

1. Incorrect. Internal service funds generally operate on a cost-reimbursement basis.
2. Incorrect. Internal service funds should be used only when the reporting government is the predominant participant in the activity.
3. Correct. Governmental funds are used to account for the general operations of a government.
4. Incorrect. Internal service funds usually provide services to internal customers.

1. Correct. Proprietary funds report change in net position as opposed to net income on a statement of revenues, expenses, and changes in net position.
2. Incorrect. Proprietary funds report restricted net position on a balance sheet or statement of net position.
3. Incorrect. Proprietary funds report net investment in capital assets on a balance sheet or statement of net position.
4. Incorrect. Proprietary funds report unrestricted net position on a balance sheet or statement of net position.

1. Correct. There are four classifications of fiduciary funds: pension (and other employee benefit) trust funds, investment trust funds, private-purpose trust funds, and custodial funds.
2. Incorrect. Governments are sometimes asked to act as fiscal custodian of resources for other organizations or individuals.
3. Incorrect. There are fewer than five categories of fiduciary funds.
4. Incorrect. Custodial funds usually operate under less formal agreements and resources are often held for only a short period of time.

1. Correct. Fiduciary funds report additions and deductions to net position.
2. Incorrect. Fund financial statements are reported by fund type.
3. Incorrect. Fiduciary funds report additions and deductions in the statement of changes in fiduciary net position.
4. Incorrect. Fiduciary funds report amounts that belong to the fiduciary fund only.

Governments may elect to report budgetary comparison schedules for the general fund and major special revenue funds with legally adopted annual budgets as budgetary comparison statements included in the fund financial statements.

CA    Cash received from sale of equipment

NC    Cash transferred from the general fund (noncapital)

NC    Cash received from state grant (noncapital)

IA    Cash paid for investments

NC    Cash received from short-term borrowing

CA    Cash paid for interest on capital related debt

OA    Cash received from customers

IA    Cash received for interest from investment

1. Correct. Generally, a government should have the minimum number of funds necessary for sound financial management and to meet legal and accounting requirements.
2. Incorrect. A government has three different types of funds: governmental, proprietary, and fiduciary.
3. Incorrect. The number of individual funds a government may have can vary from just a few to several dozen.
4. Incorrect. There are differences in how things are reported and measured in the financial statements of the different fund types.

1. Correct. Reporting by major funds applies only to governmental funds and enterprise funds.
2. Incorrect. Major fund reporting does not apply to internal service funds.
3. Incorrect. The major fund approach allows the user to focus on the most important funds of a government.
4. Incorrect. Governments report information by major funds.

1. Incorrect. There are separate sets of fund financial statements for each fund type: governmental, proprietary, and fiduciary.
2. Incorrect. The required financial statements for each fund type are different.
3. Correct. Financial statements for governments include both fund-based and government-wide statements.
4. Incorrect. Governmental funds do not report capital assets.

1. Incorrect. Governmental funds are used to report what financial resources were received during the year, how they were spent, and what amounts remain at year-end.
2. Incorrect. Governmental funds are used to report what financial resources were received during the year, how they were spent, and what amounts remain at year-end.
3. Incorrect. Governmental funds are used to report what financial resources were received during the year, how they were spent, and what amounts remain at year-end.
4. Correct. Governmental funds are used to report what financial resources were received during the year, how they were spent, and what amounts remain at year-end.

The transit authority is a component unit because the county appoints a majority of the board and there is a financial burden relationship. The authority should be blended because the two boards are substantially the same.

A tax-exempt foundation. A foundation that supports the county’s public library raises funds for the purchase of books. The foundation receives requests for the director of the county’s library systems and routinely funds those requests based on the amount of donations raised that year. The amount of resources raised and held each year is not significant to the overall county.

The foundation is not a component unit. It meets the first two tests for tax-exempt organizations but not the third. The resources of the foundation are not significant to the primary government.

1. Correct. The primary government is at the core of the financial reporting entity.
2. Incorrect. The reporting entity for a government is defined as the primary government and its component units.
3. Incorrect. All state and general-purpose local governments meet the definition of a primary government.
4. Incorrect. A special-purpose government must meet all three criteria to be considered a primary government.

1. Incorrect. There are two different methods: blending and discrete presentation.
2. Incorrect. Essentially, a blended component unit appears as just another fund in the financial statements of the primary government.
3. Correct. Once an entity has been determined to be a component unit of the primary government, the next decision is how it should be reported in the financial statements.
4. Incorrect. Some component units are blended with existing funds of the primary government.

The statement of activities should be adjusted for the operating income or losses of the internal service fund by increasing or decreasing the expenses of the functions that purchase the goods or services. Most of the nonoperating items would be added to the statement of activities.

They are reported in the statement of activities in three separate columns (charges for services, operating grants and contributions, capital grants and contributions) and are subtracted from expenses to show net (expense) revenues for the different functions of government.

1. Incorrect. The government-wide financial statements are not used to address fiscal accountability.
2. Incorrect. Government-wide statements were created with the advent of GASB Statement No. 34.
3. Correct. The purpose of the government-wide financial statements is to demonstrate operational accountability — to provide information on the results of operations and the financial condition of the overall government.
4. Incorrect. The fund financial statements are used to address fiscal accountability.

1. Correct. Fiduciary funds and fiduciary component units are excluded from the government-wide statements because these resources are not available to support the government’s programs.
2. Incorrect. The government-wide financial statements organize information by whether it relates to governmental activities or business-type activities (reported in proprietary funds).
3. Incorrect. The government-wide financial statements organize information by whether it relates to governmental activities (reported in governmental funds) or business-type activities.
4. Incorrect. The government-wide financial statements organize information by whether it relates to governmental activities (reported in capital project funds) or business-type activities.

1. Incorrect. The format of the statement of activities allows a government to report the net (expenses) revenues of the different functions of the government.
2. Incorrect. The challenge in producing the government-wide statements is with converting governmental funds to governmental activities.
3. Correct. The government-wide statements for governmental activities are generally produced each year using a worksheet approach.
4. Incorrect. The government-wide statements for governmental activities report three separate columns of program revenue.

Governments can issue just the minimum requirements or a full CAFR (the minimum requirements are contained in the CAFR).

MD&A should discuss current-year results in comparison with the prior year. This is the only place in the general-purpose external financial report that governments are required to present comparative information.

1. Correct. It is based on currently known facts, decisions, and conditions and must discuss both positive and negative aspects of current-year activity.
2. Incorrect. Any information presented for a component unit should be clearly distinguished from that of the primary government.
3. Incorrect. MD&A should be presented before the basic financial statements.
4. Incorrect. Comparative financial information is reported in MD&A.

1. Incorrect. Government-wide financial statements are required to be included in a government’s general-purpose external financial statements.
2. Incorrect. Fund financial statements are required to be included in a government’s general-purpose external financial statements.
3. Correct. The Certificate of Achievement for Excellence in Financial Reporting is not required to be included in the general-purpose financial statements but would be included in the introductory section of the CAFR, if applicable.
4. Incorrect. Notes to the financial statements are required to be included in a government’s general-purpose external financial statements.

1. Correct. When a government uses the modified approach for certain networks or subsystems of infrastructure, certain information must be disclosed as part of RSI.
2. Incorrect. RSI requirements exist related to pensions and OPEB.
3. Incorrect. MD&A is presented before the basic financial statements. Other RSI is presented after the basic financial statements.
4. Incorrect. Governments present budgetary comparison schedules only for the general fund and for each major special revenue fund with a legally adopted annual budget.

1. Incorrect. The Government Finance Officers Association (GFOA) provides guidance on what information should be included in the CAFR.
2. Incorrect. The statistical section of the CAFR provides information that is useful in evaluating the economic condition of a government.
3. Correct. The CAFR provides a variety of additional information outside the audited financial statements that is useful in assessing a government’s performance and financial condition.
4. Incorrect. GASB Statement No. 44 requires governments to report five categories of statistical information.

1. Correct. Special-purpose governments engaged in more than one program or that have both governmental and business-type activities should produce both fund financial statements and government-wide financial statements.
2. Incorrect. Some special-purpose governments do not report government-wide statements.
3. Incorrect. For special-purpose governments engaged only in a single program or only in a business-type or fiduciary activity, different financial statements are appropriate.
4. Incorrect. Special-purpose governments are separate legal entities.

1. Incorrect. A cemetery district is an example of a special-purpose government engaged only in governmental activities.
2. Incorrect. A levee district is an example of a special-purpose government engaged only in governmental activities.
3. Correct. An electric authority is an example of a special-purpose government engaged only in business-type activities.
4. Incorrect. A drainage district is an example of a special-purpose government engaged only in governmental activities.